UNITED STATES
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 June 30, 2000
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission file number 1-13895
CONECTIV
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(Exact name of registrant as specified in its charter)
Delaware 51-0377417
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(State 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 302-429-3114
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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
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Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Shares Outstanding at June 30, 2000
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Common Stock, $0.01 par value 83,058,724
Class A Common Stock, $0.01 par value 5,742,315
Conectiv
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Table of Contents
Page
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Part I. Financial Information:
Item 1. Financial Statements
Consolidated Statements of Income for the three and six months
ended June 30, 2000, and June 30, 1999................................... 1
Consolidated Statements of Comprehensive Income for the three and
six months ended June 30, 2000, and June 30, 1999........................ 2
Consolidated Balance Sheets as of June 30, 2000, and
December 31, 1999........................................................ 3-4
Consolidated Statements of Cash Flows for the
six months ended June 30, 2000, and June 30, 1999........................ 5
Notes to Consolidated Financial Statements............................... 6-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations...................................... 16-27
Item 3. Quantitative and Qualitative Disclosures About Market Risk............... 27
Part II. Other Information
Item 1. Legal Proceedings........................................................ 28
Item 5. Other Information........................................................ 28
Item 6. Exhibits and Reports on Form 8-K......................................... 28
Signature ......................................................................... 29
i
Item 1. Financial Statements
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CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------------
2000 1999 2000 1999
------------ ------------- ------------- --------------
OPERATING REVENUES
Electric $684,841 $553,510 $1,315,136 $ 1,116,823
Gas 302,543 133,180 577,036 425,030
Other services 165,000 115,790 305,557 207,212
------------ ------------- ------------- --------------
1,152,384 802,480 2,197,729 1,749,065
------------ ------------- ------------- --------------
OPERATING EXPENSES
Electric fuel and purchased energy and capacity 386,019 257,931 717,323 536,545
Gas purchased 295,410 119,199 547,029 390,812
Other services' cost of sales 139,157 90,892 257,594 164,825
Operation and maintenance 158,948 159,512 315,826 293,763
Depreciation and amortization 64,099 68,291 128,029 135,174
Taxes other than income taxes 20,389 20,797 41,620 39,550
Provision for loss on sale of businesses 25,162 - 25,162 -
------------ ------------- ------------- --------------
1,089,184 716,622 2,032,583 1,560,669
------------ ------------- ------------- --------------
OPERATING INCOME 63,200 85,858 165,146 188,396
------------ ------------- ------------- --------------
OTHER INCOME 33,593 8,985 45,908 32,098
------------ ------------- ------------- --------------
INTEREST EXPENSE
Interest charges 55,801 42,689 109,958 82,949
Allowance for borrowed funds used during
construction and capitalized interest (2,453) (1,457) (4,146) (3,023)
------------ ------------- ------------- --------------
53,348 41,232 105,812 79,926
------------ ------------- ------------- --------------
PREFERRED STOCK DIVIDEND
REQUIREMENTS OF SUBSIDIARIES 5,109 4,778 10,158 9,726
------------ ------------- ------------- --------------
INCOME BEFORE INCOME TAXES 38,336 48,833 95,084 130,842
INCOME TAXES 19,975 17,474 44,186 50,788
------------ ------------- ------------- --------------
NET INCOME $ 18,361 $ 31,359 $ 50,898 $ 80,054
============ ============= ============= ==============
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK
Common stock $ 17,364 $ 30,061 $ 52,354 $ 77,424
Class A common stock 997 1,298 (1,456) 2,630
------------ ------------- ------------- --------------
$ 18,361 $ 31,359 $ 50,898 $ 80,054
============ ============= ============= ==============
COMMON STOCK
Average shares outstanding (000)
Common stock 83,777 98,120 84,673 99,326
Class A common stock 5,742 6,408 5,742 6,484
Earnings (loss) per average share--basic and diluted
Common stock $0.21 $0.31 $0.62 $0.78
Class A common stock $0.17 $0.20 ($0.25) $0.41
Dividends declared per share
Common stock $0.22 $0.22 $0.44 $0.605
Class A common stock $0.80 $0.80 $1.60 $1.60
See accompanying Notes to Consolidated Financial Statements.
-1-
CONECTIV
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CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
----------------------------- ------------------------------
2000 1999 2000 1999
------------ ------------- ------------- --------------
Net Income $ 18,361 $ 31,359 $ 50,898 $ 80,054
Other comprehensive income, net of income -
taxes of $291 540 - 540
------------ ------------- ------------- --------------
Comprehensive income $ 18,901 $ 31,359 $ 51,438 $ 80,054
------------ ------------- ------------- --------------
See accompanying Notes to Consolidated Financial Statements.
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CONECTIV
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2000 1999
------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $61,734 $56,239
Accounts receivable, net of allowances of
$20,476 and $11,564, respectively 770,715 544,463
Inventories, at average cost
Fuel (coal, oil and gas) 58,937 65,360
Materials and supplies 58,539 58,177
Deferred energy supply costs - 8,612
Other prepayments 13,254 20,295
Prepaid New Jersey Sales and Excise Taxes 31,260 -
Prepaid income taxes - 15,674
Deferred income taxes, net 25,167 25,175
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1,019,606 793,995
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Investments
Investment in leveraged leases 55,880 72,161
Funds held by trustee 175,897 173,247
Other investments 127,663 100,764
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359,440 346,172
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Property, Plant and Equipment
Electric generation 1,571,208 1,571,556
Electric transmission and distribution 2,671,047 2,633,375
Gas transmission and distribution 267,743 265,708
Other electric and gas facilities 404,780 405,303
Telecommunications, thermal systems, and other
property, plant, and equipment 246,835 238,229
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5,161,613 5,114,171
Less: Accumulated depreciation 2,181,167 2,097,529
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Net plant in service 2,980,446 3,016,642
Construction work-in-progress 280,197 199,390
Leased nuclear fuel, at amortized cost 47,099 55,983
Goodwill, net 351,123 369,468
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3,658,865 3,641,483
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Deferred Charges and Other Assets
Recoverable stranded costs, net 1,010,754 1,030,049
Deferred recoverable income taxes 92,428 93,853
Option payments on combustion turbines 24,675 -
Unrecovered purchased power costs 21,708 28,923
Unrecovered New Jersey state excise tax 16,577 22,567
Deferred debt refinancing costs 19,410 21,113
Deferred other postretirement benefit costs 31,230 32,479
Prepaid pension costs 49,951 35,005
Unamortized debt expense 27,245 28,045
License fees 22,644 23,331
Other 46,146 41,447
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1,362,768 1,356,812
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Total Assets $6,400,679 $6,138,462
============= ===============
See accompanying Notes to Consolidated Financial Statements.
-3-
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
June 30, December 31,
2000 1999
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CAPITALIZATION AND LIABILITIES
Current Liabilities
Short-term debt $786,843 $579,688
Long-term debt due within one year 12,973 48,937
Variable rate demand bonds 158,430 158,430
Accounts payable 417,532 307,764
Taxes accrued 23,600 -
Interest accrued 43,675 41,137
Dividends payable 26,098 27,545
Deferred energy supply costs 43,643 46,375
Current capital lease obligation 28,714 28,715
Above-market purchased energy contracts
and other electric restructuring liabilities 34,156 41,101
Other 89,452 91,353
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1,665,116 1,371,045
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Deferred Credits and Other Liabilities
Other postretirement benefits obligation 95,758 96,388
Deferred income taxes, net 765,584 730,987
Deferred investment tax credits 71,251 74,431
Regulatory liability for New Jersey income tax benefit 49,262 49,262
Above-market purchased energy contracts
and other electric restructuring liabilities 110,618 119,704
Deferred gain on termination of purchased energy contract 74,968 70,849
Long-term capital lease obligation 21,078 30,395
Other 59,417 47,447
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1,247,936 1,219,463
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Capitalization
Common stock: $0.01 per share par value;
150,000,000 shares authorized; shares outstanding - -
83,058,724 in 2000, and 86,173,169 in 1999 832 863
Class A common stock: $0.01 per share par value;
10,000,000 shares authorized; shares outstanding - -
5,742,315 in 2000 and 1999 57 57
Additional paid-in capital - - common stock 1,033,705 1,085,060
Additional paid-in capital - - Class A common stock 93,738 93,738
Accumulated deficit (31,591) (36,472)
Treasury shares, at cost:
120,959 shares in 2000; 167,514 shares in 1999 (2,504) (3,446)
Unearned compensation (2,278) (1,627)
Accumulated other comprehensive income 540 -
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Total common stockholders' equity 1,092,499 1,138,173
Preferred stock of subsidiaries:
Not subject to mandatory redemption 95,933 95,933
Subject to mandatory redemption 188,950 188,950
Long-term debt 2,110,245 2,124,898
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3,487,627 3,547,954
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Commitments and Contingencies (Note 9) - -
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Total Capitalization and Liabilities $6,400,679 $6,138,462
============= ==============
See accompanying Notes to Consolidated Financial Statements.
-4-
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Six Months Ended
June 30,
--------------------------------
2000 1999
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 50,898 $ 80,054
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization 140,146 145,824
Investment tax credit adjustments, net (3,180) (2,547)
Deferred income taxes, net 35,645 (4,289)
Non-cash earnings of equity method investee (22,764) (17,978)
Provision for loss on sale of businesses 25,162 -
Net change in:
Accounts receivable (217,589) 13,978
Inventories 5,881 8,487
Accounts payable 108,782 (25,797)
Accrued / prepaid taxes 5,622 (27,198)
Other current assets & liabilities (1) 8,138 23,449
Other, net (6,371) 7,931
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Net cash provided by operating activities 130,370 201,914
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CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of businesses, net of cash acquired (798) (14,704)
Capital expenditures (186,287) (134,219)
Investments in partnerships (5,325) (21,116)
Proceeds from assets sold 19,691 -
Deposits to nuclear decommissioning trust funds (627) (5,341)
Decrease in bond proceeds held in trust funds - 11,536
Leveraged leases, net 7,270 5,930
Other, net (4,055) 1,336
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Net cash used by investing activities (170,131) (156,578)
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CASH FLOWS FROM FINANCING ACTIVITIES
Common stock dividends paid (46,541) (87,518)
Common stock redeemed (51,954) (358,943)
Long-term debt issued - 250,000
Long-term debt redeemed (50,159) (80,805)
Principal portion of capital lease payments (12,118) (10,650)
Net change in short-term debt 207,155 223,947
Cost of issuances and refinancings (1,127) (2,818)
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Net cash provided (used) by financing activities 45,256 (66,787)
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Net change in cash and cash equivalents 5,495 (21,451)
Cash and cash equivalents at beginning of period 56,239 65,884
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Cash and cash equivalents at end of period $ 61,734 $ 44,433
============= =============
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
-5-
CONECTIV
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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(Unaudited)
Note 1. Financial Statement Presentation
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Conectiv's consolidated condensed interim financial statements contained herein
include the accounts of Conectiv and its majority-owned subsidiaries and reflect
all adjustments necessary in the opinion of management for a fair presentation
of interim results. In accordance with regulations of the Securities and
Exchange Commission (SEC), disclosures which would substantially duplicate the
disclosures in Conectiv's 1999 Annual Report on Form 10-K have been omitted.
Accordingly, Conectiv's consolidated condensed interim financial statements
contained herein should be read in conjunction with Conectiv's 1999 Annual
Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for
additional relevant information.
Within the Consolidated Statements of Income, amounts previously reported for
the three and six months ended June 30, 1999 as "Electric fuel and purchased
power" and "Purchased electric capacity" have been combined and reported as
"Electric fuel and purchased energy and capacity." Certain other
reclassifications of prior period data have been made to conform with the
current presentation.
Note 2. Investment Income
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An indirect Conectiv subsidiary holds a limited partner interest in EnerTech
Capital Partners, L.P. (EnerTech). EnerTech is a venture capital fund that
invests in energy-related technology and Internet service companies. Due to the
nature of EnerTech's investments, its earnings may be volatile from period to
period. EnerTech records its investments at fair value and includes gains and
losses on changes in the fair value of its investments in income in accordance
with industry practice. Conectiv's subsidiary accounts for its investment in
EnerTech on the equity method of accounting. The pre-tax equity in earnings of
EnerTech are reported as "Other income" in the Consolidated Statements of
Income.
Conectiv's equity in earnings of EnerTech for the three and six months ended
June 30, 2000 was $24.6 million ($16.0 million after-income taxes or $0.19 per
common share), which resulted primarily from an unrealized gain on the initial
public offering of common shares of Capstone Turbine Corporation (Capstone).
Capstone develops, designs, assembles, and sells micro-turbines worldwide in the
distributed power generation market and hybrid electric vehicle market.
Conectiv's equity in earnings of EnerTech for the three and six months ended
June 30, 1999 was $2.0 million ($1.2 million after-income taxes or $0.01 per
common share) and $18.0 million ($10.6 million after taxes or $0.11 per common
share), respectively.
The carrying amount of Conectiv's investment in EnerTech was $48.8 million as of
June 30, 2000 and $26.6 million as of December 31, 1999. During the six months
ended June 30, 2000, Conectiv's subsidiary received distributions of marketable
securities ($5.8 million fair value) and cash ($1.8 million) from EnerTech.
-6-
Note 3. Asset Sales
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For information concerning agreements for the sale of the nuclear and non-
strategic baseload fossil electric generating plants of Delmarva Power & Light
Company (DPL) and Atlantic City Electric Company (ACE), see Note 13 to the
Consolidated Financial Statements included in Item 8 of Part II of Conectiv's
1999 Annual Report on Form 10-K. The operating results of the electric
generating plants to be sold are included in the Energy business segment shown
in Note 11 to the Consolidated Financial Statements included herein.
As discussed in Note 13 to the Consolidated Financial Statements included in
Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, consummation of
the sales of the nuclear and non-strategic baseload fossil electric generating
plants is subject to the receipt of required regulatory approvals. In addition,
the agreements for the sales of the electric generating plants contemplate that
the sales of the plants of ACE and DPL will occur simultaneously. Although
management had expected such sales to close during the third or fourth quarter
of 2000, the current status of litigation relating to certain deregulation
matters in New Jersey (see discussion below under the caption "New Jersey
Electric Utility Industry Restructuring" in Note 4 to the Consolidated Financial
Statements) could result in a delay in such closings. Management cannot predict
the outcome of such litigation, the timing of such outcome, the effect on
Conectiv's ability to consummate the sales or the impact on Conectiv's ability
to recover or securitize any related stranded costs.
On March 22, 2000, Conectiv announced its plans to sell Conectiv Services, Inc.
(CSI) and Conectiv Thermal Systems, Inc. (CTS). CSI provides heating,
ventilation, and air conditioning (HVAC) services and CTS constructs and
operates thermal energy systems. Conectiv sold a division of CSI (total assets
of $12 million) during June 2000 and expects to sell CSI's other divisions
within several months, which had total assets of approximately $61 million as of
June 30, 2000. The results of operations for CSI are presented as the "HVAC"
business segment in Note 11 to the Consolidated Financial Statements included
herein.
During June 2000, CTS reached agreements with subsidiaries of Sempra Energy to
sell its 50% ownership interests in two thermal energy system projects for
approximately $39 million, subject to certain adjustments upon completion of the
sale. The sale is expected to be completed in August or September of 2000. As of
June 30, 2000, CTS had total assets of approximately $188 million, including $39
million (net of valuation reserves) for the two thermal energy system projects.
Conectiv continues to seek purchasers for the remaining operations of CTS, but
may retain those operations if satisfactory offers are not obtained. The results
of operations for CTS are included in the Energy business segment in Note 11 to
the Consolidated Financial Statements included herein.
Conectiv recorded a loss of $25.2 million before income taxes ($23.4 million
after income taxes or $0.28 per average common share) in the second quarter of
2000 for the sales of CTS' 50% interest in two projects, the sale of a division
of CSI, and for the expected sale of the remainder of CSI's operations. The
pre-tax charge is shown on the Consolidated Statements of Income as "Provision
for loss on sale of businesses." The primary effect on the balance sheet of
recording the $25.2 million loss was a $16 million reduction in goodwill
associated with HVAC operations. Since most of the goodwill which was written-
off is not deductible for income tax purposes, no income tax benefit was
recognized for that portion of the pre-tax loss.
-7-
Note 4. Rate Matters
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An update to the information previously reported in Note 9 to the Consolidated
Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual
Report on Form 10-K is presented below.
New Jersey Electric Utility Industry Restructuring
As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued
a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity
supply business and indicated that a more detailed order would be issued at a
later time. The NJBPU's final order for ACE has been delayed due to appeals of
the NJBPU's final order concerning restructuring the electricity supply business
of Public Service Electric and Gas Company (PSE&G). On April 13, 2000, the
Superior Court of New Jersey, Appellate Division, issued its decision on this
matter, generally upholding the orders of the NJBPU.
The New Jersey Business Users and the Division of the Ratepayer Advocate,
appellants in the Superior Court proceeding, petitioned the New Jersey Supreme
Court to review the Superior Court's decision. The New Jersey Supreme Court
agreed to review the Superior Court's decision on July 14, 2000, setting a
schedule for briefing by the parties, with oral argument set for November 8,
2000.
Management cannot predict the effect, if any, of the outcome of the appeals
discussed above upon ACE's final order for restructuring, or related matters,
such as securitization by ACE of its stranded costs and the sale of the electric
generating plants, as discussed in Note 3 to the Consolidated Financial
Statements.
ACE provides Basic Generation Service (BGS) to customers who do not have an
alternative electricity provider. ACE's ability to recover its BGS supply costs
is subject to review by the NJBPU. In accordance with the Summary Order, ACE
intends to secure BGS supply requirements (net of sources otherwise available to
it at any particular time) by competitive bidding. To date, ACE has issued two
requests for proposals (RFP) for BGS supply. Neither RFP resulted in ACE's
entering into BGS supply contracts, and ACE has secured BGS supplies through
other means.
Virginia Electric Utility Industry Restructuring
On June 29, 2000, the Virginia State Corporation Commission issued an order
that, among other things, approved DPL's plan for the functional separation of
its generation from transmission and distribution and authorized the transfer of
electric generating facilities and related assets to other Conectiv
subsidiaries.
-8-
Note 5. Income Taxes
- ------- ------------
For the three and six months ended June 30, 2000, the amount computed by
multiplying "Income before income taxes" by the federal statutory rate is
reconciled below to income tax expense.
Three Months Six Months
Ended Ended
June 30, 2000 June 30, 2000
--------------- ---------------
Amount Rate Amount Rate
-------- ----- -------- -----
(Dollars in Thousands)
Statutory federal income tax expense $13,418 35% $33,279 35%
State income taxes, net of federal benefit 4,085 11 9,423 10
Non-deductible goodwill 5,396 14 6,055 6
Plant basis differences 1,476 4 2,951 3
Amortization of investment tax credits (1,907) (5) (3,180) (3)
Resolution of income tax matters* (3,555) (9) (6,195) (7)
Other, net 1,062 2 1,853 2
------- -- ------- --
$19,975 52% $44,186 46%
======= == ======= ==
*Reflects a change in estimate of previously accrued income taxes due to
resolution of matters with taxing authorities.
Note 6. Common Stockholders' Equity
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(A) General
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As previously disclosed in Note 16 to the Consolidated Financial Statements
included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, as
a registered holding company under the Public Utility Holding Company Act of
1935 (PUHCA), Conectiv may not pay dividends on the shares of common stock and
Class A common stock from an accumulated deficit or paid-in-capital without SEC
approval. As of June 30, 2000, Conectiv had an accumulated deficit of $31.6
million. On April 27, 2000, the SEC approved Conectiv's payment of dividends on
common stock and Class A common stock for the first and second quarters of 2000.
Management expects Conectiv to have retained earnings sufficient for dividends
declared on shares of common stock and Class A common stock beginning in the
third quarter of 2000. Management expects that, if additional SEC approvals are
required for quarterly payment of dividends, such approvals would be received.
(B) Conectiv Common Stock
---------------------
During the six months ended June 30, 2000, Conectiv purchased 3,245,100 shares
of Conectiv common stock for $52.0 million. As of June 30, 2000, 2,926,700
shares of common stock remained authorized for purchase under the stock purchase
program announced in January 2000.
Conectiv's Board of Directors declared quarterly dividends per share of common
stock of $0.22 for the first quarter of 2000 and $0.22 for the second quarter of
2000, or $0.44 for the six months ended June 30, 2000. For the six months ended
June 30, 2000, dividends declared per share of common stock represented
approximately 71% of earnings per average share of common stock outstanding of
$0.62 and approximately 49% of earnings per average share of common stock
outstanding adjusted to exclude the $0.28 loss per average share of common stock
outstanding related to the disposition of the HVAC business and a portion of
CTS. For additional information concerning dividends on common stock, see
"Dividends on Common Stock" on page II-7 in Management's Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) included in Conectiv's
1999 Annual Report on Form 10-K.
-9-
(C) Conectiv Class A Common Stock
-----------------------------
For general information concerning Class A common stock and information about
conversion and redemption provisions related to Class A common stock, refer to
Note 17 to the Consolidated Financial Statements included in Item 8 of Part II
of Conectiv's 1999 Annual Report on Form 10-K.
For the three months ended June 30, 2000, dividends declared per share of Class
A common stock were $0.80 compared to earnings per average share of Class A
common stock outstanding of $0.17. For the six months ended June 30, 2000,
dividends declared per share of Class A common stock were $1.60 compared to a
loss per average share of Class A common stock outstanding of $0.25. For
additional information concerning dividends on Class A common stock, see
"Dividends on Class A Common Stock" on page II-8 of the MD&A included in
Conectiv's 1999 Annual Report on Form 10-K.
Computation of Earnings Applicable to Conectiv Class A Common Stock
(Dollars in Thousands)(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
Net earnings of ACE $ 13,581 $ 14,345 $ 14,621 28,903
Exclude net (income) loss of non-utility activities 71 54 46 (48)
-------- -------- -------- --------
Net income of Atlantic Utility Group 13,652 14,399 14,667 28,855
Pro-rata portion of fixed notional charge
of $40 million per year (10,000) (10,000) (20,000) (20,000)
-------- -------- -------- --------
Company Net Income (Loss) Attributable
to the Atlantic Utility Group 3,652 4,399 (5,333) 8,855
Percentage applicable to Class A Common Stock * 27.3% 29.5% 27.3% 29.7%
-------- -------- -------- --------
Earnings (loss) applicable to Class A Common Stock $ 997 $ 1,298 $ (1,456) $ 2,630
======== ======== ======== ========
* For information concerning the percentage of "Company Net Income (Loss)
Attributable to the Atlantic Utility Group" which is applicable to Class A
common stock, refer to Note 17 to the Consolidated Financial Statements
included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K.
-10-
Summarized Financial Information of Atlantic City Electric Company
(Dollars in Thousands)(unaudited)
Income Statement Information
Three Months Ended Six Months Ended
June 30, June 30,
------------------------ ------------------
2000 1999 2000 1999
---------- ---------- -------- --------
Operating revenues $ 236,249 $ 246,143 $445,135 $490,982
Operating income $ 36,411 $ 35,967 $ 59,091 $ 74,001
Net income $ 14,113 $ 14,878 $ 15,686 $ 29,969
Earnings applicable to common stock $ 13,581 $ 14,345 $ 14,621 $ 28,903
Balance Sheet Information
June 30, December 31,
2000 1999
---------- ----------
Current assets $ 286,921 $ 340,774
Noncurrent assets 2,272,195 2,313,885
---------- ----------
Total assets $2,559,116 $2,654,659
========== ==========
Current liabilities $ 226,100 $ 300,837
Noncurrent liabilities 1,548,917 1,550,690
Preferred stock 125,181 125,181
Common stockholder's equity 658,918 677,951
---------- ----------
Total capitalization and liabilities $2,559,116 $2,654,659
========== ==========
(D) Changes in Consolidated Common Stockholders' Equity
---------------------------------------------------
Conectiv's consolidated common stockholders' equity decreased from $1,138.2
million as of December 31, 1999, to $1,092.5 million as of June 30, 2000. The
$45.7 million decrease was primarily due to $46.0 million of common dividends
declared and Conectiv's purchase of 3,245,100 shares of Conectiv common stock
for $52.0 million, partly offset by net income of $50.9 million.
Note 7. Debt
- ------- ----
The $786.8 million of short-term debt outstanding as of June 30, 2000 primarily
represented borrowings at the holding company level by Conectiv and had an
average interest rate of 6.9%. Conectiv (the holding company) has credit
agreements which provide borrowing capability of up to $1.03 billion.
ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26,
2000. DPL redeemed $2.1 million of 7 1/8% Pollution Control Bonds on February 1,
2000 and $1.4 million of 6.95% Amortizing First Mortgage Bonds on June 1, 2000.
On January 31, 2000, DPL arranged a $150 million revolving credit facility which
expires January 31, 2003. The credit facility provides liquidity for DPL's
$104.8 million of Variable Rate Demand Bonds and general corporate purposes.
-11-
Note 8. Subsequent Event--Debt Refinancing
- -------- ----------------------------------
On behalf of DPL, the Delaware Economic Development Authority issued the bonds
listed below on July 7, 2000, and loaned the proceeds to DPL. The bonds are not
secured by a mortgage or security interest in property of DPL.
Maturity Interest
Principal Series Date Rate
- ----------- --------------------------------------------------------- ---------------- ------------
($000)
$11,150 Exempt Facilities Refunding Revenue Bonds, Series 2000A July 1, 2030 Variable (1)
27,750 Exempt Facilities Refunding Revenue Bonds, Series 2000B July 1, 2030 Variable (1)
15,000 Pollution Control Refunding Revenue Bonds, Series 2000C July 1, 2025 (2) 5.5%
16,240 Pollution Control Refunding Revenue Bonds, Series 2000D July 1, 2028 (2) 5.65%
-------
$70,140
=======
(1) The bonds interest rates are set by either auction or remarketing procedures
for periods specified by DPL which may be daily, weekly or other periods,
including long-term periods extending up to the bonds' maturity date. The
initial interest rate period selected was a 35 day auction period. The bonds may
be subject to optional redemption prior to maturity as provided for in the
indenture for the bonds.
(2) The bonds are subject to mandatory tender on July 1, 2010. All or a portion
of the tendered bonds may be redeemed and/or remarketed. After July 1, 2010, the
bonds may bear interest at a variable rate or fixed rate and may be subject to
optional redemption prior to maturity, as provided for in the indenture for the
bonds.
The $70.14 million of proceeds DPL received related to issuance of the bonds
listed above and additional cash will be used to redeem $70.17 million of bonds
which are listed below and were called prior to maturity for redemption on
September 1, 2000 and October 1, 2000, as indicated. The bonds were called at
101.5% to 102% of their principal amount.
Redemption Interest
Principal Series Date Rate
- ----------- --------------------------------------------------------- ----------------- ---------
($000)
$11,170 Exempt Facilities Revenue Bonds, Series 1985 September 1, 2000 7.3%
9,000 Exempt Facilities Revenue Bonds, Series 1989 October 1, 2000 7.5%
35,000 Exempt Facilities Revenue Bonds, Series 1990A September 1, 2000 7.6%
15,000 Pollution Control Refunding Revenue Bonds, Series 1990B September 1, 2000 7.3%
-------
$70,170
=======
-12-
Note 9. Contingencies
- ------- --------------
Environmental Matters
Conectiv's subsidiaries are subject to regulation with respect to the
environmental effects of their operations, including air and water quality
control, solid and hazardous waste disposal, and limitations on land use by
various federal, regional, state, and local authorities. Federal and state
statutes authorize governmental agencies to compel responsible parties to clean
up certain abandoned or uncontrolled hazardous waste sites. Costs may be
incurred to clean up facilities found to be contaminated due to past disposal
practices. Conectiv's current liabilities include $3.0 million as of June 30,
2000 and December 31, 1999, respectively, for potential clean-up and other costs
related to sites at which a Conectiv subsidiary is a potentially responsible
party or alleged to be a third party contributor. Conectiv does not expect such
future costs to have a material effect on its financial position or results of
operations.
In December 1999, DPL discovered an oil leak at the Indian River power plant.
DPL took action to determine the source of the leak and cap it, contain the oil
to minimize impact to a nearby waterway and recover oil from the soil. Costs
incurred for this first phase of response are $2.2 million.
On June 14, 2000, the Secretary of the Delaware Department of Natural Resources
and Environmental Control (DNREC) issued an order which required DPL to make a
$350,000 payment to DNREC in connection with the oil leak at the Indian River
power plant. Of the $350,000, $250,000 is a penalty. Under the terms of the
order, DNREC will transfer the remaining $100,000 to the Center for Inland Bays
to support the annual Environmental Projects Grant Program for improving the
Inland Bays. DPL is currently negotiating a consent agreement with DNREC for
clean-up of the area affected by the leak.
In the same order, DNREC contended that DPL did not comply with a condition of
DNREC-issued construction permits for the installation of pollution control
equipment at Indian River generating units 1 and 2. In resolving this
enforcement action, DPL paid a $100,000 penalty.
Nuclear Insurance
In conjunction with the ownership interests of DPL and ACE in Peach Bottom
Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem),
and Hope Creek Nuclear Generating Station (Hope Creek), DPL and ACE could be
assessed for a portion of any third-party claims associated with an incident at
any commercial nuclear power plant in the United States. Under the provisions of
the Price Anderson Act, if third-party claims relating to such an incident
exceed $200 million (the amount of primary insurance), DPL and ACE could be
assessed up to $57.0 million on an aggregate basis for such third-party claims.
In addition, Congress could impose a revenue-raising measure on the nuclear
industry to pay such claims.
The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance
coverage of approximately $2.8 billion for each unit for loss or damage to the
units, including coverage for decontamination expense and premature
decommissioning. In addition, Conectiv is a member of an industry mutual
insurance company, which provides replacement power cost coverage in the event
of a major accidental outage at a nuclear power plant. Under these coverages,
Conectiv is subject to potential retrospective loss experience assessments of up
to $7.3 million on an aggregate basis.
-13-
Note 10. Supplemental Cash Flow Information
- -------- ----------------------------------
Six Months Ended
June 30,
------------------
2000 1999
-------- -------
Cash paid (received) for:
Interest, net of amounts capitalized $ 99,448 $71,145
Income taxes, net of refunds $(28,568) $65,520
During the six months ended June 30, 2000, Conectiv received $96.7 million of
income tax refunds. The income tax refunds were primarily related to the tax
benefit associated with ACE's payment of $228.5 million on December 28, 1999 to
terminate ACE's purchase of electricity under a contract with the Pedricktown
Co-generation Limited Partnership (Pedricktown). For additional information
concerning the contract termination, see Note 10 to the Consolidated Financial
Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on
Form 10-K.
Note 11. Business Segments
- -------- -----------------
The following information is presented in accordance with Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" (SFAS No. 131). Conectiv's business segments under SFAS No.
131 are as follows: "Energy" represents (a) the generation, purchase, trading
and sale of electricity, including the obligations of DPL and ACE to supply
electricity to customers who do not choose an alternative electricity supplier;
(b) gas supply and trading activities, (c) power plant operation services, and
(d) thermal heating and cooling systems operation and construction services
provided by CTS; "Power Delivery" includes activities related to delivery of
electricity and gas to customers at regulated prices over transmission and
distribution systems; "Telecommunications" represents services provided by
Conectiv Communications Inc. (CCI), including local and long- distance telephone
service and Internet services; "HVAC" represents heating, ventilation, and air
conditioning services provided by CSI.
As discussed in Note 9 to the Consolidated Financial Statements included in Item
8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, Conectiv's
electricity supply businesses were deregulated in the third quarter of 1999.
Prior to deregulation, amounts included in billings to electric customers for
electricity supply and delivery were not separately identified; during this
period, revenues were allocated directly to the Energy and Power Delivery
business segments based on the cost of services provided.
The operating results for business segments are evaluated based on "earnings
before interest and income taxes," which is generally equivalent to Operating
Income plus Other Income, less certain interest charges allocated to the
business segments. For the three and six month periods ended June 30, 2000,
"earnings before interest and income taxes" exclude the $25.2 million loss
accrued for the expected sale of CSI and CTS' interest in two thermal heating
and cooling system projects. The "earnings before interest and income taxes" of
"All Other" business segments include the following amounts for equity in
earnings of EnerTech: three and six months ended June 30, 2000--$24.6 million;
three months ended June 30, 1999--$2.0 million; six months ended June 30, 1999--
$18.0 million.
For additional information concerning EnerTech, see Note 2 to the
Consolidated Financial Statements contained herein and Note 7 to the
Consolidated Financial Statements included in Item 8 of Part II of Conectiv's
1999 Annual Report on Form 10-K.
-14-
Three Months Ended Three Months Ended
June 30, 2000 June 30, 1999
-------------------------------- -------------------------------
Earnings Earnings
Before Interest Before Interest
Business Segments Revenues and Taxes Revenues and Taxes
- -------------------- -------------- ---------------- --------------- ---------------
(Dollars in Thousands)
Energy (1) $ 1,059,878 $ 61,534 $ 625,464 $ 47,076
Power Delivery 181,318 48,178 177,761 55,028
Telecommunications 14,313 (11,934) 8,293 (8,945)
HVAC 37,184 (1,299) 38,314 (1,978)
All Other 963 22,210 1,901 1,190
------------- ----------- ----------- ----------
$ 1,293,656 (2) $ 118,689 (3) $ 851,733 (4) $ 92,371 (5)
============= =========== =========== ==========
(1) Includes the operating results of non-strategic electric generating plants
which, subsequent to receipt of required regulatory approvals, are expected
to be sold.
(2) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$139,074; Telecommunications business
segment--$1,594; All Other business segments--$604.
(3) "Earnings before interest and income taxes" less $54,687 of interest expense
and preferred stock dividends, $504 of net Merger-related consolidation
adjustments, and the $25,162 pre-tax provision for loss expected on the sale
of CSI and CTS' interest in two thermal heating and cooling system projects
equals consolidated income before income taxes.
(4) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$43,818; Telecommunications business
segment--$804; All Other business segments--$4,631.
(5) "Earnings before interest and income taxes" less $43,034 of interest expense
and preferred stock dividends and $504 of net Merger-related consolidation
adjustments equals consolidated income before income taxes.
Six Months Ended Six Months Ended
June 30, 2000 June 30, 1999
-------------------------------- ----------------------------------
Earnings Earnings
Before Interest Before Interest
Business Segments Revenues and Taxes Revenues and Taxes
- -------------------- -------------- ---------------- ----------------- ---------------
(Dollars in Thousands)
Energy (1) $ 2,010,173 $ 126,506 $ 1,388,823 $ 86,164
Power Delivery 369,379 111,440 374,727 135,962
Telecommunications 26,876 (25,511) 15,112 (17,234)
HVAC 69,047 (4,804) 65,010 (5,306)
All Other 3,602 21,866 3,684 15,549
------------- ----------- ------------- -----------
$ 2,479,077 (2) $ 229,497 (3) $ 1,847,356 (4) $ 215,135 (5)
============= =========== ============= ===========
(1) Includes the operating results of non-strategic electric generating plants
which, subsequent to receipt of required regulatory approvals, are expected
to be sold.
(2) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$276,728; Telecommunications business
segment--$3,118; All Other business segments--$1,502.
(3) "Earnings before interest and income taxes" less $108,243 of interest
expense and preferred stock dividends, $1,008 of net Merger-related
consolidation adjustments, and the $25,162 pre-tax provision for loss
expected on the sale of CSI and CTS' interest in two thermal heating and
cooling system projects equals consolidated income before income taxes.
(4) Includes intercompany revenues which are eliminated in consolidation as
follows: Energy business segment--$92,488; Telecommunications business
segment--$1,612; All Other business segments--$4,191.
(5) "Earnings before interest and income taxes" less $83,438 of interest expense
and preferred stock dividends and $855 of net Merger-related consolidation
adjustments equals consolidated income before income taxes.
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 "intend," "will,"
"anticipate," "estimate," "expect," "believe," 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: the effects of deregulation of energy supply and the unbundling
of delivery services; the ability to enter into purchased power agreements on
terms acceptable to Conectiv; market demand and prices for energy, capacity, and
fuel; weather variations affecting energy usage; operating performance of power
plants; an increasingly competitive marketplace; results of any asset
dispositions; sales retention and growth; federal and state regulatory actions;
future litigation results; costs of construction; operating restrictions;
increased costs and construction delays attributable to environmental
regulations; nuclear decommissioning and the availability of reprocessing and
storage facilities for spent nuclear fuel; and credit market concerns. Conectiv
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 list of factors pursuant to the Litigation Reform Act should not
be construed as exhaustive or as any admission regarding the adequacy of
disclosures made prior to the effective date of the Litigation Reform Act.
Common Stock Earnings Summary
- ------------------------------
Earnings applicable to common stock were $17.4 million, or $0.21 per average
share of common stock outstanding (83,777,000 average shares outstanding) for
the second quarter of 2000, compared to earnings applicable to common stock of
$30.1 million, or $0.31 per average share of common stock outstanding
(98,120,000 average shares outstanding) for the second quarter of 1999.
Earnings applicable to common stock were $52.4 million, or $0.62 per average
share of common stock outstanding (84,673,000 average shares outstanding) for
the six months ended June 30, 2000, compared to earnings applicable to common
stock of $77.4 million, or $0.78 per average share of common stock outstanding
(99,326,000 average shares outstanding) for the six months ended June 30, 1999.
Conectiv's Board of Directors declared quarterly dividends per share of common
stock of $0.22 for the first quarter of 2000 and $0.22 for the second quarter of
2000, or $0.44 for the six months ended June 30, 2000. For the six months ended
June 30, 2000, dividends declared per share of common stock represented
approximately 71% of earnings per average share of common stock outstanding of
$0.62 and approximately 49% of earnings per average share of common stock
outstanding adjusted to exclude the $0.28 loss per average share of common stock
outstanding related to the disposition of the HVAC business and a portion of
CTS. For additional information concerning dividends on common stock, see
"Dividends on Common Stock" on page II-7 in the MD&A included in Conectiv's 1999
Annual Report on Form 10-K.
-16-
The table shown below shows contributions to earnings per average share of
common stock outstanding for each period reported.
After-tax contribution to earnings (loss) per average share of common stock
outstanding
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2000 1999 2000 1999
------ ------ ------ ------
(1) Provision for losses on the sales
of CSI and a portion of CTS $(0.28) - $(0.28) -
(2) Equity in earnings of EnerTech 0.19 0.01 0.19 0.11
(3) CCI (telecommunications) (0.11) (0.06) (0.23) (0.11)
(4) CSI (HVAC) (0.02) (0.01) (0.05) (0.04)
(5) Energy, Power Delivery, and Other 0.43 0.37 0.99 0.82
------ ------ ------ ------
$ 0.21 $ 0.31 $ 0.62 $ 0.78
====== ====== ====== ======
(1) As discussed in Note 3 to the Consolidated Financial Statements, Conectiv
recorded a pre-tax loss of $25.2 million before income taxes ($23.4 million
after income taxes or $0.28 per average common share) in the second quarter
of 2000 for the sales of CTS' 50% interest in two projects, the sale of a
division of CSI, and for the expected sale of the remainder of CSI's
operations. The pre-tax charge is shown on the Consolidated Statements of
Income as "Provision for loss on sale of businesses."
(2) As discussed in Note 2 to the Consolidated Financial Statements, Conectiv's
equity in earnings of EnerTech for the three and six months ended June 30,
2000 was $24.6 million ($16.0 million after-income taxes or $0.19 per
common share), which resulted primarily from an unrealized gain on the
initial public offering of common shares of Capstone. Capstone develops,
designs, assembles, and sells micro-turbines worldwide in the distributed
power generation market and hybrid electric vehicle market. For the six
months ended June 30, 1999, Conectiv's equity in earnings of EnerTech was
$18.0 million ($10.6 million after taxes or $0.11 per common share) which
resulted primarily from the initial public offering of common shares of a
business-to-business Internet company. The earnings of EnerTech may be
volatile from period to period due to the nature of its investments in
energy-related technology and Internet service companies. As of June 30,
2000, the carrying amount of Conectiv's investment in EnerTech was $48.8
million.
(3) As announced on March 22, 2000, Conectiv continues to seek a strategic
partner in the telecommunications business. As shown above, the loss per
average share of common stock outstanding which resulted from CCI's
operations increased: (a) to $0.11 in the second quarter of 2000 from $0.06
in the second quarter of 1999 and (b) to $0.23 for the six months ended
June 30, 2000 from $0.11 for the six months ended June 30, 1999. The higher
losses per average share of common stock outstanding resulted from
increased interest, customer service, sales and network operations expenses
and fewer average shares outstanding of common stock. Expenses increased as
a result of expansion of CCI's business.
(4) As discussed in Note 3 to the Consolidated Financial Statements, Conectiv
sold a division of CSI (total assets of $12 million) during June 2000 and
expects to sell CSI's other divisions within several months, which had
total assets of approximately $61 million as of June 30, 2000.
-17-
(5) As shown in the preceding table, the contribution to earnings per average
share of common stock outstanding by "Energy, Power Delivery, and Other"
increased to (a) to $0.43 in the second quarter of 2000 from $0.37 in the
second quarter of 1999 and (b) to $0.99 for the six months ended June 30,
2000 from $0.82 for the six months ended June 30, 1999. These increases
were primarily due to fewer average common shares outstanding and higher
earnings from the Energy business segment, partly offset by lower earnings
from the Power Delivery business segment. As disclosed in Note 11 to the
Consolidated Financial Statements, earnings before interest and income
taxes of the Energy business segment increased $14.5 million and $40.3
million for the three-month and six-month periods, respectively. Earnings
before interest and income taxes of the Power Delivery business segment
decreased by $6.9 million and $24.5 million for the three-month and
six-month periods, respectively.
Earnings before interest and income taxes of the Energy business segment
increased primarily due to additional revenues from non-regulated
electricity generation. The Energy business also benefited from lower
purchased capacity and depreciation costs due to the effects of
discontinuing the application of Statement of Financial Accounting
Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation" (SFAS No. 71) in the third quarter of 1999. These positive
variances were partly offset by an unfavorable variance for supplying
electricity to DPL's "default service" customers (customers who do not
choose an alternative energy supplier). DPL no longer operates under energy
adjustment clauses which had generally eliminated the effect of seasonal
and other energy price fluctuations on costs expensed. DPL's fuel and
purchased power costs for the second quarter of 1999 reflect a credit, due
to the effect of last year's energy adjustment clauses.
Conectiv's participation in energy markets results in exposure to commodity
market risk. Conectiv has controls in place that are intended to keep risk
exposures within certain management-approved risk tolerance levels. For
additional information concerning commodity market risk, see "Item 3.
Quantitative and Qualitative Disclosures About Market Risk," included
herein.
Earnings before interest and income taxes of the Power Delivery business
segment decreased primarily due to revenue decreases from lower rates for
electric delivery customers and higher customer care expenses.
Class A Common Stock Earnings Summary
- --------------------------------------
For general information concerning Class A common stock and information about
conversion and redemption provisions related to Class A common stock, refer to
Note 17 to the Consolidated Financial Statements included in Item 8 of Part II
of Conectiv's 1999 Annual Report on Form 10-K.
As provided in Conectiv's Restated Certificate of Incorporation, Class A common
stock has an interest in earnings of the Atlantic Utility Group (AUG) in excess
of a notional fixed charge of $40 million per year. (The AUG includes the assets
and liabilities of the electric generation, transmission, and distribution
businesses of ACE which existed on August 9, 1996 and were regulated by the
NJBPU.) For any reporting period, if the AUG earns less than the pro-rata
portion of the annual fixed notional charge, a loss will be applicable to Class
A common stock. For the first six months of 2000, the net income of the AUG was
less than the fixed notional charge, which resulted in a loss of $0.25 per
average share of Class A common stock outstanding. For additional information
concerning the computation of earnings applicable to Class A common stock, see
Note 6 to the Consolidated Financial Statements.
-18-
In comparison to the $0.25 loss per average share of Class A common stock
outstanding for the first six months of 2000, earnings per average share of
Class A common stock outstanding for the first six months of 1999 were $0.41.
For the second quarter of 2000, earnings per average share of Class A common
stock outstanding were $0.17, compared to $0.20 for the second quarter of 1999.
These decreases in earnings per average share of Class A common stock resulted
primarily from customer rate decreases associated with deregulation of ACE's
electricity supply business, partly offset by income tax benefits related to the
resolution of certain tax matters.
For the three months ended June 30, 2000, dividends declared per share of Class
A common stock were $0.80 compared to earnings per average share of Class A
common stock outstanding of $0.17. For the six months ended June 30, 2000,
dividends declared per share of Class A common stock were $1.60 compared to a
loss per average share of Class A common stock outstanding of $0.25. For
additional information concerning dividends on Class A common stock, see
"Dividends on Class A Common Stock" on page II-8 of the MD&A included in
Conectiv's 1999 Annual Report on Form 10-K.
Deregulated Generation and Power Plant Sales
- --------------------------------------------
As previously disclosed in the MD&A under "Deregulated Generation and Power
Plant Sales" on page II-12 of Conectiv's 1999 Annual Report on Form 10-K,
Conectiv is building two combined cycle units, representing 1,100 megawatts (MW)
of capacity, under its mid-merit electric generation strategy. In connection
with Conectiv's strategic plan to further grow its mid-merit electric generating
business, on June 9, 2000, Conectiv's Board of Directors authorized the
expenditure of up to an additional $45 million to preserve the option to
purchase up to fifteen additional combustion turbine units and for expenses
associated with power plant site development and procurement. As of June 30,
2000, Conectiv had made $24.7 million of such expenditures which are classified
on the balance sheet as "Option payments on combustion turbines" under Deferred
Charges and Other Assets.
As also previously disclosed in the MD&A under "Deregulated Generation and Power
Plant Sales" on page II-12 of Conectiv's 1999 Annual Report on Form 10-K,
Conectiv is selling the nuclear and non-strategic baseload fossil electric
generating plants of DPL and ACE. Consummation of the sales of the nuclear and
non-strategic baseload fossil electric generating plants is subject to the
receipt of required regulatory approvals. In addition, the agreements for the
sales of the electric generating plants contemplate that the sales of the plants
of ACE and DPL will occur simultaneously. Although management had expected such
sales to close during the third or fourth quarter of 2000, the current status of
litigation relating to certain deregulation matters in New Jersey (see
discussion below under the caption "New Jersey Electric Utility Industry
Restructuring") could result in a delay in such closings. Management cannot
predict the outcome of such litigation, the timing of such outcome, the effect
on Conectiv's ability to consummate the sales or the impact on Conectiv's
ability to recover or securitize any related stranded costs.
The sales of the electric generating plants may cause a decrease in earnings of
the Energy business because the electric generating plants will likely be sold
before the combined cycle units are phased into service during the third quarter
of 2001 through 2003. The proceeds from sales of the electric generating plants
are expected to be used for debt repayment, repurchases of common stock,
expansion of the mid-merit electric generation business, and general corporate
purposes.
-19-
Formation of Conectiv Energy Holding Company
- --------------------------------------------
Strategic electric generating plants of DPL and ACE, with capacity of 1,364 MW
and 502 MW, respectively, were transferred to other Conectiv subsidiaries on
July 1, 2000. The Conectiv subsidiaries which received the transferred plants
became subsidiaries of a new Conectiv subsidiary, Conectiv Energy Holding
Company (CEH). CEH and its subsidiaries are engaged in non-regulated electricity
production and sales, energy trading and marketing. The electric generating
plants of ACE that were transferred to a subsidiary of CEH remain in the AUG.
After the sale of the nuclear and non-strategic baseload fossil electric
generating plants of DPL and ACE, the principal remaining businesses of DPL and
ACE will be the transmission and distribution of electricity. Additionally, DPL
will continue to supply and deliver gas under regulated tariffs and DPL and ACE
will supply electricity to customers who do not choose alternative electricity
suppliers. After DPL and ACE complete the sale of the nuclear and non-strategic
baseload fossil electric generating plants, purchased power will be the source
of the electricity supplied to their customers.
Electric Utility Industry Restructuring
- ----------------------------------------
An update to the information previously reported in the MD&A under "Electric
Utility Industry Restructuring," beginning on page II-9 of Conectiv's 1999
Annual Report on Form 10-K is presented below.
New Jersey Electric Utility Industry Restructuring
As previously disclosed, the NJBPU issued a Summary Order to ACE in July 1999
concerning restructuring ACE's electricity supply business and indicated that a
more detailed order would be issued at a later time. The NJBPU's final order for
ACE has been delayed due to appeals of the NJBPU's final order concerning
restructuring the electricity supply business of Public Service Electric and Gas
Company (PSE&G). On April 13, 2000, the Superior Court of New Jersey, Appellate
Division, issued its decision on this matter, generally upholding the orders of
the NJBPU.
The New Jersey Business Users and the Division of the Ratepayer Advocate,
appellants in the Superior Court proceeding, petitioned the New Jersey Supreme
Court to review the Superior Court's decision. The New Jersey Supreme Court
agreed to review the Superior Court's decision on July 14, 2000, setting a
schedule for briefing by the parties, with oral argument set for November 8,
2000.
Management cannot predict the effect, if any, of the outcome of the appeals
discussed above upon ACE's final order for restructuring, or related matters,
such as securitization by ACE of its stranded costs and the sale of the electric
generating plants, as discussed under "Deregulated Generation and Power Plant
Sales" within the MD&A.
ACE provides Basic Generation Service (BGS) to customers who do not have an
alternative electricity provider. ACE's ability to recover its BGS supply costs
is subject to review by the NJBPU. In accordance with the Summary Order, ACE
intends to secure BGS supply requirements (net of sources otherwise available to
it at any particular time) by competitive bidding. To date, ACE has issued two
requests for proposals (RFP) for BGS supply. Neither RFP resulted in ACE's
entering into BGS supply contracts, and ACE has secured BGS supplies through
other means.
-20-
Electric Revenues
- -----------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2000 1999 2000 1999
------ ------ -------- --------
(Dollars in millions)
Regulated electric revenues $489.2 $491.6 $ 951.2 $ 991.7
Non-regulated electric revenues 195.6 61.9 364.0 125.1
------ ------ -------- --------
Total electric revenues $684.8 $553.5 $1,315.2 $1,116.8
====== ====== ======== ========
The table above shows the amounts of electric revenues earned which are subject
to price regulation (regulated) and which are not subject to price regulation
(non-regulated). "Regulated electric revenues" include revenues for delivery
(transmission and distribution) service and electricity supply service within
the service areas of DPL and ACE.
"Regulated electric revenues" decreased by $2.4 million, from $491.6 million for
the second quarter of 1999 to $489.2 million for the second quarter of 2000. For
the six-month period, "regulated electric revenues" decreased by $40.5 million,
from $991.7 million for the six months ended June 30, 1999 to $951.2 million for
the six months ended June 30, 2000. Details of the variances in "regulated
electric revenues" are shown below.
Increase (Decrease) in
Regulated Electric Revenues
-----------------------------
Three Months Six Months
--------------- ------------
(Dollars in millions)
Customers choosing alternative electricity suppliers $(28.9) $(52.2)
Decrease in retail rates for electric utility industry restructuring (17.8) (36.5)
Higher volumes of interchange sales 31.0 38.8
Revenues recognized due to under-recoveries of BGS costs 14.9 8.6
Other (1.6) 0.8
------ ------
$ (2.4) $(40.5)
====== ======
The revenue impact of the electricity delivery customers of DPL and ACE choosing
alternative electricity suppliers was minimized by (a) selling electricity
generated by the deregulated power plants to other customers, and (b) some
customers selecting "Conectiv Energy" (the trade name under which Conectiv
subsidiaries market competitive retail energy) as their alternative electricity
supplier. Customers representing approximately 5% of the 1999 peak loads of DPL
and ACE were purchasing electricity marketed under the Conectiv Energy trade
name as of June 30, 2000. Delivery customers representing approximately 6% of
the 1999 peak loads of DPL and ACE were purchasing electricity from suppliers
other than Conectiv as of June 30, 2000.
As previously reported in the MD&A under "Electric Utility Industry
Restructuring" on page II-9 of Conectiv's 1999 Annual Report on Form 10-K,
effective July 1, 2000, DPL's Maryland electric customers have the option of
choosing an alternative electricity supplier and residential rates are reduced
7.5%, or approximately $12.5 million on an annualized basis. Under the scheduled
phase-in of customer choice in Delaware, through September 30, 2000, customers
with peak loads of 300 kilowatts or more may choose an alternative electricity
supplier, and on October 1, 2000, all customers will have choice.
-21-
"Non-regulated electric revenues" result primarily from electricity trading
activities, bulk sales of electricity including sales of output from deregulated
electric generating plants, and competitive retail sales. For the three and six
months ended June 30, 2000, electricity trading and strategic generation
electricity sales accounted for about 45%-46% and 28%-29%, respectively, of
"non-regulated electric revenues." The remaining approximate one-fourth of
"non-regulated electric revenues" was from competitive retail sales. In June
2000, Conectiv announced that it would cease selling electricity to residential
customers in Pennsylvania. Conectiv will continue to evaluate market changes and
modify retail strategies as appropriate.
"Non-regulated electric revenues" increased by $133.7 million, from $61.9
million for the second quarter of 1999 to $195.6 million for the second quarter
of 2000. For the six-month period, "non-regulated electric" revenues increased
by $238.9 million, from $125.1 million for the six months ended June 30, 1999 to
$364.0 million for the six months ended June 30, 2000. The revenue increases
resulted from higher wholesale sales of electricity generated by deregulated
power plants, increased volumes of electricity traded, and higher competitive
retail electricity sales. Deregulation of the electric generating plants, high
plant availability, and lower load obligations due to some customers choosing
alternative suppliers made more electricity output of electric generating plants
available for sale in non-regulated markets. Sales of competitive retail
electricity increased due to increased marketing to large commercial and
industrial customers outside Conectiv's service area and sales to the delivery
customers of DPL and ACE who selected "Conectiv Energy" (trade name) as their
alternative electricity supplier.
Gas Revenues
- ------------
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
(Dollars in millions)
Regulated gas revenues $ 22.2 $ 22.8 $ 67.0 $ 75.4
Non-regulated gas revenues 280.3 110.4 510.0 349.6
------ ------ ------ ------
Total gas revenues $302.5 $133.2 $577.0 $425.0
====== ====== ====== ======
DPL earns gas revenues from on-system natural gas sales which generally are
subject to price regulation and from the transportation of natural gas for
customers. DPL and a subsidiary of CEH also trade and sell natural gas in
transactions which are not subject to price regulation. The table above shows
the amounts of gas revenues earned from sources which were subject to price
regulation (regulated) and which were not subject to price regulation (non-
regulated).
For the six months ended June 30, 2000, "regulated gas revenues" decreased $8.4
million primarily because some commercial and industrial customers elected to
buy gas from alternative suppliers. However, DPL's gross margin (gas revenues
less gas purchased) from supplying regulated gas customers is insignificant, so
the effect of the revenue decrease on pre-tax profits was minimal.
"Non-regulated gas revenues" increased by $169.9 million for the three-month
period and $160.4 million for the six-month period due to higher volumes of gas
traded and increased competitive retail gas sales. Although "non-regulated gas
revenues" increased, due to unfavorable gas trading results the gross margin
earned from "non-regulated gas revenues" decreased by $6.1 million for the
three-month period and $3.0 million for six-month period.
-22-
Other Services Revenues
- ------------------------
Other services revenues were comprised of the following:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2000 1999 2000 1999
------ ------ ------ ------
(Dollars in millions)
Fuel oil and gasoline $ 90.3 $ 45.8 $161.8 $ 83.3
CSI (HVAC) 37.2 38.3 69.0 65.0
CCI (Telecommunications) 14.3 8.3 26.9 15.1
Thermal systems 6.4 6.4 12.6 12.3
Operation of power plants 11.5 7.2 20.8 13.3
Solutions * 4.0 4.5 7.3 9.2
Other 1.3 5.3 7.2 9.0
------ ------ ------ ------
Total $165.0 $115.8 $305.6 $207.2
====== ====== ====== ======
* Customized energy-related products and services
"Other services" revenues increased $49.2 million and $98.4 million in the
three-month and six-month periods, respectively, primarily due to higher volume
and market prices for fuel oil and gasoline.
CCI continued to grow its business, resulting in revenue increases of $6.0
million for the three-month period and $11.8 million for the six-month period.
CCI had sold approximately 95,000 access lines as of June 30, 2000, which
represented a 70% increase from a year ago.
Revenues from "Operation of power plants" increased in the three-month and six-
month periods due to more power plants being operating under additional
contracts.
Operating Expenses
- -------------------
Electric Fuel and Purchased Energy and Capacity
"Electric fuel and purchased energy and capacity" increased $128.1 million for
the three-month period and $180.8 million for the six-month period mainly due to
higher volumes of non-regulated electricity generated and purchased for resale
and higher volumes of electricity interchanged, partly offset by lower costs due
to termination of the Pedricktown purchased power contract in the fourth quarter
of 1999. Lower capacity costs due to discontinuance of SFAS No. 71 for the
electricity supply business in the third quarter of 1999 also mitigated the
increases.
Gas Purchased
Gas purchased increased by $176.2 million for the three-month period and $156.2
million for the six-month period mainly due to higher volumes of non-regulated
natural gas trading activities, partly offset by lower volumes of gas supplied
under regulated tariffs to commercial and industrial customers in DPL's service
area.
-23-
Other Services Cost of Sales
Other services cost of sales increased by $48.3 million for the three-month
period and $92.8 million for the six-month period, primarily due to higher
volumes and market prices of fuel oil and gasoline purchased for resale and
higher volumes of HVAC and telecommunication services provided.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased by $0.6 million in the second
quarter due to lower operating expenses of jointly-owned power plants, partly
offset by higher operating expenses of CCI's business. For the six-month period,
operating and maintenance expenses increased $22.1 million due to higher
expenses related to expanding CCI's business, operating electric generating
plants, and servicing customers of the regulated utility businesses.
Depreciation and amortization
Depreciation and amortization expenses decreased $4.2 million for the three-
month period and $7.1 million for the six-month period mainly due to the write-
downs in the third and fourth quarters of 1999 of the electric generating plants
in connection with restructuring the electric utility industry in Delaware,
Maryland, and New Jersey. Amortization of "Recoverable stranded costs" partly
offset the decrease from lower depreciation of power plants.
Other Income
- -------------
Other income increased $24.6 million in the second quarter mainly due to
Conectiv's equity in earnings of EnerTech for the second quarter of 2000, which
resulted primarily from an unrealized gain on the initial public offering of
common shares of Capstone.
Other income increased $13.8 million for the six-month period, including a $6.6
million increase from Conectiv's equity in earnings of EnerTech. For the six
months ended June 30, 2000, Conectiv's equity in earnings of EnerTech were $24.6
million compared to $18.0 million for the six months ended June 30, 1999, which
included an unrealized gain from the initial public offering of common shares of
a business-to-business Internet company. The remaining $7.2 million increase in
other income for the six-month period was mainly due to a gain on the sale of an
investment in a leveraged lease and higher equity in earnings of a non-utility
generation joint venture, partly offset by income in the first quarter of 1999
from implementation of mark-to-market accounting for energy trading activities.
Financing Costs
- ----------------
Financing costs reflected in the Consolidated Statements of Income include
interest charges, allowance for funds used during construction, and preferred
stock dividend requirements of subsidiaries. Financing costs increased $12.5
million for the three-month period and $26.8 million for the six-month period
mainly due to additional interest expense on borrowings to finance the
following: (1) purchases of Conectiv common stock; (2) the $228.5 million
payment in December 1999 to terminate the Pedricktown purchased power contract,
and (3) the operations of CCI and other nonutility subsidiaries.
Income Taxes
- ------------
Income taxes as a percent of "Income before income taxes" increased for the
three-month and six-month periods primarily due to the write-off of goodwill
which was not tax deductible.
-24-
New Accounting Pronouncements
- -----------------------------
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities--Deferral of the Effective Date of FASB
Statement No. 133," which delayed the required implementation date for SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities," until all
fiscal quarters of all fiscal years beginning after June 15, 2000. In June
2000, FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," which amended certain aspects of SFAS No. 133.
SFAS No. 133 and 138 established accounting and reporting standards for
derivative instruments and for hedging activities. Conectiv has not yet adopted
SFAS No. 133 and 138 and currently cannot determine the effect that these
accounting standards will have on its financial statements. However, SFAS No.
133 and 138 may cause the volatility of earnings to increase.
Liquidity and Capital Resources
- --------------------------------
Cash Flows From Operating Activities
Due to $130.4 million of cash provided by operating activities, $170.1 million
of cash used by investing activities, and $45.3 million of cash provided by
financing activities, cash and cash equivalents increased by $5.5 million during
the six months ended June 30, 2000.
Net cash provided by operating activities for the six months ended June 30, 2000
included $96.7 million of income tax refunds which were primarily related to the
tax benefit associated with ACE's payment of $228.5 million on December 28, 1999
to terminate the Pedricktown purchased power contract. After excluding the $96.7
million of cash flow attributed to the income tax refunds from operating cash
flows for the six months ended June 30, 2000, net cash flow from operations
decreased by $168.2 million for the six-month period. This decrease in operating
cash flow was due to working capital requirements associated with energy
trading, slower collection of accounts receivable, higher interest expense
payments, and prior-year over-collections of energy costs from customers.
Excluding changes due to reclassifications, accounts receivable as of June 30,
2000 increased by $217.6 million in comparison to December 31, 1999. This
increase was primarily due to higher natural gas and other energy trading
activities, and also reflects slower collections of accounts receivable caused
by conversion to a new customer billing system in December 1999. Increased
energy trading activities was also the primary reason for a $108.8 million
increase (excluding reclassifications) in the balance of accounts payable as of
June 30, 2000, compared to December 31, 1999.
Cash Flows From Investing Activities
Capital expenditures were $186.3 million for the six months ended June 30, 2000
compared to $134.2 million for the six months ended June 30, 1999. Capital
expenditures increased $52.1 million primarily due to the capital requirements
of Conectiv's mid-merit electric generation strategy, including construction
expenditures for the two combined cycle units with 1,100 MW of total capacity
and payments ($24.7 million) for preservation of the option to purchase up to
fifteen additional combustion turbine units. Other projects contributing to the
increase in capital expenditures were upgrades of the electric transmission and
distribution systems which increase system reliability, expansion of CCI's
telecommunications network, and replacement of CCI's customer service system.
The $19.7 million of cash proceeds for the six months ended June 30, 2000 from
"asset sales" was mainly from the sale of an aircraft which was owned through a
leveraged lease, and also includes proceeds from the sale of a division of CSI
and marketable securities.
-25-
Cash Flows From Financing Activities
Common dividends paid were $46.5 million for the six months ended June 30, 2000
compared to $87.5 million for the six months ended June 30, 1999. The decrease
in common dividends paid was due to fewer shares of common stock and Class A
common stock and lower dividends per share of common stock. For information
concerning the 1999 offer to purchase shares of common stock and the 1999
reduction in dividends per share of common stock, see Note 16 to the
Consolidated Financial Statements included in Item 8 of Part II of Conectiv's
1999 Annual Report on Form 10-K.
As previously disclosed, as a registered holding company under PUHCA, Conectiv
may not pay dividends on the shares of common stock and Class A common stock
from an accumulated deficit or paid-in-capital without SEC approval. As of June
30, 2000, Conectiv had an accumulated deficit of $31.6 million. On April 27,
2000, the SEC approved Conectiv's payment of dividends on common stock and Class
A common stock for the first and second quarters of 2000. Management expects
Conectiv to have retained earnings sufficient for dividends declared on shares
of common stock and Class A common stock beginning in the third quarter of 2000.
Management expects that, if additional SEC approvals are required for quarterly
payment of dividends, such approvals would be received.
During the six months ended June 30, 2000, Conectiv purchased 3,245,100 shares
of Conectiv common stock for $52.0 million. As of June 30, 2000, 2,926,700
shares of common stock remained authorized for purchase under the stock purchase
program announced in January 2000.
ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26,
2000. DPL redeemed $2.1 million of 7 1/8% Pollution Control Bonds on February 1,
2000 and $1.4 million of 6.95% Amortizing First Mortgage Bonds on June 1, 2000.
Conectiv's short-term debt balance as of June 30, 2000 increased by $207.2
million from the balance as of December 31, 1999 primarily due to financing
capital expenditures and purchases of Conectiv common stock.
Conectiv's capital structure, including short-term debt, current maturities of
long-term debt, and variable rate demand bonds, is shown below.
June 30, December 31,
2000 1999
-------- ------------
Common stockholders' equity 24.6% 26.2%
Preferred stock of subsidiaries 6.4% 6.6%
Long-term debt and variable rate demand bonds 51.0% 52.7%
Short-term debt and
current maturities of long-term debt 18.0% 14.5%
Subsequent Event--Debt Refinancing
As discussed in Note 8 to the Consolidated Financial Statements, on behalf of
DPL, the Delaware Economic Development Authority issued $70.14 million of bonds
on July 7, 2000 and loaned the proceeds to DPL. Of the bonds issued, $38.9
million have a variable interest rate and a maturity date of July 1, 2030, $15.0
million have a fixed interest rate of 5.5% and a maturity date of July 1, 2025,
and $16.24 million have a fixed interest rate of 5.65% and a maturity date of
July 1, 2028. The fixed interest rate bonds are subject to mandatory tender on
July 1, 2010, and DPL may choose to redeem and/or remarket all or a portion of
the tendered bonds. The $70.14 million of proceeds received by DPL on July
-26-
7, 2000 and additional cash will be used to redeem $70.17 million of bonds
(7.48% average interest rate) prior to maturity on September 1, 2000 ($61.17
million principal amount of bonds) and October 1, 2000 ($9.0 million principal
amount of bonds). The bonds were called at 101.5% to 102% of their principal
amount.
Ratio of Earnings to Fixed Charges
Conectiv's ratio of earnings to fixed charges under the SEC Method is shown
below. See Exhibit 12, Ratio of Earnings to Fixed Charges, for additional
information.
12 Months
Ended Year Ended December 31,
June 30, ----------------------------
2000 1999 1998 1997 1996 1995
--------- ---- ---- ---- ---- ----
Ratio of Earnings to
Fixed Charges (SEC Method) 1.72 1.98 2.38 2.63 2.83 2.92
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
As previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-24 to II-25 of Conectiv's 1999 Annual Report on Form
10-K, Conectiv is subject to market risks, including interest rate risk, equity
price risk, and commodity price risk. An update concerning Conectiv's commodity
price risk appears below.
Conectiv is exposed to the impact of market fluctuations in the price and
transportation costs of natural gas, electricity, and petroleum products.
Conectiv engages in commodity hedging activities to minimize the risk of market
fluctuations associated with the purchase and sale of energy commodities
(natural gas, petroleum products and electricity). Some hedging activities are
conducted using energy derivatives (futures, options, and swaps). The remainder
of Conectiv's hedging activity is conducted by backing physical transactions
with offsetting physical positions. The hedging objectives include the assurance
of stable and known minimum cash flows and the fixing of favorable prices and
margins when they become available. Conectiv also engages in energy commodity
trading and arbitrage activities, which expose Conectiv to commodity market risk
when, at times, Conectiv creates net open energy commodity positions or allows
net open positions to continue. To the extent that Conectiv has net open
positions, controls are in place that are intended to keep risk exposures within
management-approved risk tolerance levels.
Conectiv uses a value-at-risk model to assess the market risk of its
electricity, gas, and petroleum products commodity activities. The model
includes fixed price sales commitments, physical forward contracts, and
commodity derivative instruments. Value-at-risk represents the potential gain or
loss on instruments or portfolios due to changes in market factors, for a
specified time period and confidence level. Conectiv estimates value-at-risk
across its power, gas, and petroleum commodity businesses using a delta-normal
variance/covariance model with a 95 percent confidence level and assuming a
five-day holding period. Conectiv's calculated value-at-risk with respect to its
commodity price exposure associated with contractual arrangements was
approximately $29.7 million as of June 30, 2000, in comparison to $4.0 million
as of December 31, 1999. The increase in value-at-risk was primarily due to
increased hedging, with forward contracts, of the deregulated portion of the
electricity output of Conectiv's power plants.
-27-
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
- ------- -----------------
Information concerning fines related to environmental matters reported in Note 9
to the Consolidated Financial Statements under Item 1 in Part I herein is
incorporated by reference.
On July 20, 2000, a class action lawsuit was filed in the Court of Common Pleas
in Philadelphia County, Pennsylvania, purportedly on behalf of a class of
residential electricity customers in Pennsylvania served by Conectiv Energy. The
lawsuit alleges that Conectiv Energy's recent withdrawal from the residential
market in Pennsylvania violated certain Pennsylvania laws and breached Conectiv
Energy's contracts with its customers. Management believes that Conectiv
Energy's withdrawal from this retail energy market was lawful and that Conectiv
Energy did not breach its customer contracts.
ITEM 5. Other Information
- ------- -----------------
ELECTRIC SYSTEM OUTAGES
As previously disclosed, on October 13, 1999, the Delaware Public Service
Commission (DPSC) initiated a formal proceeding to investigate the adequacy of
DPL's facilities and services, including the remedies and incentives (if any) to
be imposed or offered, respectively, to ensure the continued adequacy of DPL's
facilities and services. That proceeding considered the effects (if any) of
electric utility industry restructuring in Delaware on the reliability of
electric service. On June 20, 2000, the DPSC issued an order in which the DPSC
concluded that, in general, DPL had acted properly with regard to electric
system outages in early-July 1999 during an extended period of hot and humid
weather and high demand for electricity. The DPSC found only that rolling
blackouts might have been avoided if concerns about reactive power needs on the
Delmarva Peninsula had prompted the acceleration of some transmission system
upgrades.
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Exhibits
- ---------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- --------------------
On June 15, 2000, Conectiv filed a Current Report on Form 8-K dated June 15,
2000 reporting on Item 5, Other Events.
-28-
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.
Conectiv
--------
(Registrant)
Date: August 11, 2000 /s/ John C. van Roden
--------------- ---------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-29-
Exhibit Index
-------------
Exhibit 12, Ratio of Earnings to Fixed Charges
Exhibit 27, Financial Data Schedule
-30-