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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1999
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13895
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CONECTIV
(Exact name of registrant as specified in its charter)
Delaware 51-0377417
(State of incorporation) (I.R.S. Employer Identification No.)
800 King Street, P. O. Box 231
Wilmington, Delaware 19899
(Address of principal executive offices)
Registrant's telephone number (302) 429-3114
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Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
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Common stock, $0.01 par value New York Stock Exchange
Class A common stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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Indicate by check mark whether the registrant (1) has filed all reports re-
quired 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 reg-
istrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [_]
The aggregate market value of Conectiv common stock and Conectiv Class A
common stock held by non-affiliates as of December 31, 1999, was $1,617.1 mil-
lion based on the New York Stock Exchange Composite Transaction closing pric-
es.
The number of shares outstanding of each class of Conectiv's common stock,
as of the latest practicable date, was as follows:
Class Outstanding at January 31, 2000
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Common stock, $0.01 par value 86,149,969 shares
Class A common stock, $0.01 par value 5,742,315 shares
Documents Incorporated by Reference
Part of Form 10-K Documents Incorporated by Reference
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III Portions of the Definitive Proxy Statement for the Annual Meeting of Stockholders
of Conectiv held March 28, 2000, which Definitive Proxy Statement was filed
with the Securities and Exchange Commission on February 22, 2000.
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TABLE OF CONTENTS
Page
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PART I
Item 1. Business
Overview............................................................... I-1
Power Delivery......................................................... I-1
Energy................................................................. I-2
Telecommunications..................................................... I-3
HVAC................................................................... I-4
Other Businesses....................................................... I-4
Business Transition.................................................... I-5
Installed Electric Capacity............................................ I-6
Pennsylvania-New Jersey-Maryland Interconnection Association........... I-7
Purchased Power........................................................ I-7
Nuclear Power Plants................................................... I-8
Fuel Supply for Electric Generation.................................... I-9
Energy Adjustment Clauses.............................................. I-10
Retail Electric and Gas Rates.......................................... I-11
Customer Billing....................................................... I-12
Electric System Outages................................................ I-12
New Jersey Demand Side Management...................................... I-12
Cost Accounting Manual/Code of Conduct................................. I-13
Affiliated Transactions................................................ I-13
Federal Decontamination & Decommissioning Fund......................... I-13
Regulated Gas Delivery and Supply...................................... I-13
Capital Spending and Financing Program................................. I-14
Environmental Matters.................................................. I-15
Executive Officers..................................................... I-17
Item 2. Properties...................................................... I-18
Item 3. Legal Proceedings............................................... I-20
Item 4. Submission of Matters to a Vote of Security Holders............. I-20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters................................................................ II-1
Item 6. Selected Financial Data......................................... II-3
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. II-5
Item 7A. Quantitative and Qualitative Disclosures About Market Risk..... II-24
Item 8. Financial Statements and Supplementary Data..................... II-26
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure................................................... II-74
PART III
Item 10. Directors and Executive Officers of the Registrant............. III-1
Item 11. Executive Compensation......................................... III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management............................................................. III-1
Item 13. Certain Relationships and Related Transactions................. III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K.................................................................... IV-1
Signatures.............................................................. IV-8
i
PART I
ITEM 1. BUSINESS
Overview
On March 1, 1998, Conectiv became a public utility holding company after a
series of merger transactions involving Delmarva Power & Light Company (DPL),
Atlantic Energy, Inc. (Atlantic), Conectiv, Inc., and DS Sub, Inc. (the Merg-
er). As a result of the Merger, Atlantic ceased to exist and DPL, Atlantic
City Electric Company (ACE), and the nonutility subsidiaries formerly held
separately by DPL and Atlantic became wholly-owned subsidiaries of Conectiv.
For additional information about the Merger, refer to Note 4 to the Consoli-
dated Financial Statements included in Item 8 of Part II. As used in this doc-
ument, references to Conectiv may mean the activities of one or more subsidi-
aries.
DPL and ACE are public utilities which supply and deliver electricity to
their customers. DPL also supplies and delivers natural gas to its customers.
These businesses are weather sensitive and seasonal because sales of electric-
ity are usually higher during the summer months due to air conditioning and
natural gas sales are usually higher in the winter when gas is used for space-
heating.
At December 31, 1999, Conectiv had 4,847 employees, including 1,872 employ-
ees represented by labor organizations. At December 31, 1999, 1,506 of
Conectiv's 4,847 employees worked in the heating, ventilation, and cooling
(HVAC) and telecommunications businesses of Conectiv subsidiaries.
Conectiv is a registered holding company under the Public Utility Holding
Company Act of 1935, as amended (PUHCA). PUHCA imposes certain restrictions on
the operations of registered holding companies and their subsidiaries. Pursu-
ant to PUHCA regulations, Conectiv formed a subsidiary service company,
Conectiv Resource Partners, Inc. (CRP) in 1998. CRP provides a variety of sup-
port services to Conectiv subsidiaries, and its employees are primarily former
DPL and ACE employees. The costs of CRP are directly assigned and allocated to
the Conectiv subsidiaries using CRP's services, including DPL and ACE.
Certain aspects of Conectiv's electric utility businesses are subject to
regulation by the Delaware and Maryland Public Service Commissions (DPSC and
MPSC, respectively), the New Jersey Board of Public Utilities (NJBPU), the
Virginia State Corporation Commission (VSCC), and the Federal Energy Regula-
tory Commission (FERC). Retail gas sales are subject to regulation by the
DPSC. Excluding off-system sales not subject to price regulation, the percent-
age of electric and gas utility operating revenues regulated by each regula-
tory commission for the year ended December 31, 1999, was as follows: NJBPU-
46.3%; DPSC-36.3%; MPSC-13.2%; VSCC-1.3%; and FERC-2.9%.
The sources of Conectiv's 1999 consolidated revenues were as follows: regu-
lated (subject to price regulation) electricity sales-57.4%; non-regulated
(not subject to price regulation) electricity sales-8.3%; regulated gas sales-
3.1%; non-regulated gas sales-18.7%; and other services-12.5%. Revenues from
"other services" include revenues earned from nonutility businesses such as
telecommunications, HVAC, petroleum sales, and other activities. In 1999, the
regulated retail electricity delivery and supply businesses provided most of
Conectiv's earnings. In 1999, Conectiv's consolidated regulated electric re-
tail revenues were earned from the following customer classes: residential-
46.2%; commercial-38.5%; industrial-14.4%; and other-0.9%.
For financial information concerning Conectiv's business segments, see Note
25 to Conectiv's 1999 Consolidated Financial Statements included in Item 8 of
Part II. The operations of Conectiv's business segments are discussed below.
Power Delivery
The Power Delivery business segment is responsible for the transmission and
distribution of electricity and natural gas to customers within the service
territories of DPL and ACE. Rates charged to DPL's customers for
I-1
delivery services are subject to regulation primarily by the DPSC, MPSC, and
VSCC. Rates charged to ACE's customers for electricity delivery service are
subject to regulation primarily by the NJBPU.
DPL and ACE deliver electricity within their service areas to approximately
955,000 customers through their respective transmission and distribution sys-
tems and also supply electricity to most of their electricity delivery custom-
ers. DPL has about 462,600 customers in its service area and ACE has about
492,400 customers in its service area. DPL's regulated electric service area
has a population of approximately 1.2 million and covers an area of about
6,000 square miles on the Delmarva Peninsula (Delaware and portions of Mary-
land and Virginia). ACE's regulated service area is located in the southern
one-third of New Jersey, covers an area of about 2,700 square miles, and has a
population of approximately 0.9 million.
DPL delivers natural gas through its gas transmission and distribution sys-
tems to approximately 107,300 customers in a service territory that covers
about 275 square miles in northern Delaware and has a population of approxi-
mately 0.5 million.
As discussed below, the electric utility businesses of DPL and ACE were re-
structured in 1999 pursuant to legislation enacted in Delaware, Maryland, and
New Jersey and orders issued by the DPSC, MPSC, and NJBPU. All customers in
ACE's service area could choose an alternative electricity supplier beginning
August 1, 1999. Some of DPL's customers could choose an alternative electric-
ity supplier effective October 1, 1999, and by October 1, 2000, about 96% of
DPL's customers will be able to choose an alternative electricity supplier.
Some of DPL's natural gas customers can currently choose an alternative sup-
plier. The electricity delivered by Power Delivery may be supplied to custom-
ers by alternative suppliers, DPL or ACE; gas delivered may be supplied to
customers by alternative suppliers or DPL. Delivery services are structured
into various forms of price regulated offers, some including energy supply, so
that customers may choose the combination that provides the best value. As the
electric utility industry evolves and restructuring of electricity supply is
implemented, there will be opportunities to serve new customers such as inter-
mediate marketers, wholesalers, bundled services providers, and energy service
companies.
Energy
DPL and ACE supply electricity to customers in their service areas with
power purchased from other suppliers and electricity generated by their power
plants. DPL also supplies natural gas to its customers in northern Delaware
under regulated tariffs. The transition to market pricing and terms of service
for supplying electricity to customers in the regulated service areas of DPL
and ACE began in 1999. In the latter half of 1999, public utility regulatory
commissions issued orders to DPL and ACE which restructured the electricity
supply businesses of DPL and ACE. By October 1, 2000, all of DPL's Delaware
and Maryland customers (approximately 96% of DPL's customers) may choose an
alternative electricity supplier. Effective August 1, 1999, all of ACE's cus-
tomers could choose an alternative electricity supplier. Among other things,
the electric restructuring orders provided for decreases in customer electric
rates, recovery of stranded costs, securitization of ACE's stranded costs, and
the regulatory treatment of any gain or loss arising from the divestiture of
electric power plants. For information about restructuring the electricity
supply business of DPL and ACE, see Notes 1, 6, 9, and 15 to the Consolidated
Financial Statements, included in Item 8 of Part II, and "Electric Utility In-
dustry Restructuring" within Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A), included in Item 7 of Part II.
As discussed under "Deregulated Generation and Power Plant Sales" within the
MD&A, included in Item 7 of Part II, Conectiv is realigning the mix of elec-
tric generating plants owned by its subsidiaries. Conectiv expects that, in
the future, the electric generating plants owned by its subsidiaries will be
primarily "mid-merit" units. The kilowatt-hour (kWh) output of mid-merit units
can be increased or decreased quickly on an economic basis. Mid-merit plants
also typically have relatively low fixed operating and maintenance costs, can
use different fuel types, and are generally operated when demand rises and
electricity prices are higher.
I-2
In conjunction with Conectiv's mid-merit strategy, DPL and ACE entered into
agreements to sell their nuclear and non-strategic baseload fossil electric
generating plants (2,589 megawatts of capacity), as discussed under "Installed
Electric Capacity" in Part I and in Note 13 to the Consolidated Financial
Statements included in Item 8 of Part II. After these units are sold, Conectiv
will have approximately 1,900 megawatts (MW) of generating capacity, excluding
new mid-merit units being constructed. Conectiv is constructing new mid-merit
electric generating units seeking to establish a leading position in the mid-
merit generation market for the region served by the PJM. Conectiv's invest-
ment in mid-merit generation could ultimately grow to $2 billion to $3 bil-
lion. Conectiv is currently constructing a mid-merit electric power plant com-
prised of three combustion turbines, waste heat recovery boilers, and a steam
turbine (combined cycle unit). The combined cycle unit will have 550 MW of ca-
pacity, cost approximately $300 million, and is expected to be phased into
service from the third quarter of 2001 to the third quarter of 2002. In addi-
tion, Conectiv is beginning construction of another 550 MW combined cycle unit
($300 million estimated cost) which is expected to be phased into service over
a twelve month period starting in early- to mid-2002. The expected installa-
tion dates of the combined cycle units could change depending on whether con-
struction proceeds on schedule, permits and licenses are obtained as planned,
and other factors. Management is also currently reviewing other potential al-
ternatives for adding to Conectiv's mid-merit electric generating units.
In December 1999, DPL and ACE filed an application with the FERC for ap-
proval of the transfer to other Conectiv subsidiaries of the electric generat-
ing plants which are not being sold. Through the planned sales and transfers
of the electric generating units of DPL and ACE, the principal businesses of
DPL and ACE will be the transmission and distribution of energy, as envisioned
by legislation enacted during 1999 which restructured the electric utility in-
dustries in Delaware, Maryland and New Jersey. The production of electricity
will be conducted by the Conectiv subsidiaries receiving the transferred elec-
tric generating units, which are also expected to assume the non-regulated
electricity and gas trading activities currently conducted by DPL. For pro
forma information concerning the expected sale of the nuclear and non-strate-
gic baseload fossil electric generating plants, see Exhibit 99 to this Report
on Form 10-K.
DPL currently trades electricity and gas, and sells electricity and gas in
bulk in markets which are not subject to price regulation. DPL also sells
electricity and gas in competitive retail markets (including Delaware, Mary-
land, and New Jersey) where customers may choose an electric supplier other
than the local utility responsible for delivery. ACE sells the electricity
output of certain deregulated power plants in markets which are not price reg-
ulated. For additional information concerning these activities for DPL and
ACE, see Note 11 to the Consolidated Financial Statements included in Item 8
of Part II.
Other "Energy" businesses of Conectiv's subsidiaries include operation and
construction of thermal energy systems, power plant operating services, in-
vestments in electric co-generation projects, custom energy solutions, and
sales of petroleum products.
Telecommunications
Conectiv Communications, Inc. (CCI) is a competitive local exchange carrier
(CLEC) providing local, regional, and long distance voice and data services to
business and residential customers in Delaware, Pennsylvania, New Jersey, and
Maryland. CCI owns and operates a fiber optic network of more than 730 route
miles, and has installed its equipment in 62 Bell Atlantic central offices in
order to provide facilities-based services through a Nortel DMS-500 switch. In
the areas where CCI does not yet have its own facilities, CCI resells Bell At-
lantic local and Frontier long distance services.
In June 1999, CCI purchased an Internet service provider which offers dedi-
cated and dial-up Internet service, consulting, data security, and web servic-
es. This acquisition combined with CCI's DSL (digital subscriber line--a high
speed Internet connection) service, enables CCI to provide end-to-end Internet
service.
CCI had sold about 75,000 access line equivalents as of December 31, 1999,
in comparison to 32,000 access line equivalents as of December 31, 1998. CCI
sold fewer access lines in 1999 than originally planned due to longer than ex-
pected customer provisioning intervals (the period from signing up a new cus-
tomer to the start of
I-3
service) and lower than anticipated customer credit quality. In its efforts to
reduce provisioning intervals and increase customer satisfaction, during the
third quarter of 1999, CCI engaged in extensive negotiations with Bell Atlan-
tic regarding the terms and conditions for interconnection of the CCI and Bell
Atlantic networks and CCI's access to elements of Bell Atlantic's network as
required by federal law. In January 2000, CCI and Bell Atlantic reached agree-
ment on the terms of new interconnection agreements, which will apply through-
out Bell Atlantic's region and will continue in effect until early 2002. These
agreements are subject to regulatory approval in each state.
During the fourth quarter of 1999, Conectiv announced the appointment of a
30-year veteran of the telecommunications industry as the new president of
CCI.
As discussed below under "Business Transition," on March 22, 2000, Conectiv
announced plans to find a strategic partner in the telecommunications business
and increase focus on business markets and Internet related data services.
CCI has general tariffs on file in Delaware, Pennsylvania, New Jersey, and
Maryland, which detail the pricing and descriptions of each service offering.
These tariffs are based on a market pricing system rather than the traditional
cost-of-service model. Tariff filings have also been made with the Federal
Communications Commission for the provision of domestic and international long
distance services.
HVAC
Conectiv Services Inc. (CSI) is a full-service HVAC business operating in
the Mid-Atlantic region. CSI provides commercial customers with mechanical
HVAC/piping construction and installation, design services, sheet metal fabri-
cation, refrigeration services, preventive maintenance and repair services.
CSI offers residential services such as HVAC installation, maintenance, repair
and related plumbing services. The regional HVAC and plumbing industry is
highly competitive, fragmented, and rapidly consolidating. The sales and earn-
ings of the HVAC businesses are affected by construction cycles and weather
conditions.
As discussed below under "Business Transition," on March 22, 2000, Conectiv
announced plans to sell CSI.
Other Businesses
As discussed in Note 7 to the Consolidated Financial Statements, an indirect
Conectiv subsidiary holds a limited partner interest in Enertech Capital Part-
ners, L.P. (Enertech). Enertech is a venture capital fund that invests in en-
ergy-related technology and Internet service companies. Enertech's investments
include, among others, essential.com, Capstone Turbine Corporation, Coastal
Security Systems, Inc., Extant, Inc., Sagemaker and Whisper Communications,
Inc. Due to the nature of Enertech's investments, its earnings may be volatile
from period to period.
I-4
Business Transition
As discussed above, Conectiv's businesses have changed due to the restructur-
ing of the electric utility industry, planned sales of electric generating
plants, implementation of the "mid-merit" strategy, and other factors. Accord-
ingly, past results are not an indication of future business prospects or fi-
nancial results.
On March 22, 2000, Conectiv announced plans to (1) Expand Conectiv's new
sources of mid-merit generating capacity as discussed above; (2) Find a strate-
gic partner in the telecommunications business and increase focus on business
markets and Internet related data services; and (3) Sell CSI and the thermal
energy business of Conectiv Thermal Systems, Inc. (CTS). On a combined basis,
the operations of CSI and CTS for 1999 resulted in a net after-tax loss of $8.7
million, excluding the special charges discussed in Note 5 to the Consolidated
Financial Statements included in Item 8 of Part II.
These changes and other on-going business developments will cause the future
operating results of Conectiv's businesses to differ from the past. Operating
earnings may decrease temporarily as Conectiv exits from the regulated elec-
tricity production business and ramps up mid-merit generation and other busi-
nesses. In the future, Conectiv's operating earnings may also be more volatile
and are expected to be affected by the following factors.
. The return earned on the proceeds from the expected sale of power plants
compared to returns earned on such power plants prior to their sale--
management expects that the aggregate proceeds from the sale of the
electric generating plants will be used for debt repayment, repurchases
of common stock and new investments that fit with Conectiv's strategies,
including expansion of the mid-merit generation business;
. The performance and operating results of deregulated power plants, which
previously were subject to rate regulation;
. The amount of DPL's actual energy costs compared to the amounts included
in its customer rates for supplying electricity under default service,
as discussed in Note 9 to the Consolidated Financial Statements;
. Conectiv's ability to achieve cost reductions and streamline operations;
. The amount of income from investments, including Enertech; and
. The level of operating losses (or income) generated by nonutility busi-
nesses.
I-5
Installed Electric Capacity
Capacity is the capability to produce electric power, typically from owned
generation or third-party purchase contracts, and differs from the electric en-
ergy markets, which trade the actual energy being generated. The MW of net in-
stalled summer electric generating capacity available to DPL and ACE to serve
their peak loads as of December 31, 1999, are presented below. The net generat-
ing capacity available for operations at any time may be less than the total
net installed generating capacity due to generating units being out of service
for inspection, maintenance, repairs, or unforeseen circumstances. See Item 2,
Properties, for additional information concerning electric generating units.
Megawatts of Capacity
-------------------------
Consolidated
Sources of Capacity DPL ACE Conectiv
------------------- ----- ----- ------------
Coal-fired generating units..................... 1,153 471 1,624
Oil-fired generating units...................... 598 241 839
Combustion turbines/combined cycle generating
units.......................................... 674 524 1,198
Nuclear generating units........................ 328 380 708
Diesel units.................................... 23 9 32
----- ----- -----
Conectiv-owned generating capacity.............. 2,776 1,625 4,401
Customer-owned capacity......................... 105 -- 105
Long-term purchased capacity.................... 243 708 951
Short-term purchased (sold) capacity............ 218 (11) 207
----- ----- -----
Total........................................... 3,342 2,322 5,664
===== ===== =====
As discussed in Note 13 to the Consolidated Financial Statements, included in
Item 8 of Part II, DPL and ACE have entered into agreements for the sale of
electric generating units, listed below, which are included in the table of in-
stalled capacity shown above. After the sale of these units, DPL and ACE will
purchase more electricity to supply customers in their service areas. See "Pur-
chased Power" for additional information.
Megawatts of Capacity
-------------------------
Consolidated
Electric Generating Units Expected to be sold DPL ACE Conectiv
--------------------------------------------- ----- ----- ------------
Coal fired generating units...................... 894 471 1,365
Oil-fired generating units....................... 153 295* 448
Combustion turbines & diesel units............... 37 31 68
Nuclear generating units......................... 328 380 708
----- ----- -----
1,412 1,177 2,589
===== ===== =====
- --------
* Includes 54 MW which is excluded from installed capacity for a generating
unit which currently is not being dispatched.
As members of the Pennsylvania-New Jersey-Maryland Interconnection Associa-
tion (PJM), DPL and ACE are obligated to maintain capacity levels based on
their allocated shares of estimated aggregate PJM capacity requirements. (The
PJM is discussed below.) DPL and ACE periodically update their forecasts of
peak demand and re-evaluate resources available to supply projected growth.
More capacity will be purchased after the sale of the nuclear and non-strategic
power plants, which have 2,589 MW of capacity.
I-6
DPL's regulated peak load in 1999 was 3,255 MW on July 5, a 5.5% increase
from DPL's previous historical peak demand of 3,085 MW which occurred on July
23, 1998. ACE experienced its highest historical peak demand of 2,329 MW on
July 5, 1999, which was 7.7% above the previous peak demand of 2,162 MW re-
corded on July 22, 1998. DPL and ACE met their 20% reserve margin obligations
to the PJM in 1999. To meet their PJM reserve obligations subsequent to the di-
vestiture of their power plants, DPL and ACE will purchase capacity from
sources that may include other Conectiv subsidiaries, other utilities, and the
PJM.
Pennsylvania-New Jersey-Maryland Interconnection Association
As members of the PJM, DPL's and ACE's generation and transmission facilities
are operated on an integrated basis with other electricity suppliers in Penn-
sylvania, New Jersey, Maryland, and the District of Columbia, and are intercon-
nected with other major utilities in the United States. This power pool im-
proves the reliability and operating economies of the systems in the group and
provides capital economies by permitting shared reserve requirements. The PJM's
installed capacity as of December 31, 1999, was 57,588 MW. The PJM's peak de-
mand during 1999 was 51,600 MW on July 6, which resulted in a summer reserve
margin of 10.4% (based on installed capacity of 56,944 MW on that date).
The PJM operates a centralized capacity credit market, enabling participants
to procure or sell surplus capacity to meet reliability obligations within the
PJM region.
The PJM Operating Agreement allows bids to sell electricity (energy) received
from generation located within the PJM control area. Transactions that are bid
into the PJM pool are capped at $1,000 per megawatt hour. All power providers
are paid the locational marginal price (LMP) set through power providers' bids.
The LMP will be higher in congested areas reflecting the price bids of those
higher cost generating units that are dispatched to supply demand and alleviate
the transmission constraint. Furthermore, in the event that all available gen-
eration within the PJM control area is insufficient to satisfy demand, the PJM
may institute emergency purchases from adjoining regions. The cost of such
emergency purchases is not subject to any PJM price cap.
Purchased Power
In Delaware and Maryland, DPL is the electricity supplier for customers who
do not choose an alternative electricity supplier, or the "default service"
provider. Upon completion of the divestiture of DPL's electric generating
plants, DPL will supply default service customers entirely with purchased pow-
er. As discussed in Note 13 to the Consolidated Financial Statements included
in Item 8 of Part II, the terms of DPL's power plant sale agreement with NRG
Energy, Inc. provide for DPL to purchase from NRG Energy, Inc. 500 megawatt-
hours of firm electricity per hour from completion of the sale through December
31, 2005. DPL currently purchases from PECO Energy Company (PECO) 243 MW of ca-
pacity and energy, which increases to 279 MW by 2006 when the contract expires.
Recently, DPL entered into another agreement with PECO to purchase 350 MW of
capacity and energy from March 2000 to February 2003. Subsequent to the divest-
iture of DPL's electric generating plants, management expects that these con-
tracts with NRG Energy, Inc. and PECO will satisfy approximately 80% of DPL's
forecasted average energy requirements. DPL also contracts with other electric
suppliers on an as needed basis for capacity and energy.
The Public Utility Regulatory Policy Act of 1978 (PURPA) established a class
of nonutility power suppliers, known as independent power producers (IPPs), and
required electric utilities to purchase the excess power from IPPs. As a result
of PURPA, ACE had long-term contracts with four IPPs for the purchase of 659 MW
of capacity and energy through December 28, 1999. On December 28, 1999, ACE
paid $228.5 million to terminate its 116 MW contract with Pedricktown Co-gener-
ation Limited Partnership, which was one of the four IPPs. For additional in-
formation concerning the contract termination, including expected recovery of
the termination payment from customers, see Note 10 to the Consolidated Finan-
cial Statements included in Item 8 of Part II.
I-7
ACE's NJBPU-approved IPP contracts as of December 31, 1999 are listed below.
Fuel MW Date of
Project Location Type Capacity Commercial Operation
---------------- ----------- -------- --------------------
Chester, Pennsylvania.............. solid waste 75 September 1991
Carney's Point, New Jersey......... coal 249 March 1994
Logan Township, New Jersey......... coal 219 September 1994
---
Total........................... 543
===
ACE is also currently purchasing 125 MW of capacity and energy from PECO un-
der a contract which ends May 31, 2000. ACE also contracts with other electric
suppliers on an as-needed basis for the purchase of short-term capacity and en-
ergy.
Effective August 1, 1999, under Basic Generation Service (BGS), ACE supplies
electricity to retail customers in its service area who have not chosen an al-
ternative electricity supplier. ACE will supply the BGS load requirement with
power purchased under the contracts shown above and the output generated by
certain units to be divested (prior to divestiture of the units). ACE will pur-
chase power through a competitive bidding process for any BGS supply require-
ment greater than the output from certain generation units to be divested and
the power purchased from the nonutility suppliers. Upon completion of the di-
vestiture of ACE's electric generating plants, ACE will supply BGS entirely
with purchased power.
Nuclear Power Plants
DPL and ACE have entered into agreements for the sale of their ownership in-
terests in nuclear power plants to PSEG Power LLC (a subsidiary of Public Serv-
ice Enterprise Group) and PECO. Upon completion of the sales, DPL and ACE will
transfer their respective nuclear decommissioning trust funds to the purchas-
ers, who will assume full responsibility for the decommissioning of Peach Bot-
tom Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Sa-
lem), and Hope Creek Nuclear Generating Station (Hope Creek). The sales are
subject to various federal and state regulatory approvals and are expected to
be completed by the third quarter of 2000. For additional information, see Note
13 to the Consolidated Financial Statements included in Item 8 of Part II.
DPL's nuclear capacity is provided by Peach Bottom Units 2 and 3 and by Salem
Units 1 and 2. ACE's nuclear capacity is provided by Peach Bottom, Salem, and
Hope Creek. Peach Bottom is located in York County, Pennsylvania, is operated
by PECO, and has a summer capacity of 2,186 MW. Public Service Electric and Gas
(PSE&G) operates Salem and Hope Creek, which are located adjacent to each other
in Salem County, New Jersey, and have summer capacities of 2,212 MW and 1,031
MW, respectively.
DPL's and ACE's share of MW capacity and ownership interest in the nuclear
power plants are shown below.
Consolidated
Plant DPL ACE Conectiv
----- ---- ---- ------------
Peach Bottom
Share of MW....................................... 164 164 328
Ownership %....................................... 7.51% 7.51% 15.02%
Salem
Share of MW....................................... 164* 164* 328
Ownership %....................................... 7.41% 7.41% 14.82%
Hope Creek
Share of MW....................................... -- 52 52
Ownership %....................................... -- 5.00% 5.00%
- --------
* Excludes DPL's and ACE's interest in the combustion turbine at Salem.
I-8
The ownership interests of DPL and ACE in nuclear power plants provided ap-
proximately 13% of Conectiv's total installed capacity as of December 31,
1999. See Note 12 to Conectiv's 1999 Consolidated Financial Statements, in-
cluded in Item 8 of Part II, for information about its investment in jointly-
owned generating stations.
The operation of nuclear generating units is regulated by the Nuclear Regu-
latory Commission (NRC). Such regulation requires that all aspects of plant
operations be conducted in accordance with NRC safety and environmental re-
quirements and that continuous demonstrations be made to the NRC that plant
operations meet applicable requirements. The NRC has the ultimate authority to
determine whether any nuclear generating unit may operate.
As a by-product of nuclear operations, nuclear generating units produce low-
level radioactive waste (LLRW). LLRW is accumulated on-site until shipped to a
federally licensed permanent disposal facility. Salem, Hope Creek, and Peach
Bottom have on-site interim storage facilities with five-year storage capaci-
ties. For a discussion about the disposal of nuclear fuel, see "Nuclear," un-
der "Fuel Supply for Electric Generation."
For information concerning funding DPL's and ACE's shares of the estimated
future cost of decommissioning the Salem, Hope Creek, and Peach Bottom nuclear
reactors, see Note 14 to the Consolidated Financial Statements included in
Item 8 of Part II.
For information about lawsuits seeking to recover damages for the costs of
replacing the steam generators at Salem, see Item 3, Legal Proceedings.
Fuel Supply for Electric Generation
DPL's and ACE's electric generating capacity by fuel type are shown under
"Installed Electric Capacity." To facilitate the purchase of adequate amounts
of fuel, DPL and ACE contract with various suppliers of coal, oil, and natural
gas on both a long- and short-term basis. DPL's long-term coal contracts gen-
erally contain provisions for periodic and limited price adjustments, which
are based on current market prices. Oil and natural gas contracts generally
are of shorter term with prices determined by market-based indices.
DPL's and ACE's obligations for coal, oil, and gas supply contracts related
to the fossil fuel-fired electric generating units to be sold are expected to
be assumed by NRG Energy, Inc., the party which has agreed to purchase the
fossil fuel-fired plants. Under the sales agreements for DPL's and ACE's in-
terests in nuclear generating units, DPL and ACE will receive proceeds for the
book value of the nuclear fuel inventories, which are expected to be used to
liquidate DPL's and ACE's obligations for the lease of the nuclear fuel inven-
tories.
Coal
Conectiv's coal fired generation includes DPL's wholly-owned Edge Moor Units
3 and 4 and the Indian River Station, and ACE's wholly-owned B.L. England
Units 1 and 2 and Deepwater Unit 6. Coal is also the fuel source for the Key-
stone and Conemaugh generating plants, in which DPL and ACE have ownership in-
terests. During 1999, 30% of DPL's coal supply was purchased under contracts
of less than three years in duration, 51% under long-term contracts (up to ten
years), and the balance on the spot market. During 1999, 51% of ACE's coal
supply was purchased under long-term contracts (up to ten years) and the bal-
ance was purchased on the spot market. Approximately 41% and 82% of DPL's and
ACE's respective projected coal requirements are expected to be provided under
supply contracts. DPL and ACE do not anticipate any difficulty in obtaining
adequate amounts of coal.
Oil
Currently, 100% of the residual oil used in DPL's Edge Moor Unit 5 is pur-
chased on a spot basis. Natural gas is used when economically feasible. A two-
year residual oil supply contract that expires in 2001 provides
I-9
90% to 100% of the fuel supply requirements for DPL's Vienna Generating Sta-
tion (Vienna). Any amount over 90% of Vienna's requirements may be purchased
in the spot market. All of the residual oil used in ACE's B.L. England Unit 3
and Deepwater Unit 1 and all of the distillate oil supply for ACE's combustion
turbines is purchased on a spot basis.
Gas
Natural gas is the primary fuel for the three combustion turbines at DPL's
Hay Road site and a secondary fuel for DPL's Edge Moor Units 3, 4, and 5. Nat-
ural gas for these DPL generating units is purchased on a firm or interrupti-
ble basis from suppliers such as marketers, producers, and utilities. The sec-
ondary fuel for DPL's Hay Road combustion turbines is low-sulfur diesel fuel,
which is purchased in the spot market. Six of ACE's combustion turbines use
natural gas as a primary fuel source and ACE's Deepwater Units 1 and 6 use
natural gas as secondary fuel. Natural gas for ACE's gas-fired generating
units is primarily purchased from the local gas distribution company on a firm
basis and is also purchased from other suppliers such as marketers, producers,
and utilities. Natural gas is delivered to both DPL and ACE through the inter-
state pipeline system under a mix of long-term firm, short-term firm, and in-
terruptible contracts.
Nuclear
PSE&G has informed DPL and ACE that it has several long-term contracts with
uranium ore operators, converters, enrichers and fabricators to meet the cur-
rently projected fuel requirements for Salem. PSE&G has also informed ACE that
it has similar contracts to satisfy the fuel requirements of Hope Creek. DPL
and ACE have also been advised by PECO that it has contracts similar to
PSE&G's contracts to satisfy the fuel requirements of Peach Bottom. Currently,
there is an adequate supply of nuclear fuel for Salem, Hope Creek, and Peach
Bottom.
After spent fuel is removed from a nuclear reactor, it is placed in tempo-
rary storage for cooling in a spent fuel pool at the nuclear station site. Un-
der the Nuclear Waste Policy Act of 1982 (NWPA), the federal government en-
tered into contracts with utilities operating nuclear power plants for trans-
portation and ultimate disposal of spent nuclear fuel and high level radioac-
tive waste. However, no permanent government-owned and operated repositories
are in service or under construction. The United States Department of Energy
(DOE) has stated that it would not be able to open a permanent, high level nu-
clear waste storage facility until 2010, at the earliest.
Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be
stored in reactor facility storage pools or in independent spent nuclear fuel
storage installations located at or away from reactor sites for at least 30
years beyond the licensed life for operation (which may include the term of a
revised or renewed license). PSE&G has advised DPL and ACE that, as a result
of reracking the two spent fuel storage pools at Salem, the availability of
spent fuel storage capacity is estimated to be adequate through 2012 for Unit
1 and 2016 for Unit 2. PSE&G has also advised ACE that the Hope Creek pool is
also fully racked and it is expected to provide adequate storage capacity un-
til 2008. PECO has advised DPL and ACE that spent fuel racks at Peach Bottom
have storage capacity until 2000 for Unit 2 and until 2001 for Unit 3. PECO
has also advised DPL and ACE that it is constructing an on-site dry storage
facility, which is expected to be operational in 2000, to provide additional
storage capacity.
Energy Adjustment Clauses
As a result of electric utility industry restructuring, energy adjustments
in DPL's Delaware regulated retail electric tariffs were eliminated effective
October 1, 1999, and energy adjustments in DPL's Maryland regulated retail
electric tariffs are to be eliminated effective June 30, 2000. The energy ad-
justment clauses provided for collection from customers of fuel costs and pur-
chased energy costs. In Virginia, DPL proposed to the VSCC that the energy ad-
justment clause be discontinued in 2000. Earnings volatility may increase due
to elimination of DPL's energy adjustment clauses.
I-10
A gas cost rate clause provides for the recovery of gas costs through regu-
lated tariffs from DPL's regulated gas customers. Gas costs for regulated, on-
system customers are charged to operations based on costs billed to customers
under the gas cost rate clause. Any under-collection or over-collection of gas
costs in a current period is generally deferred. Customers' rates are adjusted
periodically to reflect amounts actually paid by DPL for purchased gas.
Through July 31, 1999, ACE's tariffs for its electric customers included en-
ergy adjustments for fuel costs, purchased energy costs, and capacity pur-
chased from nonutility electricity suppliers. Effective August 1, 1999,
through various components of regulated rates, the rates charged to ACE's BGS
customers for electricity supply, include ACE's fuel costs, purchased energy
costs, and capacity purchased from nonutility electricity suppliers. Under the
terms of the NJBPU's Summary Order concerning restructuring ACE's electricity
business, ACE's regulatory liability for over-recovered energy supply costs as
of July 31, 1999 is to be offset by any subsequent under-recoveries of BGS and
certain other costs. Similarly, any over-recoveries will increase the regula-
tory liability. Customer rates are to be adjusted for any deferred balance re-
maining after the initial four-year transition period which began August 1,
1999.
Retail Electric and Gas Rates
Changes in DPL's and ACE's customer rates other than those related to the
energy adjustment clauses are discussed below. Changes in customer rates due
to the electric and gas energy adjustment clause generally do not affect earn-
ings.
Effective October 1, 1999, DPL's Delaware residential electric rates were
reduced 7.5% in connection with the restructuring of the Delaware electric
utility industry. Also, electric rates in effect on October 1, 1999 are to re-
main unchanged for four years for Delaware residential customers and three
years for Delaware non-residential customers. Management estimates that the
initial 7.5% Delaware residential rate reduction will reduce revenues by ap-
proximately $17.5 million (on an annualized basis, assuming fiscal year 1998
sales and revenues).
A 7.5% reduction in DPL's Maryland residential electric rates is scheduled
for July 1, 2000, in connection with the restructuring of the Maryland elec-
tric utility industry. Also, the electric rates which become effective on July
1, 2000 are to remain unchanged for four years for Maryland residential cus-
tomers and three years for Maryland non-residential customers. Management es-
timates that the initial 7.5% Maryland residential rate reduction will reduce
revenues by approximately $12.5 million (on an annualized basis, assuming fis-
cal year 1998 sales and revenues).
DPL has proposed a 2.6% (approximately $0.7 million on an annual basis) rev-
enue decrease for Virginia electric retail customers by the completion of the
divestiture of DPL's electric generating plants.
In connection with restructuring the electric utility industry in New Jer-
sey, the NJBPU directed ACE to implement a 5% aggregate rate reduction effec-
tive August 1, 1999. ACE also must implement at least an additional 2% rate
reduction by January 1, 2001. By August 1, 2002, rates must be reduced by 10%
from the rates which were in effect as of April 30, 1997. Management estimates
that the initial rate reduction effective August 1, 1999, will reduce revenues
by approximately $50 million (on an annualized basis, assuming fiscal year
1998 sales and revenues). Since an estimated $25 million of the revenue reduc-
tion resulted from the energy component of ACE's regulated revenues previously
exceeding related energy costs, this portion of the revenue reduction should
not affect earnings.
In accordance with the terms included in regulatory commissions' orders
which approved the Merger, ACE and DPL phased in reductions in electric and
gas retail customer rates. ACE's total Merger-related electric rate decrease
of $15.7 million was phased in as follows: (1) $5.0 million effective January
1, 1998 coincident with a $5.0 million increase for recovery of deferred other
postretirement benefit costs; (2) $9.9 million effective March 1, 1998, and
(3) $0.8 million effective January 1, 1999. DPL's total Merger-related rate
decrease of $13.0 million
I-11
was phased in as follows: (1) $11.5 million effective March 1, 1998, (2) $1.1
million effective March 1, 1999, and (3) $0.4 million effective October 1,
1999.
For information concerning lower New Jersey customer rates due to corre-
sponding New Jersey tax reductions, see Note 3 to the Consolidated Financial
Statements included in Item 8 of Part II.
For additional information concerning the impact of electric utility indus-
try restructuring on customer rates, see Note 9 to the Consolidated Financial
Statements included in Item 8 of Part II.
Customer Billing
In December 1999, a new customer billing system was installed, among other
reasons, to accommodate the unbundled utility bills required by electric util-
ity industry restructuring. As is the case with any complex billing system
changeover, errors have occurred, which Conectiv is in the process of resolv-
ing. On March 14, 2000, the DPSC initiated a proceeding in which billing sys-
tem and related customer service issues are to be reviewed. Although billing
system implementation problems may potentially affect future revenues and cash
flows, management currently does not expect such problems to materially affect
Conectiv's results of operations or financial position.
Electric System Outages
After customers experienced electric service outages in early-July 1999 dur-
ing an extended period of hot and humid weather and high demand for electrici-
ty, (i) the NJBPU initiated an investigation of outages occurring in the serv-
ice territories of ACE and other New Jersey electric utilities; (ii) the DPSC
initiated an investigation of outages occurring in DPL's Delaware service ter-
ritory (as well as an examination of post-Merger DPL customer service levels);
and (iii) the MPSC initiated an investigation of outages occurring in the
service territories of DPL and other Maryland electric utilities. ACE and DPL
have responded to, and expect to continue to respond to, information requests
during the pendency of these investigations.
In November 1999, the NJBPU expanded its July outage investigation to in-
clude a general reliability investigation of ACE and all other New Jersey
utilities.
In a separate but related proceeding, the NJBPU has convened an Electric
Distribution Service Reliability and Quality Standards working group to draft
performance standards for the electric and gas transmission and distribution
systems of New Jersey utilities. Performance standards are expected to be es-
tablished by late-2000.
On October 13, 1999, the DPSC initiated a formal proceeding to investigate
the adequacy of DPL's facilities and services, including the remedies and in-
centives (if any) to be imposed or offered, respectively, to ensure the con-
tinued adequacy of DPL's facilities and services. That proceeding also will
consider the effects (if any) of electric industry restructuring in Delaware
on the reliability of electric service. DPL is actively involved in defending
actions taken (including rotating load-shedding) during early-July 1999 and
explaining its view that electric industry restructuring is unlikely to affect
DPL's electric system reliability. This DPSC proceeding is scheduled to con-
clude by May 2000.
On November 4-5, 1999, the MPSC held hearings on outages occurring during
1999 in the service territories of DPL and other Maryland utilities.
New Jersey Demand Side Management
The NJBPU adopted rules in 1991 to encourage utilities to offer demand side
management (DSM) and conservation services. The Electric Discount and Energy
Competition Act, enacted February 9, 1999 in New Jersey, requires the continu-
ation of these energy efficiency programs and the initiation of renewable en-
ergy programs, the costs of which are to be recovered through a societal bene-
fits charge to electric and gas customers
I-12
of New Jersey public utilities. On June 9, 1999, the NJBPU initiated the Com-
prehensive Resource Analysis (CRA) proceeding causing a comprehensive resource
analysis of energy programs to be undertaken including the re-evaluation of
existing DSM programs and the incorporation of new energy efficiency and re-
newable energy programs. A key issue in the CRA proceeding is the determina-
tion of the appropriate level of funding for energy efficiency and renewable
energy programs on a statewide basis. Hearings were conducted in November 1999
and a record was established that would permit the NJBPU to render decisions
for each New Jersey utility in lieu of settlements, if necessary. ACE filed
its proposed CRA plan with the NJBPU on August 23, 1999. A decision by the
NJBPU is expected in 2000.
Cost Accounting Manual/Code of Conduct
Conectiv and its subsidiaries have cost allocation and direct charging mech-
anisms in place to prevent cross-subsidization of competitive activities by
regulated utility activities. DPL and ACE are also subject to various Codes of
Conduct that affect the relationship between their regulated activities and
the unregulated activities that they or other Conectiv subsidiaries perform.
In general, these Codes of Conduct limit information obtained through utility
activities from being disseminated to employees engaged in non-regulated ac-
tivities, and restrict or prohibit sales leads, joint sales calls, joint pro-
motions, and the use of the same telephone numbers for regulated and unregu-
lated activities. There are ongoing regulatory proceedings affecting both DPL
and ACE that could result in modifications to the existing Codes of Conduct,
which modifications could adversely impact the way Conectiv's subsidiaries are
organized and Conectiv's ability to capture economies of common management and
to deploy resources efficiently.
Affiliated Transactions
Certain types of transactions between DPL and ACE and their affiliates may
require the prior approval of the VSCC and the NJBPU.
On March 15, 2000, the NJBPU adopted Interim Affiliate Relations, Fair Com-
petition and Accounting Standards and Related Reporting Requirements (Interim
Standards). These Interim Standards will remain in effect for no longer than
18 months, until final standards are issued by the NJBPU. Management is cur-
rently reviewing the Interim Standards.
Federal Decontamination & Decommissioning Fund
The Energy Policy Act of 1992 provided for creation of a Decontamination &
Decommissioning (D&D) Fund to pay for the future clean-up of DOE gaseous dif-
fusion enrichment facilities. Domestic utilities and the federal government
are required to make payments to the D&D Fund until 2008 or $2.25 billion, ad-
justed annually for inflation, is collected. The liability accrued for DPL's
and ACE's shares of the D&D Fund was $9.7 million as of December 31, 1999. The
terms of agreements for the sales of DPL's and ACE's interests in the nuclear
power plants provide for the buyers of the plants to assume the amount of this
liability which exists at the time the sales are completed.
Regulated Gas Delivery and Supply
DPL's large and medium volume commercial and industrial customers may pur-
chase gas from DPL, or directly from other suppliers and make arrangements for
transporting gas purchased from these suppliers to the customers' facilities.
DPL's transportation customers pay a fee, which may be either fixed or negoti-
ated, for the use of DPL's gas transmission and distribution facilities.
On November 1, 1999, DPL instituted a pilot program to provide transporta-
tion service and a choice of gas suppliers to a group of retail customers. The
program was open to 15% of residential and 15% of small commercial customers.
Approximately 40% of residential and 80% of small commercial customers who
were eligible for the program actually enrolled. The pilot program will be in
effect until October 30, 2001.
I-13
DPL purchases gas supplies from marketers and producers under spot market,
short-term, and long-term agreements. As shown in the table below, DPL's maxi-
mum 24-hour system capability, including natural gas purchases, storage deliv-
eries, and the emergency sendout capability of its peak shaving plant, is
190,416 Mcf (thousand cubic feet).
Number of Expiration Daily
Contracts Dates Mcf
--------- ---------- -------
Supply......................................... 1 2001 9,180
Transportation................................. 5 2001-2016 86,152
Storage........................................ 6 2000-2013 50,084
Local Peak Shaving (emergency capability)...... 45,000
-------
Total........................................ 190,416
=======
DPL experienced an all-time daily peak in combined firm sales and transpor-
tation sendout of 158,810 Mcf on January 17, 1997. DPL's peak shaving plant
liquefies, stores, and re-gasifies natural gas in order to provide supplemen-
tal gas in the event of pipeline supply shortfalls or system emergencies.
In 1998, DPL implemented a DPSC-approved gas price hedging/risk management
program with respect to gas supply for regulated customers. The program seeks
to limit exposure to commodity price uncertainty. Costs and benefits of the
program are included in the gas cost rate clause, resulting in no effect on
DPL's earnings.
Capital Spending and Financing Program
For financial information concerning Conectiv's capital spending and financ-
ing program, refer to "Liquidity and Capital Resources" in the MD&A included
in Item 7 of Part II, and Notes 16 to 19 to the 1999 Consolidated Financial
Statements, included in Item 8 of Part II.
Conectiv's ratios of earnings to fixed charges under the Securities and Ex-
change Commission (SEC) Method for 1995-1999 are shown below.
Year Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges (SEC Method)... 1.98 2.38 2.63 2.83 2.92
Under the SEC Method, earnings, including Allowance For Funds Used During
Construction, are income before extraordinary item plus income taxes and fixed
charges, less capitalized interest. Fixed charges include gross interest ex-
pense, the estimated interest component of rentals, and preferred stock divi-
dend requirements of subsidiaries. Preferred stock dividend requirements for
purposes of computing the ratio have been increased to an amount representing
the pre-tax earnings which would be required to cover such dividend require-
ments.
DPL's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1995-1999 are shown below.
Year Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges (SEC Method)... 3.65 2.92 2.83 3.33 3.54
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends (SEC Method)..................... 3.37 2.72 2.63 2.83 2.92
ACE's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1995-1999 are shown below.
Year Ended December 31,
------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges (SEC Method)... 2.57 1.66 2.84 2.59 3.19
Ratio of Earnings to Fixed Charges and Preferred
Stock Dividends (SEC Method)..................... 2.44 1.55 2.58 2.16 2.43
I-14
Environmental Matters
Conectiv's subsidiaries are subject to various federal, regional, state, and
local environmental regulations, including air and water quality control, oil
pollution control, solid and hazardous waste disposal, and limitation on land
use. Permits are required for construction projects and the operation of ex-
isting facilities. Conectiv has incurred, and expects to continue to incur,
capital expenditures and operating costs because of environmental considera-
tions and requirements. Conectiv has a continuing program to assure compliance
with the environmental standards adopted by various regulatory authorities.
Included in Conectiv's forecasted capital requirements are construction ex-
penditures for compliance with environmental regulations, which are estimated
to be $13 million in 2000.
Air Quality Regulations
The federal Clean Air Act requires utilities and other industries to signif-
icantly reduce emissions of air pollutants such as sulfur dioxide (SO\\2\\)
and oxides of nitrogen (NOx). Title IV of the Clean Air Act, the acid rain
provisions, established a two-phase program which mandated reductions of
SO\\2\\ and NOx emissions from certain electric generating units by 1995
(Phase I) and required other electric generating units to begin reducing
SO\\2\\ and NOx emissions in the year 2000 (Phase II). Phase I emission reduc-
tion requirements have been achieved by the jointly-owned Conemaugh generating
station and ACE's B.L. England Units 1 and 2. The remainder of the wholly- and
jointly-owned fossil-fuel units of DPL and ACE are required to comply with
Phase II emission limits.
The facilities of DPL and ACE also must comply with Title I of the Clean Air
Act, the ozone nonattainment provisions, which require states to promulgate
Reasonably Available Control Technology (RACT) regulations for existing
sources located within ozone nonattainment areas or within the Northeast Ozone
Transport Region (NOTR). To comply with RACT regulations, DPL has installed
low NOx burner technology on six of its generating units. DPL filed its RACT
compliance program in accordance with regulatory requirements but the program
has not yet received final regulatory approvals from Delaware and Maryland.
The New Jersey Department of Environmental Protection (NJDEP) has approved
ACE's RACT compliance plan.
Additional "post-RACT" NOx emission regulations are being pursued by states
in the NOTR. Delaware implemented post-RACT NOx control regulations requiring
attainment of summer seasonal emission reductions of up to 65% below 1990 lev-
els by May 1999 through reduced emissions or the procurement of NOx emission
allowances. In 1999, DPL complied with these post-RACT requirements. DPL's
post-RACT compliance plan for its Delaware generating units includes capital
expenditures of approximately $12 million. In New Jersey, post-RACT NOx con-
trol regulations require attainment of summer seasonal emission reductions, of
up to 65% below 1990 levels by May 1999 and 90% by 2003. ACE complied with
post-RACT requirements in 1999. ACE anticipates spending approximately $5 mil-
lion to $8 million over the next five years to achieve compliance with New
Jersey's post-RACT NOx regulations.
In addition to the above requirements, the United States Environmental Pro-
tection Agency (USEPA) has proposed summer seasonal NOx controls commensurate
with reductions of up to 85% below baseline years by the year 2003 for a 22
state region, including Delaware and New Jersey. Since New Jersey will require
a greater percent reduction than the USEPA, the ACE facilities will most
likely achieve compliance with the USEPA requirement by 2003. Because Delaware
has not yet promulgated regulations to implement the reductions that the USEPA
has mandated by 2003, DPL currently cannot determine the additional operating
and capital costs that will be incurred to comply with these initiatives.
In July 1997, the USEPA adopted new federal air quality standards for par-
ticulate matter and ozone. The new particulate matter standard addresses fine
particulate matter. Attainment of the fine particulate matter standard may re-
quire reductions in NOx and SO\\2\\. However, under the time schedule an-
nounced by the USEPA, particulate matter non-attainment areas will not be des-
ignated until 2002 and control measures to meet this standard will not be
identified until 2005.
I-15
In 1999, the USEPA requested data from a number of electric utilities re-
garding older coal fired units in order to determine compliance with the regu-
lations for the Prevention of Significant Deterioration of Air Quality (PSD).
Based on the collected data, the U.S. Justice Department, on behalf of the
USEPA, filed seven lawsuits against electric utility companies in the Midwest
and South on November 3, 1999. On February 23, 2000, ACE received a request
for data from the USEPA and NJDEP on coal-fired operations at the Deepwater
and B.L. England electric generating stations. At this time it is not possible
to predict the impact of this request, if any, on Deepwater or B.L. England
operations.
Water Quality Regulations
The Federal Water Pollution Control Act, as amended (the Clean Water Act)
provides for the imposition of effluent limitations to regulate the discharge
of pollutants, including heat, into the waters of the United States. National
Pollution Discharge Elimination System (NPDES) permits issued by state envi-
ronmental regulatory agencies specify effluent limitations, monitoring re-
quirements, and special conditions with which facilities discharging
wastewaters must comply. To ensure that water quality is maintained, permits
are issued for a term of five years and are modified as necessary to reflect
requirements of new or revised regulations or changes in facility operations.
ACE holds New Jersey Pollution Discharge Elimination System (NJPDES) permits
issued by the NJDEP for the Deepwater and B.L. England power stations. The
NJDEP has issued a draft revised NJPDES permit for the Deepwater station. The
NJPDES permit for the B.L. England station expired in December 1999, but con-
tinues in effect because application for renewal was submitted, as required,
in June 1999. Both plants are permitted to continue operations under these
permits.
The Clean Water Act also requires that cooling water intake structures be
designed to minimize adverse environmental impact. The USEPA is required by a
consent order to adopt regulations in determining whether cooling water intake
structures represent the best technology available for minimizing adverse en-
vironmental impacts. As part of its efforts to develop regulations, the USEPA
has requested information from ACE and DPL regarding current intake structure
design. Final action on the proposed regulations is required in 2001.
In reviewing DPL's applications to renew NPDES permits, DNREC has required
DPL to update earlier studies to determine if Indian River and Edge Moor power
plants are still in compliance with the Clean Water Act. Studies assessing
thermal water quality standards compliance were completed in 1999 and studies
assessing impacts of the cooling water intake structures will be completed in
2000. A report of the results of the thermal impact studies will be completed
in May 2000. If the studies indicate an adverse environmental impact, then up-
grades to the intake structures and/or environmental enhancement projects to
offset adverse impacts may be required. Impact studies would cost up to $2
million per plant. Costs for intake structure upgrades and enhancement pro-
jects would range from approximately $1 million if little adverse impact is
found, to $45 million if cooling towers are required, which DPL considers to
be an unlikely potential outcome.
Hazardous Substances
The nature of the electric and gas utility businesses results in the produc-
tion or handling of various by-products and substances which may contain sub-
stances defined as hazardous under federal or state statutes. The disposal of
hazardous substances can result in costs to clean up facilities found to be
contaminated due to past disposal practices. Federal and state statutes autho-
rize governmental agencies to compel responsible parties to clean up certain
abandoned or uncontrolled hazardous waste sites. Conectiv's exposure is mini-
mized by adherence to environmental standards for Conectiv-owned facilities
and through a waste disposal contractor screening and audit process.
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 began recovering oil from
the soil. DPL is in the process of determining the extent of the leak, design-
ing an oil
I-16
recovery/remediation system, and estimating the costs to remediate the site.
DPL is working together with regulatory agencies and may be subject to mone-
tary penalties. Management cannot predict the outcome of this matter.
As of December 31, 1999, Conectiv's other accrued liabilities included $3
million for clean-up and other potential costs related to federal and state
superfund sites. Conectiv does not expect such future costs to have a material
effect on Conectiv's financial position or results of operations.
Executive Officers
The names, ages, and positions of all of the executive officers of Conectiv
as of December 31, 1999, are listed below, along with their business experi-
ences during the past five years. Officers are elected annually by Conectiv's
Board of Directors. There are no family relationships among these officers,
nor any arrangement or understanding between any officer and any other person
pursuant to which the officer was selected.
Executive Officers of Conectiv
(As of December 31, 1999)
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
Howard E. Cosgrove, 56....... Elected 1998 as Chairman of the Board and Chief
Chairman of the Board, Executive Officer of Conectiv, Delmarva Power &
President and Light Company, and Atlantic City Electric
Chief Executive Officer Company. Elected 1992 as Chairman of the Board,
President and Chief Executive Officer and
Director of Delmarva Power & Light Company.
Barry R. Elson, 58........... Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1997 as
Executive Vice President, Delmarva Power & Light
Company. Executive Vice President, Cox
Communications, Inc., Atlanta, Georgia, from
1995 to 1996. Senior Vice President, Cox
Enterprises/Cox Communications, Inc., Atlanta,
Georgia, from 1984 to 1995.
Thomas S. Shaw, 52........... Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company and
Atlantic City Electric Company. Elected 1992 as
Senior Vice President of Delmarva Power & Light
Company.
John C. van Roden, 50........ Elected 1998 as Senior Vice President and Chief
Senior Vice President and Financial Officer of Conectiv, Delmarva Power &
Chief Financial Officer Light Company, and Atlantic City Electric
Company and Director of Delmarva Power & Light
Company and Atlantic City Electric Company.
Principal, Cook and Belier, Inc. in 1998. Senior
Vice President/Chief Financial Officer and Vice
President/Treasurer, Lukens, Inc. from 1987 to
1998.
(continued on following page)
I-17
Executive Officers of Conectiv (continued)
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
Barbara S. Graham, 51........ Elected 1999 as Senior Vice President of
Senior Vice President Conectiv , Delmarva Power & Light Company, and
Atlantic City Electric Company and Director of
Delmarva Power & Light Company and Atlantic City
Electric Company. Elected 1998 as Senior Vice
President and Chief Financial Officer of
Conectiv, and Senior Vice President and Chief
Financial Officer and Director of Delmarva Power
& Light Company and Atlantic City Electric
Company. Elected 1994 as Senior Vice President,
Treasurer and Chief Financial Officer of
Delmarva Power & Light Company.
James P. Lavin, 52........... Elected 1998 as Controller of Conectiv, Delmarva
Controller and Chief Power & Light Company, and Atlantic City
Accounting Officer Electric Company. Elected 1993 as Comptroller,
Delmarva Power & Light Company.
ITEM 2. PROPERTIES
Substantially all utility plant and properties of DPL and ACE are subject to
liens of the Mortgages under which First Mortgage Bonds are issued.
The electric properties of DPL and ACE are located in New Jersey, Delaware,
Maryland, Virginia, and Pennsylvania. The following table sets forth the net
installed summer electric capacity available to DPL and ACE to serve their
peak loads as of December 31, 1999.
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
Coal-Fired
Edge Moor.......... Wilmington, DE...................... 260,000
Indian River....... Millsboro, DE....................... 767,000
B L England........ Beesley's Pt., NJ................... 284,000
Conemaugh.......... New Florence, PA.................... 128,000(A)
Keystone........... Shelocta, PA........................ 105,000(A)
Deepwater.......... Pennsville, NJ...................... 80,000
---------
1,624,000
---------
Oil-Fired
Edge Moor.......... Wilmington, DE...................... 445,000
B L England........ Beesley's Pt., NJ................... 155,000
Vienna............. Vienna, MD.......................... 153,000
Deepwater.......... Pennsville, NJ...................... 86,000(B)
---------
839,000
---------
(continued on following page)
I-18
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
Combustion
Turbines/Combined Cycle
Hay Road.............. Wilmington, DE...................... 511,000
Cumberland............ Millville, NJ....................... 84,000
Sherman Avenue........ Vineland, NJ........................ 81,000
Middle................ Rio Grande, NJ...................... 77,000
Carll's Corner........ Upper Deerfield Twp, NJ............. 73,000
Cedar................. Cedar Run, NJ....................... 68,000
Missouri Avenue....... Atlantic City, NJ................... 60,000
Mickleton............. Mickleton, NJ....................... 59,000
Christiana............ Wilmington, DE...................... 45,000
Deepwater............. Pennsville, NJ...................... 19,000
Edge Moor............. Wilmington, DE...................... 13,000
Madison Street........ Wilmington, DE...................... 11,000
West.................. Marshallton, DE..................... 15,000
Delaware City......... Delaware City, DE................... 16,000
Indian River.......... Millsboro, DE....................... 17,000
Vienna................ Vienna, MD.......................... 17,000
Tasley................ Tasley, VA.......................... 26,000
Salem................. Lower Alloways Creek Twp., NJ....... 6,000(A)
---------
1,198,000
---------
Nuclear
Peach Bottom.......... Peach Bottom Twp., PA............... 328,000(A)
Salem................. Lower Alloways Creek Twp., NJ....... 328,000(A)
Hope Creek............ Lower Alloways Creek Twp., NJ....... 52,000(A)
---------
708,000
---------
Diesel Units
Crisfield............. Crisfield, MD....................... 10,000
Bayview............... Bayview, VA......................... 12,000
B L England........... Beesley's Pt., NJ................... 8,000
Keystone.............. Shelocta, PA........................ 700(A)
Conemaugh............. New Florence, PA.................... 800(A)
---------
31,500
---------
Subtotal--Conectiv-Owned Generating Capacity............... 4,400,500
---------
Customer-
Owned Capacity......... Delaware City, DE................... 105,000(C)
Long-term Capacity Purchases................................. 950,500
Short-term Capacity Purchases................................ 207,300
---------
Total...................................................... 5,663,300
=========
- --------
(A) DPL and ACE portion of jointly-owned plants.
(B) Excludes 54,000 kilowatts for a generating unit currently not being dis-
patched.
(C) Represents capacity owned by a refinery customer of DPL which is available
to DPL to serve its peak load.
On a combined basis, the electric transmission and distribution systems of
DPL and ACE include 2,622 transmission poleline miles of overhead lines, 5
transmission cable miles of underground cables, 16,350 distribution poleline
miles of overhead lines, and 6,738 distribution cable miles of underground ca-
bles.
I-19
DPL has a liquefied natural gas plant located in Wilmington, Delaware, with
a storage capacity of 3.045 million gallons and an emergency sendout capabil-
ity of 45,000 Mcf per day. DPL also owns five natural gas city gate stations
at various locations in its gas service territory. These stations have a total
sendout capacity of 200,000 Mcf per day.
The following table sets forth DPL's gas pipeline miles:
Transmission Mains.................................................. 114*
Distribution Mains.................................................. 1,573
Service Lines....................................................... 1,155
- --------
* Includes 11 miles of joint-use gas pipeline that is used 10% for gas opera-
tions and 90% for electric operations.
DPL, ACE, and other Conectiv subsidiaries also own and occupy a number of
properties and buildings that are used for office, service, and other purpos-
es.
ITEM 3. LEGAL PROCEEDINGS
As previously reported, on February 27, 1996, the co-owners of Salem, in-
cluding ACE and DPL, filed a complaint in the United States District Court for
New Jersey against Westinghouse Electric Corporation (Westinghouse), the de-
signer and manufacturer of the Salem steam generators. The complaint, which
sought to recover from Westinghouse the costs associated with and resulting
from the cracks discovered in Salem's steam generators and with replacing such
steam generators, alleged violations of federal and New Jersey Racketeer In-
fluenced and Corrupt Organizations Acts, fraud, negligent misrepresentation
and breach of contract. On November 4, 1998, the Court granted Westinghouse's
motion for summary judgment with regard to the federal Racketeer Influenced
and Corrupt Organizations Act claim, and dismissed the remaining state law
claims against Westinghouse in the Superior Court of New Jersey. The co-owners
also filed an appeal of the District Court's dismissal with the United States
Court of Appeals for the Third Circuit. Following oral argument before the
Court of Appeals for the Third Circuit, Westinghouse and Public Service Elec-
tric and Gas, on behalf of the co-owners, negotiated a settlement of the liti-
gation. The federal and state cases have been dismissed with prejudice.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of the security holders of Conectiv (the holding com-
pany), through the solicitation of proxies or otherwise.
I-20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Conectiv common stock and Conectiv Class A common stock are listed on the
New York Stock Exchange.
As of December 31, 1999, there were 66,299 holders of Conectiv's common
stock and 30,523 holders of Conectiv's Class A common stock.
Conectiv common stock(1)
------------------------
1999 1998
------------------------- ----------------------------
Price Price
Dividend --------------- Dividend ------------------
Declared High Low Declared High Low
--------- ------- ------- --------- -------- ---------
First Quarter........... $0.38 1/2 $24 3/8 $19 3/8 $0.38 1/2 $22 3/4 $20 7/8
Second Quarter.......... 0.22 25 1/2 19 3/8 0.38 1/2 22 9/16 19 7/8
Third Quarter........... 0.22 25 1/4 19 0.38 1/2 23 1/4 19 11/16
Fourth Quarter.......... 0.22 20 3/4 16 1/4 0.38 1/2 24 1/2 21 7/8
Conectiv Class A common
stock(2)
-----------------------
1999 1998
--------------------------- --------------------------
Price Price
Dividend ------------------ Dividend -----------------
Declared High Low Declared High Low
-------- --------- -------- -------- ------- ---------
First Quarter........... $0.80 $40 $34 7/8 $0.80 $34 1/2 $29 9/16
Second Quarter.......... 0.80 42 1/4 34 3/8 0.80 36 7/8 31 11/16
Third Quarter........... 0.80 43 37 5/16 0.80 37 3/8 34
Fourth Quarter.......... 0.80 40 13/16 26 1/2 0.80 39 7/8 35 3/8
- --------
(1) The 1998 common stock price represents DPL for January and February, and
Conectiv for March through December, based on the March 1, 1998 Merger
date.
(2) Conectiv Class A common stock began trading March 3, 1998.
Stock Stock Symbol
Conectiv common stock CIV (New York Stock Ex-
Conectiv Class A common change)
stock CIV A (New York Stock Ex-
change)
DIVIDENDS ON COMMON STOCK
Conectiv announced on May 11, 1999 that it intended to reduce the dividends
on common stock to a targeted payout ratio of 40% to 60% of earnings per aver-
age share of common stock outstanding. Conectiv's Board of Directors declared
a quarterly dividend per share of common stock of $0.385 for the first quarter
of 1999, and $0.22 per share in the second, third, and fourth quarters of
1999, or a total of $1.045 in 1999 which represented approximately 55% of the
$1.89 of earnings per average share of common stock outstanding adjusted to
exclude the special and extraordinary charges discussed in Notes 5 and 6 to
the Consolidated Financial Statements, included in Item 8 of Part II.
DIVIDENDS ON CLASS A COMMON STOCK
As previously disclosed, Conectiv's Board of Directors intends that the
quarterly dividend on shares of Class A common stock will remain $0.80 per
share ($3.20 annualized rate) until March 31, 2001 (the "Initial Period"),
subject to declaration by Conectiv's Board of Directors and the obligations of
Conectiv's Board of Directors to consider the financial condition and regula-
tory environment of Conectiv and its subsidiaries and the results of opera-
tions of Conectiv and its subsidiaries; and also subject to the limitations
under applicable law and the provisions of Conectiv's Restated Certificate of
Incorporation.
II-1
Conectiv intends, following the Initial Period, subject to declaration by
Conectiv's Board of Directors and the obligation of the Board of Directors to
consider the financial condition and regulatory environment of Conectiv and
its subsidiaries and the results of operations of Conectiv and its subsidiar-
ies, to pay annual dividends on the Class A common stock in an aggregate
amount equal to (1) 90% of "Company Net Income Attributable to the Atlantic
Utility Group" (as defined in the Restated Certificate) multiplied by (2) the
Outstanding Atlantic Utility Fraction. The Outstanding Atlantic Utility Frac-
tion, as defined in Conectiv's Restated Certificate of Incorporation, repre-
sents the proportionate interest of the Class A common stock in the equity
value of the Atlantic Utility Group (and the percentage of "Company Net Income
Attributable to the Atlantic Utility Group" which is applicable to Class A
common stock). The Outstanding Atlantic Utility Fraction was 27.3% as of De-
cember 31, 1999 and 30.0% as of December 31, 1998. Notwithstanding Conectiv's
intention with respect to dividends on the Class A common stock following the
Initial Period, if and to the extent that the annual dividends paid on the
Class A common stock during the Initial Period exceed 100% of the earnings of
the Atlantic Utility Group that were applicable to the Class A common stock
during such period, Conectiv's Board of Directors may consider such fact in
determining the appropriate annual dividend rate on the Class A common stock
following the Initial Period. Dividends declared per share of Class A common
stock were $3.20 for 1999 and $3.20 for 1998. In comparison, earnings exclud-
ing special charges and the extraordinary item which were applicable to Class
A common stock were $1.44 in 1999 and $1.82 in 1998.
Management does not expect that earnings attributable to the Atlantic Util-
ity Group that are applicable to the shares of Class A common stock will be
sufficient to cover dividends on the Class A common stock during the remainder
of the Initial Period.
DIVIDEND RESTRICTION
Under the Public Utility Holding Company Act of 1935, as amended, 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 approval of the SEC. As
of December 31, 1999, Conectiv had an accumulated deficit of $36.5 million. In
January 2000, the SEC approved payment of the dividends declared by Conectiv
on its common stock and Class A common stock in December 1999. Conectiv ex-
pects to have retained earnings sufficient to offset dividends declared on
shares of common stock and Class A common stock beginning in the third quarter
of 2000, when the sale of the electric generating units discussed in Note 13
to the Consolidated Financial Statements, included in Item 8 of Part II, is
expected to be completed. There can be no assurances, however, that the sales
of the electric generating units will be completed, or that any gain will be
realized from such sales of the electric generating units. In any event,
Conectiv expects to receive the necessary SEC approvals during 2000 for the
quarterly payment of dividends on shares of its common stock and Class A com-
mon stock.
II-2
CONECTIV
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
--------------------------------------------------------------------------
1999 1998(1) 1997 1996 1995
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
Operating Results and
Data
Operating Revenues...... $ 3,744,897 $ 3,071,606 $ 1,415,367 $ 1,168,664 $ 1,055,725
Operating Income........ $ 345,589(2) $ 386,915(2) $ 226,294 $ 250,389 $ 254,425
Income Before
Extraordinary Item..... $ 113,578(2) $ 153,201(2) $ 101,218(3) $ 107,251 $ 107,546
Extraordinary Item, Net
of Income Taxes(4)..... $ (311,718) -- -- -- --
Net Income (Loss)....... $ (198,140)(2) $ 153,201(2) $ 101,218(3) $ 107,251 $ 107,546
On System Electric Sales
(kWh 000)(5)........... 22,418,459 20,687,653 13,231,766 12,925,716 12,310,921
On System Gas Sold and
Transported (mcf 000).. 23,461 21,587 22,855 22,424 21,371
Common Stock Information
Basic and Diluted
Earnings (Loss)
Applicable to:
Common Stock
Income Before
Extraordinary Item.... $ 106,639(6) $ 141,292(6) $ 101,218(3) $ 107,251 $ 107,546
Extraordinary Item, Net
of Income Taxes(4).... (295,161) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total................. $ (188,522) $ 141,292 $ 101,218 $ 107,251 $ 107,546
----------- ----------- ----------- ----------- -----------
Class A Common Stock
Income Before
Extraordinary Item.... $ 6,939(7) $ 11,909 -- -- --
Extraordinary Item, Net
of Income Taxes(4).... (16,557) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total................. $ (9,618) $ 11,909 -- -- --
----------- ----------- ----------- ----------- -----------
Earnings (Loss) Per
Share of:
Common Stock
Before Extraordinary
Item.................. $ 1.14(6) $ 1.50(6) $ 1.66(3) $ 1.77 $ 1.79
Extraordinary Item(4).. (3.16) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total................. $ (2.02) $ 1.50 $ 1.66 $ 1.77 $ 1.79
----------- ----------- ----------- ----------- -----------
Class A Common Stock
Before Extraordinary
Item.................. $ 1.14(7) $ 1.82 -- -- --
Extraordinary Item(4).. (2.71) -- -- -- --
----------- ----------- ----------- ----------- -----------
Total................. $ (1.57) $ 1.82 -- -- --
----------- ----------- ----------- ----------- -----------
Dividends Declared Per
Share of:
Common Stock........... $ 1.045 $ 1.54 $ 1.54 $ 1.54 $ 1.54
Class A Common Stock... $ 3.20 $ 3.20 -- -- --
Average Shares
Outstanding (000):
Common Stock........... 93,320 94,338 61,122 60,698 60,217
Class A Common Stock... 6,110 6,561 -- -- --
Year-End Stock Price:
Common Stock........... $ 16 13/16 $ 24 1/2 $ 23 1/16 $ 20 3/8 $ 22 3/4
Class A Common Stock... $ 29 5/8 $ 39 1/2 -- -- --
Book Value Per Common
Share(8)............... $ 12.38 $ 17.21 $ 15.59 $ 15.41 $ 15.20
Return on Average Common
Stockholders'
Equity(9).............. 8.0% 8.3% 10.6% 11.4% 11.7%
Capitalization
Common Stockholders'
Equity................. $ 1,138,173 $ 1,843,161 $ 954,496 $ 934,913 $ 923,440
Preferred Stock of
Subsidiaries:
Not Subject to
Mandatory Redemption.. 95,933 95,933 89,703 89,703 168,085
Subject to Mandatory
Redemption............ 188,950 188,950 70,000 70,000 --
Variable Rate Demand
Bonds (VRDB)(10)....... 158,430 125,100 71,500 85,000 86,500
Long-Term Debt.......... 2,124,898 1,746,562 983,672 904,033 853,904
----------- ----------- ----------- ----------- -----------
Total Capitalization
with VRDB.............. $ 3,706,384 $ 3,999,706 $ 2,169,371 $ 2,083,649 $ 2,031,929
=========== =========== =========== =========== ===========
Other Information
Total Assets............ $ 6,138,462 $ 6,087,674 $ 3,015,481 $ 2,931,855 $ 2,866,685
Long-Term Capital Lease
Obligation............. $ 30,395 $ 36,603 $ 19,877 $ 20,552 $ 20,768
Capital Expenditures.... $ 320,395 $ 224,831 $ 156,808 $ 165,595 $ 142,833
- --------
(1) As discussed in Note 4 to the Consolidated Financial Statements, Delmarva
Power & Light Company (DPL) and Atlantic City Electric Company (ACE) be-
came wholly-owned subsidiaries of Conectiv (the Merger) on March 1, 1998.
The Merger was accounted for under the purchase method of accounting,
with DPL as the acquirer. Accordingly, the 1998 Consolidated Statement of
Income includes 10 months of operating results for ACE and other former
subsidiaries of Atlantic Energy, Inc.
II-3
(2) Special Charges, as discussed in Note 5 to the Consolidated Financial
Statements, decreased operating income, income before extraordinary item,
and net income by $105.6 million, $71.6 million, and $71.6 million, re-
spectively, in 1999, and operating income, income before extraordinary
item, and net income by $27.7 million, $16.8 million and $16.8 million,
respectively in 1998.
(3) In 1997, the gain on the sale of a landfill and waste-hauling company in-
creased income before extraordinary item, net income and earnings per
common share by $13.7 million, $13.7 million, and $0.22, respectively.
(4) As discussed in Note 6 to the Consolidated Financial Statements, the ex-
traordinary item resulted from the restructuring of the electric utility
industry.
(5) Excludes interchange deliveries.
(6) Special Charges, as discussed in Note 5 to the Consolidated Financial
Statements, decreased income before extraordinary item applicable to
Conectiv common stock by $69.7 million ($0.75 per share) in 1999 and
$16.8 million ($0.18 per share) in 1998.
(7) Special Charges, as discussed in Note 5 to the Consolidated Financial
Statements, decreased income before extraordinary item applicable to
Conectiv Class A common stock by $1.9 million ($0.30 per share) in 1999.
(8) Conectiv common stock and Conectiv Class A common stock have the same
book value per common share.
(9) Before extraordinary item in 1999.
(10) Although Variable Rate Demand Bonds are classified as current liabili-
ties, management intends to use the bonds as a source of long-term fi-
nancing, as discussed in Note 19 to the Consolidated Financial State-
ments.
II-4
CONECTIV
ITEM 7. 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 dis-
closures without the threat of litigation, provided those statements are iden-
tified as forward-looking and are accompanied by meaningful, cautionary state-
ments 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 manage-
ment's beliefs as well as assumptions made by and information currently avail-
able to management. When used herein, the words "intend," "will," "antici-
pate," "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 ac-
tions; future litigation results; costs of construction; operating restric-
tions; 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 ade-
quacy of disclosures made prior to the effective date of the Litigation Reform
Act.
OVERVIEW
Conectiv was formed on March 1, 1998 (the Merger), through an exchange of
common stock with Delmarva Power & Light Company (DPL) and Atlantic Energy,
Inc. (Atlantic). Conectiv's two largest subsidiaries, DPL and Atlantic City
Electric Company (ACE), generate, purchase and sell electricity. DPL also sup-
plies and transports gas to its customers. Conectiv also has subsidiaries with
nonutility businesses which include local and long-distance telephone servic-
es, other telecommunication services; heating, ventilation, and air condition-
ing (HVAC) construction and services; and various other businesses.
As used in this document, references to Conectiv may mean the activities of
one or more subsidiary companies.
Under the purchase method of accounting, with DPL as the acquirer, the Con-
solidated Statements of Income include the results of operations for ACE and
formerly Atlantic-owned nonutility businesses from March 1, 1998 and thereaf-
ter. See Note 4 to the Consolidated Financial Statements for additional infor-
mation concerning the Merger.
II-5
COMMON STOCK EARNINGS SUMMARY
1999 1998 1997
-------- -------- --------
(Dollars in Millions,
Except Per Share Amounts)
After-tax contribution to earnings (loss)
applicable to common stock
Income excluding Special Charges and
Extraordinary Item............................ $ 176.3 $ 158.1 $ 101.2
Special Charges................................ (69.7) (16.8) --
-------- -------- --------
Income Before Extraordinary Item................. 106.6 141.3 101.2
Extraordinary Item............................... (295.1) -- --
-------- -------- --------
Earnings (loss) applicable to common stock....... $ (188.5) $ 141.3 $ 101.2
======== ======== ========
Average shares of common stock outstanding
(000)........................................... 93,320 94,338 61,122
-------- -------- --------
After-tax contribution to earnings (loss) per
average share of common stock
Income excluding Special Charges and
Extraordinary Item............................ $ 1.89 $ 1.68 $ 1.66
Special Charges................................ (0.75) (0.18) --
-------- -------- --------
Earnings (loss) per average share of common
stock:
Before Extraordinary Item...................... 1.14 1.50 1.66
Extraordinary Item............................. (3.16) -- --
-------- -------- --------
Earnings (loss) per average share of common
stock........................................... $ (2.02) $ 1.50 $ 1.66
======== ======== ========
For 1999, Conectiv reported a net loss applicable to common stock of $188.5
million, or a loss of $2.02 per average common share (93,320,000 average com-
mon shares). The net loss resulted from (i) a $295.1 million extraordinary
charge applicable to common stock ($3.16 per average share of common stock)
for discontinuing the application of Statement of Financial Accounting Stan-
dards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regula-
tion," (SFAS No. 71) to DPL's and ACE's electricity supply businesses because
of deregulation, and (ii) $69.7 million of special charges applicable to com-
mon stock ($0.75 per average share of common stock) primarily for write-downs
of investments in non-utility businesses and accrued employee separation
costs. For 1998, earnings applicable to common stock were $141.3 million, or
$1.50 per average share of common stock (94,338,000 average common shares),
after special charges of $16.8 million ($0.18 per average common share). For
additional information concerning special charges, see Note 5 to the Consoli-
dated Financial Statements and the "Special Charges" caption within "Manage-
ment's Discussion and Analysis of Financial Condition and Results of Opera-
tions" (MD&A). For additional information concerning deregulation and the ex-
traordinary charge to earnings, see Notes 1, 6, 9 and 15 to the Consolidated
Financial Statements and the "Electric Utility Industry Restructuring" section
within the MD&A. As discussed in Note 9 to the Consolidated Financial State-
ments, ACE's portion of the extraordinary charge was based on a Summary Order
issued by the New Jersey Board of Public Utilities (NJBPU) which addressed
stranded costs, unbundled rates, and other matters related to restructuring.
The NJBPU is to issue a more detailed order at a later date. If the NJBPU's
final detailed order were to differ materially from the Summary Order, then
the extraordinary charge could change.
Excluding the extraordinary and special charges to earnings, earnings appli-
cable to common stock were $176.3 million, or $1.89 per average common share,
for 1999 compared to $158.1 million, or $1.68 per average common share, for
1998. The $0.21 increase in earnings per average share of common stock in-
cluded a $0.06 per share increase from the net effect of purchasing 12.8 mil-
lion outstanding shares of Conectiv common stock in June 1999 (the Offer), as
discussed in Note 16 to the Consolidated Financial Statements, a $0.06 per
share increase from utility operations, and a $0.09 per share increase from
non-regulated investments and operations. The operating results of regulated
utility operations improved mainly due to higher retail electric and gas
sales, which benefited from the effects of weather, partly offset by electric
rate decreases and higher operating expenses. The $0.09 per share net improve-
ment in non-regulated investments and operations includes $0.27 per share in
1999 from equity in earnings of the Enertech venture capital fund (as dis-
cussed in Note 7 to the
II-6
Consolidated Financial Statements) and a $0.05 per share lower loss from HVAC
operations. These improvements were partially offset by the prior year equity
in earnings of a nonutility generation joint venture ($0.11 per share) and a
$0.12 per share higher net loss from Conectiv's other nonutility businesses,
primarily attributed to the telecommunications business which incurred higher
expenses to gain new customers and expand operations. Excluding the equity in
earnings of the venture capital fund in 1999 and the nonutility generation
joint venture in 1998, the operations of non-regulated businesses resulted in
a net loss after taxes of approximately $44 million in 1999 compared to a net
loss of $38 million in 1998.
Excluding the special charges to earnings, earnings applicable to common
stock were $158.1 million, or $1.68 per average common share (94,338,000 aver-
age common shares), for 1998 compared to $101.2 million, or $1.66 per average
common share (61,122,000 average common shares) for 1997. The net effect of
the higher number of average common shares due to the Merger on the variance
in earnings per share was essentially neutral since the dilution resulting
from the additional common shares was offset by the net earnings contributed
by the former Atlantic companies. The $0.02 increase in earnings per common
share (as adjusted) was primarily attributed to 2.5% higher DPL retail elec-
tric kilowatt-hour (kWh) sales and lower DPL utility operating and maintenance
expenses, offset substantially by the 1997 gain on sale of a landfill and
waste-hauling company ($0.22 per share) and higher operating losses of non-
regulated businesses.
DIVIDENDS ON COMMON STOCK
Conectiv announced on May 11, 1999 that it intended to reduce the dividends
on common stock to a targeted payout ratio of 40% to 60% of earnings per aver-
age share of common stock outstanding. Conectiv's Board of Directors declared
a quarterly dividend per share of common stock of $0.385 for the first quarter
of 1999, and $0.22 per share in the second, third, and fourth quarters of
1999, or a total of $1.045 in 1999 which represented approximately 55% of the
$1.89 of earnings per average share of common stock outstanding adjusted to
exclude the special and extraordinary charges discussed in Notes 5 and 6 to
the Consolidated Financial Statements.
CLASS A COMMON STOCK EARNINGS SUMMARY
After Tax Earnings (Loss) Earnings (Loss) Per
Applicable to Average
Class A Common Stock Class A Common Share
-------------------------- ----------------------
1999 1998 1999 1998
------------ ------------ ---------- ----------
(Dollars in Millions, Except Per Share
Amounts)
Income excluding Special
Charges and Extraordinary
Item........................ $ 8.8 $ 11.9 $ 1.44 $ 1.82
Special Charges.............. (1.9) -- (0.30) --
------------ ------------ ---------- ---------
Income Before Extraordinary
Item........................ 6.9 11.9 1.14 1.82
Extraordinary Item........... (16.5) -- (2.71) --
------------ ------------ ---------- ---------
Earnings (loss) applicable to
Class A common stock........ $ (9.6) $ 11.9 $ (1.57) $ 1.82
============ ============ ========== =========
Average shares of Class A
common Stock outstanding
(000)....................... 6,110 6,561
------------ ------------
For 1999, the net loss applicable to Class A common stock was $9.6 million,
or $1.57 per average share of Class A common stock. Excluding the $16.5 mil-
lion extraordinary charge (due to deregulation of the electricity supply busi-
ness of ACE as discussed in Notes 1, 6, 9, and 15 to the Consolidated Finan-
cial Statements) and $1.9 million of special charges applicable to Class A
common stock, earnings applicable to Class A common stock were $8.8 million,
or $1.44 per average share of Class A common stock, for 1999 compared to $11.9
million, or $1.82 per average share of Class A common stock, for 1998. The
$0.38 decrease in earnings per average share
II-7
of Class A common stock (excluding the extraordinary item and special charges)
was mainly due to higher fourth quarter operating expenses for ACE's electric-
ity delivery and generation businesses and the customer rate decreases which
became effective on August 1, 1999 due to restructuring of the electric util-
ity industry in New Jersey.
Earnings applicable to Class A common stock are equal to a percentage of
"Company Net Income Attributable to the Atlantic Utility Group," which is
earnings of the Atlantic Utility Group (AUG) less $40 million per year. The
Atlantic Utility Group (AUG) includes the assets and liabilities of the elec-
tric generation, transmission, and distribution businesses of ACE which ex-
isted on August 9, 1996 and were regulated by the NJBPU. The earnings of the
AUG will continue to be affected by the implementation of the Summary Order in
New Jersey, including the related rate decreases. (See Note 9 to the Consoli-
dated Financial Statements for information concerning the Summary Order.) The
planned sales of most of ACE's electric generating plants (discussed under
"Deregulated Generation and Power Plant Sales") are expected to decrease the
earnings capacity of the AUG. The extent of the decrease in earnings capacity
will be affected by how the proceeds from the sales of the generating plants
are utilized, which has not yet been finalized by Conectiv's management and
Board of Directors. On January 19, 2000, Conectiv announced that it expects to
use the proceeds for debt repayment, repurchases of common stock and new in-
vestments that fit with Conectiv's strategies, including expansion of the mid-
merit generation business (which is discussed under "Deregulated Generation
and Power Plant Sales"). Under certain circumstances, the percentage of "Com-
pany Net Income Attributable to the Atlantic Utility Group" applicable to
Class A common stock may be adjusted. The electric generating plants of ACE
which are not sold to third parties are expected to be transferred to another
Conectiv subsidiary; such transfer would not affect the earnings of the AUG or
the percentage of "Company Net Income Attributable to the Atlantic Utility
Group" applicable to Class A common stock because the transferred electric
generating plants would remain part of the AUG.
DIVIDENDS ON CLASS A COMMON STOCK
As previously disclosed, Conectiv's Board of Directors intends that the
q