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 September 30, 2000
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OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 1-1405
Delmarva Power & Light Company
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(Exact name of registrant as specified in its charter)
Delaware and Virginia 51-0084283
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(States of incorporation) (I.R.S. Employer
Identification No.)
800 King Street, P.O. Box 231, Wilmington, Delaware 19899
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 302-429-3114
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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
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
All 1,000 issued and outstanding shares of Delmarva Power & Light Company common
stock, $2.25 per share par value, are owned by Conectiv.
DELMARVA POWER & LIGHT COMPANY
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Table of Contents
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Page No.
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Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income for the three and nine
months ended September 30, 2000, and September 30, 1999............... 1
Consolidated Balance Sheets as of September 30, 2000,
and December 31, 1999................................................. 2-3
Consolidated Statements of Cash Flows for the nine months
ended September 30, 2000, and September 30, 1999...................... 4
Notes to Consolidated Financial Statements............................ 5-11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................................... 12-20
Item 3. Quantitative and Qualitative Disclosures About Market Risk............ 21
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K........................................ 22
Signature.......................................................................... 23
i
Part 1. FINANCIAL INFORMATION
Item 1. Financial Statements
DELMARVA POWER & LIGHT COMPANY
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CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
2000 1999 2000 1999
----------- ---------- ------------ ---------
OPERATING REVENUES
Electric $ 333,504 $ 446,356 $ 1,153,904 $1,076,588
Gas 47,544 156,361 552,680 578,743
Other services 5,505 6,553 22,032 24,448
----------- ---------- ------------ ----------
386,553 609,270 1,728,616 1,679,779
OPERATING EXPENSES
Electric fuel and purchased energy and capacity 179,211 219,307 653,525 532,593
Gas purchased 41,459 151,369 519,985 542,181
Other services' cost of sales 4,390 4,377 18,385 19,906
Special charges - 10,504 - 10,504
Operation and maintenance 52,868 63,221 192,537 189,680
Depreciation and amortization 26,778 31,449 85,447 97,116
Taxes other than income taxes 10,705 11,690 32,608 31,690
----------- ---------- ------------ ----------
315,411 491,917 1,502,487 1,423,670
----------- ---------- ------------ ----------
OPERATING INCOME 71,142 117,353 226,129 256,109
----------- ---------- ------------ ----------
OTHER INCOME 1,793 1,172 4,624 4,794
----------- ---------- ------------ ----------
INTEREST EXPENSE
Interest charges 20,315 19,776 59,006 60,118
Allowance for borrowed funds used during
construction and capitalized interest (157) (386) (773) (1,138)
----------- ---------- ------------ ----------
20,158 19,390 58,233 58,980
----------- ---------- ------------ ----------
PREFERRED DIVIDEND REQUIREMENT ON
PREFERRED SECURITIES OF A SUBSIDIARY TRUST 1,422 1,422 4,266 4,266
----------- ---------- ------------ ----------
INCOME BEFORE INCOME TAXES AND
EXTRAORDINARY ITEM 51,355 97,713 168,254 197,657
INCOME TAXES, EXCLUDING INCOME TAXES
APPLICABLE TO EXTRAORDINARY ITEM 21,172 38,825 65,566 78,562
----------- ---------- ------------ ----------
INCOME BEFORE EXTRAORDINARY ITEM 30,183 58,888 102,688 119,095
EXTRAORDINARY ITEM (Net of $147,780 of income taxes) - (253,622) - (253,622)
----------- ---------- ------------ ----------
NET INCOME (LOSS) 30,183 (194,734) 102,688 (134,527)
DIVIDENDS ON PREFERRED STOCK 1,251 1,259 3,690 3,251
----------- ---------- ------------ ----------
EARNINGS (LOSS) APPLICABLE TO COMMON STOCK $ 28,932 $ (195,993) $ 98,998 $ (137,778)
=========== ========== ============= ===========
See accompanying Notes to Consolidated Financial Statements.
-1-
DELMARVA POWER & LIGHT COMPANY
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2000 1999
-------------- ---------------
ASSETS
Current Assets
Cash and cash equivalents $ 10,342 $ 648
Accounts receivable, net of allowances
of $8,785 and $6,479, respectively 331,810 308,690
Intercompany loan receivable 74,128 13,473
Inventories, at average cost
Fuel (coal, oil and gas) 26,719 45,686
Materials and supplies 24,149 31,855
Prepayments 21,099 14,152
Deferred supply energy costs 2,480 8,612
Deferred income taxes, net 7,856 18,935
-------------- ---------------
498,583 442,051
-------------- ---------------
Investments 78,660 69,511
-------------- ---------------
Property, Plant and Equipment
Electric generation 631,625 1,314,657
Electric transmission and distribution 1,434,593 1,398,574
Gas transmission and distribution 269,245 265,708
Other electric and gas facilities 185,421 202,953
Other property, plant and equipment 12,526 5,469
-------------- ---------------
2,533,410 3,187,361
Less: Accumulated depreciation 1,154,803 1,434,597
-------------- ---------------
Net plant in service 1,378,607 1,752,764
Construction work-in-progress 79,758 64,747
Leased nuclear fuel, at amortized cost 25,476 25,592
Goodwill, net 68,441 69,850
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1,552,282 1,912,953
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Deferred Charges and Other Assets
Recoverable stranded costs, net 32,965 41,775
Deferred recoverable income taxes 68,843 71,986
Prepaid employee benefits costs 159,678 129,962
Unamortized debt expense 10,864 11,106
Deferred debt refinancing costs 8,565 7,538
Other 21,909 17,903
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302,824 280,270
-------------- ---------------
Total Assets $ 2,432,349 $ 2,704,785
============== ===============
See accompanying Notes to Consolidated Financial Statements.
-2-
DELMARVA POWER & LIGHT COMPANY
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CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)
September 30, December 31,
2000 1999
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CAPITALIZATION AND LIABILITIES
Current Liabilities
Long-term debt due within one year $ 1,753 $ 1,545
Variable rate demand bonds 104,830 104,830
Accounts payable 195,295 207,073
Taxes accrued 56,022 31,621
Interest accrued 23,352 20,160
Dividends payable 6,134 7,027
Current capital lease obligation 12,507 12,495
Above-market purchased energy contracts and
other electric restructuring liabilities 25,313 33,109
Other 31,972 26,226
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457,178 444,086
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Deferred Credits and Other Liabilities
Deferred income taxes, net 297,490 341,748
Deferred investment tax credits 24,981 34,823
Long-term capital lease obligation 13,977 14,175
Above-market purchased energy contracts and
other electric restructuring liabilities 92,220 102,781
Other 23,694 14,079
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452,362 507,606
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Capitalization
Common stock, $2.25 par value;
1,000,000 shares authorized; 1,000 shares outstanding 2 2
Additional paid-in-capital 212,612 528,893
Retained earnings 227,954 147,288
----------- -----------
Total common stockholder's equity 440,568 676,183
Preferred stock not subject to mandatory redemption 89,703 89,703
Preferred securities of subsidiary trust subject to
mandatory redemption 70,000 70,000
Long-term debt 922,538 917,207
----------- -----------
1,522,809 1,753,093
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Commitments and Contingencies (Note 10)
- -
----------- -----------
Total Capitalization and Liabilities $ 2,432,349 $ 2,704,785
=========== ===========
See accompanying Notes to Consolidated Financial Statements.
-3-
DELMARVA POWER & LIGHT COMPANY
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CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)
Nine Months Ended
September 30,
----------------------------
2000 1999
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 102,688 $ (134,527)
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Extraordinary item, net of income taxes - 253,622
Special charges - 10,504
Depreciation and amortization 93,790 104,506
Deferred income taxes, net 23,126 25,912
Investment tax credit adjustments, net (1,836) (1,919)
Net change in:
Accounts receivable (15,074) 1,597
Inventories (857) 930
Accounts payable (13,692) (4,996)
Other current assets and liabilities (1) 31,767 (5,822)
Other, net (37,407) (13,083)
----------- -----------
Net cash provided by operating activities 182,505 236,724
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Intercompany loan receivable (60,655) (41,603)
Capital expenditures (80,115) (51,906)
Increase in bond proceeds held in trust funds (9,029) (10,992)
Deposits to nuclear decommissioning trust funds (333) (2,481)
Proceeds from assets sold 8,664 -
Other, net (4,297) (521)
----------- -----------
Net cash used by investing activities (145,765) (107,503)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Common dividends paid (19,071) (69,317)
Preferred dividends paid (3,833) (2,908)
Long-term debt issued 70,140 -
Long-term debt redeemed (64,715) (53,517)
Principal portion of capital lease payments (8,343) (7,905)
Variable rate demand bonds issued - 33,330
Net change in short-term debt - (21,700)
Cost of issuances and refinancings (1,224) (316)
----------- -----------
Net cash used by financing activities (27,046) (122,333)
----------- -----------
Net change in cash and cash equivalents 9,694 6,888
Cash and cash equivalents at beginning of period 648 1,761
----------- -----------
Cash and cash equivalents at end of period $ 10,342 $ 8,649
=========== ===========
(1) Other than debt and deferred income taxes classified as current.
See accompanying Notes to Consolidated Financial Statements.
-4-
DELMARVA POWER & LIGHT COMPANY
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
(Unaudited)
Note 1. Financial Statement Presentation
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The consolidated condensed interim financial statements contained herein include
the accounts of Delmarva Power & Light Company (DPL) and its wholly-owned
subsidiaries and reflect all adjustments, consisting of only normal recurring
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 DPL's 1999 Annual Report on Form 10-K have been omitted.
Accordingly, DPL's consolidated condensed interim financial statements contained
herein should be read in conjunction with DPL'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 nine months ended September 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. New Accounting Pronouncement
- ------- ----------------------------
DPL will implement the provisions of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended, beginning in the first quarter of 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires all derivative instruments, within the scope
of the statement, to be recognized as assets or liabilities on the balance sheet
at fair value. Changes in the fair value of derivatives that are not hedges,
under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative
that hedges exposure to variable cash flow of a forecasted transaction is
initially recorded in other comprehensive income (a separate component of common
stockholder's equity) and is subsequently reclassified into earnings when the
forecasted transaction occurs. Changes in the fair value of other hedging
derivatives result in a change in the value of the asset, liability, or firm
commitment being hedged, to the extent the hedge is effective. Any ineffective
portion of a hedge is recognized in earnings immediately.
DPL's financial statements are not expected to be affected upon the initial
adoption of SFAS No. 133 in the first quarter of 2001 because DPL is not
expected to hold derivative instruments as of December 31, 2000, except for in
connection with its hedging activities associated with regulated gas supply. Any
gains or losses on derivative instruments used for hedging regulated gas supply
are subject to the provisions of SFAS No. 71, "Accounting for the Effects of
Certain Types of Regulation." However, if and to the extent DPL does hold
derivative instruments as of December 31, 2000 for non-regulated transactions,
the initial impact would include the following: (a) recognition of assets or
liabilities for the fair value of any contracts which would be classified as
derivatives under SFAS No. 133; (b) derecognition (or elimination) of any
deferred gains or losses on hedging derivatives, which exist as of December 31,
2000; and (c) a "cumulative effect" type of adjustment for the impact on
comprehensive income, which would be partly recorded in other comprehensive
income and partly in earnings. To the extent DPL holds derivative instruments
for non-regulated transactions subsequent to initial adoption of SFAS No. 133,
there may be increased volatility in DPL's earnings, revenues and common
stockholder's equity.
-5-
Note 3. Intercompany Purchases and Sales
- ------- --------------------------------
DPL's operating expenses and revenues include amounts for transactions with
other Conectiv subsidiaries. DPL purchased electric energy, electric capacity
and natural gas from Conectiv subsidiaries in the amounts of $70.5 million and
$94.9 million for the three and nine months, respectively, ended September 30,
2000. No intercompany purchases of energy occurred during the three and nine
months ended September 30, 1999. DPL also sold natural gas and leased certain
assets to other Conectiv subsidiaries. Amounts included in operating revenues
for these transactions are as follows: (1) three months ended September 30,
2000, $4.7 million; (2) three months ended September 1999, $12.0 million; (3)
nine months ended September 30, 2000, $27.0 million; (4) nine months ended
September 30, 1999, $38.8 million.
Note 4. Divestiture of Electric Generating Plants
- ------- -----------------------------------------
Agreements for the Sale of Electric Generating Plants
As previously disclosed in Note 11 to the Consolidated Financial Statements
included in Item 8 of Part II of DPL's 1999 Annual Report on Form 10-K, Conectiv
is building mid-merit electric generating plants and is selling the nuclear and
non-strategic baseload fossil fuel-fired electric generating plants of DPL.
Consummation of the sales of the nuclear and non-strategic baseload fossil fuel-
fired electric generating plants is subject to the receipt of required
regulatory approvals. The contracts for the sales of the electric generating
plants of DPL generally require closing simultaneous with the sales of the
electric generating plants of Atlantic City Electric Company (ACE), a subsidiary
of Conectiv that operates in New Jersey. Appeals relating to certain
deregulation matters in New Jersey have resulted in delays in the issuance of
required regulatory approvals and a delay of the closings of the sales of the
electric generating units. As a result, management entered into discussions with
the prospective purchasers of its interests in the nuclear electric generating
plants. See discussion below in Note 5 to the Consolidated Financial Statements.
Management currently expects the sales of DPL's interest in the nuclear electric
generating plants to take place during the fourth quarter of 2000 or the first
quarter of 2001, and the remainder of the sales to take place during 2001.
However, management cannot predict the timing or outcome of such appeals and the
effect thereof on the ability of DPL to consummate the sales of various electric
generating plants.
Contribution of Electric Generating Plants to Conectiv
Effective July 1, 2000, DPL contributed at book value its (a) strategic electric
generating plants (approximately 1,364 megawatts of capacity), (b) certain non-
strategic electric generating plants (approximately 126 megawatts of capacity),
which are expected to be sold through a special purpose entity, and (c) related
transmission equipment, inventories, other assets and liabilities to a wholly-
owned subsidiary (Conectiv Delmarva Generation, Inc., or CDG). DPL then
contributed CDG to Conectiv in conjunction with the formation of an energy-
holding company by Conectiv, which is engaged in non-regulated electricity
production and sales, and energy trading and marketing. The primary effects on
DPL's balance sheet of the contribution to Conectiv were as follows: (a)
property, plant and equipment decreased $350 million (primarily electric
generating plants); (b) fuel inventories and other assets decreased $27 million;
(c) deferred income taxes and investment tax credits decreased $61 million; and
(d) the additional paid-in capital portion of common stockholder's equity
decreased $316 million.
-6-
Note 5. Subsequent Event, Wholesale Transaction Confirmation Letter Agreements
- ------- ----------------------------------------------------------------------
As discussed in Note 4 to the Consolidated Financial Statements, consummation of
the sales of certain electric generating plants has been delayed. DPL entered
into Wholesale Transaction Confirmation letter agreements (Letter Agreements) on
October 3, 2000. The Letter Agreements provide for the sale of the electricity
output and capacity associated with the ownership interests of DPL in the Peach
Bottom Atomic Power Station (Peach Bottom) and Salem Nuclear Generating Station
(Salem). PECO Energy Company (PECO) and PSEG Energy Resources & Trade LLC
(PSER&T), an indirect subsidiary of Public Service Enterprise Group, will each
purchase 50% of DPL's 7.51% interest in the electricity output and capacity of
Peach Bottom. PSER&T will purchase DPL's 7.41% interest in the
electricity output and capacity of Salem.
The Letter Agreements became effective October 7, 2000, and will terminate, with
respect to the respective interests of DPL in the electricity output and
capacity at a given nuclear electric generating plant, upon the earlier of (1)
the closing of the sale of that plant, (2) the termination in accordance with
its terms of the purchase agreement relating to the sale of such plant or (3)
September 30, 2001.
In exchange for the electricity output and capacity purchased from a given
plant, PECO and PSER&T will reimburse DPL for the nuclear fuel amortized during
the term of the Letter Agreements at each plant, and will be responsible for the
payment of operation and maintenance costs, inventories, capital expenditures
(subject, in certain circumstances, to reimbursement by DPL) and certain other
liabilities associated with the ownership interests of DPL in each plant.
In addition, DPL, PECO and PSEG Power LLC, a subsidiary of Public Service
Enterprise Group, amended the respective purchase agreements relating to the
sale of the nuclear electric generating plants, among other things, to give
effect to the transactions contemplated by the Letter Agreements and to permit
separate closings of the sales of the ACE and DPL interests in such plants.
Note 6. Extraordinary Item
- ------- ------------------
As previously reported in the third quarter of 1999, after receiving electric
utility industry restructuring orders from state regulatory commissions, DPL
discontinued applying SFAS No. 71, "Accounting for the Effects of Certain Types
of Regulation," to its electricity supply businesses during the third quarter of
1999. As a result of discontinuing SFAS No. 71, DPL recorded an extraordinary
charge of $253.6 million, net of $147.8 million of income taxes. The
extraordinary charge primarily resulted from financial impairment of electric
generating plants and certain other assets, uneconomic energy contracts, and
other effects of deregulation requiring loss recognition. The extraordinary
charge was decreased by a regulatory asset established for the amount of
stranded costs expected to be recovered through regulated electricity delivery
rates (Recoverable stranded costs, net).
Note 7. Special Charges
- ------- ---------------
DPL's operating results for the three and nine months ended September 30, 1999
include special charges of $10.5 million before taxes ($6.4 million after taxes)
primarily due to the cost of employee separations associated with the merger by
which DPL and ACE became wholly-owned subsidiaries of Conectiv (the Merger) and
other Merger-related costs.
-7-
Note 8. Common Stockholder's Equity
- ------- ---------------------------
Common stockholder's equity decreased from $676.2 million as of December 31,
1999 to $440.6 million as of September 30, 2000 as a result of a $316.3 million
decrease from the contribution of electric generating plants to Conectiv and an
$80.7 million net increase in retained earnings, which resulted from $99.0
million of earnings applicable to common stock and $18.3 million of common
dividends declared payable to Conectiv for the nine months ended September 30,
2000.
Note 9. Debt
- ------- ----
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 for general corporate purposes.
No amounts had been borrowed under the credit facility as of September 30, 2000.
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 interest rates on these bonds 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 proceeds from the issuance of the bonds listed above and additional cash
were used to redeem $70.17 million of bonds, which are listed below. On
September 1, 2000, $61.17 million of bonds with interest rates of 7.3% to 7.6%
were redeemed. On October 1, 2000, $9.0 million of bonds with a 7.5% interest
rate were redeemed. The bonds were called at 101.5% to 102% of their principal
amount.
-8-
Redemption Interest
Principal Series Date Rate
- --------- ------------------------------------------------------- ----------------- --------
($000)
$11,170 Exempt Facilities Revenue Bonds, Series 1985 September 1, 2000 7.3%
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%
- -------
61,170
9,000 Exempt Facilities Revenue Bonds, Series 1989 October 1, 2000 7.5%
- -------
$70,170
=======
Note 10. Contingencies
- -------- -------------
Environmental Matters
DPL is subject to regulation with respect to the environmental effect of its
operations, including air and water quality control, solid and hazardous waste
disposal, and limitation on land use by various federal, regional, state, and
local authorities. Costs may be incurred to clean up facilities found to be
contaminated due to past disposal practices. Federal and state statutes
authorize governmental agencies to compel responsible parties to clean up
certain abandoned or uncontrolled hazardous waste sites. DPL is currently a
potentially responsible party at three federal superfund sites. At one of these
sites, DPL has resolved its liability for clean up costs through a de minimis
settlement with the government. At this site, DPL may be liable for a claim by
the state or federal government for natural resource damages. DPL also is
alleged to be a third-party contributor at three other federal superfund sites.
DPL also has two former coal gasification sites in Delaware and one former coal
gasification site in Maryland, each of which is a state superfund site. Also,
the Delaware Department of Natural Resources and Environmental Control notified
DPL in 1998 that it is a potentially responsible party liable for clean-up of
the Wilmington Public Works Yard as a former owner of the property.
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 $2.6 million. In addition, DPL
paid $350,000 in penalties and $100,000 for an environmental improvement project
to the Delaware Department of Natural Resources and Environmental Control
(DNREC) in connection with the oil leak and another matter related to the Indian
River power plant. DPL is currently negotiating a consent agreement with DNREC
for clean-up of the area affected by the oil leak.
DPL's liability for clean-up costs is affected by the activities of these
governmental agencies and private land-owners, the nature of past disposal
practices, the activities of others (including whether they are able to
contribute to clean-up costs), and the scientific and other complexities
involved in resolving clean up-related issues (including whether DPL or a
corporate predecessor is responsible for conditions on a particular parcel).
There is $2 million included in DPL's current liabilities as of September 30,
2000 and December 31, 1999 for clean-up and other potential costs related to
these sites. DPL does not expect such future costs to have a material effect on
DPL's financial position or results of operations.
-9-
Nuclear Insurance
In conjunction with DPL's ownership interests in Peach Bottom and Salem, DPL
could be assessed for a portion of any third-party claims associated with an
incident at any commercial nuclear power plant in the United States. Under the
provisions of the Price Anderson Act, if third-party claims relating to such an
incident exceed $200 million (the amount of primary insurance), DPL could be
assessed up to $26.3 million on an aggregate basis for such third-party claims.
In addition, Congress could impose a revenue-raising measure on the nuclear
industry to pay such claims.
The co-owners of Peach Bottom and Salem maintain property insurance coverage of
approximately $2.8 billion for each unit for loss or damage to the units,
including coverage for decontamination expense and premature decommissioning.
In addition, DPL is a member of an industry mutual insurance company (NEIL),
which provides replacement power cost coverage in the event of a major
accidental outage at a nuclear power plant. Under these coverages, DPL is
subject to potential retrospective loss experience assessments of up to $3.4
million on an aggregate basis.
Under changes in NEIL's bye-laws approved on October 26, 2000, to be effective
December 31, 2000, subject to there being no pending legal action or claim by
any member of NEIL challenging the validity of such bye-law changes, member
account balances will no longer exist. NEIL members who sell their interests in
nuclear electric generating plants on or after December 31, 2000, may choose
either (i) to continue to receive certain policyholders' distributions from NEIL
(if, as, and when declared) over a 5-year period or (ii) to remain a NEIL member
by purchasing other insurance products from NEIL and thus remain eligible for
policyholders' distributions (if, as, and when declared) for a longer period. In
addition, NEIL members that sell their interests in nuclear generating plants on
or before December 30, 2000, may elect prior to February 28, 2001, as an
alternative to be paid their member account balances by NEIL as a result of
terminating their NEIL insurance coverages. As a result of the NEIL bye-law
changes, the choices available to DPL depend on whether and when the sale of
ownership interests in Peach Bottom and Salem occur (see Note 4 to the
Consolidated Financial Statements) as well as management's analysis of the
choices then-available, including the amounts of non-nuclear insurance coverage
that might be obtained from NEIL, the costs of that coverage, and NEIL's
prospects generally. Depending on timing of sale of interests in nuclear units
and option selected, management estimates that DPL could realize between $0 and
$16 million.
Note 11. Supplemental Cash Flow Information
- -------- ----------------------------------
Nine Months Ended
September 30,
-----------------
2000 1999
-------- -------
(Dollars in thousands)
Cash paid (received) for:
Interest, net of amounts capitalized $52,207 $53,283
Income taxes, net of refunds $28,838 $37,786
Non-cash Investing and Financing Transaction
For information concerning a non-cash transaction related to investing and
financing activities, see "Contribution of Electric Generating Plants to
Conectiv" in Note 4 to the Consolidated Financial Statements.
-10-
Note 12. Business Segments
- -------- -----------------
Conectiv's organizational structure and management reporting information is
aligned with Conectiv's business segments, irrespective of the subsidiary, or
subsidiaries, through which a business is conducted. Businesses are managed
based on lines of business, not legal entity. Business segment information is
not produced, or reported, on a subsidiary by subsidiary basis. Thus, as a
Conectiv subsidiary, no business segment information (as defined by SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information") is
available for DPL on a stand-alone basis. However, DPL's principal business is
expected to be the transmission and distribution of electricity upon completion
of the sale of the electric generating plants of DPL (as discussed in Note 4 to
the Consolidated Financial Statements). The transfer of certain electric
generating plants to Conectiv and energy-trading activities to another Conectiv
subsidiary effective July 1, 2000 resulted in electricity transmission and
distribution representing a greater proportion of DPL's business.
-11-
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 DPL; 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. DPL
undertakes no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
The foregoing 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.
Earnings Results Summary
- ------------------------
Earnings applicable to common stock were $28.9 million for the third quarter of
2000, compared to a net loss applicable to common stock of $196.0 million for
the third quarter of 1999. Earnings applicable to common stock for the third
quarter of 1999 were reduced by a $253.6 million extraordinary charge for
discontinuing the application of SFAS No. 71 to DPL's electricity supply
business because of deregulation and $6.4 million, net of income taxes, of
special charges. For additional information concerning the extraordinary item,
see Note 6 to the Consolidated Financial Statements. The special charges
primarily reflected costs of employee separations and other costs related to the
merger that formed Conectiv.
Excluding the extraordinary and special charges from earnings applicable to
common stock for the third quarter of 1999, earnings were $64.0 million compared
to earnings of $28.9 million for the third quarter of 2000. This $35.1 million
earnings decrease was mainly due to lower gross margins (revenues net of related
energy costs) earned from regulated electric sales, non-regulated electric
sales, and non-regulated electric trading activities. The amount of gross
margin earned from regulated electric sales decreased due to the adverse effect
of cooler summer weather on electric sales, customer rate decreases, and prior
year deferred energy expense credits, which had resulted from the operation of
regulated energy adjustment clauses prior to deregulation. The amount of gross
margin earned from non-regulated electric revenues decreased due to DPL's
contribution of the electric generating plants to Conectiv as of
-12-
July 1, 2000 (which is discussed below) and due to the transfer of electric
trading activities to a subsidiary of Conectiv's new energy holding company.
These negative earnings variances were partly offset by lower depreciation and
operation and maintenance expenses.
Earnings applicable to common stock were $99.0 million for the nine months ended
September 30, 2000, compared to a net loss applicable to common stock of $137.8
million for the nine months ended September 30, 1999. Excluding the $260.0
million of extraordinary and special charges from earnings applicable to common
stock for the nine months ended September 30, 1999, earnings were $122.2 million
compared to earnings of $99.0 million for the nine months ended September 30,
2000. The $23.2 million decrease was mainly due to a lower amount of gross
margin from regulated electricity sales, due to the cooler summer weather,
customer rate decreases, and prior year deferred energy expense credits. These
negative earnings variances were partly offset by an increase in gross margin
from non-regulated electricity sales and trades, and lower depreciation expense.
As discussed below, DPL contributed electric generating plants with 1,490 MW of
capacity to Conectiv effective July 1, 2000 and has agreements for the sale of
its remaining electric generating plants. Also, DPL's competitive energy
activities, including energy trading, are being phased-out and transferred to a
subsidiary of Conectiv's energy-holding company. DPL's exit from the businesses
of electricity production and competitive energy activities is expected to cause
a decrease in DPL's earnings capacity. In part, the third quarter earnings
decrease reflects the effects of the phase-out of these businesses.
DPL's participation in energy markets, which has recently decreased as discussed
above, results in exposure to commodity market risk. DPL 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.
Agreements for the Sale of Electric Generating Plants
- -----------------------------------------------------
As previously disclosed in Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) under "Deregulated Generation and
Power Plant Divestiture" on page II-5 of DPL's 1999 Annual Report on Form 10-K,
Conectiv is building mid-merit electric generating plants and is selling the
nuclear and non-strategic baseload fossil fuel-fired electric generating plants
of DPL. Consummation of the sales of the nuclear and non-strategic baseload
fossil fuel-fired electric generating plants is subject to the receipt of
required regulatory approvals. The contracts for the sales of the electric
generating plants of DPL generally require closing simultaneous with the sales
of the electric generating plants of ACE, a subsidiary of Conectiv that operates
in New Jersey. Appeals relating to certain deregulation matters in New Jersey
have resulted in delays in the issuance of required regulatory approvals and a
delay of the closings of the sales of the electric generating units. As a
result, management entered into discussions with the prospective purchasers of
its interests in the nuclear electric generating plants to address that delay.
See discussion below under "Wholesale Transaction Confirmation Letter
Agreements." Management currently expects the sale of DPL's interests in the
nuclear electric generating plants to take place during the fourth quarter of
2000 or the first quarter of 2001, and the remainder of the sales to take place
during 2001. However, management cannot predict the timing or outcome of such
appeals and the effect thereof on the ability of DPL to consummate the sales of
various electric generating plants.
-13-
Contribution of Electric Generating Plants to Conectiv
- ------------------------------------------------------
Effective July 1, 2000, DPL contributed at book value its (a) strategic electric
generating plants (approximately 1,364 megawatts of capacity), (b) certain non-
strategic electric generating plants (approximately 126 megawatts of capacity),
which are expected to be sold through a special purpose entity, and (c) related
transmission equipment, inventories, other assets and liabilities to a wholly-
owned subsidiary, CDG. DPL then contributed CDG to Conectiv in conjunction with
the formation of an energy-holding company by Conectiv, which is engaged in non-
regulated electricity production and sales, and energy trading and marketing.
The primary effects on DPL's balance sheet of the contribution to Conectiv were
as follows: (a) property, plant and equipment decreased $350 million (primarily
electric generating plants); (b) fuel inventories and other assets decreased $27
million; (c) deferred income taxes and investment tax credits decreased $61
million; and (d) the additional paid-in capital portion of common stockholder's
equity decreased $316 million.
Wholesale Transaction Confirmation Letter Agreements
- ----------------------------------------------------
As discussed above, consummation of the sales of the electric generating plants
has been delayed. DPL entered into Wholesale Transaction Confirmation letter
agreements (Letter Agreements) on October 3, 2000. The Letter Agreements
provide for the sale of the electricity output and capacity associated with the
ownership interests of DPL in Peach Bottom and Salem. PECO and PSER&T will each
purchase 50% of DPL's 7.51% interest in the electricity output and capacity of
Peach Bottom. PSER&T will purchase DPL's 7.41% interest in the electricity
output and capacity of Salem.
The Letter Agreements became effective October 7, 2000, and will terminate, with
respect to the respective interests of DPL in the electricity output and
capacity at a given nuclear electric generating plant, upon the earlier of (1)
the closing of the sale of that plant, (2) the termination in accordance with
its terms of the purchase agreement relating to the sale of such plant or (3)
September 30, 2001.
In exchange for the electricity output and capacity purchased from a given
plant, PECO and PSER&T will reimburse DPL for the nuclear fuel amortized during
the term of the Letter Agreements at such plant, and will be responsible for the
payment of operation and maintenance costs, inventories, capital expenditures
(subject, in certain circumstances, to reimbursement by DPL) and certain other
liabilities associated with the ownership interests of DPL in such plant.
In addition, DPL, PECO and PSEG Power LLC, a subsidiary of Public Service
Enterprise Group, amended the respective purchase agreements relating to the
sale of the nuclear electric generating plants, among other things, to give
effect to the transactions contemplated by the Letter Agreements and to permit
separate closings of the sales of the ACE and DPL interests in such plants.
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 electric generation operations from transmission and distribution operations
and authorized the transfer of certain electric generating plants and related
assets to other Conectiv subsidiaries.
-14-
Electric Revenues
- -----------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ ------------------
2000 1999 2000 1999
-------- ------ -------- --------
(Dollars in millions)
Regulated electric revenues $288.0 $347.9 $ 827.2 $ 853.0
Non-regulated electric revenues 45.5 98.5 326.7 223.6
------ ------ -------- --------
Total electric revenues $333.5 $446.4 $1,153.9 $1,076.6
====== ====== ======== ========
The table above shows the amounts of electric revenues earned that are subject
to price regulation (Regulated) and that 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 area of DPL.
Regulated electric revenues
"Regulated electric revenues" decreased by $59.9 million, from $347.9 million
for the third quarter of 1999 to $288.0 million for the third quarter of 2000.
For the nine-month period, "regulated electric revenues" decreased by $25.8
million, from $853.0 million for the nine months ended September 30, 1999 to
$827.2 million for the nine months ended September 30, 2000. Details of the
variances in "regulated electric revenues" are shown below.
Increase (Decrease) in
Regulated Electric Revenues
-----------------------------
Three Months Nine Months
------------- -------------
(Dollars in millions)
Customers choosing alternative electricity suppliers $(18.5) $(58.0)
Decrease in retail rates for electric utility industry restructuring (8.5) (17.0)
Volumes of interchange and resale sales (31.6) 11.9
Retail sales volume, sales mix, and other * (1.3) 37.3
------ ------
$(59.9) $(25.8)
====== ======
* Includes the adverse effect of cooler summer weather on regulated retail
electricity sales in the third quarter of 2000.
As previously reported in the MD&A under "Electric Utility Industry
Restructuring" beginning on page II-4 of DPL's 1999 Annual Report on Form 10-K,
effective July 1, 2000, DPL's Maryland electric customers had the option of
choosing an alternative electricity supplier. In Delaware, from October 1, 1999
through September 30, 2000, large customers could choose an alternative
electricity supplier, and effective October 1, 2000, all customers had the
option of choosing an alternative electricity supplier. Some customers of DPL
are purchasing electricity marketed by "Conectiv Energy" (the trade name under
which DPL markets competitive retail energy) and revenues from these competitive
retail sales are included in non-regulated electric revenues, which are
discussed below.
-15-
Non-regulated electric revenues
"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. As discussed above,
the business activities associated with "non-regulated electric revenues" are
being phased-out by DPL.
"Non-regulated electric revenues" decreased by $53.0 million, from $98.5 million
for the third quarter of 1999 to $45.5 million for the third quarter of 2000.
The $53.0 million decrease was primarily due to the transfer of non-regulated
energy trading activities to another Conectiv subsidiary. For the nine-month
period, "non-regulated electric revenues" increased by $103.1 million, from
$223.6 million for the nine months ended September 30, 1999 to $326.7 million
for the nine months ended September 30, 2000. The nine-month period revenue
increase resulted from higher wholesale sales of electricity generated by
deregulated power plants and higher competitive retail electricity sales, partly
offset by lower volumes of energy traded. Sales from deregulated power plants
increased despite the transfer of electric generating plants (1,490 MW of
capacity) to Conectiv on July 1, 2000 due to the timing of deregulation (October
1, 1999 for Delaware and July 1, 2000 for Maryland). Sales of competitive retail
electricity increased due to earlier marketing efforts to large commercial and
industrial customers outside of DPL's service area and sales to the delivery
customers of DPL who selected "Conectiv Energy" (trade name) as their
alternative electricity supplier. 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.
Gas Revenues
- ------------
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2000 1999 2000 1999
-------- ------ -------- ------
(Dollars in millions)
Regulated gas revenues $12.9 $ 12.0 $ 79.9 $ 87.5
Non-regulated gas revenues 34.6 144.4 472.8 491.2
----- ------ ------ ------
Total gas revenues $47.5 $156.4 $552.7 $578.7
===== ====== ====== ======
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). DPL's on-system sales and transportation of natural
gas are generally subject to price regulation. Effective July 1, 2000, DPL ended
its non-regulated gas trading activities. "Non-regulated gas revenues" for the
third quarter of 2000 include the settlement of non-regulated gas trading
transactions initiated before July 1, 2000 and certain sales of gas which are
not subject to price regulation .
For the nine months ended September 30, 2000, "regulated gas revenues" decreased
$7.6 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" decreased by $109.8 million for the three-month
period and $18.4 million for the nine-month period primarily due to the transfer
of non-regulated gas trading activities to another Conectiv subsidiary, partly
offset by higher revenues from competitive retail gas sales. DPL's operating
profits were not significantly impacted by the transfer of gas trading
activities because the gross margin
-16-
earned from these activities during the three- and nine-month periods in 1999
was not significant. Although revenues from competitive retail gas sales
increased, management recently began a phase-out of this business.
Other Services Revenues
- -----------------------
Other services revenues decreased by $1.0 million and $2.4 million for the
three-and nine-month period, respectively, primarily due to less construction
services provided to a major customer.
Operating Expenses
- ------------------
Electric Fuel and Purchased Energy and Capacity
"Electric fuel and purchased energy and capacity" decreased $40.1 million for
the three-month period primarily due to the phase-out of non-regulated
electricity trading and lower average energy and capacity costs, partly offset
by the energy expense credit in the third quarter of 1999, associated with the
former regulated energy adjustment clauses. For the nine-month period,
"Electric fuel and purchased energy and capacity" increased $120.9 million
mainly due to higher volumes of non-regulated electricity traded and generated,
and also due to the energy expense credit in the prior year's nine-month period
associated with the former regulated energy adjustment clauses. Lower capacity
costs, due to the discontinuance of SFAS No. 71 to the electricity supply
business, mitigated the increase for the nine-month period.
Gas Purchased
Gas purchased decreased by $109.9 million for the three-month period and $22.2
million for the nine-month period mainly due to the transfer of non-regulated
natural gas trading activities to another Conectiv subsidiary, effective July 1,
2000. Lower volumes of gas supplied under regulated tariffs to commercial and
industrial customers in DPL's service area also contributed to the decrease for
the nine-month period.
Other Services' Cost of Sales
Other services' cost of sales decreased by $1.5 million for the nine-month
period principally due to less construction services provided to a large
customer.
Special Charges
DPL's operating results for the three and nine months ended September 30, 1999
include special charges of $10.5 million before taxes ($6.4 million after taxes)
primarily due to the cost of employee separations associated with the Merger and
other Merger-related costs.
Operation and Maintenance Expenses
Operation and maintenance expenses decreased by $10.4 million for the three-
month period and increased by $2.8 million for the nine-month period. Each
variance reflects lower pension and other postretirement benefits costs and
increased customer service expenses associated with serving regulated electric
and gas delivery customers. The three-month period also reflects a decrease in
operating and maintenance expenses for electric generating plants due to the
transfer of certain electric generating plants to Conectiv effective July 1,
2000.
-17-
Depreciation and amortization
Depreciation and amortization expenses decreased $4.7 million in the three-month
period and $11.7 million in the nine-month period mainly due to the transfer of
certain electric generating plants to Conectiv (effective July 1, 2000) and the
write-down in the third quarter of 1999 of the nuclear electric generating
plants in connection with restructuring the electric utility industry in
Delaware and Maryland. Depreciation of capital improvements to the electric
transmission and distribution systems recently placed in-service and
amortization of "Recoverable stranded costs" partly offset the decrease from
lower depreciation of power plants.
Income Taxes
- ------------
Income taxes decreased $17.7 million for the three-month period and $13.0
million for the nine-month period mainly due to lower income before income
taxes.
New Accounting Pronouncements
- -----------------------------
DPL will implement the provisions of Statement of Financial Accounting Standards
(SFAS) No. 133, "Accounting for Derivative Instruments and Hedging Activities,"
as amended, beginning in the first quarter of 2001. SFAS No. 133 establishes
accounting and reporting standards for derivative instruments and for hedging
activities. SFAS No. 133 requires all derivative instruments, within the scope
of the statement, to be recognized as assets or liabilities on the balance sheet
at fair value. Changes in the fair value of derivatives that are not hedges,
under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative
that hedges exposure to variable cash flow of a forecasted transaction is
initially recorded in other comprehensive income (a separate component of common
stockholder's equity) and is subsequently reclassified into earnings when the
forecasted transaction occurs. Changes in the fair value of other hedging
derivatives result in a change in the value of the asset, liability, or firm
commitment being hedged, to the extent the hedge is effective. Any ineffective
portion of a hedge is recognized in earnings immediately.
DPL's financial statements are not expected to be affected upon the initial
adoption of SFAS No. 133 in the first quarter of 2001 because DPL is not
expected to hold derivative instruments as of December 31, 2000, except for in
connection with its hedging activities associated with regulated gas supply. Any
gains or losses on derivative instruments used for hedging regulated gas supply
are subject to the provisions of SFAS No. 71. However, if and to the extent DPL
does hold derivative instruments as of December 31, 2000 for non-regulated
transactions, the initial impact would include the following: (a) recognition of
assets or liabilities for the fair value of any contracts which would be
classified as derivatives under SFAS No. 133; (b) derecognition (or elimination)
of any deferred gains or losses on hedging derivatives, which exist as of
December 31, 2000; and (c) a "cumulative effect" type of adjustment for the
impact on comprehensive income, which would be partly recorded in other
comprehensive income and partly in earnings. To the extent DPL holds derivative
instruments for non-regulated transactions subsequent to initial adoption of
SFAS No. 133, there may be increased volatility in DPL's earnings, revenues and
common stockholder's equity.
-18-
Liquidity and Capital Resources
- -------------------------------
Cash Flows From Operating Activities
Due to $182.5 million of cash provided by operating activities, $145.8 million
of cash used by investing activities, and $27.0 million of cash used by
financing activities, cash and cash equivalents increased by $9.7 million during
the nine months ended September 30, 2000.
The $182.5 million of net cash provided by operating activities for the nine
months ended September 30, 2000 represented a $54.2 million decrease in
comparison to cash flow from operations during the same period a year ago. This
decrease was primarily due to slower collection of accounts receivable and lower
electricity sales.
Excluding changes due to reclassifications, accounts receivable as of September
30, 2000 decreased by $15.1 million in comparison to December 31, 1999 due to
the transfer of energy-trading activities to another Conectiv subsidiary, partly
offset an increase caused by slower collections of accounts receivable
attributed to conversion to a new customer billing system in December 1999.
Cash Flows From Investing Activities
The $60.7 million of cash used during the nine months ended September 30, 2000
for "Intercompany loan receivable" represents the incremental amount of DPL's
loan to Conectiv's pool of funds that Conectiv subsidiaries borrow from or
invest in, depending on their cash position.
Capital expenditures of $80.1 million for the nine months ended September 30,
2000 were primarily for electric transmission and distribution system upgrades
to increase system reliability.
The $9.0 million use of funds for "Increase in bond proceeds held in trust
funds" resulted from the temporary investment of proceeds from bonds issued in
July 2000, which were used on October 1, 2000 to refinance $9.0 million of 7.5%
bonds. See additional discussion below under "Cash Flows From Financing
Activities."
The $8.7 million of proceeds from assets sold for the nine months ended
September 30, 2000 was mainly due to the sale of land.
See "Contribution of Electric Generating Plants to Conectiv" for information
concerning this non-cash investing and financing transaction, which, among other
effects on the balance sheet, caused a $350 million decrease in property, plant
and equipment and a $316 million decrease in common stockholder's equity.
-19-
Cash Flows From Financing Activities
Common dividends paid decreased to $19.1 million for the nine months ended
September 30, 2000, from $69.3 million for the nine months ended September 30,
1999, due to lower payments to Conectiv.
As discussed in Note 9 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 7,
2000 and additional cash were used to redeem $61.17 million of bonds (7.47%
average interest rate) on September 1, 2000 and $9.0 million of 7.5% bonds on
October 1, 2000.
Other bond redemptions for DPL included $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.
DPL's capital structure including current maturities of long-term debt,
expressed as a percentage of total capitalization, is shown below as of
September 30, 2000, and December 31, 1999. The changes in DPL's capital
structure were primarily due to the contribution of electric generating plants
to Conectiv, effective July 1, 2000.
September 30, December 31,
2000 1999
---- ----
Common stockholder's equity 27.0% 36.4%
Preferred stock and preferred trust securities 9.8% 8.6%
Long-term debt, including current maturities
and variable rate demand bonds 63.2% 55.0%
Ratio of Earnings to Fixed Charges
DPL's ratio of earnings to fixed charges and ratio of earnings to fixed charges
and preferred dividends under the SEC Methods are shown below. See Exhibit 12-
A, Ratio of Earnings to Fixed Charges, and Exhibit 12-B, Ratio of Earnings to
Fixed Charges and Preferred Dividends, for additional information.
Year Ended December 31,
----------------------------
12 Months
Ended
September 30,
2000 1999 1998 1997 1996 1995
---- ---- ---- ---- ---- ----
Ratio of Earnings to
Fixed Charges (SEC Method) 3.33 3.65 2.92 2.83 3.33 3.54
Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends (SEC Method) 3.06 3.37 2.72 2.63 2.83 2.92
-20-
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- ------- ----------------------------------------------------------
As previously disclosed under "Quantitative and Qualitative Disclosures About
Market Risk" on pages II-14 to II-15 of DPL's 1999 Annual Report on Form 10-K,
DPL is subject to market risks, including interest rate risk, equity price risk,
and commodity price risk. An update concerning DPL's commodity price risk is
below.
As of September 30, 2000, DPL held derivative instruments solely for the
purposes of hedging the cost of supplying natural gas under regulated tariffs in
Delaware. Prior to the transfer on July 1, 2000 of certain electric generating
plants to Conectiv and energy-trading activities to another Conectiv subsidiary,
DPL's activities included energy commodity trading and sales of the electricity
produced by non-regulated electric generating plants. To minimize the commodity
market risk associated with these activities, DPL had engaged in commodity
hedging. Some hedging activities were conducted using energy derivatives
(futures, options, and swaps) and the remainder of DPL's hedging activity was
conducted by backing physical transactions with offsetting physical positions.
The hedging objectives included the assurance of stable and known minimum cash
flows and the fixing of favorable prices and margins when they become available.
DPL uses a value-at-risk model to assess the market risk of its electricity and
gas commodity activities. The model includes fixed price sales commitments,
physical forward contracts, and commodity derivative instruments. Value-at-risk
represents the potential gain or loss on instruments or portfolios due to
changes in market factors, for a specified time period and confidence level. DPL
estimates value-at-risk across its power and gas commodity businesses using a
delta-normal variance/covariance model with a 95 percent confidence level and
assuming a five-day holding period. Due to the operation of the regulated gas
cost recovery clause, DPL had no value-at-risk as of September 30, 2000. As of
December 31, 1999, DPL's calculated value-at-risk with respect to its commodity
price exposure associated with contractual arrangements was approximately $5.3
million.
-21-
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- ------- --------------------------------
Exhibits
- --------
Exhibit 12-A, Ratio of Earnings to Fixed Charges
Exhibit 12-B, Ratio of Earnings to Fixed Charges and Preferred Dividends
Exhibit 27, Financial Data Schedule
Reports on Form 8-K
- --------------------
On July 7, 2000, DPL filed a Current Report on Form 8-K dated July 1, 2000
reporting on Item 5, Other Events.
-22-
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Delmarva Power & Light Company
--------------------------------
(Registrant)
Date: November 13, 2000 /s/ John C. van Roden
----------------- ----------------------------------------
John C. van Roden, Senior Vice President
and Chief Financial Officer
-23-
Exhibit Index
-------------
Exhibit 12-A, Ratio of Earnings to Fixed Charges
Exhibit 12-B, Ratio of Earnings to Fixed Charges and Preferred Dividends
Exhibit 27, Financial Data Schedule