SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): July 18, 2002
COMMISSION FILE NUMBER REGISTRANT, STATE OF I.R.S. EMPLOYER
INCORPORATION, ADDRESS AND IDENTIFICATION NUMBER
TELEPHONE NUMBER
1-13895 Conectiv 51-0377417
(a Delaware Corporation)
800 King Street
P. O. Box 231
Wilmington, Delaware 19899
Telephone: (302) 429-3114
ITEM 5. OTHER EVENTS
The following items update and supplement disclosures contained in Conectiv's
Annual Report on Form 10-K for the year ended December 31, 2001, and its
Quarterly Report on Form 10-Q for the quarter ended March 31, 2002. Conectiv is
voluntarily making the following disclosures, which would ordinarily be made in
the normal course in Conectiv's second-quarter Form 10-Q, in this Current Report
on Form 8-K.
EMERGING ISSUES TASK FORCE PRONOUNCEMENT
Conectiv is in the process of assessing the recent pronouncement issued by the
Emerging Issues Task Force (EITF), entitled EITF 02-3 "Accounting for Contracts
Involved in Energy Trading and Risk Management Activities." EITF 02-3 addresses
the presentation of revenues and expenses associated with "energy trading book"
contracts on a gross versus net basis. Previously, the EITF concluded that
presentation on a gross basis was acceptable and Conectiv presented the revenues
and expenses of its energy trading business on that basis in its public
financial disclosures. With the issuance of EITF 02-3 and the subsequent
guidance provided by the EITF in June 2002, presentation on a net basis is
required, effective for the third quarter 2002 reporting cycle.
Conectiv has not completed its evaluation of the financial statement
reclassification required by EITF 02-3. However, Conectiv believes that the
implementation of EITF 02-3, because of financial statement line item changes,
likely will: (i) materially decrease Conectiv's gross revenues and revenue
growth; (ii) result in higher gross margins as a percentage of gross revenues;
and (iii) have no impact on its overall financial position or earnings. For the
year ended December 31, 2001, Conectiv's commodity trading gross revenues were
approximately $1.9 billion; Conectiv expects that a substantial portion of these
revenues would be eliminated in the reclassification.
FEDERAL ENERGY REGULATORY COMMISSION INQUIRIES INTO ENERGY TRADING ACTIVITIES
During May and June 2002, Conectiv Energy Supply, Inc., an indirect subsidiary
of Conectiv (CESI), responded on the following dates to Federal Energy
Regulatory Commission (FERC) inquiries concerning CESI's energy trading
activities: (i) May 17, 2002, to a FERC data request asking whether it had
engaged in any of the questionable energy trading strategies in which Enron had
engaged; (ii) May 23, 2002, to a FERC data request asking whether it had engaged
in any "round trip" or "wash" transactions in the Western System Coordinating
Counsel; and (iii) June 5, 2002, to a FERC data request asking whether it had
engaged in any "round trip" or "wash" transactions in gas into California or
Texas. In all of the responses, CESI stated that it did not engage in any of
such transactions.
RESULTS OF GOODWILL IMPAIRMENT TEST
As previously disclosed, Conectiv implemented Statement of Financial Accounting
Standards No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142),
effective January 1, 2002. Conectiv's goodwill balance of $313.1 million as of
June 30, 2002, is associated with the Power Delivery business segment. Conectiv
recently completed a test for impairment of goodwill in accordance with the
implementation requirements of SFAS No. 142. The test resulted in no impairment
of goodwill, as of January 1, 2002, because the fair value of the Power Delivery
business segment exceeded its book value carrying amount, including goodwill.
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AGREEMENT FOR THE ACQUISITION OF CONECTIV
As previously reported, on February 9, 2001, the Boards of Directors of Conectiv
and Potomac Electric Power Company (Pepco) approved an Agreement and Plan of
Merger under which Pepco will acquire Conectiv, and Conectiv and Pepco will
become wholly owned subsidiaries of Pepco Holdings, Inc. (the Conectiv/Pepco
Merger). In July 2001, the stockholders of each of Pepco and Conectiv voted to
approve the Conectiv/Pepco Merger agreement.
Consummation of the Conectiv/Pepco Merger is subject to receipt of various
statutory and regulatory approvals. All required approvals, except the approval
of the Securities and Exchange Commission (SEC) under the Public Utility Holding
Company Act of 1935, have been obtained, including approvals by the FERC, the
Maryland Public Service Commission, the Delaware Public Service Commission
(DPSC), the Public Service Commission of the District of Columbia, the Virginia
State Corporation Commission, the New Jersey Board of Public Utilities and the
Pennsylvania Public Service Commission. Merger clearance also has been obtained
from the Federal Trade Commission and the U.S. Department of Justice under the
Hart-Scott-Rodino Antitrust Improvements Act (Hart-Scott). In the event,
however, that the Conectiv/Pepco Merger does not close by August 6, 2002, the
parties to the Conectiv/Pepco Merger will have to refile for clearance under
Hart-Scott. The DPSC order approving the Conectiv/Pepco Merger and the related
settlement agreement has been appealed by a party to that proceeding, AES
NewEnergy, Inc. The appellant does not oppose the Conectiv/Pepco Merger itself
but instead objects to certain other terms of the settlement agreement. Conectiv
does not expect the Delaware appeal to have any impact on the closing of the
Conectiv/Pepco Merger.
CONECTIV MEDIUM-TERM NOTE ISSUANCE
On June 4, 2002, Conectiv sold $250 million in principal amount of 5.30% Notes
due 2005 (the Notes). The net proceeds of this issuance will be used for general
corporate purposes and the repayment of short-term debt. The Notes were not
offered pursuant to a registration statement filed under the Securities Act of
1933, but Conectiv has agreed to use its reasonable best efforts to (i) file an
exchange offer registration statement no later than 120 days after the closing
of the Note offering, (ii) cause the registration statement to be declared
effective no later than 180 days after such closing (the effectiveness
deadline), and (iii) cause an exchange offer for the Notes to be completed no
later than 30 business days after the effectiveness deadline. If Conectiv has
not caused these actions to be taken within the specified time periods,
additional interest of 0.25% per annum will accrue until the required actions
have been completed.
CONECTIV BETHLEHEM, INC. PROJECT FINANCING
On June 25, 2002, Conectiv Bethlehem, Inc. (CBI), a subsidiary of Conectiv
Energy Holding Company (CEH) and an indirect subsidiary of Conectiv, entered
into a Credit Agreement (CBI Credit Agreement) with various banks and financial
institutions. CBI is constructing new mid-merit power plants in Bethlehem,
Pennsylvania. Under the CBI Credit Agreement, CBI may borrow up to $365 million
as a construction loan and convert the construction loan to a term loan after
completing construction of the two 545 MW combined cycle power plants (CBI
Project). Borrowings under the CBI Credit Agreement are secured by a lien on CBI
and all tangible, intangible, and real property of CBI.
CBI expects to convert the construction loan to a term loan, on one of the
following dates: February 27, 2004, April 30, 2004, June 30, 2004, August 31,
2004 or September 30, 2004 (Term
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Loan Conversion Date), as provided for in the CBI Credit Agreement. CBI is
required to repay any portion of the construction loan not converted to a term
loan at the Term Loan Conversion Date or no later than September 30, 2004. Four
semi-annual principal payments begin six months after the Term Loan Conversion
Date. Depending on the Term Loan Conversion Date, the amount of the term loan
principal, which is repaid by the total of the four semi-annual payments, is
approximately 12.89% to 14.7%. The remaining principal of the term loan (and any
unpaid accrued interest or fees) is due upon the loan's maturity, which is the
later of June 25, 2006, or the second anniversary of the Term Loan Conversion
Date.
For borrowings under the CBI Credit Agreement, CBI has the option of choosing an
interest rate based on the London inter-bank offering rate (LIBOR) plus (i)
1.625%, or (ii) 1.75%, for construction and term loans, respectively. The CBI
Credit Agreement requires CBI to hedge the interest rate on at least 50% of
principal borrowings and on at least 75% of principal borrowings if LIBOR
exceeds 4.0% for three or six month borrowing periods. On July 11, 2002, CBI
entered into an interest rate swap agreement on 75% of the anticipated forward
monthly loan balances outstanding. The notional amount of the swap will increase
with the expected draw schedule of the construction loan (an average of $221
million). The swap agreement provides for CBI to receive interest based on a
variable rate and to pay interest based on a fixed rate of 4.15%. The swap
agreement is expected to effectively convert the variable interest rate on 75%
of the expected average loan balance to the fixed rate of 4.15%.
In connection with the CBI Credit Agreement, Conectiv provides a guarantee
associated with CESI's agreement to purchase energy and capacity from CBI (CESI
Power Agreement) and other guarantees related to obligations of Conectiv
subsidiaries under agreements related to constructing and operating the CBI
Project. Generally, Conectiv's guarantee obligations will not exceed the amount
of the debt outstanding under the CBI Credit Agreement and do not guarantee
CBI's obligation to repay the debt. If Conectiv's credit ratings fall below the
"Minimum Ratings Requirement" specified by the CBI Credit Agreement, then, in an
amount equal to Conectiv's outstanding guarantees, Conectiv is required to
either: (i) deposit cash, (ii) obtain a letter of credit, or (iii) have another
qualified party provide such guarantees. The "Minimum Ratings Requirement" of
the CBI Credit Agreement is not met if Conectiv's unsecured senior long-term
debt (i) is rated lower than Baa3 by Moody's Investor Service (Moody's) or BBB-
by Standard & Poors (S&P) or (ii) Conectiv's unsecured senior long-term debt is
rated Baa3 by Moody's or BBB- by S&P and Conectiv receives a "negative outlook"
or is placed on "credit watch negative" by Moody's or S&P.
Upon substantial completion of construction of the CBI Project, the CBI Credit
Agreement requires that revenues from the CBI Project be deposited with a bank
that administers the disbursement of cash (Administrative Agent) based on the
terms of a "depository agreement." The depository agreement requires that cash
be applied to (i) pay operating costs and principal and interest on the loans
and (ii) establish reserves for debt service and major scheduled maintenance of
the CBI Project, before cash is released to CBI for other uses, such as the
payment of dividends by CBI to Conectiv or Conectiv subsidiaries.
The CBI Credit Agreement contains a number of events of default that could be
triggered by defaults on Conectiv or CBI debt, bankruptcy, CBI's loss of
collateral, defaults by CBI under CBI Project agreements such as the CESI Power
Agreement, and material adverse changes in CBI's regulatory status.
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CBI is in the process of changing its legal entity structure from a corporation
to a limited liability company (LLC). If CBI is not converted to a LLC by
December 31, 2002, the construction loan becomes due. CBI's borrowings under the
construction loan are limited to $190 million until the LLC conversion occurs.
TEMPORARY "FREEZE" PERIOD FOR CONECTIVDIRECT(R) TRANSACTIONS
Transactions in ConectivDirect(R), Conectiv's dividend reinvestment and stock
purchase plan, will be suspended for the period of time necessary to allow
orderly processing of election forms in connection with the Conectiv/Pepco
Merger. This "freeze" period is expected to begin on July 22, 2002, and it is
expected that these transactions will remain suspended after the Conectiv/Pepco
Merger closing until all final allocations of the merger consideration
(comprised of cash and Pepco Holdings, Inc. common stock) have been completed.
Plan participants will not be able to access their dividend reinvestment
accounts or make any transactions during that period.
SALE OF INVESTMENT IN LEVERAGED LEASES
As a result of Conectiv's decision to sell its investment in leveraged leases,
Conectiv was required to test its investment for impairment and the test showed
that Conectiv's investment in leveraged leases was impaired as of June 30, 2002.
Accordingly, a $17.6 million before-tax ($10.1 million after-tax or $0.12 per
share of Conectiv common stock) impairment charge was recorded in the second
quarter of 2002, which reduced the carrying amount of Conectiv's investment in
leveraged leases from $44.6 million to $27.0 million. On July 3, 2002, Conectiv
sold its leveraged lease portfolio of three aircraft and two containerships for
cash of $24.4 million and a note, which had an estimated fair value of $5.1
million at the time of the sale.
FORECASTED ENERGY GENERATION OUTPUT HEDGE OBJECTIVE
Conectiv manages to the objective of hedging the variability in future cash
flows for forecasted energy output from its generation assets at 75% or greater
of such forecasted output over a period of 36 months. As of June 2002,
Conectiv's average forecasted hedge position for the forward 36 months exceeded
that objective.
FORWARD-LOOKING STATEMENTS
The Private Securities Litigation Reform Act of 1995 (the "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 statements. Forward-looking
statements have been made in this Report. Such statements are based on beliefs
of Conectiv's management ("Management") 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 other, the following: prevailing federal and state governmental policies
and regulatory actions affecting the energy industry, including without
limitation with respect to allowed rates of return, industry and rate
structures, acquisition and disposal of assets and facilities, operation and
construction of plant facilities, recovery of purchased power expenses,
deregulation of energy supply, unbundling of delivery services, and present or
prospective wholesale and retail competition (including without limitation
retail wheeling and transmission costs); an increasingly competitive and
volatile energy marketplace, including without limitation volatility in market
demand and prices for energy, capacity and fuel and competition for new energy
development opportunities and other opportunities; potential negative impacts
resulting from an economic downturn; ability to secure electric and natural gas
supply to fulfill sales
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commitments at favorable prices; operating performance of power plants; sales
retention and growth; population growth rates and demographic patterns; growth
in demand, sales and capacity to fulfill demand; the effects of weather; changes
in construction or project costs; unanticipated changes in operating expenses
and capital expenditures; operating restrictions; increased costs and
construction delays attributable to environmental and safety laws, regulations
and policies; legal and administrative proceedings (whether civil or criminal)
and settlements that influence the company's business and profitability; changes
in tax rates or policies or in rates of inflation; restrictions on the ability
to obtain financing and other restrictions imposed by the Public Utility Holding
Company Act of 1935; capital market conditions; interest rate fluctuations and
credit market concerns; and effects of geopolitical events, including the threat
of domestic terrorism.
Any forward-looking statements speak only as of the date of this Report and
Conectiv undertakes no obligation to publicly update or revise any
forward-looking statements to reflect events or circumstances after the date on
which such statements are made or to reflect the occurrence of unanticipated
events. New factors emerge from time to time and it is not possible for Conectiv
to predict all such factors, nor can it assess the impact of any such factor on
Conectiv's business or the extent to which any factor, or combination of
factors, may cause results to differ materially from those contained in any
forward-looking statements. The foregoing list of factors pursuant to the
Litigation Reform Act should not be construed as exhaustive or as admission
regarding the adequacy of disclosures made prior to the effective date of the
Litigation Reform Act.
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 hereunto duly authorized.
Conectiv
By: /s/ John C. Van Roden
John C. van Roden
Senior Vice President &
Chief Financial Officer
Date: July 18, 2002
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