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Table of Contents

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, 2002

OR


  o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-13895

CONECTIV

(Exact name of registrant as specified in its charter)

  Delaware
(State of incorporation)

   51-0377417
(I.R.S. Employer
Identification No.)		  

  800 King Street, P.O. Box 231, Wilmington, Delaware
(Address of principal executive offices)
   19899
(Zip Code)		  

  Registrant’s telephone number, including area code
   302-429-3018  

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 o

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, 2002
  Common Stock, $0.01 par value   83,067,713
  Class A Common Stock, $0.01 par value   5,742,315


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Conectiv

Table of Contents

      Page
PART I. FINANCIAL INFORMATION:  
     
Item 1. Financial Statements  
     
  Consolidated Statements of Income for the three and six months
   ended June 30, 2002, and June 30, 2001 		1-2
     
  Consolidated Statements of Comprehensive Income for the three
   and six months ended June 30, 2002, and June 30, 2001 		3
     
  Consolidated Balance Sheets as of June 30, 2002, and December
   31, 2001 		4-5
     
  Consolidated Statements of Cash Flows for the six months
   ended June 30, 2002, and June 30, 2001 		6
     
  Notes to Consolidated Financial Statements 7-18
     
Item 2. Management’s Discussion and Analysis of Financial Condition
   and Results of Operations 		19-31
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 32-33
     
     
     
PART II. OTHER INFORMATION  
     
Item 1. Legal Proceedings 34
     
Item 5. Other Information 34
     
Item 6. Exhibits and Reports on Form 8-K 35
     
   
   
SIGNATURE 36
   
   
i

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONECTIV
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

Three Months Ended
June 30, 		Six Months Ended
June 30,
2002 2001 2002 2001
OPERATING REVENUES                          
   Electric   $ 817,077   $ 898,828   $ 1,545,061   $ 1,660,940  
   Gain on sales of electric generating plants     —     297,140     15,817     297,140  
   Gas     173,470     364,983     384,907     1,003,068  
   Other services     109,673     137,626     206,209     273,582  
    1,100,220     1,698,577     2,151,994     3,234,730  
OPERATING EXPENSES                          
   Electric fuel and purchased energy and capacity     576,253     640,165     1,114,033     1,131,269  
   Gas purchased     145,775     358,671     330,807     982,683  
   Other services' cost of sales     95,386     110,520     181,320     224,184  
   Operation and maintenance     125,458     135,410     241,073     235,515  
   Impairment of investment in leveraged leases     17,585     —     17,585     —  
   Depreciation and amortization     49,517     60,192     98,371     120,535  
   Taxes other than income taxes     15,190     18,472     30,798     38,355  
   Deferred electric service costs     (24,234 )   (53,554 )   (40,432 )   (58,321 )
    1,000,930     1,269,876     1,973,555     2,674,220  
OPERATING INCOME     99,290     428,701     178,439     560,510  
OTHER INCOME     5,743     66,443     6,466     69,195  
INTEREST EXPENSE                          
   Interest charges     40,056     50,009     77,676     103,041  
   Capitalized interest and allowance for borrowed funds
      used during construction		     (4,036 )   (4,821 )   (8,343 )   (9,752 )
    36,020     45,188     69,333     93,289  
PREFERRED STOCK DIVIDEND REQUIREMENTS
   OF SUBSIDIARIES 		    4,044     5,043     8,088     10,202  
INCOME FROM CONTINUING OPERATIONS
   BEFORE INCOME TAXES 		    64,969     444,913     107,484     526,214  
INCOME TAXES     27,482     186,105     45,951     221,591  
    37,487     258,808     61,533     304,623  
DISCONTINUED TELECOMMUNICATION
   OPERATIONS 		                         
    LOSS FROM OPERATIONS, NET OF INCOME
      TAXES 		    —     (2,685 )   —     (7,696 )
    LOSS FROM DISPOSAL, NET OF INCOME
      TAXES 		    —     (118,788 )   —     (118,788 )
NET INCOME   $ 37,487   $ 137,335   $ 61,533   $ 178,139  

(Continued on following page)

See accompanying Notes to Consolidated Financial Statements.

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CONECTIV
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands, Except Per Share Amounts)
(Unaudited)

(Continued from previous page)

Three Months Ended
June 30, 		Six Months Ended
June 30,
2002 2001 2002 2001
EARNINGS (LOSS) APPLICABLE TO COMMON
   STOCK 		                         
   Common stock                          
     Continuing operations   $ 36,884   $ 255,682   $ 62,740   $ 300,605  
     Discontinued telecommunication operations                          
       Loss from operations     —     (2,685 )   —     (7,696 )
       Loss from disposal     —     (118,788 )   —     (118,788 )
   Class A common stock     603     3,126     (1,207 )   4,018  
  $ 37,487   $ 137,335   $ 61,533   $ 178,139  
COMMON STOCK                          
    Average shares outstanding (000)                          
     Common stock     82,704     82,704     82,704     82,704  
     Class A common stock     5,742     5,742     5,742     5,742  
    Earnings (loss) per average share-basic and diluted                          
     Common stock                          
       Continuing operations   $ 0.45   $ 3.09   $ 0.76   $ 3.63  
       Discontinued telecommunication operations                          
         Loss from operations   $ —   $ (0.03 ) $ —   $ (0.09 )
         Loss from disposal   $ —   $ (1.44 ) $ —   $ (1.44 )
     Class A common stock   $ 0.11   $ 0.54   $ (0.21 ) $ 0.70  
    Dividends declared per share                          
     Common stock   $ 0.22   $ 0.22   $ 0.44   $ 0.44  
     Class A common stock   $ 0.25   $ 0.25   $ 0.75   $ 1.05  

See accompanying Note to Consolidated Financial Statements,

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Table of Contents

CONECTIV
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)

Three Months Ended
June 30, 		Six Months Ended
June 30,
2002 2001 2002 2001
                         
Net income   $ 37,487   $ 137,335   $ 61,533   $ 178,139  
Other comprehensive income / (loss) , net of taxes                          
                         
   Energy commodity derivative instruments designated as cash
      flow hedges		                          
                         
     Unrealized gain / (loss) from cash flow hedges net of
        reclassification adjustments and net of taxes of $16,553 and
        $27,662 for the three months ended June 30, 2002 and 2001,
        respectively, and net of taxes of $46,408 and $38,372 for the
        six months ended June 30, 2002 and 2001, respectively		     23,958     (40,036 )   67,170     (55,538 )
                         
     Cumulative effect of a change in accounting resulting from
        adoption of Statement of Financial Accounting Standards
        No. 133, “Accounting for Derivative Instruments and
        Hedging Activities,” net of taxes of $2,380		     —     —     —     3,445  
                         
   Unrealized loss on marketable securities net of reclassification
      adjustments and net of taxes of $494 and $777 for the three
      months ended June 30, 2002 and 2001, respectively, and net
      of taxes of $1,159 and $821 for the six months ended June 30,
      2002 and 2001, respectively		     (918 )   (1,443 )   (2,153 )   (1,525 )
                         
Other comprehensive income / (loss), net of income taxes     23,040     (41,479 )   65,017     (53,618 )
                         
Comprehensive income   $ 60,527   $ 95,856   $ 126,550   $ 124,521  

See accompanying Notes to Consolidated Financial Statements.

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CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

June 30,
2002 		December 31,
2001

    ASSETS 		             
             
Current Assets              
   Cash and cash equivalents   $ 28,791   $ 52,871  
   Accounts receivable, net of allowances of $32,676 and $32,162, respectively     675,630     636,404  
   Inventories, at average cost              
     Fuel (coal, oil and gas)     63,734     81,448  
     Materials and supplies     41,151     44,604  
   Deferred energy supply costs     —     25,525  
   Prepayments and other     70,235     76,107  
    879,541     916,959  
             
Investments              
   Investment in leveraged leases, held for sale as of June 30, 2002     26,976     45,314  
   Funds held by trustee     9,788     12,136  
   Other investments     52,985     60,845  
    89,749     118,295  
             
Property, Plant and Equipment              
   Electric generation     1,221,624     1,067,464  
   Electric transmission and distribution     2,863,460     2,792,615  
   Gas transmission and distribution     298,043     291,052  
   Other electric and gas facilities     355,475     363,373  
   Other property, plant, and equipment     180,697     181,838  
    4,919,299     4,696,342  
   Less: Accumulated depreciation     1,850,823     1,784,170  
   Net plant in service     3,068,476     2,912,172  
   Construction work-in-progress     675,192     584,440  
   Goodwill, net of accumulated amortization of $42,817 and $42,817, respectively     313,124     313,124  
    4,056,792     3,809,736  
             
Deferred Charges and Other Assets              
   Regulatory assets:              
     Recoverable stranded costs, net     927,030     944,529  
     Other non-current regulatory assets     335,145     294,114  
   Prepaid pension costs     94,391     91,891  
   Unamortized debt expense     37,597     25,513  
   License fees     19,894     20,581  
   Other     39,823     34,664  
    1,453,880     1,411,292  
Total Assets   $ 6,479,962   $ 6,256,282  

See accompanying Notes to Consolidated Financial Statements.

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Table of Contents

CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

CAPITALIZATION AND LIABILITIES
June 30,
2002 		December 31,
2001
 
             
Current Liabilities              
   Short-term debt   $ 1,057,928   $ 1,039,820  
   Long-term debt due within one year     365,096     397,963  
   Variable rate demand bonds     158,430     158,430  
   Accounts payable     350,870     351,382  
   Derivative instruments     72,117     87,876  
   Other current liabilities     229,874     197,109  
    2,234,315     2,232,580  
             
Deferred Credits and Other Liabilities              
   Other postretirement benefits obligation     96,162     89,836  
   Deferred income taxes, net:              
     Assets held and used     835,691     843,039  
     Leveraged leases held for sale as of June 30, 2002     54,676     —  
   Deferred investment tax credits     47,914     49,542  
   Regulatory liability for New Jersey income tax benefit     49,262     49,262  
   Above-market purchased energy contracts and other electric restructuring
      liabilities		     76,175     85,326  
   Derivative instruments     4,703     28,852  
   Other     44,943     43,736  
    1,209,526     1,189,593  
             
Capitalization              
   Common stock: $0.01 per share par value; 150,000,000 shares authorized; shares
      outstanding — 83,067,713 in 2002, and 82,957,613 in 2001		     831     830  
   Class A common stock, $0.01 per share par value; 10,000,000 shares authorized;
      shares outstanding — 5,742,315 in 2002 and 2001		     57     57  
   Additional paid-in capital — common stock     1,030,515     1,027,790  
   Additional paid-in capital — Class A common stock     93,738     93,738  
   Retained earnings     230,173     209,336  
   Unearned compensation     (3,744 )   (1,719 )
   Accumulated other comprehensive income     (914 )   (65,931 )
     Total common stockholders’ equity     1,350,656     1,264,101  
   Preferred stock and securities of subsidiaries:              
     Not subject to mandatory redemption     35,813     35,813  
     Subject to mandatory redemption     —     12,450  
   Company obligated mandatorily redeemable preferred securities of subsidiary
      trusts holding solely company debentures		     165,000     165,000  
   Long-term debt     1,483,983     1,356,003  
   Long-term capital lease obligation     669     742  
    3,036,121     2,834,109  
Commitments and Contingencies (Note 11)              
             
Total Capitalization and Liabilities   $ 6,479,962   $ 6,256,282  

See accompanying Notes to Consolidated Financial Statements.

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CONECTIV
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

Six Months Ended
June 30,
2002 2001
CASH FLOWS FROM OPERATING ACTIVITIES              
   Net income   $ 61,533   $ 178,139  
   Adjustments to reconcile net income to net cash provided by operating activities:              
     Depreciation and amortization     98,445     130,097  
     Deferred income taxes, net     2,939     (19,463 )
     Gains on sales of electric generating plants     (15,817 )   (297,140 )
     Impairment of investment in leveraged leases     17,585     —  
     Deferred electric service costs and gas supply costs     (12,885 )   (69,411 )
     Recognition of deferred gain on contract termination     —     (73,015 )
     Provision for loss on disposal of discontinued operations     —     177,245  
     Net change in:              
       Accounts receivable     (75,623 )   (97,445 )
       Inventories     21,167     (22,951 )
       Accounts payable     125,797     (11,483 )
       Accrued / prepaid taxes     22,741     109,654  
       Other current assets & liabilities (1)     (3,325 )   (26,694 )
   Other, net     10,896     (18,699 )
   Net cash provided (used) by operating activities     253,453     (41,166 )
             
CASH FLOWS FROM INVESTING ACTIVITIES              
   Capital expenditures     (335,781 )   (254,967 )
   Investments in partnerships     (2,475 )   (21,224 )
   Proceeds from sales of electric generating plants     10,000     641,734  
   Proceeds from other assets sold     8,710     23,862  
   Increase in funds held by trustee     —     (172,837 )
   Other, net     (268 )   (1,977 )
   Net cash provided (used) by investing activities     (319,814 )   214,591  
             
CASH FLOWS FROM FINANCING ACTIVITIES              
   Common stock dividends paid     (40,792 )   (45,693 )
   Preferred stock redeemed     (12,450 )   (11,500 )
   Long-term debt issued     296,000     59,000  
   Long-term debt redeemed     (201,010 )   (12,298 )
   Principal portion of capital lease payments     (73 )