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 September 30, 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 September 30, 1997
----------------------------- ---------------------------------
Common Stock, $2.25 par value 61,207,261 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 September 30, 1997
and December 31, 1996 1-2
Consolidated Statements of Income for the three and
nine months ended September 30, 1997 and 1996 3
Consolidated Statements of Cash Flows for the
nine months ended September 30, 1997 and 1996 4
Notes to Consolidated Financial Statements 5-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations 10-19
Part II. Other Information and Signature 20-26
i
PART I. FINANCIAL INFORMATION
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
ASSETS
------
CURRENT ASSETS
Cash and cash equivalents $32,831 $36,533
Accounts receivable 178,475 142,431
Inventories, at average cost:
Fuel (coal, oil, and gas) 35,804 36,584
Materials and supplies 42,591 41,292
Prepayments 9,868 20,233
Deferred energy costs 22,156 31,127
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321,725 308,200
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NONUTILITY PROPERTY AND INVESTMENTS
Nonutility property, net 107,016 63,023
Investment in leveraged leases 46,483 46,961
Funds held by trustee 38,511 34,735
Other investments 8,481 4,155
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200,491 148,874
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UTILITY PLANT, AT ORIGINAL COST
Electric 3,070,022 3,037,830
Gas 238,868 229,362
Common 153,649 136,897
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3,462,539 3,404,089
Less: Accumulated depreciation 1,341,536 1,292,325
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Net utility plant in service 2,121,003 2,111,764
Construction work-in-progress 84,245 118,208
Leased nuclear fuel, at amortized cost 32,798 31,513
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2,238,046 2,261,485
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DEFERRED CHARGES AND OTHER ASSETS
Prepaid employee benefit costs 47,568 35,146
Unamortized debt expense 13,479 13,858
Deferred debt refinancing costs 19,412 21,366
Deferred recoverable income taxes 127,294 137,561
Other 63,514 52,663
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271,267 260,594
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TOTAL ASSETS $3,031,529 $2,979,153
============= ============
See accompanying Notes to Consolidated Financial Statements.
- 1 -
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
September 30, December 31,
1997 1996
------------- ------------
(Unaudited)
CAPITALIZATION AND LIABILITIES
------------------------------
CURRENT LIABILITIES
Short-term debt $78,383 $74,355
Long-term debt due within one year 27,801 27,676
Variable rate demand bonds 83,500 85,000
Accounts payable 80,110 81,628
Taxes accrued 10,095 -
Interest accrued 22,981 16,193
Dividends declared 23,787 23,265
Current capital lease obligation 12,714 12,598
Deferred income taxes, net 4,684 7,276
Other 32,936 31,489
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376,991 359,480
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DEFERRED CREDITS AND OTHER LIABILITIES
Deferred income taxes, net 522,112 526,449
Deferred investment tax credits 40,582 42,501
Long-term capital lease obligation 21,740 20,552
Other 31,184 31,522
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615,618 621,024
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CAPITALIZATION
Common stock, $2.25 par value; 90,000,000
shares authorized; shares outstanding:
1997--61,207,261, 1996--60,682,719 139,104 136,765
Additional paid-in capital 525,833 508,300
Retained earnings 302,897 293,604
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967,834 938,669
Treasury shares, at cost:
1997--616,788 shares, 1996--101,831 shares (11,639) (2,138)
Unearned compensation (323) (1,618)
------------- ------------
Total common stockholders' equity 955,872 934,913
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 923,345 904,033
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2,038,920 1,998,649
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TOTAL CAPITALIZATION AND LIABILITIES $3,031,529 $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 Nine Months Ended
September 30 September 30
------------------------ -------------------------
1997 1996 1997 1996
--------- --------- ---------- ---------
OPERATING REVENUES
Electric $332,391 $279,025 $841,362 $756,559
Gas 39,315 13,852 127,731 82,164
Other services 28,796 15,463 88,456 46,019
--------- --------- ---------- ---------
400,502 308,340 1,057,549 884,742
--------- --------- ---------- ---------
OPERATING EXPENSES
Electric fuel and purchased energy 128,411 90,768 317,351 244,593
Gas purchased 32,246 7,280 90,430 43,844
Purchased electric capacity 6,980 8,194 20,936 25,147
Operation and maintenance 103,143 83,170 299,111 243,800
Depreciation 34,291 31,910 101,807 95,218
Taxes other than income taxes 9,922 9,482 27,879 26,668
--------- --------- ---------- ---------
314,993 230,804 857,514 679,270
--------- --------- ---------- ---------
OPERATING INCOME 85,509 77,536 200,035 205,472
--------- --------- ---------- ---------
OTHER INCOME
Allowance for equity funds used
during construction - 293 - 774
Other income 2,021 1,587 5,000 4,531
--------- --------- ---------- ---------
2,021 1,880 5,000 5,305
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INTEREST EXPENSE
Interest charges 20,932 18,607 62,450 55,387
Allowance for borrowed funds used during
construction and capitalized interest (791) (868) (3,027) (2,317)
--------- --------- ---------- ---------
20,141 17,739 59,423 53,070
--------- --------- ---------- ---------
DIVIDENDS ON PREFERRED SECURITIES
OF A SUBSIDIARY TRUST 1,422 - 4,266 -
--------- --------- ---------- ---------
INCOME BEFORE INCOME TAXES 65,967 61,677 141,346 157,707
INCOME TAXES 26,556 24,642 58,145 63,204
--------- --------- ---------- ---------
NET INCOME 39,411 37,035 83,201 94,503
DIVIDENDS ON PREFERRED STOCK 1,092 2,430 3,391 7,293
--------- --------- ---------- ---------
EARNINGS APPLICABLE TO COMMON STOCK $38,319 $34,605 $79,810 $87,210
========= ========= ========== =========
COMMON STOCK
Average shares outstanding (000) 61,247 60,667 61,093 60,709
Earnings per average share $0.63 $0.57 $1.31 $1.44
Dividends declared per share $0.38 1/2 $0.38 1/2 $1.15 1/2 $1.15 1/2
See accompanying Notes to Consolidated Financial Statements.
-3-
DELMARVA POWER & LIGHT COMPANY
------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30
------------------------
1997 1996
--------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $83,201 $94,503
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 106,269 99,291
Investment tax credit adjustments, net (1,919) (1,920)
Deferred income taxes, net 3,338 20,293
Net change in:
Accounts receivable (33,771) (3,864)
Inventories (123) (693)
Accounts payable (2,614) (13,362)
Other current assets & liabilities 35,559 (6,488)
Other, net (7,631) (10,097)
--------- ---------
Net cash provided by operating activities 182,309 177,663
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CASH FLOWS FROM INVESTING ACTIVITIES
Capital and acquisition expenditures (135,179) (110,304)
Decrease in bond proceeds held in trust funds 1,225 5,526
Deposits to nuclear decommissioning trust funds (3,180) (2,825)
Other, net 220 (1,655)
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Net cash used by investing activities (136,914) (109,258)
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CASH FLOWS FROM FINANCING ACTIVITIES
Dividends: Common (70,266) (69,968)
Preferred (3,119) (7,428)
Issuances: Long-term debt 124,200 -
Common stock 17,711 50
Redemptions: Long-term debt (27,256) (939)
Variable rate demand bonds (1,500) -
Common stock (7,274) (4,599)
Principal portion of capital lease payments (4,462) (4,073)
Net change in short-term debt (72,972) 18,033
Cost of issuances and refinancings (4,159) (152)
---------- ---------
Net cash used by financing activities (49,097) (69,076)
---------- ---------
Net change in cash and cash equivalents (3,702) (671)
Cash and cash equivalents at beginning of period 36,533 28,951
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Cash and cash equivalents at end of period $32,831 $28,280
========== =========
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
conform amounts reported for the three- and nine-month periods ended
September 30, 1996 to the current presentation. Primarily, the operating
results of nonutility subsidiaries were reclassified from "Other income"
into other classifications within the income statement. Revenues from
"Other services" includes revenues of the nonutility subsidiaries and
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. Pending Merger with Atlantic
----------------------------
As previously reported in Note 4 to the Consolidated Financial Statements
of the Company's 1996 Annual Stockholders' Report, on August 12, 1996, the
Company announced plans to merge with Atlantic Energy, Inc. (Atlantic).
Regulatory Approvals and Base Rate Decreases
- --------------------------------------------
Regulatory approvals of the planned merger have been obtained from the
Federal Energy Regulatory Commission, Delaware Public Service Commission
(DPSC), Maryland Public Service Commission (MPSC), Virginia State
Corporation Commission (VSCC), and Pennsylvania Public Utility Commission.
The Company has merger applications pending before the New Jersey Board of
Public Utilities, the Nuclear Regulatory Commission, and the Securities and
Exchange Commission. The Company expects to obtain approval of these
applications by year-end or early 1998.
Under the merger approval settlement agreements with the DPSC, MPSC, and
VSCC, the Company will reduce retail base rates in order to share with
utility customers a portion (ranging from approximately 50% to 60%) of the
cost savings expected to result from the merger. The annualized amounts of
the retail base rate decreases are as follows:
-5-
Annualized Base
Jurisdiction Rate Decrease Effective Date
------------------------ ------------------- ------------------------------
Delaware retail electric $7.5 million (1.5%) merger date
Delaware retail electric $0.6 million (0.1%) one year after the merger date
Delaware retail electric $0.4 million (0.1%) two years after the merger date
Delaware gas $0.5 million (0.5%) two years after the merger date
Maryland retail electric $3.5 million (1.3%) merger date
Virginia retail electric $0.4 million (1.5%) merger date
In addition, the Company will contribute $340,000 per year to certain
economic development and societal programs in Maryland for three years after
the merger.
Enhanced Retirement Offer
- -------------------------
On June 26, 1997, the Company and Atlantic announced that enhanced
retirement offers (ERO) and other employee separation programs are expected
to be utilized to achieve workforce reductions concurrent with the merger
of the two companies. The ERO and other employee separation programs are
contingent on consummation of the merger. Employee separation costs
related to Delmarva's employees and employee retraining costs will be
expensed and are estimated to be approximately $30 million to $35 million
before taxes ($18 million to $21 million after taxes). The actual cost of
Delmarva's employee separation plans may vary from the estimate above
depending on the number of employees who choose the ERO.
3. Debt
----
The Company redeemed $25 million of 6 3/8% First Mortgage Bonds at maturity
in September 1997 through the issuance of short-term debt.
In October 1997, the Company initiated a public offering of up to $75
million of unsecured Medium-Term Notes. Through November 12, 1997, the
Company had issued $22 million of unsecured Medium-Term Notes with
maturities of 5 to 8 years and interest rates of 6.6% to 6.8%. The
proceeds are being used to refinance short-term debt.
4. Pine Grove Landfill
-------------------
On October 17, 1997, a subsidiary of the Company signed an agreement for
the sale of the Pine Grove Landfill and its related waste-hauling company.
The subsidiaries being sold have a net book value of approximately $13
million and reported revenues in 1996 of approximately $14 million. In the
fourth quarter of 1997, the Company expects to receive gross proceeds from
the sale of approximately $46 million, of which $13 million will be used to
pay off debt not assumed by the buyer, resulting in net proceeds of
approximately $33 million.
-6-
5. Contingencies
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Salem Nuclear Generating Station
- --------------------------------
The Company owns 7.41% of Salem Nuclear Generating Station (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 May 1995 and June 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 replaced the Unit 1 steam generators. PSE&G expects that
fuel loading for Unit 1 will begin by the end of November and Unit 1 will
return to service in early-1998, subject to approval of the Nuclear
Regulatory Commission (NRC).
After receiving NRC authorization, PSE&G returned Unit 2 to service on
August 30, 1997. The NRC plans to complete a final performance assessment
of Unit 2 after approximately two months of full power operations.
On August 26, 1997, the DPSC approved a settlement regarding the ratemaking
treatment of the Salem replacement power costs. Under the terms of the
settlement, approximately one-half of replacement power costs apportioned
to the Delaware jurisdiction were disallowed from recovery through the fuel
adjustment rate. Through August 30, 1997 (the date Unit 2 was restarted),
this disallowance amounted to approximately $11.3 million which is
equivalent to approximately $18.4 million on a total system basis. From
August 30, 1997 through the restart of Unit 1, an additional disallowance
of $15,200 per day ($25,000 per day on a system basis) will be incurred
under the terms of the settlement in Delaware.
In May 1997, the Company settled its lawsuit against PSE&G concerning Salem
operations. PSE&G agreed to pay the Company approximately $12 million on
December 31, 1997, in settlement of all claims related to the lawsuit.
(For additional information concerning terms of the lawsuit settlement with
PSE&G, refer to Note 3 to the Company's second quarter 1997 report on Form
10-Q.) The Company's settlement with Delaware provides that the Company
will retain the first $4.8 million ($8.0 million on a system basis) of
proceeds from the lawsuit settlement with PSE&G. The next $2.4 million
($4.0 million on a system basis) of lawsuit settlement proceeds will
benefit customers.
On a system basis, the Company has expensed $12.2 million of replacement
power costs related to the Salem outage since the start of the outage.
Based on the restart of Unit 2 and the scheduled restart of Unit 1, amounts
previously expensed by the Company, the lawsuit settlement with PSE&G, and
the settlement in Delaware, the Company does not expect future earnings to
be significantly impacted by the lawsuit settlement or replacement power
costs disallowed for ratemaking purposes.
-7-
As previously reported, on February 27, 1996, the co-owners of Salem,
including the Company, filed a complaint in the United States District
Court for New Jersey against Westinghouse Electric Corporation
(Westinghouse), the designer and manufacturer of the Salem steam
generators. The complaint, which seeks 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. The estimated replacement cost of such generators is between
$150 million and $170 million. On October 1, 1997, Westinghouse filed a
motion for summary judgment. The parties are currently briefing the
summary judgment motion with a decision expected after December 5, 1997.
No trial date has been set. The Company cannot predict the outcome of this
lawsuit.
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
September 30, 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.
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.
-8-
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
September 30, 1997 for claims related to the outages. The Company cannot
predict the outcome of this lawsuit.
6. Supplemental Cash Flow Information
----------------------------------
Nine Months Ended
September 30,
-----------------
Cash paid for 1997 1996
------- -------
(Dollars in thousands)
Interest, net of amounts
capitalized $50,026 $44,669
Income taxes, net of refunds $42,721 $39,226
-9-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
------------------------------------------------
Earnings Summary
- ----------------
Earnings per share were $0.63 for the three months ended September 30, 1997
compared to $0.57 for the three months ended September 30, 1996. The $0.06
increase in earnings per share was primarily due to higher net electric
revenues which resulted from warmer summer weather and customer growth.
Higher capital costs and anticipated cost increases associated with
investments that are positioning the Company to compete in deregulated
energy markets constrained the earnings increase.
Earnings per share were $1.31 for the nine months ended September 30, 1997
compared to $1.44 for the nine months ended September 30, 1996. The $0.13
decrease in earnings per share was primarily due to the expected cost
increases discussed above and milder winter weather in the first quarter
which lowered sales to residential customers and decreased electric and gas
revenues, net of fuel costs. These factors were mitigated by lower outage
expenses associated with the Salem nuclear generating units and additional
net electric revenues from warmer summer weather. Outage costs for the
Salem nuclear generating units decreased earnings per share by about $0.06
in the current nine month period compared to a $0.15 per share decrease for
the same period last year.
Earnings Outlook
- ----------------
Strategic Investments
As deregulation of the electric industry continues to unfold, the Company
is moving ahead with its plan to become a prominent regional player by
being first into new markets that complement its utility business and by
enhancing its ability to serve additional customers outside its traditional
borders. (See "New Business Activities" below.) To accomplish its
objectives, the Company has been increasing its investments in
marketing/branding programs, new businesses, and infrastructure systems.
As a result of these investments, the Company anticipates 1997 and 1998
earnings per share, excluding any unusual one-time charges or gains, will
be lower than results for the past two years. Beyond 1998, the Company
expects that its investments will yield additional revenues that will
result in earnings growth which will exceed the industry average.
Atlantic Merger
A portion of the cost savings from the planned merger with Atlantic Energy,
Inc. (Atlantic) will serve to reduce customers' rates and the balance of
the cost savings will positively impact earnings of the merged company
(Conectiv). Pursuant to settlement agreements approving the planned
merger, the Company will decrease retail customer non-fuel (base) rates by
an aggregate total of $13 million in Delaware, Maryland, and Virginia. The
New Jersey merger application is pending and approval is expected before
year-end.
Concurrent with the merger, the Company and Atlantic plan to achieve
workforce reductions through ERO and other employee separation programs.
The cost of Delmarva's employee separation programs are currently estimated
to be $30 million to $35 million before income taxes ($18 million to
-10-
$21 million after income taxes). The actual cost of Delmarva's employee
separation plans may vary from this estimate depending on the number of
employees who choose the ERO. Refer to Note 2 to the Consolidated Financial
Statements for additional information concerning the pending merger.
Other Matters
As previously reported, in August 1996, Old Dominion Electric Cooperative
(ODEC), the Company's largest resale customer, notified the Company that it
will reduce its load of approximately 200 megawatts (MW) by 60 MW on
September 1, 1998, and will further reduce its load to zero on September 1,
2001. The Company expects to secure a contract for the 60 MW portion of
ODEC's load; however, lower pricing is expected which would decrease
earnings per share by $0.06 to $0.08 on an annualized basis beginning
September 1, 1998.
The Company was recently advised by its actuary that the Company's annual
pension cost for 1997 will be lower than previously estimated. In
accordance with the Company's accounting policies, the change in estimated
pension cost will be recognized over the remainder of the year. Operating
expenses in the fourth quarter will be reduced by approximately $7 million
($4.2 million after income taxes) due to recording the change in estimated
pension cost.
In the fourth quarter, the Company expects to close an agreement for the
sale of the Pine Grove Landfill and its related waste-hauling company. The
subsidiaries being sold have a net book value of approximately $13 million
and the sale is expected to result in net proceeds of approximately $33
million.
New Business Activities
- -----------------------
On June 30, 1997, the Company launched a campaign to introduce the new
Conectiv brand and Conectiv's products and services. The campaign explains
that Conectiv will be more than a power company and will offer one-stop
shopping for energy, telecommunications, heating and cooling, and related
services for homes and businesses. This campaign will run through the end
of the year and has been a key means of acquiring customers in the pilot
programs discussed below.
The Company recently began successfully participating in several retail
energy pilot programs. In the Pennsylvania electric pilot program,
Conectiv Energy, a division of the Company, signed up more than 27,000
residential and 5,000 small business customers. However, the pilot was
oversubscribed. After a lottery, Conectiv Energy retained about 7,000
residential and 700 small business customers. In Monroe Township, New
Jersey, Conectiv Energy will begin supplying electricity to 9,680
residential and 850 commercial and industrial customers this fall.
Conectiv Energy is the first utility to participate in New Jersey's only
customer choice electric pilot program. In gas pilot programs, Conectiv
Energy gained 7,000 customers in suburban Washington, D.C. and 1,100
customers in Southern New Jersey.
In September 1997, the Company announced that Conectiv Energy and
Connecticut Energy Corporation formed a joint venture to sell natural gas,
electricity, fuel oil, and other energy-related products and services in
New York and New England.
-11-
The Company's subsidiary, Conectiv Communications, Inc., recently began
testing its fiber optic telecommunications system. Conectiv Communications
expects to begin providing local and long distance phone service in
Delaware and Pennsylvania during the fourth quarter.
Electric Industry Restructuring
- -------------------------------
In response to the Delaware House of Representatives initiative (House
Resolution No. 36), the Delaware Public Service Commission (DPSC), on July
15, 1997, opened a docket to address possible alternative approaches to
the restructuring of the electric utility industry in Delaware. On August
8, 1997, the DPSC Staff issued its first draft report recommending a four-
year phase-in of full retail choice beginning April 1, 1999. After
receiving comments from other parties, the DPSC Staff issued its second
draft report recommending a three-year phase-in which would start twelve
months after legislation is passed by the State Legislature. During the
three year phase-in, customers would be open to retail choice in equal
annual installments of one-third per year. The DPSC Staff recommends that
a default supplier be established to serve all customers who do not choose
an alternative supplier and that the default supplier should offer a
regulated "standard offer" generation price capped throughout the
transition period at the lower of the generation rate without customer
choice or the market price for retail generation services. The DPSC Staff
recommends that utilities be given the flexibility to deregulate
generation assets when they choose, on the condition that they provide a
standard offer for generation service at market prices. All deregulated
generation assets must be structurally separated from the utility's
transmission and distribution (T&D) investments. The DPSC Staff also
recommended that utilities file with the DPSC revenue-neutral unbundled
rates separating generation from T&D by two months after any restructuring
legislation is signed into law, and a comprehensive analysis of market
power by nine months after the legislation is signed into law. The
unbundled rates for T&D would continue to be set on a cost-of-service
basis. Further, a utility that demonstrates a significant amount of non-
mitigatable stranded costs should be given the opportunity to recover an
appropriate portion of those costs through a Market Transition Charge
(MTC). In addition, a non-bypassable system benefits charge should be
established to finance energy efficiency investments and other public
policy programs at current levels.
Public hearings were held in October. Comments on the DPSC Staff's second
draft report were filed on November 4, 1997. The DPSC Staff expects to
issue a final draft report by November 21, for consideration by the DPSC
in December. The DPSC is scheduled to submit recommendations to the House
of Representatives by January 31, 1998.
For information concerning electric industry restructuring activities in
Maryland, refer to Part II, Item 5 in the Company's report on Form 10-Q
for the second quarter of 1997. The Maryland Public Service Commission is
expected take action on this matter by year-end.
-12-
Accounting for Deregulation of Utilities
- ----------------------------------------
Prices charged to electric utility customers have historically been a
"bundled" price which includes the electricity production cost and the
delivery cost (transmission and distribution). Various state regulatory
commissions and legislatures, as well as federal legislators, are
considering or have approved changes to laws and regulations governing the
pricing of electricity. These changes would generally deregulate the
component of the price charged to a customer for the production of
electricity. Under existing plans, the transmission and distribution of
electricity would continue to be regulated. The Emerging Issues Task Force
(EITF), which evaluates accounting issues under the direction of the
Financial Accounting Standards Board (FASB), was asked to review accounting
issues related to deregulation of electricity production and continued
application of Statement of Financial Accounting Standards No. 71,
"Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71).
Final accounting guidance recently issued by the EITF concluded that a
utility should cease to apply SFAS No. 71 for the electricity production
portion of its business no later than the date that a specific
deregulation plan is enacted. Stranded costs and regulatory assets
attributed to electricity production could continue to be recognized to
the extent that a transition plan provides for their recovery through cash
flows from the regulated transmission and distribution business.
As discussed above and in previously filed reports on Form 10-K and Form
10-Q, proposals concerning deregulation of the electric utility industry
are being considered in Delaware, Maryland, and Virginia (the states which
have jurisdiction over the Company's retail electric utility business).
However, no electric utility industry deregulation plan has been yet
agreed to, ordered or legislated in Delaware, Maryland or Virginia. Thus,
at this time, the Company cannot predict if or when it would cease
applying SFAS No. 71, and the related financial impacts of discontinuing
SFAS No. 71.
Please refer to the information previously disclosed under the caption
"Competition and the Changing Regulatory Environment" in Management's
Discussion and Analysis of Financial Condition and Results of Operations in
the Company's 1996 Annual Stockholders' Report for additional information
concerning accounting issues associated with deregulation and competition.
-13-
Electric Revenues
- -----------------
Details of the changes in the various components of electric revenues for
the three- and nine-month periods ended September 30, 1997, as compared to
the same periods in 1996, are shown below (dollars in millions):
Three Nine
Months Months
------ ------
Non-fuel (Base Rate) Revenues $11.3 $ 3.6
Fuel Revenues 8.5 26.9
Interchange Delivery Revenues (12.6) (22.5)
Merchant Revenues 46.2 76.8
------ ------
Total $53.4 $84.8
====== ======
Electric non-fuel revenues increased $11.3 million for the three-month
period primarily due to warmer summer weather and customer growth. For the
nine-month period, the increase in electric non-fuel revenues from the
warmer summer weather and customer growth was largely offset by the
unfavorable impact of milder winter weather, resulting in a $3.6 million
increase. Total retail electric kilowatt-hour (kWh) sales increased 5.1%
and 1.6% for the three-month and nine-month periods, respectively.
Electric fuel revenues increased $8.5 million and $26.9 million for the
three- and nine-month periods, respectively, due to higher retail electric
fuel rates and higher sales. Fuel revenues, or electric fuel costs billed
to customers, generally do not affect net income, since the expense
recognized as fuel costs is adjusted to match the fuel revenues. The
amount of under- or over-recovered fuel costs is deferred until it is
subsequently recovered from or returned to utility customers.
Interchange delivery revenues decreased $12.6 million and $22.5 million for
the three- and nine-month periods, respectively, mainly due to lower output
available for sale to the Pennsylvania-New Jersey-Maryland Interconnection
(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 $46.2 million and $76.8 million for the three- and nine-month
periods, respectively, 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.
-14-
Gas Revenues
- ------------
Details of the changes in the various components of gas revenues for the
three- and nine-month periods ended September 30, 1997, as compared to the
same periods in 1996, are shown below (dollars in millions):
Three Nine
Months Months
------ ------
Non-fuel (Base Rate) Revenues $ 0.3 $(1.6)
Fuel Revenues 0.4 8.0
Merchant Revenues 24.8 39.2
------ ------
Total $25.5 $45.6
====== ======
Gas non-fuel revenues decreased $1.6 million for the nine-month period
primarily due to an 11.7% decline in residential gas sales from milder
winter weather in the first quarter. This weather-related sales revenue
decrease was partly offset by additional sales revenues from a 2.5%
increase in the average number of gas customers.
Gas fuel revenues increased $0.4 million and $8.0 million for the three-
and nine-month periods, respectively, due to higher fuel rates.
Gas merchant revenues increased $24.8 million and $39.2 million for the
three- and nine-month periods, respectively, primarily due to higher off-
system gas sales. Gas merchant revenues also include fees earned for
release of pipeline capacity and other services. Similar to electric
merchant revenues, the margin provided by gas merchant revenues in excess
of related purchased gas costs is relatively small due to the competitive
nature of bulk commodity sales.
Other Services Revenues
- -----------------------
Total revenues from "Other services" (as discussed in Note 1 to the
Consolidated Financial Statements) increased from $15.5 million to $28.8
million for the three-month period, and from $46.0 million to $88.5 million
for the nine-month period. These revenue increases were principally due to
acquisitions, by Conectiv Services, Inc., of companies which provide HVAC
(heating, ventilation, and air conditioning) and plumbing services. Lower
revenues from real estate activities partly offset the revenue increases.
The companies acquired by Conectiv Services, Inc. are located in Delaware,
Maryland, and Pennsylvania. The services marketed by Conectiv Services,
Inc. will help build customer relationships and brand recognition, and
influence customers to choose the Company as their energy supplier.
Refer to "Regulatory Matters" in Item 5 of Part II for a discussion of
regulatory issues concerning HVAC and certain other business activities.
-15-
Electric Fuel and Purchased Energy Expenses
- -------------------------------------------
Electric fuel and purchased energy expenses increased $37.6 million and
$72.8 million for the three- and nine-month periods, respectively, mainly
due to greater volumes of energy purchased for sale on- and off-system and
higher deferred energy expenses, partly offset by lower kWh output for
interchange deliveries.
The kWh output required to serve load within the Company's service
territory is substantially equivalent to total output less interchange
deliveries. For the nine months ended September 30, 1997, the Company's
output for load within its service territory was provided by 36% coal
generation, 32% net purchased power, 22% oil and gas generation, and 10%
nuclear generation.
Gas Purchased
- -------------
Gas purchased increased $25.0 million for the three-month period and $46.6
million for the nine-month period mainly due to larger volumes of gas
purchased for resale off-system.
Operation and Maintenance Expenses
- ----------------------------------
Operation and maintenance expenses increased $20.0 million and $55.3
million for the three- and nine-month periods, respectively. These
increases were due to the cost of sales and operating expenses of acquired
HVAC companies (as discussed under "Other Services Revenues"), advertising
costs to establish the Conectiv brand name, telecommunication start-up
costs, and other expense increases. Lower Salem outage expenses and
decreased cost of sales for subsidiaries' real estate activities reduced
the increases in total operation and maintenance expenses for the three-
and nine-month periods.
Depreciation Expense
- --------------------
Depreciation expense increased $2.4 million and $6.6 million for the
three- and nine-month periods, respectively, due to completion of on-going
construction projects and installation of new systems. The new systems
support the Company's business unit management information needs and have
also substantially resolved the "year 2000" problem.
Financing Costs
- ---------------
Financing costs reflected in the consolidated income statement include
interest charges, allowance for funds used during construction (AFUDC),
dividends on preferred securities of a subsidiary trust, and dividends on
preferred stock. Financing costs increased $2.8 million and $7.5 million
for the three- and nine-month periods, respectively, mainly due to higher
interest charges from the issuance of $124.2 million of Medium-Term Notes
in February 1997.
-16-
Liquidity and Capital Resources
- -------------------------------
Net cash provided by operating activities was $182.3 million for the nine
months ended September 30, 1997 compared to $177.7 million for the nine
months ended September 30, 1996. Higher cash flows attributed to
increased regulated fuel revenues net of fuel costs were largely offset by
working capital requirements associated with the Company's electric and
gas merchant businesses.
Capital and acquisition expenditures for the nine-month periods increased
from $110.3 million to $135.2 million principally due to acquisition of
HVAC service companies, construction of telecommunication assets, and
merger-related costs, partly offset by lower utility construction
expenditures. Aggregate capital and acquisition expenditures for the HVAC
service and telecommunication businesses were approximately $38 million
and 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. The $73.0
million decrease in short-term debt shown on the Consolidated Statements
of Cash Flows for the nine months ended September 30, 1997 reflects the
$124.2 million decrease from the refinancing, partly offset by a $51.2
million increase for interim financing requirements, including $25.0
million for redemption of the 6 3/8% First Mortgage Bonds which matured
September 1, 1997.
The balances of long-term debt due within one year were approximately the
same as of September 30, 1997 and December 31, 1996 since the $25.0
million decrease from redemption of the 6 3/8% First Mortgage Bonds was
offset by a $25.0 million increase from the scheduled maturity in June
1998 of 5.69%, Medium-Term Notes.
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 by February 7, 1997. Thus, balances as of September 30,
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.
During the first nine months of 1997, the Company raised $17.7 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 nine months of 1996 since shares
were purchased in the open market to satisfy the plan's needs.
A shelf registration for $250 million of securities filed by the Company
with the Securities and Exchange Commission (SEC) became effective May 12,
1997. 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. Pursuant to the shelf registration, the Company
initiated a public offering of up to $75 million of unsecured Medium-Term
Notes in October and November 1997.
-17-
In the fourth quarter of 1997, the Company expects to receive
approximately $46 million of gross proceeds from the sale of Pine Grove
Inc., of which $13 million will be used to pay off debt not assumed by the
buyer. The Company also expects to receive in the fourth quarter $12
million from PSE&G for settlement of the Salem litigation. Please refer
to Notes 4 and 5 to the Consolidated Financial Statements for more
information.
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
September 30, Year Ended December 31,
----------------------------
1997 1996 1995 1994 1993 1992
------------- ---- ---- ---- ---- ----
Ratio of Earnings to:
Fixed Charges 2.88 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 2.64 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 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
-18-
following: deregulation and the unbundling of energy supplies and services;
an increasingly competitive energy marketplace; sales retention and growth;
federal and state regulatory actions; costs of construction; operating
restrictions; increased costs and construction delays attributable to
environmental regulations; nuclear decommissioning and the availability of
reprocessing and storage facilities for spent nuclear fuel; and credit
market concerns. The Company undertakes no obligation to publicly update
or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The foregoing review of factors
pursuant to the Litigation Reform Act should not be construed as exhaustive
or as any admission regarding the adequacy of disclosures made by the
Company prior to the effective date of the Litigation Reform Act.
-19-
PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
- -------------------------
Refer to "Salem Nuclear Generating Station" in Note 5 to the Consolidated
Financial Statements for information concerning the Company's lawsuit
against Westinghouse Electric Corporation.
Refer to "Other" in Note 5 to the Consolidated Financial Statements for
information concerning a lawsuit filed against the Company by a major
customer.
On August 18, 1997, the Delaware Department of Natural Resources and
Environmental Control (DNREC) issued an Administrative Penalty
Assessment of $282,000 against the Company for alleged environmental
reporting violations at the Hay Road Power Complex (HRPC). The fine was
assessed in connection with the Company's inability to file complete
quarterly emissions reports in 1995 due to hardware and software problems
associated with continuous emissions monitors at the HRPC. The Company
has appealed the Administrative Penalty Assessment and currently is
engaged in settlement discussions with DNREC.
Item 5. Other Information
- -------------------------
Regulatory Matters
- ------------------
On May 8, 1997, the MPSC established a procedural schedule for the quasi-
legislative procedures to consider affiliated transactions and affiliate
standards of conduct of gas and electric utilities. Initial comments were
filed by all parties on July 17, 1997. Reply comments and legislative-type
hearings occurred in October 1997. The Company has filed a Cost Accounting
Manual (CAM) and Code of Conduct (Code) with the DPSC and attached its CAM
and Code to its comments filed in Maryland on July 17, 1997. The Company
believes that its CAM and Code protects trade competitors against any
unfair competitive advantages that the Company may be perceived to have as
a result of its regulated utility operations.
As previously reported, the Company filed a CAM and Code in February 1997
which is under review by the DPSC. Joint resolutions passed by the
Delaware General Assembly in mid-1997 provide that during the pendency of
the case before the DPSC, the Company will: (1) operate under the CAM and
Code as filed; (2) not acquire any new energy services businesses in
Delaware, nor increase the number of Delaware employees working for energy
services businesses beyond a certain number; (3) allow the DPSC to examine
the books and records of the Company's affiliates; and (4) give 20 days
notice prior to completing any acquisitions of new affiliates in excess of
$50,000. The legislation directs the DPSC to complete its review of the
CAM and Code on or before February 1, 1998.
-20-
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
Exhibits
- --------
Exhibit 12-A, Computation of Ratio of Earnings to Fixed Charges
Exhibit 12-B, Computation of Ratio of Earnings to Fixed Charges and
Preferred Dividends
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- -------------------
On July 2, 1997, the Company filed an 8-K concerning a review of business
strategy and the impact of growth initiatives on earnings.
On October 27, 1997, the Company filed an 8-K concerning a pending sale of
its Pine Grove Landfill and related wasted-hauling company.
-21-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delmarva Power & Light Company
------------------------------
(Registrant)
Date: November 12, 1997 /s/ B. S. Graham
-------------------- -----------------------------------
B. S. Graham, Senior Vice President
and Chief Financial Officer
-22-
EXHIBIT INDEX
Exhibit Page
Number Number
------- ------
Computation of ratio of earnings to fixed charges 12-A 24
Computation of ratio of earnings to fixed charges
and preferred dividends 12-B 25
Financial Data Schedule 27 26
-23-