Back to GetFilings.com
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
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, 2000
or
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
Commission file number 1-13895
----------------
CONECTIV
(Exact name of registrant as specified in its charter)
Delaware 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) 429-3069
----------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -----------------------
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
----------------
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, 2000 was $1,730.4 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, 2001
----- -------------------------------
Common stock, $0.01 par value 82,972,179 shares
Class A common stock, $0.01 par value 5,742,315 shares
Documents Incorporated by Reference
Part of Form 10-K Document Incorporated by Reference
----------------- ----------------------------------
III Portions of the Preliminary Joint Proxy Statement/Prospectus for New RC Inc.
on Form S-4 which was filed with the Securities and Exchange Commission on
March 14, 2001.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
----
PART I
Item 1.Business
Overview.................................................................. I-1
General.................................................................. I-1
Business Segments........................................................ I-1
Regulation............................................................... I-2
Sources of Revenues...................................................... I-2
Certain Business Focus Changes During 2000............................... I-3
Earnings Outlook......................................................... I-3
Power Delivery............................................................ I-3
Energy.................................................................... I-3
Electric Utility Industry Restructuring.................................. I-4
Basic Generation Service................................................. I-4
Default Service.......................................................... I-4
Conectiv Energy Holding Company.......................................... I-4
Mid-merit Electric Generation............................................ I-5
Agreements for the Sales of Electric Generating Plants................... I-5
Telecommunications........................................................ I-6
HVAC...................................................................... I-7
Other Businesses.......................................................... I-7
Capacity.................................................................. I-7
Electric Generating Plants............................................... I-7
Purchased Power.......................................................... I-8
Supplying Forecasted Peak Loads.......................................... I-8
PJM Interconnection, L.L.C. .............................................. I-8
Nuclear Power Plants...................................................... I-9
Fuel Supply for Electric Generation....................................... I-9
Coal..................................................................... I-10
Oil...................................................................... I-10
Gas...................................................................... I-10
Nuclear.................................................................. I-10
Energy Adjustment Clauses................................................. I-11
Retail Electric Rates..................................................... I-11
Customer Billing.......................................................... I-12
New Jersey Electric System Reliability Standards.......................... 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-14
Air Quality Regulations.................................................. I-14
Water Quality Regulations................................................ I-15
Hazardous Substances..................................................... I-16
Executive Officers........................................................ I-17
Item 2.Properties.......................................................... I-18
Item 3.Legal Proceedings................................................... I-19
Item 4.Submission of Matters to a Vote of Security Holders................. I-19
i
Page
-----
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-26
Item 8.Financial Statements and Supplementary Data...................... II-28
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure............................................ II-81
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-9
ii
ITEM 1. BUSINESS
Overview
General
Conectiv was formed on March 1, 1998 (the 1998 Merger), through a series of
merger transactions and an exchange of common stock with Delmarva Power &
Light Company (DPL) and Atlantic Energy, Inc. (Atlantic). For additional in-
formation about the 1998 Merger, refer to Note 4 to the Consolidated Financial
Statements included in Item 8 of Part II. As used in this document, references
to Conectiv may mean the activities of one or more subsidiaries. Conectiv's
primary businesses are the supply and delivery of electricity and gas in mar-
kets subject to price regulation ("regulated") and the supply and trading of
electricity and gas in markets not subject to price regulation ("non-regulat-
ed"). These businesses, particularly the regulated businesses, are weather
sensitive and seasonal because sales of electricity are usually higher during
the summer months, due to air conditioning usage, and natural gas sales are
usually higher in the winter when gas is used for space-heating.
On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec-
tric Power Company (Pepco) approved an Agreement and Plan of Merger
(Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for
a combination of cash and stock. The transaction is subject to various statu-
tory and regulatory approvals and approval by the stockholders of Conectiv and
Pepco. For information about the Conectiv/Pepco Merger Agreement, see Note 5
to the Consolidated Financial Statements included in Item 8 of Part II or
"Agreement For The Acquisition Of Conectiv" in Management's Discussion and
Analysis of Financial Condition and Results of Operations (MD&A) included in
Item 7 of Part II.
Conectiv's two largest subsidiaries, DPL and Atlantic City Electric Company
(ACE), are public utilities that supply and deliver electricity to their cus-
tomers under the trade name Conectiv Power Delivery. A 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. Substantially all of the
customers of DPL and ACE can now elect to choose an alternative electricity
supplier. DPL also supplies and delivers natural gas to its customers.
Conectiv Energy Holding Company (CEH) was formed during 2000. CEH and its sub-
sidiaries are engaged in non-regulated electricity production and sales, en-
ergy trading and marketing.
Conectiv is changing the types of electric generating plants it owns. Based
on megawatts (MW) of generating capacity, approximately 54% (2,203.5 MW) of
the electric generating plants owned by Conectiv as of December 31, 2000
(4,079.5 MW) were under agreements for sale. Conectiv is also building new
"mid-merit" electric generating plants, which management expects will provide
a better strategic fit with Conectiv's energy trading activities and have more
profitable operating characteristics than the plants to be sold. See "Mid-
merit Electric Generation" beginning on I-5 for additional information.
At December 31, 2000, Conectiv had 3,573 employees, including 1,871 employ-
ees represented by labor organizations. The number of employees as of December
31, 2000 decreased by 1,274 from December 31, 1999, primarily due to the sale
of the heating, ventilation, and cooling (HVAC) businesses in 2000 and staff-
ing reductions for the telecommunications businesses of Conectiv Communica-
tions, Inc. (CCI).
Business Segments
A brief description of Conectiv's business segments is presented below. Also
see the more detailed discussions about the business segments, which begin on
page I-3 within Part I and see Note 27 to Conectiv's Consolidated Financial
Statements included in Item 8 of Part II for financial information about the
business segments.
"Power Delivery" includes activities related to delivery of electricity and
gas to customers at regulated prices over transmission and distribution sys-
tems. The Power Delivery business is conducted by DPL and ACE.
I-1
"Energy" includes (a) the generation, purchase, trading and sale of elec-
tricity, including the obligations of DPL and ACE to supply electricity to
customers who do not choose an alternative electricity supplier; (b) gas and
other energy supply and trading activities, (c) power plant operation servic-
es, and (d) district heating and cooling systems operation and construction
services provided by Conectiv Thermal Systems, Inc. (CTS).
"Telecommunications" represents services provided by CCI, including local
and long-distance telephone service and Internet services.
"HVAC" represents heating, ventilation, and air conditioning services, which
were provided by Conectiv Services, Inc. (CSI) prior to the sale of this busi-
ness in the latter half of 2000.
Regulation
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. The costs of CRP are directly assigned
and allocated to the Conectiv subsidiaries.
Certain aspects of Conectiv's electric and gas utility businesses are sub-
ject 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 En-
ergy Regulatory Commission (FERC). As discussed below and under "Energy" be-
ginning on page I-3, the nature of regulation of retail electricity sales by
these regulatory commissions changed during 1999. Retail gas sales are subject
to regulation by the DPSC. Excluding sales not subject to price regulation,
the percentages of retail electric and gas utility operating revenues regu-
lated by each regulatory commission for the year ended December 31, 2000, were
as follows: NJBPU, 45.9%; DPSC, 34.0%; MPSC, 18.4%; and VSCC, 1.7%. Wholesale
electricity sales are subject to FERC regulation.
Sources of Revenues
The sources of Conectiv's consolidated revenues on a percentage basis are
shown in the table below. Regulated electric and gas revenues include the sup-
ply and delivery of these commodities within the service areas of DPL and ACE.
2000 1999 1998
----- ----- -----
Regulated electric revenues *........................... 39.8% 57.4% 62.4%
Non-regulated electric revenues......................... 18.0 8.3 9.3
Regulated gas revenues.................................. 2.2 3.1 3.5
Non-regulated gas revenues.............................. 28.2 18.7 13.9
Other services.......................................... 11.8 12.5 10.9
----- ----- -----
Total revenues.......................................... 100.0% 100.0% 100.0%
===== ===== =====
- --------
* In 2000, Conectiv's consolidated regulated electric retail revenues were
earned from the following customer classes: residential--48.0%; commer-
cial--37.2%; industrial--12.4%; and other--2.4%.
During 1998-2000, the percentage of Conectiv's revenues provided by non-reg-
ulated electricity and gas sales have increased and the percentage of
Conectiv's revenues provided by regulated electricity and gas sales have de-
creased. This change in the composition of Conectiv's revenues has primarily
resulted from growth of Conectiv's energy trading activities, deregulation of
Conectiv's electric generating plants in 1999, customers within the service
areas of DPL and ACE choosing alternative suppliers, and rate reductions asso-
ciated with restructuring the electric utility industry. The business activi-
ties included in "other services" revenues are telecommunications, HVAC, pe-
troleum sales, and other activities.
I-2
Certain Business Focus Changes During 2000
During mid- to late-2000, Conectiv sold its HVAC business and portions of
CTS, which constructs and operates district heating and cooling systems.
Conectiv also began exiting from the competitive retail energy business (the
supply of electricity and gas in deregulated retail markets). In addition,
Conectiv initiated a process in 2000 to identify a strategic partner for CCI.
Due to weaknesses in the valuations of telecommunications businesses, Conectiv
continues to evaluate its partnering or other options.
Earnings Outlook
Conectiv's businesses have undergone significant change during 2000 and are
expected to continue to change. Among other things, deregulated electricity
generation and energy trading now constitute a greater portion of Conectiv's
earnings. The sale of the HVAC businesses during 2000 has removed an unprofit-
able operation from Conectiv. On-going business developments are also expected
to cause future operating results to differ from the past. Accordingly, past
results are not an indication of future business prospects or financial re-
sults. As Conectiv exits from the regulated electricity production business
and builds mid-merit electric generation, operating earnings may temporarily
decrease and may also be more volatile.
For additional information concerning factors that are expected to influence
future operating results, see "Common Stock Earnings Outlook" and "Class A
Common Stock Earnings Outlook" in the MD&A included in Item 7 of Part II.
Power Delivery
In addition to the topics that are discussed within this section, informa-
tion about the "Power Delivery" business is included in Part I under the fol-
lowing captions: "Retail Electric Rates," "Customer Billing," "New Jersey
Electric System Reliability Standards," "New Jersey Demand Side Management,"
"Cost Accounting Manual/Code of Conduct," "Affiliated Transactions," and "Reg-
ulated Gas Delivery and Supply."
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 delivery
services are subject to regulation primarily by the DPSC, MPSC, and VSCC.
Rates charged to ACE's customers for electric delivery service are subject to
regulation primarily by the NJBPU.
DPL and ACE deliver electricity within their service areas to approximately
973,600 customers through their respective transmission and distribution sys-
tems and also supply electricity to most of their electricity delivery custom-
ers. DPL has about 472,600 customers in its service area and ACE has about
501,000 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 110,800 customers in a service territory that covers
about 275 square miles in northern Delaware and has a population of approxi-
mately 0.5 million.
The electricity delivered by Power Delivery may be supplied to customers by
alternative suppliers, DPL or ACE. Gas delivered may be supplied to customers
by alternative suppliers or DPL.
Energy
In addition to the topics that are discussed within this section, informa-
tion about the "Energy" business is included in Part I under the following
captions: "Capacity," "PJM Interconnection, L.L.C.," "Nuclear Power Plants,"
"Fuel Supply for Electric Generation," "Energy Adjustment Clauses," "Retail
Electric Rates," "Fed-
I-3
eral Decontamination & Decommissioning Fund," "Regulated Gas Delivery and Sup-
ply," and "Environmental Matters."
Electric Utility Industry Restructuring
The electric utility businesses of DPL and ACE were restructured in 1999
pursuant to legislation enacted in Delaware, Maryland, and New Jersey and or-
ders issued by the DPSC, MPSC, and NJBPU. Among other things, the electric re-
structuring orders provided for the choice of alternative electricity suppli-
ers by customers, decreases in customer electric rates, recovery of stranded
costs (which are the uneconomic portion of assets and long-term contracts that
resulted from electric utility industry restructuring), 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 restruc-
turing the electricity supply business of DPL and ACE, see Notes 1, 7, 10, 11
and 17 to the Consolidated Financial Statements, included in Item 8 of Part
II, and "Electric Utility Industry Restructuring" within the MD&A, included in
Item 7 of Part II.
All customers in ACE's service area could choose an alternative electricity
supplier, effective August 1, 1999. All of DPL's Delaware and Maryland custom-
ers, or about 95% of DPL's customers, could choose an alternative electricity
supplier by October 1, 2000. Power Delivery customers representing approxi-
mately 6% of the combined peak loads of DPL and ACE were purchasing electric-
ity from suppliers other than Conectiv as of December 31, 2000.
Basic Generation Service
Through July 31, 2002, under New Jersey's Basic Generation Service (BGS),
ACE is obligated to supply electricity to customers who do not choose an al-
ternative electricity supplier. ACE supplies the BGS load requirement with
purchased power and the output generated by certain units to be sold. To re-
place the output of the generating units to be sold, ACE plans to increase the
amount of power it purchases to supply the BGS load. ACE intends to manage BGS
supply requirements (net of sources otherwise available to it at any particu-
lar time) through the use of a portfolio approach, including the use of com-
petitive bidding. ACE's customer rates are designed to recover the costs of
providing BGS service, including above-market portions of long-term purchased
power contracts. As a result, ACE recognizes revenues for BGS service equal to
the related costs incurred. Any difference between such revenues and costs re-
sults in a related adjustment to "Deferred energy supply costs." ACE had a
regulatory liability of $34.7 million as of December 31, 2000 and $46.4 mil-
lion as of December 31, 1999 for over-recovered energy supply costs. ACE's
customer rates are to be adjusted for any deferred balance remaining after the
initial four-year transition period ends July 31, 2003. ACE's recovery of BGS
supply costs is subject to review by the NJBPU.
Default Service
DPL is obligated to supply electricity to customers who do not choose an al-
ternative electricity supplier for three years for non-residential customers
and four years for residential customers during the transition periods that
began on October 1, 1999, in Delaware and July 1, 2000, in Maryland. Differ-
ences between DPL's actual energy costs and the related amounts included in
customer rates began affecting Conectiv's earnings as of October 1, 1999, for
DPL's Delaware business and July 1, 2000, for DPL's Maryland business.
Conectiv Energy Holding Company
CEH and its subsidiaries are engaged in non-regulated electricity production
and sales, energy trading and marketing. CEH was formed effective July 1, 2000
by transferring (a) certain strategic electric generating plants of DPL and
ACE to subsidiaries of CEH and (b) trading, arbitrage and competitive sales of
electricity and natural gas from DPL to Conectiv Energy Supply, Inc. (CESI), a
subsidiary of CEH. CESI uses futures, options, swap agreements, and forward
contracts to hedge firm commitments or anticipated transactions of energy com-
modities and also creates net open energy commodity positions, or trading po-
sitions. For additional information concerning energy hedging and trading ac-
tivities, see Note 12 to the Consolidated Financial Statements included in
I-4
Item 8 of Part II. As of December 31, 2000, the electric generating plants of
CEH's subsidiaries had 2,002.8 MW of capacity, which includes 126.8 MW for
certain jointly-owned fossil plants expected to be sold during 2001.
During 2001 CESI is expected to seek to supply some or all the electricity
necessary to meet the load requirements of customers of DPL who have not cho-
sen an alternative electricity supplier.
Mid-merit Electric Generation
Conectiv is changing the types of electric generating plants it owns in con-
junction with implementing its asset-backed, "merchant" strategy focusing on
"mid-merit" electric generating plants. Mid-merit electric generating plants
can quickly increase or decrease their kilowatt-hour (kWh) output level on an
economic basis. Mid-merit plants typically have relatively low fixed operating
and maintenance costs and also can use different types of fuel. These plants
are generally operated during times when demand for electricity rises and
prices are higher. In contrast, baseload electric generating plants run almost
continuously to supply the base level of demand for electricity, or the mini-
mum demand level which generally always exists on an electrical system. Man-
agement expects that mid-merit electric generating plants will be more profit-
able and provide higher returns on invested capital than baseload electric
generating plants. As discussed below, DPL sold its ownership interests in
baseload nuclear electric generating plants on December 29, 2000, and the own-
ership interests of Conectiv subsidiaries in other baseload electric generat-
ing plants are expected to be sold during 2001, pursuant to existing agree-
ments.
Conectiv plans to add to its mid-merit electric generating plants by build-
ing combined cycle units, which are constructed with combustion turbines,
waste heat recovery boilers and a steam turbine. On September 21, 2000,
Conectiv announced that it had ordered 21 combustion turbine units, which,
with additional equipment, could be configured into 8 combined cycle plants.
Each combined cycle plant would have approximately 550 MW of capacity, al-
lowing Conectiv to add up to 4,400 MW of electric generating capacity, repre-
senting a potential total investment of about $2.6 billion. Under an acceler-
ated schedule, construction would occur in phases and would be completed by
the end of 2004. Conectiv is actively working on developing sites for combined
cycle plants within the region of the PJM Interconnection, L.L.C. (PJM).
The three new combustion turbines planned for the Hay Road site are expected
to be operational during the summer of 2001 (adding 330 MW of capacity). The
waste heat recovery boiler and steam turbine needed for the new combined cycle
operation at Hay Road are expected to be completed by the third quarter of
2002 (resulting in 550 MW of total capacity for the combined cycle plant).
The number of combined cycle plants ultimately built under Conectiv's mid-
merit construction program and the timing of construction will depend on vari-
ous factors including the following: growth in demand for electricity; con-
struction of generating units by competitors; fuel prices; availability of
suitable financing; possible construction delays; and the timing and ability
to obtain required permits and licenses. The level of the construction program
could also potentially be affected by the planned acquisition of Conectiv by
Pepco. Conectiv has made progress payments on the 21 combustion turbines that
have been ordered. However, Conectiv's Board of Directors has thus far ap-
proved construction of 2 combined cycle plants, for which only 6 combustion
turbines would be needed. Should Conectiv choose not to build all 8 combined
cycle plants, then Conectiv would attempt to sell its related investment in
such combustion turbines and development sites. The ability to find a buyer
and the amount of the proceeds from such a sale would be determined by market
conditions. Through January 31, 2001, Conectiv had made $49 million in pro-
gress payments on the 15 combustion turbines needed to build up to 6 combined
cycle plants in addition to the 2 combined cycle plants currently approved by
the Board of Directors.
Agreements for the Sales of Electric Generating Plants
DPL and ACE have entered into agreements for the sale of their respective
ownership interests in non-strategic baseload fossil fuel-fired electric gen-
erating plants and ACE has executed agreements for the sale of its ownership
interests in nuclear electric generating plants. Pursuant to agreements, DPL
sold its ownership interests in nuclear electric generating plants (331 MW) on
December 29, 2000 and the related nuclear fuel for
I-5
approximately $32 million. As of December 31, 2000, the electric generating
plants of Conectiv subsidiaries that are subject to sales agreements had a net
book value of $423.2 million and aggregate capacity of 2,203.5 MW. These elec-
tric generating plants held for sale include the following:
(i) The ownership interests of ACE in nuclear electric generating plants:
(a) The agreed upon selling price is $11 million plus the net book value of
ACE's interests in nuclear fuel as of the closing date; (b) As of December
31, 2000, the capacity and the net book value of ACE's interests in these
plants were 383 MW and $14.5 million, respectively.
(ii) The ownership interests of Conectiv subsidiaries in certain wholly and
jointly owned fossil fuel-fired electric generating units: (a) The agreed
upon selling price is $800 million, before certain adjustments and selling
expenses; (b) As of December 31, 2000, the capacity and the net book value
for Conectiv subsidiaries' ownership interests in these electric generating
units were 1,820.5 MW and $408.7 million, respectively.
Consummation of the sales of the electric generating plants is subject to
the receipt of required regulatory approvals. In addition, the agreements for
the sales of the electric generating plants contemplated that the sales of the
plants of ACE and DPL would occur simultaneously. Appeals related to the
NJBPU's final order concerning restructuring the electricity supply business
of Public Service Electric and Gas Company (PSE&G) and recent electricity
shortages and price increases in California have resulted in delays in the is-
suance of required regulatory approvals, the NJBPU's final order concerning
restructuring the electricity supply business of ACE, and the closings of the
sales of the electric generating units. Effective October 3, 2000, the agree-
ments relating to the sale of the nuclear plants were amended to, among other
things, permit separate closings of the sales of the ACE and DPL interests in
the nuclear plants. DPL's ownership interests in the nuclear electric generat-
ing plants were sold on December 29, 2000, as discussed above. On December 6,
2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Su-
perior Court Appellate Division, which had previously upheld the NJBPU's final
order concerning the PSE&G restructuring. Management currently expects the
sales of ACE's nuclear and fossil, and DPL's fossil, electric generating
plants to take place during 2001. However, management cannot predict the tim-
ing of the issuance of required NJBPU approvals, the timing or outcome of ap-
peals, if any, of such approvals, the effect of any of the foregoing on the
ability of ACE or DPL to consummate the sales of various electric generating
plants or the impact of any of the foregoing on ACE's ability to recover or
securitize any related stranded costs.
For additional information, see "Agreements for the Sales of Electric Gener-
ating Plants" within the MD&A, included in Item 7 of Part II, and Note 14 to
the Consolidated Financial Statements included in Item 8 of Part II.
Telecommunications
As discussed under "Common Stock Earnings Summary" in the MD&A included in
Item 7 of Part II, the telecommunication operations of CCI resulted in losses
during 1998-2000. Conectiv continues to evaluate its partnering or other op-
tions for CCI.
CCI is a competitive local exchange carrier (CLEC) providing local, region-
al, and long distance voice and data services to business and residential cus-
tomers in Delaware, Pennsylvania, New Jersey, and Maryland. CCI owns and oper-
ates a fiber optic network of more than 856 route miles and 45,296 fiber
miles. CCI has installed its equipment in 64 Verizon central offices in order
to provide facilities-based services through its Nortel DMS-500 switch.
CCI had installed approximately 111,000 access line equivalents (comprised
of 24,000 residential access lines, 36,000 business access lines, and 51,000
business voice grade equivalents) as of December 31, 2000. In comparison, CCI
had installed approximately 77,000 access line equivalents (comprised of
26,000 residential access lines, 20,000 business access lines, and 31,000
business voice grade equivalents) as of December 31, 1999.
I-6
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
As discussed under "Common Stock Earnings Summary" in the MD&A included in
Item 7 of Part II, the HVAC operations of CSI resulted in losses during 1998-
2000. During mid- to late-2000, Conectiv sold the HVAC businesses of CSI.
Prior to its sale, CSI was a full-service HVAC business operating in the Mid-
Atlantic region. CSI provided customers with mechanical HVAC/piping construc-
tion and installation, design services, sheet metal fabrication, refrigeration
services, preventive maintenance and repair services.
Other Businesses
As discussed in Note 8 to the Consolidated Financial Statements included in
Item 8 of Part II, an indirect Conectiv subsidiary holds a limited partner in-
terest in EnerTech Capital Partners, L.P. and EnerTech Capital Partners II,
L.P. (the EnerTech funds). The EnerTech funds are venture capital funds that
invest in energy related technology and Internet service companies. The in-
vestments of the EnerTech funds include, among others, Capstone Turbine Corpo-
ration, essential.com, ICG Commerce, Inc., and Sagemaker, Inc. Due to the na-
ture of the investments of the EnerTech funds, the earnings of the funds may
be volatile from period to period.
Capacity
Capacity is the capability to produce electric power from owned electric
generating units and differs from the electric energy markets, which trade the
actual energy being generated. Capacity may also be purchased through third-
party contracts. As discussed below, the PJM power pool operates a centralized
capacity market, which allows PJM member companies such as Conectiv to buy or
sell capacity as needed for electric utility operations. As a member of the
PJM, Conectiv is obligated to maintain capacity levels based on its allocated
share of estimated aggregate PJM capacity requirements. More capacity will
need to be purchased after the electric generating units subject to sales
agreements are sold.
Electric Generating Plants
The capacity provided by the electric generating plants of Conectiv's sub-
sidiaries as of December 31, 2000 is summarized in the chart below. For a more
detailed listing, see Item 2, Properties. The net generating capacity avail-
able for operations at any time may be less than the total net installed gen-
erating capacity due to generating units being out of service for inspection,
maintenance, repairs, or unforeseen circumstances.
MW of Electric Generating Capacity
------------------------------------------
As of Units Expected Units Expected to
12/31/00 to be Sold to be Retained**
-------- -------------- -----------------
Coal-fired generating units..... 1,624.0 1,364.0 260.0
Oil-fired generating units...... 839.0 394.0 445.0
Combustion turbines/combined
cycle generating units......... 1,205.0 56.0 1,149.0
Nuclear generating units........ 380.0* 380.0 --
Diesel units.................... 31.5 9.5 22.0
------- ------- -------
Electric Generating Capacity.. 4,079.5 2,203.5 1,876.0
======= ======= =======
- --------
* Excludes a 3 MW ownership interest of ACE in a combustion turbine located
at the Salem Nuclear Generating Station
** Represents the electric generating units as of December 31, 2000 less the
units expected to be sold during 2001.
I-7
Purchased Power
As discussed in Note 23 to the Consolidated Financial Statements included in
Item 8 of Part II, as of December 31, 2000, Conectiv's subsidiaries had long-
term purchased power contracts, which provided 1,421 MW of capacity and vary-
ing amounts of firm electricity per hour during each month of a given year.
Also, the terms of the agreement for the sale of DPL's wholly owned electric
generating plants provides for DPL to purchase 500 megawatt-hours of firm
electricity per hour from the buyer of the plants beginning upon completion of
the sale and continuing through December 31, 2005.
Supplying Forecasted Peak Loads
Management currently forecasts peak loads in 2001 of 2,530 MW for DPL's de-
fault service and 2,074 MW for ACE's BGS.
During 2001, DPL expects to enter into contracts with one or more suppliers
that would supply all electricity requirements for DPL's default service obli-
gation. CESI, a subsidiary of CEH, may seek to supply some or all of DPL's de-
fault service load obligation. Once DPL has secured such supply contract(s),
it expects to sell the capacity and energy of its electric generating plants
to CESI and also assign its rights and obligations under purchased power
agreements to CESI. Should DPL not enter into such supply contracts, then ap-
proximately 65% of DPL's forecasted 2001 default service load requirement
would be supplied from a combination of long-term power purchases and elec-
tricity generated by plants of DPL. The balance of the supply would be pur-
chased from the spot market.
ACE intends to manage its BGS supply requirement through the use of a port-
folio approach, including the use of competitive bidding. Approximately 50% of
ACE's forecasted 2001 BGS load requirement will be supplied from a combination
of existing bilateral long-term power purchases and electricity generated by
plants of ACE. The balance of the supply is expected to be provided through
additional bilateral contracts and the spot market.
PJM Interconnection, L.L.C
As a member of the PJM, the generation and transmission facilities of
Conectiv are operated on an integrated basis with other electricity suppliers
in Pennsylvania, New Jersey, Maryland, and the District of Columbia, and are
interconnected with other major utilities in the eastern half of the United
States. This power pool improves 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, 2000,
was 58,701 MW. The PJM's peak demand during 2000 was 49,430 MW on August 9,
which resulted in a summer reserve margin of 18.4% (based on installed capac-
ity of 58,524 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) re-
ceived 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 prov-
iders' bids. The LMP will be higher in congested areas reflecting the price
bids of those higher cost generating units that are dispatched to supply de-
mand and alleviate the transmission constraint. Furthermore, in the event that
all available generation within the PJM control area is insufficient to sat-
isfy demand, the PJM may institute emergency purchases from adjoining regions.
The cost of such emergency purchases is not subject to any PJM price cap.
There are a number of factors that distinguish the PJM market from Califor-
nia, and make the types of problems recently experienced there less likely.
The most prominent difference is the extent to which there is adequate gener-
ating capacity to meet demand in the region. The PJM's reserve margin is 18
percent, which is considerably higher than the reserve margin in California.
The two markets have also operated differently.
I-8
Considerable price risk for California utilities resulted from requirements to
sell a significant portion of their generation assets and, until recently, buy
their energy from the spot market (longer-term forward contracts were not per-
mitted). In contrast, PJM utilities have not been required to divest of their
generation assets and have been permitted to lock in prices through long-term
contracts, and to mitigate risk with use of other hedging instruments. Final-
ly, California is highly dependent on gas-fired and hydro electric generation,
both of which are highly dependent on weather. In contrast, PJM has a more di-
verse fuel mix, including a substantial base of coal and nuclear generators.
Nuclear Power Plants
As discussed in Note 14 to the Consolidated Financial Statements included in
Item 8 of Part II, DPL and ACE entered into agreements during 1999 for the
sale of their nuclear electric generating plants to PSEG Power LLC (a subsidi-
ary of Public Service Enterprise Group) and PECO Energy Company (PECO). Pursu-
ant to the agreements, DPL sold its 7.51% (164 MW) interest in Peach Bottom
Atomic Power Station (Peach Bottom) and 7.41% (167 MW) interest in Salem Nu-
clear Generating Station (Salem) on December 29, 2000. As a result, DPL no
longer has an ownership interest in any nuclear electric generating plants. In
accordance with the sales agreements, DPL transferred its decommissioning
trust funds and related obligation for decommissioning the plants to the pur-
chasers.
ACE owns 5% of Hope Creek Nuclear Generating Station (Hope Creek), which has
1,031 MW of capacity, 7.41% of Salem, which has 2,212 MW of capacity excluding
the on-site combustion turbine, and 7.51% of Peach Bottom, which has 2,186 MW
of capacity. The Hope Creek Unit and Salem Units 1 and 2 are located adjacent
to each other in Salem County, New Jersey, and are operated by PSE&G. Peach
Bottom Units 2 and 3 are located in York County, Pennsylvania, and are oper-
ated by PECO. The agreements for the sale of ACE's interests in the nuclear
plants (164 MW in Peach Bottom, 167 MW in Salem, and 52 MW in Hope Creek) pro-
vide for (a) a sales price of approximately $11 million plus the net book
value of the interests of ACE in nuclear fuel on-hand as of the closing date
and (b) the transfer of ACE's nuclear decommissioning funds and related obli-
gation for decommissioning the plants to the purchasers upon completion of the
sales.
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.
For information concerning funding ACE's share of the estimated future cost
of decommissioning the Salem, Hope Creek, and Peach Bottom nuclear reactors,
see Note 16 to the Consolidated Financial Statements included in Item 8 of
Part II.
Fuel Supply for Electric Generation
The electric generating capacity of Conectiv by fuel type is shown above un-
der "Electric Generating Plants." To facilitate the purchase of adequate
amounts of fuel, Conectiv contracts with various suppliers of coal, oil, and
natural gas on both a long- and short-term basis. Conectiv's long-term coal
contracts generally contain provisions for periodic and limited price adjust-
ments, which are based on current market prices. Oil and natural gas contracts
generally are of shorter term with prices determined by market-based indices.
Conectiv's obligations for coal and oil supply contracts related to the fos-
sil 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. The agreements for sale of the ownership interests of ACE in nu-
clear generating units provide for ACE to receive proceeds for the book value
of the nuclear fuel inventories, which management expects would be used to
liquidate ACE's obligations for the lease of the nuclear fuel inventories.
I-9
Management does not anticipate any difficulty in obtaining adequate amounts
of fuel for Conectiv's electric generating plants.
Coal
Conectiv's wholly and jointly owned electric generating plants that use coal
as a source of fuel have 1,624 MW of capacity and are listed in Item 2. During
2000, the coal supply for certain electric generating units with 1,153 MW of
capacity was purchased as follows: 70% under contracts of less than three
years in duration, 10% under long-term contracts (up to ten years), and 20% on
the spot market. For the other 471 MW of coal-fired electric generating
plants, approximately 80% of the coal supply was purchased under contracts ex-
piring in 2002 and 20% was purchased on the spot market. During 2001, manage-
ment expects that approximately 75% of the coal requirements will be purchased
under supply contracts and the other 25% purchased on the spot market.
Oil
A two-year residual oil supply contract that expires in 2001 provides 90% to
100% of the fuel supply requirements for the Vienna Generating Station (153
MW). Oil supply for the other electric generating units, which use oil as a
primary or secondary fuel, is purchased on the spot market.
Gas
Natural gas is the primary fuel for the three combustion turbines at the Hay
Road site (521 MW) and a secondary fuel for the Edge Moor units (705 MW). Nat-
ural gas for these generating units is purchased on a firm or interruptible
basis from suppliers such as marketers, producers, and utilities. The second-
ary fuel for the Hay Road combustion turbines is low-sulfur diesel fuel, which
is purchased in the spot market. Five combustion turbines (316 MW), in addi-
tion to those located at Hay Road, use natural gas as a primary fuel source
and the units at the Deepwater station, which use coal and oil as primary fu-
els, use natural gas as a secondary fuel. Natural gas for these five combus-
tion turbines and the Deepwater station is primarily purchased from a local
gas distribution company on a semi-firm basis and is also purchased from other
suppliers such as marketers, producers, and utilities. Natural gas is deliv-
ered through the interstate pipeline system under a mix of long-term firm,
short-term firm, and interruptible contracts.
Nuclear
PSE&G has informed ACE that it has several long-term contracts with uranium
ore operators, converters, enrichers and fabricators to meet the currently
projected fuel requirements for Salem and Hope Creek. ACE has also been ad-
vised 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.
On December 29, 2000, DPL's former nuclear fuel disposal obligations were
assumed by the purchasers of DPL's ownership interests in nuclear electric
generating units.
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
has stated that it would not be able to open a permanent, high level nuclear
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).
I-10
PSE&G has advised ACE that adequate spent fuel storage capacity is estimated
to be available through 2011 for Salem Unit 1, 2015 for Salem Unit 2, and 2007
for Hope Creek. PECO has advised ACE that it has constructed an on-site dry
storage facility at Peach Bottom which provides adequate storage capacity
through the end of the current licenses for the two Peach Bottom units.
Energy Adjustment Clauses
As a result of electric utility industry restructuring, energy adjustments
in DPL's regulated retail electric tariffs were eliminated effective October
1, 1999 in Delaware and effective June 30, 2000 in Maryland and Virginia. The
energy adjustment clauses provided for collection from customers of fuel costs
and purchased energy costs. Earnings volatility may increase due to elimina-
tion of DPL's energy adjustment clauses.
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.
Natural gas commodity prices and futures rose to unprecedented levels during
2000 due to increased demand for gas to generate electricity, low storage lev-
els nationally, and cold weather. DPL's Gas Cost Rate (GCR) was increased by
9.6% on December 1, 2000 to recover those increases in the natural gas commod-
ities. On December 8, 2000, DPL was required by its gas service tariff to file
for an additional increase of 23%, which became effective on February 1, 2001.
DPL is currently involved in an evidentiary process to prove the reasonable-
ness of those rate increases, and expects final approval in 2001. As of Decem-
ber 31, 2000, DPL had deferred $16.9 million of natural gas costs in anticipa-
tion of recovering such costs from customers through the gas cost rate clause.
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 non-utility 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 non-utility electricity suppliers. Under
the terms of the NJBPU's Summary Order concerning restructuring ACE's elec-
tricity 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 would increase
the regulatory liability. ACE had a regulatory liability of $34.7 million as
of December 31, 2000 and $46.4 million as of December 31, 1999 for over-recov-
ered energy supply costs. Customer rates are to be adjusted for any deferred
balance remaining after the initial four-year transition period, which ends
July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the
NJBPU.
Retail Electric 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. The 7.5% Delaware residential
rate reduction reduced revenues by approximately $17.5 million on an
annualized basis.
I-11
A 7.5% reduction in DPL's Maryland residential electric rates became effec-
tive July 1, 2000, in connection with the restructuring of the Maryland elec-
tric utility industry. Also, the electric rates in effect on July 1, 2000 are
to remain unchanged for four years for Maryland residential customers and
three years for Maryland non-residential customers. Management estimates that
the initial 7.5% Maryland residential rate reduction will reduce revenues by
approximately $12.5 million on an annualized basis.
In its Summary Order, the NJBPU directed ACE to implement a 5% aggregate
rate reduction effective August 1, 1999 and an additional 2% rate reduction by
January 1, 2001. By August 1, 2002, rates must be reduced by 10% from the
rates that were in effect as of April 30, 1997. The initial 5% rate reduction
effective August 1, 1999 reduced annual revenues by approximately $50 million.
The additional 2% rate reduction required by January 1, 2001 was implemented
through two separate 1% rate reductions effective January 1, 2000 and 2001,
respectively. Each of the 1% rate reductions reduced annual revenues by ap-
proximately $10 million, or $20 million in total. The final rate reduction,
which is required by August 1, 2002, is expected to reduce revenues by an ad-
ditional $30 million, which would result in a cumulative rate reduction of
$100 million since August 1, 1999.
Customer Billing
In December 1999, a new customer billing system was installed primarily to
accommodate the unbundled utility bills required by electric utility industry
restructuring. As with any complex billing system changeover, errors occurred.
The financial impact for Conectiv of the conversion to the new customer bill-
ing system was primarily slower collection of accounts receivable. In a set-
tlement to conclude a DPSC review of the billing system, DPL agreed to provide
a credit of approximately $2.5 million to customers bills. The credits were
reflected on customers bills in February 2001.
New Jersey Electric System Reliability Standards
In November 1999, the NJBPU began a general review of the reliability of the
electric systems of ACE and all other New Jersey utilities. The NJBPU began
its review as a result of electric service outages which occurred during an
extended period of hot and humid weather in July 1999. On November 28, 2000,
the NJBPU approved interim reliability standards which are in effect through
2002 and are designed to reduce outage frequency and duration, as well as im-
prove maintenance and inspection of electric facilities. Final reliability
standards are expected to be adopted in late-2002, after the NJBPU reviews
data submitted by the utilities. Expenditures of approximately $5 million are
expected by ACE during 2001 in order to comply. The NJBPU could fine utilities
up to $50,000 per violation of the rule requirements.
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 of New Jersey public utilities. On
June 9, 1999, the NJBPU initiated the Comprehensive 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 incor-
poration of new energy efficiency and renewable energy programs. A key issue
in the CRA proceeding is the determination of the appropriate level of funding
for energy efficiency and renewable energy programs on a statewide basis.
Hearings have been conducted and a record has been established to permit the
NJBPU to render decisions for each New Jersey utility in lieu of settlements,
if necessary. A decision by the NJBPU is expected in 2001.
I-12
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.
Most of Conectiv's unregulated activities are now conducted by subsidiaries
other than DPL and ACE. In general, these Codes of Conduct limit information
obtained through utility activities from being disseminated to employees en-
gaged in non-regulated activities, restrict or prohibit sales leads, joint
sales calls and joint promotions; require separation of certain employees and
functions; and require separation of certain office space and facilities.
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. A compliance audit
of these interim standards was conducted during 2000 and a final order is
pending by the NJBPU.
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. On December 29, 2000, DPL's
former liability to the D&D Fund was assumed by the purchasers of DPL's owner-
ship interests in nuclear electric generating units. The liability accrued for
ACE's D&D Fund liability was $5.1 million as of December 31, 2000. The terms
of agreements for the sale of ACE's interests in the nuclear power plants pro-
vide for the buyers of the plants to assume the amount of this liability which
exists at the time the sale is 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. Primarily due to high natural
gas prices and market price volatility, most of the customers participating in
the pilot program were returned to DPL by their supplier in the last quarter
of 2000. As of March 1, 2001, no customers remained in the pilot program,
which expires in October 2001.
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).
I-13
Number of Expiration Daily
Contracts Dates Mcf
--------- ---------- -------
Supply......................................... 1 2001 9,180
Transportation................................. 19 2001-2016 86,152
Storage........................................ 11 2001-2013 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 175,059 Mcf on January 17, 2000. 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 18 to 21 to the Consolidated Financial State-
ments, 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 1996-2000 are shown below.
Year Ended December 31,
------------------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
Ratio of Earnings to Fixed Charges (SEC Method)... 2.13 1.98 2.38 2.63 2.83
Under the SEC Method, earnings, including Allowance For Funds Used During
Construction, are income before extraordinary item plus income taxes and fixed
charges, less non-utility capitalized interest and undistributed earnings of
equity method investees. Fixed charges include gross interest expense, the es-
timated interest component of rentals, and preferred stock dividend require-
ments of subsidiaries. Preferred stock dividend requirements for purposes of
computing the ratio have been increased to an amount representing the pre-tax
earnings that would be required to cover such dividend requirements.
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 $10 million in 2001.
Air Quality Regulations
The federal Clean Air Act required utilities and other industries to signif-
icantly reduce emissions of air pollutants such as sulfur dioxide (SO\\2\\)
and oxides of nitrogen (NOx) by the year 2000. All wholly or jointly owned
electric generating units of Conectiv are in compliance with these require-
ments.
I-14
The electric generating plants of Conectiv also must comply with Title I of
the Clean Air Act, the ozone non-attainment provisions, which require states
to promulgate Reasonably Available Control Technology (RACT) regulations for
existing sources located within ozone non-attainment areas or within the
Northeast Ozone Transport Region (NOTR). To comply with RACT regulations, low
NOx burner technology has been installed on a number of electric generating
units. Additional "post-RACT" NOx emission regulations are being pursued by
states in the NOTR. In 2000, the electric generating plants of Conectiv com-
plied with post-RACT requirements. In addition to the above requirements, the
United States Environmental Protection Agency (USEPA) has proposed summer sea-
sonal 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 Jer-
sey. Since the State of New Jersey will require a greater percent reduction
than that required by the USEPA, the ACE facilities will most likely achieve
compliance with the USEPA requirement by 2003. The estimated cost to comply is
approximately $5-$8 million over the next five years. 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.
The USEPA requested data from a number of electric utilities regarding older
coal-fired units in order to determine compliance with the regulations for the
Prevention of Significant Deterioration of Air Quality (PSD). A number of set-
tlements have been announced throughout the utility industry. On February 23,
2000, ACE received a request for data from the USEPA and the New Jersey De-
partment of Environmental Protection (NJDEP) on coal-fired operations at the
Deepwater and B.L. England electric generating stations. Data was submitted,
as requested by the USEPA throughout 2000. At this time it is not possible to
predict the impact of this request, if any, on Deepwater or B.L. England oper-
ations.
Water Quality Regulations
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 environmental regulatory agencies specify effluent limita-
tions, monitoring requirements, and special conditions with which facilities
discharging waste-waters must comply. To ensure that water quality is main-
tained, permits are issued for a term of five years and are modified as neces-
sary to reflect requirements of new or revised regulations or changes in fa-
cility 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
NJPDES permit for the Deepwater Station expired in 1991. The permit has been
administratively extended and the plant continues to operate under the condi-
tions of the existing permit while negotiations are underway for permit renew-
al. The NJPDES permit for the B.L. England station expired in December 1999,
but has been administratively extended and the plant continues to operate un-
der the conditions of the existing permit until a renewal permit is issued by
NJDEP.
Conectiv's subsidiaries hold NPDES permits for the Vienna, Indian River, and
Edge Moor power plants. The NPDES permit for the Vienna power plant is ex-
pected to be renewed, maintaining the current permit limitations, in early
2001. The NPDES permit issued by the Delaware Department of Natural Resources
and Environmental Control (DNREC) for the Indian River power plant expired in
1992 but has been administratively extended and the plant continues to operate
under the conditions of the existing permit. Studies have been conducted to
determine thermal impacts and the results of the studies are currently under
evaluation by DNREC. The studies are intended to support a request for a vari-
ance from thermal water quality standards in order to allow the plant to con-
tinue operating under the current discharge temperature limitations. In addi-
tion, the NPDES
I-15
permits for the Indian River and Edge Moor power plants require studies to de-
termine impacts on aquatic organisms by the plants' intake structures. The
studies began in 1999 and will be completed in 2001. The results of these
studies will determine whether upgrades to intake structures are required to
minimize environmental impacts.
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 recover oil from the soil.
Remediation costs are expected to be approximately $10 million, including ap-
proximately $3 million of cumulative expenditures which had been incurred as
of December 31, 2000. In addition, DPL paid $350,000 in penalties and $100,000
for an environmental improvement project to DNREC in connection with the oil
leak and another matter related to the Indian River power plant.
Conectiv's current liabilities included $9.8 million as of December 31, 2000
and $3.0 million as of December 31, 1999 for potential clean-up and other
costs related to sites at which a Conectiv subsidiary is a potentially respon-
sible party or alleged to be a third-party contributor, including the Indian
River power plant discussed above. Conectiv does not expect such future costs
to have a material effect on its financial position or results of operations.
I-16
Executive Officers
The names, ages, and positions of all of the executive officers of Conectiv
as of December 31, 2000, 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, 2000)
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
Howard E. Cosgrove, 57........ Elected 1998 as Chairman of the Board and Chief
Chairman of the Board and Executive Officer of Conectiv. Elected 1992 as
Chief Executive Officer Chairman of the Board, President and Chief
Executive Officer and Director of Delmarva Power
& Light Company.
Thomas S. Shaw, 53............ Elected 2000 as President and Chief Operating
President and Chief Operating Officer of Conectiv. Elected 1998 as Executive
Officer Vice President of Conectiv. Elected 1992 as
Senior Vice President of Delmarva Power & Light
Company.
John C. van Roden, 51......... Elected 1998 as Senior Vice President and Chief
Senior Vice President and Financial Officer of Conectiv. Principal, Cook
Chief Financial Officer and Belier, Inc. in 1998. Senior Vice
President/Chief Financial Officer and Vice
President/Treasurer, Lukens, Inc. from 1987 to
1998.
Barbara S. Graham, 52......... Elected 1999 as Senior Vice President of
Senior Vice President Conectiv. Elected 1998 as Senior Vice President
and Chief Financial Officer of Conectiv. Elected
1994 as Senior Vice President, Treasurer and
Chief Financial Officer of Delmarva Power &
Light Company.
Joseph M. Rigby, 44........... Elected 2000 as Senior Vice President of
Senior Vice President Conectiv. 1999, Vice President, Electric
Delivery, Conectiv. 1998, Vice President, Gas
Delivery, Conectiv. 1997, Vice President, Merger
Integration Team, Conectiv. 1996, Director of
Human Resources, Atlantic Energy, Inc.
William H. Spence, 43......... Elected 2000 as Senior Vice President of
Senior Vice President Conectiv. Vice President and General Manager of
Merchant Energy, Conectiv, 1998-1999. Director
of Merchant Energy, Delmarva Power & Light
Company, 1996-1997.
James P. Lavin, 53............ Elected 1998 as Controller of Conectiv. Elected
Controller and Chief 1993 as Comptroller, Delmarva Power & Light
Accounting Officer Company.
I-17
ITEM 2. PROPERTIES
Generating
Electric Generating 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*
Keystone................ Shelocta, PA........................ 105,000*
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
---------
839,000
---------
Combustion
Turbines/Combined Cycle
Hay Road................ Wilmington, DE...................... 521,000
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....... 3,000*
---------
1,205,000
---------
Nuclear
Peach Bottom............ Peach Bottom Twp., PA............... 164,000*
Salem................... Lower Alloways Creek Twp., NJ....... 164,000*
Hope Creek.............. Lower Alloways Creek Twp., NJ....... 52,000*
---------
380,000
---------
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*
Conemaugh............... New Florence, PA.................... 800*
---------
31,500
---------
Total Electric Generating Capacity............................. 4,079,500
---------
- --------
* Represents Conectiv's subsidiaries ownership interests in jointly owned
plants.
I-18
The electric properties of Conectiv's subsidiaries are located in New Jer-
sey, Delaware, Maryland, Virginia, and Pennsylvania. The above table sets
forth the summer electric generating capacity of the electric generating
plants owned by Conectiv's subsidiaries.
Substantially all utility plant and properties of Conectiv's subsidiaries
are subject to liens of the Mortgages under which First Mortgage Bonds are is-
sued.
On a combined basis, the electric transmission and distribution systems of
DPL and ACE include 2,624 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.
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 eight 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 Conectiv's gas pipeline miles:
Transmission Mains.................................................... 111*
Distribution Mains.................................................... 1,605
Service Lines......................................................... 1,179
- --------
* Includes 7.2 miles of joint-use gas pipeline that is used 10% for gas oper-
ations and 90% for electric generation.
Conectiv's subsidiaries also own and occupy a number of properties and
buildings that are used for office, service, and other purposes.
ITEM 3. LEGAL PROCEEDINGS
On October 24, 2000, the City of Vineland, New Jersey, filed an action in a
New Jersey Superior Court to acquire by eminent domain ACE electric distribu-
tion facilities located within the City limits. The City has offered approxi-
mately $11 million for these assets, including the right to provide electric
service in this area. ACE believes that, properly evaluated, the assets sought
by the City are worth approximately $40 million.
For information concerning penalties paid in connection with the environ-
ment, see "Hazardous Substances," under "Environmental Matters," which is
above and within Item 1 of Part I.
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, through the so-
licitation of proxies or otherwise.
I-19
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, 2000, there were 62,318 holders of Conectiv's common
stock and 28,249 holders of Conectiv's Class A common stock.
Conectiv Common stock
2000 1999
----------------------------- ------------------------
Price Price
Dividend -------------------- Dividend ---------------
Declared High Low Declared High Low
-------- --------- ---------- -------- ------- -------
First Quarter............ $0.220 $18 1/4 $13 7/16 $0.385 $24 3/8 $19 3/8
Second Quarter........... 0.220 18 13/16 15 0.220 25 1/2 19 3/8
Third Quarter............ 0.220 19 3/16 15 1/2 0.220 25 1/4 19
Fourth Quarter........... 0.220 20 3/4 15 13/16 0.220 20 3/4 16 1/4
Conectiv Class A common stock
2000 1999
-------------------------- ---------------------------
Price Price
Dividend ----------------- Dividend ------------------
Declared High Low Declared High Low
-------- --------- ------- -------- --------- --------
First Quarter............ $0.80 $32 1/4 $21 3/4 $0.80 $40 $34 7/8
Second Quarter........... 0.80 24 5/8 19 3/8 0.80 42 1/4 34 3/8
Third Quarter............ 0.80 25 9/16 17 3/4 0.80 43 37 5/16
Fourth Quarter........... 0.80 20 1/4 8 1/2 0.80 40 13/16 26 1/2
Stock Stock Symbol
Conectiv common stock CIV (New York Stock Exchange)
Conectiv Class A common stock CIV A (New York Stock Exchange)
Dividends on Common Stock
As discussed in Note 5 to the Consolidated Financial Statements, during the
period the Conectiv/Pepco Merger Agreement is in effect, Conectiv's dividend
payments cannot exceed $0.22 per share of Conectiv common stock per quarter.
In 2000, Conectiv's Board of Directors declared quarterly dividends per
share of common stock of $0.22, or $0.88 for the year, which represented ap-
proximately 45% of earnings per share of common stock of $1.97. In the second
quarter of 1999, Conectiv established the objective of having a dividend pay-
out ratio on common stock of 40% to 60% of earnings per share of common stock
and also reduced the quarterly dividend from $0.385 per share to $0.22 per
share.
Dividends on Class A Common Stock
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 Di-
rectors to consider the financial condition and regulatory environment of
Conectiv and the results of its operations; and also subject to the limita-
tions under applicable law and the provisions of Conectiv's Restated Certifi-
cate of Incorporation.
II-1
As disclosed at the time of the 1998 Merger, 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 the results of its operations, to
pay annual dividends on the Class A common stock at a rate equal to 90% of
annualized earnings of the Class A common stock (taking into account the
notional fixed charge of $40 million per year in accordance with Conectiv's
Restated Certificate of Incorporation). 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 the earnings that were applica-
ble to the Class A common stock during the Initial Period, Conectiv's Board of
Directors may consider such fact in determining the appropriate annual divi-
dend rate on the Class A common stock following the Initial Period. Management
expects that during the Initial Period the earnings applicable to Class A com-
mon stock will be less than the dividends on the Class A common stock. Divi-
dends declared per share of Class A common stock were $3.20 for 2000, $3.20
for 1999 and $3.20 for 1998. In comparison, earnings excluding special charges
and the extraordinary item which were applicable to Class A common stock were
$1.06 for 2000, $1.44 for 1999 and $1.82 for 1998.
As discussed in Note 5 to the Consolidated Financial Statements, after March
31, 2001 and during the period the Conectiv/Pepco Merger Agreement is in ef-
fect, dividends on Conectiv Class A common stock may be paid at an annual rate
up to 90% of annualized earnings of Class A common stock.
Dividend Restriction
Under PUHCA, Conectiv may not pay dividends on the shares of common stock
and Class A common stock from an accumulated deficit or paid-in-capital with-
out SEC approval. In the first and second quarters of 2000, Conectiv had accu-
mulated deficits and received SEC approval for the payment of quarterly divi-
dends on shares of common stock and Class A common stock.
Conectiv's common dividends paid to public stockholders are currently funded
from the common dividends DPL and ACE pay to Conectiv. Under PUHCA, DPL and
ACE are prohibited from paying a dividend from an accumulated deficit or paid-
in-capital, unless SEC approval is obtained. Also, certificates of incorpora-
tion of DPL and ACE require payment of all preferred dividends in arrears (if
any) prior to payment of common dividends to Conectiv, and have certain other
limitations on the payment of common dividends to Conectiv.
II-2
CONECTIV
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
-------------------------------------------------------------------
2000 1999 1998(1) 1997 1996
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands, Except Per Share Amounts)
Operating Results
Operating Revenues...... $5,029,124 $3,744,897 $3,071,606 $1,415,367 $1,168,664
Operating Income........ $ 487,834(2) $ 345,589 (2) $ 386,915(2) $ 226,294 $ 250,389
Income Before
Extraordinary Item..... $ 170,830(2) $ 113,578 (2) $ 153,201(2) $ 101,218(3) $ 107,251
Extraordinary Item, Net
of $188,254 of Income
Taxes (4).............. -- $ (311,718) -- -- --
Net Income (Loss)....... $ 170,830(2) $ (198,140)(2) $ 153,201(2) $ 101,218(3) $ 107,251
Common Stock Information
Basic and Diluted
Earnings (Loss)
Applicable to:
Common Stock
Income Before
Extraordinary Item.... $ 164,719(5) $ 106,639 (5) $ 141,292(5) $ 101,218(3) $ 107,251
Extraordinary Item,
Net of Income Taxes
(4)................... -- (295,161) -- -- --
---------- ---------- ---------- ---------- ----------
Total................ $ 164,719 $ (188,522) $ 141,292 $ 101,218 $ 107,251
---------- ---------- ---------- ---------- ----------
Class A Common Stock
Income Before
Extraordinary Item.... $ 6,111 $ 6,939 (6) $ 11,909 -- --
Extraordinary Item,
Net of Income Taxes
(4)................... -- (16,557) -- -- --
---------- ---------- ---------- ---------- ----------
Total................ $ 6,111 $ (9,618) $ 11,909 -- --
---------- ---------- ---------- ---------- ----------
Earnings (Loss) Per
Share of:
Common Stock
Before Extraordinary
Item.................. $ 1.97(5) $ 1.14 (5) $ 1.50(5) $ 1.66(3) $ 1.77
Extraordinary Item
(4)................... -- (3.16) -- -- --
---------- ---------- ---------- ---------- ----------
Total................ $ 1.97 $ (2.02) $ 1.50 $ 1.66 $ 1.77
---------- ---------- ---------- ---------- ----------
Class A Common Stock
Before Extraordinary
Item.................. $ 1.06 $ 1.14 (6) $ 1.82 -- --
Extraordinary Item
(4)................... -- (2.71) -- -- --
---------- ---------- ---------- ---------- ----------
Total................ $ 1.06 $ (1.57) $ 1.82 -- --
---------- ---------- ---------- ---------- ----------
Dividends Declared Per
Share of:
Common Stock........... $ 0.88 $ 1.045 $ 1.54 $ 1.54 $ 1.54
Class A Common Stock... $ 3.20 $ 3.20 $ 3.20 -- --
Average Shares
Outstanding (000):
Common Stock........... 83,686 93,320 94,338 61,122 60,698
Class A Common Stock... 5,742 6,110 6,561 -- --
Year-End Stock Price:
Common Stock........... $ 20 1/16 $ 16 13/16 $ 24 1/2 $ 23 1/16 $ 20 3/8
Class A Common Stock... $ 12 7/8 $ 29 5/8 $ 39 1/2 -- --
Book Value Per Common
Share (7).............. $ 13.10 $ 12.38 $ 17.21 $ 15.59 $ 15.41
Return on Average Common
Stockholders' Equity
(8).................... 15.1% 8.0% 8.3% 10.6% 11.4%
Capitalization
Common Stockholders'
Equity................. $1,160,269 $1,138,173 $1,843,161 $ 954,496 $ 934,913
Preferred Stock of
Subsidiaries:
Not Subject to
Mandatory
Redemption............ 95,933 95,933 95,933 89,703 89,703
Subject to Mandatory
Redemption............ 188,950 188,950 188,950 70,000 70,000
Variable Rate Demand
Bonds (VRDB) (9)....... 158,430 158,430 125,100 71,500 85,000
Long-Term Debt.......... 2,021,789 2,124,898 1,746,562 983,672 904,033
---------- ---------- ---------- ---------- ----------
Total Capitalization
with VRDB.............. $3,625,371 $3,706,384 $3,999,706 $2,169,371 $2,083,649
========== ========== ========== ========== ==========
Other Information
Total Assets............ $6,477,995 $6,138,462 $6,087,674 $3,015,481 $2,931,855
Long-Term Capital Lease
Obligation............. $ 13,744 $ 30,395 $ 36,603 $ 19,877 $ 20,552
Capital Expenditures.... $ 390,540 $ 320,395 $ 224,831 $ 156,808 $ 165,595
- --------
(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 1998
II-3
Merger) on March 1, 1998. The 1998 Merger was accounted for under the pur-
chase method of accounting, with DPL as the acquirer. Accordingly, the
1998 Consolidated Statement of Income includes 10 months of operating re-
sults for ACE and other former subsidiaries of Atlantic Energy, Inc.
(2) Special Charges, as discussed in Note 6 to the Consolidated Financial
Statements, decreased operating income, income before extraordinary item,
and net income by $25.2 million, $23.4 million and $23.4 million, respec-
tively, in 2000; $105.6 million, $71.6 million, and $71.6 million, respec-
tively, in 1999; and $27.7 million, $16.8 million and $16.8 million, re-
spectively in 1998. In 2000, a gain on the sale of the ownership interests
of DPL in nuclear electric generating plants increased operating income,
income before extraordinary item, and net income by $16.6 million, $12.8
million, and $12.8 million, respectively, as discussed in Note 14 to the
Consolidated Financial Statements.
(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 com-
mon share by $13.7 million, $13.7 million, and $0.22, respectively.
(4) As discussed in Note 7 to the Consolidated Financial Statements, the ex-
traordinary item resulted from the restructuring of the electric utility
industry and discontinuing the application of Statement of Financial Ac-
counting Standards No. 71, "Accounting for the Effects of Certain Types of
Regulation."
(5) Special Charges, as discussed in Note 6 to the Consolidated Financial
Statements, decreased income before extraordinary item applicable to
Conectiv common stock by $23.4 million ($0.28 per average share outstand-
ing) in 2000, $69.7 million ($0.75 per average share outstanding) in 1999
and $16.8 million ($0.18 per average share outstanding) in 1998. In 2000,
a gain on the sale of the ownership interests of DPL in nuclear electric
generating plants increased income before extraordinary item applicable to
Conectiv common stock by $12.8 million ($0.15 per average share outstand-
ing), as discussed in Note 14 to the Consolidated Financial Statements.
(6) Special Charges, as discussed in Note 6 to the Consolidated Financial
Statements, decreased income before extraordinary item applicable to
Conectiv Class A common stock by $1.9 million ($0.30 per average share
outstanding) in 1999.
(7) Due to the terms of Conectiv's Restated Certificate of Incorporation,
Conectiv common stock and Conectiv Class A common stock have the same book
value per common share.
(8) Before extraordinary charge of $311,718, net of $188,254 of income taxes,
in 1999.
(9) Although Variable Rate Demand Bonds are classified as current liabilities,
management intends to use the bonds as a source of long-term financing, as
discussed in Note 21 to the Consolidated Financial Statements.
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
acceptable terms; 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 sales;
sales retention and growth; federal and state regulatory actions; future liti-
gation results; costs of construction; operating restrictions; increased costs
and construction delays attributable to environmental regulations; nuclear
decommissioning and the availability of reprocessing and storage facilities
for spent nuclear fuel; and credit market concerns. Conectiv undertakes no ob-
ligation to publicly update or revise any forward-looking statements, whether
as a result of new information, future events or otherwise. The foregoing list
of factors pursuant to the Litigation Reform Act should not be construed as
exhaustive or as any admission regarding the adequacy of disclosures made
prior to the effective date of the Litigation Reform Act.
OVERVIEW
Conectiv was formed on March 1, 1998 (the 1998 Merger), through a series of
merger transactions and an exchange of common stock with Delmarva Power &
Light Company (DPL) and Atlantic Energy, Inc. (Atlantic). Conectiv's two larg-
est subsidiaries, DPL and Atlantic City Electric Company (ACE), supply and de-
liver electricity. DPL also supplies and delivers gas to its customers. A
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. Sub-
stantially all of the customers of DPL and ACE can now elect to choose an al-
ternative electricity supplier.
On July, 1, 2000, certain strategic electric generating plants of DPL and
ACE were transferred to subsidiaries of Conectiv Energy Holding Company (CEH).
CEH and its subsidiaries are engaged in non-regulated electricity production
and sales, energy trading and marketing. On December 29, 2000, DPL sold its
ownership interests in nuclear electric generating plants. Certain other elec-
tric generating plants are expected to be sold during 2001, pursuant to exist-
ing agreements. After the sales of these plants, the principal remaining busi-
nesses of DPL and ACE will be the transmission and distribution, or delivery,
of electricity. Proceeds from these sales and securitization of ACE's stranded
costs (securitization is discussed under "Stranded Cost Recovery and
Securitization") are expected to be used to repay debt and fund expansion of
the "mid-merit" electric generation business. As discussed under "Mid-Merit
Electric Generation," mid-merit electric generating plants can quickly in-
crease or decrease their output level on an economic basis and are expected to
have relatively low operating costs. Conectiv is building combustion turbines
and combined cycle units as part of its mid-merit electric generation busi-
ness, which also includes most of the plants operated by subsidiaries of CEH.
During 2000, Conectiv began exiting from certain business activities. During
mid- to late-2000, Conectiv sold its heating, ventilation, and air condition-
ing (HVAC) business and portions of Conectiv Thermal Systems, Inc. (CTS),
which constructs and operates district heating and cooling systems. Conectiv
also began exiting from
II-5
the competitive retail energy business (the supply of electricity and gas in
deregulated retail markets). In addition, Conectiv initiated a process in 2000
to identify a strategic partner for CCI. Due to weaknesses in the valuations
of telecommunications businesses, Conectiv continues to evaluate its
partnering or other options.
Under the purchase method of accounting for the 1998 Merger, with DPL as the
acquirer, the Consolidated Statements of Income include the results of opera-
tions for ACE and formerly Atlantic-owned non-utility businesses from March 1,
1998 and thereafter. See Note 4 to the Consolidated Financial Statements for
additional information concerning the 1998 Merger.
As used in this document, references to Conectiv may mean the activities of
one or more subsidiary companies.
AGREEMENT FOR THE ACQUISITION OF CONECTIV
On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec-
tric Power Company (Pepco) approved an Agreement and Plan of Merger
(Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for
a combination of cash and stock. The transaction is subject to various statu-
tory and regulatory approvals and approval by the stockholders of Conectiv and
Pepco. Upon completion of the transaction, Conectiv and Pepco will become sub-
sidiaries of a new holding company (HoldCo), to be named at a later date.
HoldCo is expected to be a registered holding company under PUHCA. Approxi-
mately 67% of the shares of HoldCo are expected to be owned by Pepco stock-
holders and 33% of the shares of HoldCo are expected to be owned by Conectiv
stockholders.
Under the terms of the Conectiv/Pepco Merger Agreement, holders of Pepco's
common stock will receive one share of HoldCo common stock for each share of
Pepco common stock owned.
Under the Conectiv/Pepco Merger Agreement, holders of Conectiv common stock
and Conectiv Class A common stock may elect to exchange their shares for cash,
HoldCo common stock, or a combination of cash and HoldCo common stock. Howev-
er, such elections will be subject to a proration procedure that will cause
the aggregate consideration paid to holders of Conectiv common stock and
Conectiv Class A common stock to be 50% cash and 50% HoldCo common stock. Sub-
ject to certain restrictions described below, (i) Conectiv stockholders elect-
ing to receive cash would receive $25 per share of Conectiv common stock ex-
changed and $21.69 per share of Conectiv Class A common stock exchanged, and
(ii) Conectiv stockholders electing to receive HoldCo common stock would re-
ceive a number of shares of HoldCo common stock determined by the exchange ra-
tio described below. Subject to certain limitations, the exchange ratio is de-
signed to provide holders of Conectiv common stock with a number of shares of
HoldCo common stock having a market value of $25.00 and holders of Conectiv
Class A common stock with a number of shares of HoldCo common stock having a
market value of $21.69.
The exchange ratio will be $25.00 divided by the volume-weighted average of
the closing trading prices of Pepco common stock for 20 trading days randomly
selected by lot out of 30 consecutive trading days ending on the fifth busi-
ness day immediately preceding the closing date of the transaction (Average
Final Price).
If the Average Final Price is below $19.50, then Conectiv common stockhold-
ers will have the right to receive 1.28205 shares of HoldCo common stock for
each share of stock exchanged and Conectiv Class A common stockholders will
have the right to receive 1.11227 shares of HoldCo common stock for each share
of stock exchanged. In this instance, the fair value of HoldCo common stock
received for each share of Conectiv common stock exchanged and each share of
Conectiv Class A common stock exchanged will be less than $25.00 and $21.69,
respectively.
If the Average Final Price is above $24.50, then Conectiv common stockhold-
ers will have the right to receive 1.02041 shares of HoldCo common stock for
each share of stock exchanged and Conectiv Class A common stockholders will
have the right to receive 0.88528 shares of HoldCo common stock for each share
of
II-6
stock exchanged. In this instance, the fair value of HoldCo common stock re-
ceived for each share of Conectiv common stock exchanged and each share of
Conectiv Class A common stock exchanged will be more than $25.00 and $21.69,
respectively.
Conectiv may terminate the Conectiv/Pepco Merger Agreement if the Average
Final Price is less than $16.50, unless Pepco, at its option, chooses to in-
crease the consideration that will be paid to Conectiv's stockholders for
their shares of Conectiv stock. If the Average Final Price is less than
$16.50, Pepco has the option of (i) adjusting the exchange ratio so as to pro-
vide Conectiv's stockholders with HoldCo common stock having a value of $21.25
for each share of Conectiv common stock and $18.35 for each share of Conectiv
Class A common stock, (ii) paying additional cash to the stockholders so that
they receive a total consideration of $21.25 for each share of Conectiv common
stock and $18.35 for each share of Conectiv Class A common stock, or (iii) un-
dertaking a combination of (i) and (ii), provided that any such combination
must be in the same proportion with respect to the Conectiv common stock and
the Conectiv Class A common stock.
The Conectiv/Pepco Merger Agreement may be terminated by either Conectiv or
Pepco if the transaction has not occurred by August 9, 2002 (18 months after
the date of the Conectiv/Pepco Merger Agreement). If however, on August 9,
2002, the conditions required to complete the merger have been satisfied, ex-
cept that additional time is needed to obtain the necessary statutory and reg-
ulatory approvals, then the Conectiv/Pepco Merger Agreement is extended for
six additional months. If Conectiv terminates the Conectiv/Pepco Merger Agree-
ment under certain circumstances, Conectiv is required to pay a $60 million
termination fee to Pepco. For example, if Conectiv's Board of Directors con-
cludes that a business combination with another party is more favorable to
Conectiv's stockholders and Conectiv terminates the Conectiv/Pepco Merger
Agreement, then Conectiv is obligated to pay a $60 million termination fee to
Pepco.
COMMON STOCK EARNINGS SUMMARY
Earnings applicable to common stock for 2000 were $164.7 million, or $1.97
per share of common stock (83,686,000 average shares outstanding) and reflect
a gain ($12.8 million after-taxes, or $0.15 per common share) on the sale of
DPL's ownership interests in nuclear power plants and special charges ($23.4
million after-taxes, or $0.28 per share of common stock) for losses on the
sales of the HVAC business and two CTS projects. For 1999, Conectiv reported a
net loss applicable to common stock of $188.5 million, or a loss of $2.02 per
share of common stock (93,320,000 average shares outstanding). The net loss
resulted from (i) a $295.1 million extraordinary charge applicable to common
stock ($3.16 per share of common stock) for discontinuing the application of
Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the
Effects of Certain Types of Regulation," (SFAS No. 71) to the electricity sup-
ply businesses of DPL and ACE because of deregulation, and (ii) $69.7 million
of special charges applicable to common stock ($0.75 per share of common
stock) primarily for write-downs of investments in non-utility businesses and
employee separation costs. For 1998, earnings applicable to common stock were
$141.3 million, or $1.50 per share of common stock (94,338,000 average shares
outstanding), after special charges of $16.8 million ($0.18 per share of com-
mon stock).
For additional information concerning the gain on the sale of the ownership
interests of DPL in nuclear electric generating plants, see "Agreements for
the Sales of Electric Generating Plants" in "Management's Discussion and Anal-
ysis of Financial Condition and Results of Operations" (MD&A) and Note 14 to
the Consolidated Financial Statements. For additional information concerning
special charges, see "Special Charges" in the MD&A and Note 6 to the Consoli-
dated Financial Statements. For additional information concerning deregulation
and the extraordinary charge to earnings, see "Electric Utility Industry Re-
structuring" in the MD&A and Notes 1, 7, 10, 11 and 17 to the Consolidated Fi-
nancial Statements.
As discussed in Note 10 to the Consolidated Financial Statements, ACE's por-
tion of the 1999 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
indicated that a more detailed order would be issued at a later time. If the
NJBPU's final detailed order were to differ materially from the Summary Order,
then another extraordinary item may result due to adjustment of the 1999 ex-
traordinary
II-7
charge. For information concerning a delay in the issuance of the NJBPU's fi-
nal detailed order, see "Agreements for the Sales of Electric Generating
Plants" in the MD&A.
A summary of common stock earnings is shown in the table below.
2000 1999 1998
-------- --------- --------
(Dollars in Millions,
Except Per Share Amounts)
After-tax Contribution to Earnings (Loss)
Applicable to Common Stock
Income Excluding Special Charges, Gain on
Sale of DPL's Interest in Nuclear Plants,
and Extraordinary Item..................... $ 175.3 $ 176.3 $ 158.1
Special Charges............................. (23.4) (69.7) (16.8)
Gain on Sale of DPL's Interest in Nuclear
Plants..................................... 12.8 -- --
-------- --------- --------
Income Before Extraordinary Item............. $ 164.7 $ 106.6 $ 141.3
Extraordinary Item........................... -- (295.1) --
-------- --------- --------
Earnings (Loss) Applicable to Common Stock... $ 164.7 $ (188.5) $ 141.3
======== ========= ========
Average Shares of Common Stock Outstanding
(000)....................................... 83,686 93,320 94,338
-------- --------- --------
After-tax Contribution to Earnings (Loss) Per
Average Share of Common Stock
(1) CCI (telecommunications)............... $ (0.46) $ (0.33) $ (0.19)
(2) CSI (HVAC)............................. (0.09) (0.10) (0.15)
(3) Investment income...................... 0.13 0.27 --
(4) Energy, Power Delivery, and Other...... 2.52 2.05 2.02
-------- --------- --------
Income Excluding Special Charges, Gain on
Sale of DPL's Interest in Nuclear Plants,
and Extraordinary Item.................... $ 2.10 $ 1.89 $ 1.68
Special Charges............................ (0.28) (0.75) (0.18)
Gain on Sale of DPL's Interest in Nuclear
Plants.................................... 0.15 -- --
-------- --------- --------
Earnings (Loss) Per Average Share of Common
Stock:
Before Extraordinary Item.................. $ 1.97 $ 1.14 $ 1.50
Extraordinary Item......................... -- (3.16) --
-------- --------- --------
Earnings (Loss) Per Average Share of Common
Stock....................................... $ 1.97 $ (2.02) $ 1.50
======== ========= ========
(1) CCI (Telecommunications)
As shown above, the loss per share of common stock that resulted from CCI's
operations was $0.46 for 2000, $0.33 for 1999, and $0.19 for 1998. The higher
losses per share of common stock resulted from increased operating and inter-
est expenses due to expansion of CCI's operations and fewer average shares
outstanding of common stock. As discussed above, Conectiv initiated a process
in 2000 to identify a strategic partner for CCI. In the fourth quarter of
2000, CCI reduced the number of its employees in order to minimize expected
operating losses while Conectiv continues to evaluate its partnering or other
options.
(2) CSI (HVAC)
As discussed above, Conectiv sold the HVAC businesses of CSI during mid- to
late-2000. The loss per share of common stock that resulted from CSI's opera-
tions was $0.09 for 2000, $0.10 for 1999, and $0.15 for 1998. In 1999, CSI's
operating losses decreased compared to 1998 due to higher sales and improved
operational efficiencies.
(3) Investment Income
As discussed in Note 8 to the Consolidated Financial Statements, Conectiv
earns investment income primarily from investments in three venture capital
funds, including the EnerTech funds and Tech Leaders II.
II-8
<