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, 1998
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) 429-3114
----------------
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange 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 January 20, 1999, was $2,522.5 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, 1999
----- -------------------------------
Common stock, $0.01 par value 100,516,768 shares
Class A common stock, $0.01 par value 6,560,612 shares
Documents Incorporated by Reference
Part of Form 10-K Documents Incorporated by Reference
----------------- --------------------------------------------------------------
III Portions of the Definitive Proxy Statement for the Annual
Meeting of Stockholders of Conectiv to be held March 30, 1999,
which Definitive Proxy Statement was filed with the Securities
and Exchange Commission on February 24, 1999.
TABLE OF CONTENTS
Page
----
Glossary................................................................... iii
PART I
Item 1. Business
General.................................................................. I-1
Competition and Electric Utility Industry Restructuring.................. I-2
Business Lines........................................................... I-2
Electric Delivery and Gas Delivery...................................... I-2
Generation.............................................................. I-3
Merchant................................................................ I-3
Retail Energy........................................................... I-3
Solutions............................................................... I-3
Conectiv Services, Inc.................................................. I-3
Conectiv Communications, Inc............................................ I-4
Conectiv Thermal Systems, Inc........................................... I-4
Electric Business........................................................ I-5
Installed Capacity...................................................... I-5
Electricity Supply...................................................... I-5
Pennsylvania-New Jersey-Maryland Interconnection Association............ I-6
Purchased Power......................................................... I-6
Nuclear Power Plants.................................................... I-7
Fuel Supply for Electric Generation..................................... I-9
Coal................................................................... I-9
Oil.................................................................... I-9
Gas.................................................................... I-9
Nuclear................................................................ I-9
Electric Regulatory Matters............................................. I-10
Electric Retail Rates.................................................. I-10
Off-Tariff Rates....................................................... I-10
Electric Energy Adjustment Clauses..................................... I-11
New Jersey Electric Distribution Service Reliability and Quality
Standards............................................................. I-12
New Jersey Demand Side Management...................................... I-12
New Jersey Public Utility Fault Determination Act...................... I-12
Gas Business............................................................. I-12
Deregulation............................................................ I-12
Gas Operations.......................................................... I-13
Gas Regulatory Matters.................................................. I-13
Other Regulatory Matters................................................. I-13
Special Contract Rate Tariffs........................................... I-13
Cost Accounting Manual/Code of Conduct.................................. I-13
Affiliated Transactions................................................. I-14
Federal Decontamination & Decommissioning Fund.......................... I-14
Capital Spending and Financing Program................................... I-14
Environmental Matters.................................................... I-15
Air Quality Regulations................................................. I-15
Water Quality Regulations............................................... I-16
Hazardous Substances.................................................... I-17
Executive Officers....................................................... I-17
i
Page
-----
Item 2. Properties................................................................. I-18
Item 3. Legal Proceedings.......................................................... I-20
Item 4. Submission of Matters to a Vote of Security Holders........................ I-20
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters...... II-1
Item 6. Selected Financial Data.................................................... II-2
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations................................................................ II-3
Item 8. Financial Statements and Supplementary Data................................ II-16
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure....................................................... II-55
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-5
ii
GLOSSARY
The following glossary lists the abbreviations used in this report.
Term Definition
---- ----------
1992 Energy Act............ National Energy Policy Act of 1992
ACE........................ Atlantic City Electric Company
the Act.................... The Electric Discount and Energy Competition Act
AFUDC...................... Allowance For Funds Used During Construction
Atlantic................... Atlantic Energy, Inc.
ALJ........................ Administrative Law Judge
APB........................ Accounting Principles Board
Bcf........................ Billion Cubic Feet
BGS........................ Basic Generation Service
CAM........................ Cost Accounting Manual
CCI........................ Conectiv Communications, Inc.
CICP....................... Conectiv Incentive Compensation Plan
Clean Water Act............ Federal Water Pollution Control Act
CRP........................ Conectiv Resource Partners, Inc.
CES........................ Conectiv Energy Supply, Inc.
CSI........................ Conectiv Services, Inc.
CTS........................ Conectiv Thermal Systems, Inc.
CLEC....................... Competitive Local Exchange Carrier
Conectiv Charter........... Conectiv's Restated Certificate of Incorporation
Debentures................. Junior Subordinated Debentures
D&D Fund................... Decontamination & Decommissioning Fund
DNREC...................... Delaware Department of Natural Resources and
Environmental Control
DOE........................ United States Department of Energy
DPL........................ Delmarva Power & Light Company
DPSC....................... Delaware Public Service Commission
DRIP....................... Dividend Reinvestment and Common Share Purchase Plan
DSM........................ Demand Side Management Plan
EITF....................... Emerging Issues Task Force
FASB....................... Financial Accounting Standards Board
FERC....................... Federal Energy Regulatory Commission
GAAP....................... Generally Accepted Accounting Principles
Hope Creek................. Hope Creek Nuclear Generating Station
HVAC....................... Heating, ventilation, and air conditioning
ILEC....................... Incumbent Local Exchange Carrier
IPP........................ Independent Power Producer
kWh........................ Kilowatt-hour
Litigation Reform Act...... The Private Securities Litigation Reform Act of 1995
LLRW....................... Low Level Radioactive Waste
LMP........................ Locational Marginal Pricing
LTIP....................... Long-Term Incentive Plan
Mcf........................ Thousand Cubic Feet
iii
Term Definition
---- ----------
MD&A.................... Management's Discussion and Analysis of Financial Condition
and Results of Operations
Merger.................. A series of merger transactions by which DPL and ACE became
subsidiaries of Conectiv
Mortgage................ Mortgage and Deed of Trust
MTCC.................... Midtown Thermal Control Center
MPSC.................... Maryland Public Service Commission
MW...................... Megawatt
MWH..................... Megawatt-hour
NERC.................... North American Electric Reliability Council
NJBPU................... New Jersey Board of Public Utilities
NJDEP................... New Jersey Department of Environmental Protection
NJPDES.................. New Jersey Pollution Discharge Elimination System
NOTR.................... Northeast Ozone Transport Region
NOx..................... Oxides of Nitrogen
NPDES................... National Pollution Discharge Elimination System
NRC..................... Nuclear Regulatory Commission
NWPA.................... Nuclear Waste Policy Act of 1982
ODEC.................... Old Dominion Electric Cooperative
PARS.................... Performance Accelerated Restricted Stock
PASO.................... Performance Accelerated Stock Options
Peach Bottom............ Peach Bottom Atomic Power Station
PECO.................... PECO Energy Company
Petron.................. Petron Oil Corporation
PJM Interconnection..... Pennsylvania-New Jersey-Maryland Interconnection Association
the Plan................ Conectiv Stockholder Rights Plan
PPPP.................... Power Plant Performance Program
PSE&G................... Public Service Electric and Gas Company
PUHCA................... Public Utility Holding Company Act of 1935
PURPA................... Public Utility Regulatory Policy Act of 1978
Ratepayer Advocate...... Division of the Ratepayer Advocate
RACT.................... Reasonably Available Control Technology
RISC.................... Rate Intervention Steering Committee
RTP..................... Real Time Pricing
Salem................... Salem Nuclear Generating Station
SALP.................... Systematic Assessment of Licensee Performance
SEC..................... Securities and Exchange Commission
SFAS.................... Statement of Financial Accounting Standards
SFAS No. 71............. SFAS No. 71, "Accounting For the Effects of Certain Types of
Regulation"
SFAS No. 88............. SFAS No. 88, "Employers' Accounting For Settlements and
Curtailments of Defined Benefit Pension Plans and for
Termination Benefits"
SFAS No. 128............ SFAS No. 128, "Earnings Per Share"
SFAS No. 131............ SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information"
SFAS No. 133............ SFAS No. 133, "Accounting for Derivative Instruments and
Hedging Activities"
SO/2/ .................. Sulfur Dioxide
iv
Term Definition
---- ----------
TEFA.............................. Transitional Energy Facility Assessment Tax
USEPA............................. United States Environmental Protection Agency
Vienna............................ Vienna Generating Station
VRDB.............................. Variable Rate Demand Bonds
VSCC.............................. Virginia State Corporation Commission
Westinghouse...................... Westinghouse Electric Corporation
v
PART I
Item 1. Business
General
On March 1, 1998, Conectiv became a holding company after a series of merger
transactions between Delmarva Power & Light Company (DPL), Atlantic Energy,
Inc. (Atlantic), Conectiv, Inc., and DS Sub, Inc. (the Merger). As a result of
the Merger, Atlantic ceased to exist and DPL, Atlantic City Electric Company
(ACE), and the nonutility subsidiaries formerly held separately by DPL and At-
lantic became wholly-owned subsidiaries of Conectiv. (For additional informa-
tion about the Merger, refer to Note 4 to Conectiv's 1998 Consolidated Finan-
cial Statements included in Item 8 of Part II.) DPL and ACE are regulated pub-
lic utilities which supply and deliver electricity to their customers; DPL
also supplies and delivers natural gas to its customers. DPL and ACE hold the
franchises necessary to provide regulated utility services in their service
territories. As used in this document, references to Conectiv may mean the ac-
tivities of one or more subsidiaries.
Conectiv is a registered holding company under the Public Utility Holding
Company Act of 1935, as amended (PUHCA). PUHCA imposes certain restrictions on
the operations of registered holding companies and their subsidiaries. Pursu-
ant to PUHCA regulations, Conectiv formed a subsidiary service company,
Conectiv Resource Partners, Inc. (CRP). CRP provides a variety of support
services to Conectiv subsidiaries, and its employees are primarily former DPL
and ACE employees. The costs of CRP are directly assigned, distributed and al-
located to the Conectiv subsidiaries using CRP's services, including DPL and
ACE.
DPL and ACE generate, purchase, deliver and sell electricity in connection
with serving approximately 944,100 customers within their regulated service
territories. DPL serves approximately 455,300 electric customers within its
service territory, which 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 Maryland and Virginia). DPL also sells electricity outside its
service territory (off-system), and in markets that are not subject to price
regulation. ACE serves approximately 488,800 customers within its service ter-
ritory, which covers an area of about 2,700 square miles in the southern one-
third of New Jersey and has a population of approximately 850,000.
DPL provides regulated gas service (supply and/or transportation) to approx-
imately 105,700 customers located in a service territory which has a popula-
tion of approximately 485,000 and covers an area of about 275 square miles in
northern Delaware, including the City of Wilmington. DPL also sells gas off-
system and in markets which are not subject to price regulation.
DPL's utility business is subject to regulation with respect to its retail
electric sales by the Delaware Public Service Commission (DPSC), Maryland Pub-
lic Service Commission (MPSC), and the Virginia State Corporation Commission
(VSCC). ACE's utility business is subject to regulation with respect to its
retail electric sales by the New Jersey Board of Public Utilities (NJBPU). The
Federal Energy Regulatory Commission (FERC) also has regulatory authority over
certain aspects of DPL's and ACE's electric utility businesses, including the
transmission of electricity, the sale of electricity to municipalities and
electric cooperatives, and interchange and other purchases and sales of elec-
tricity involving other utilities. DPL and ACE are also subject to regulation
by the Pennsylvania Public Utility Commission in limited respects concerning
property and operations in Pennsylvania.
Conectiv's nonutility subsidiaries' principal businesses are as follows:
heating, ventilation, and air conditioning (HVAC) construction and services;
telecommunications, including local and long-distance phone services; con-
struction and operation of thermal energy systems; power plant operations; and
sales of petroleum products. In addition, the nonutility subsidiaries are in-
volved in cogeneration power projects, real estate, leveraged leases, invest-
ments in energy-related technology growth companies, and gas marketing. The
net assets of Conectiv's nonutility subsidiaries represented approximately
9.5% of Conectiv's common stockholders' equity as of December 31, 1998.
I-1
The sources of Conectiv's 1998 consolidated revenues were as follows: regu-
lated electricity sales-62.5%; non-regulated electricity sales-9.3%; regulated
gas sales-3.5%; non-regulated gas sales-13.9%; and other services-10.8%. The
regulated electric retail business currently provides most of Conectiv's earn-
ings. In 1998, Conectiv's consolidated regulated electric retail revenues were
earned from the following customer classes: residential-45.0%; commercial-
38.1%; industrial-15.9%; and other-1.0%.
At December 31, 1998, Conectiv had 4,565 employees, including 1,677 employ-
ees represented by collective bargaining labor organizations. About 1,190 of
Conectiv's 4,565 employees work in Conectiv's HVAC and telecommunications
businesses.
For information concerning Conectiv's business segments, see Note 20 to
Conectiv's 1998 Consolidated Financial Statements included in Item 8 of Part
II.
Competition and Electric Utility Industry Restructuring
For information concerning restructuring the electric utility industry in
New Jersey, Delaware, Maryland, and Virginia, see Note 6 to Conectiv's 1998
Consolidated Financial Statements included in Item 8 of Part II.
Generally, with restructuring, the supply component of the price charged to
a customer for electricity will be deregulated, and electricity suppliers will
compete to supply electricity to customers. Customers will continue to pay the
local utility a regulated price for delivery of electricity over the transmis-
sion and distribution system. As electric utility industry restructuring is
implemented in DPL's, ACE's, and other utilities' service territories, gross
margins earned from supplying electricity are expected to decrease as competi-
tion to supply customers with electricity increases. Electric utility custom-
ers in New Jersey may choose an electric supplier beginning August 1, 1999,
based on the recently enacted Electric Discount and Energy Competition Act
(the Act). Delaware legislation is expected to be enacted which would begin
phasing-in choice of electricity suppliers to customers beginning October 1,
1999. In Maryland, competition to supply electric customers is expected to be
phased in beginning July 3, 2000, over a 3 year period. In Virginia, retail
electric competition is expected to be phased-in beginning January 1, 2002.
Concurrent with the transition caused by electric utility industry restruc-
turing, Conectiv has invested in the establishment and growth of new business-
es, with the objective of providing new sources of earnings. Conectiv and its
subsidiaries have also gained valuable business experience by participation in
non-regulated energy markets during the past several years. In the future, a
larger percentage of Conectiv's revenues are expected to be earned from busi-
nesses not subject to price regulation. As the unregulated component of
Conectiv's businesses grows, financial risks and rewards, and the volatility
of earnings are expected to increase. Conectiv's ability to continue reducing
costs by streamlining operations, regulatory decisions pursuant to state re-
structuring initiatives, success of Conectiv's new businesses, retention of
existing customers and the ability to gain new customers are significant de-
terminants of Conectiv's future success.
Business Lines
Conectiv's internal organization is organized around the business lines de-
scribed below.
Electric Delivery and Gas Delivery
The Electric Delivery and Gas Delivery business lines are responsible for
the transmission and distribution of electricity and natural gas to customers
within Conectiv's service territories. Delivery services are structured into
various forms of price regulated offers, some including energy supply, so that
customers may choose the combination that provides the best value. As restruc-
turing of the electric utility industry is implemented, there will be opportu-
nities to serve new customers in the form of intermediate marketers, wholesal-
ers, bundled services providers, and energy service companies. As delivery
service providers, Electric Delivery and Gas Delivery will contract with en-
ergy suppliers to deliver energy across Conectiv's electric and natural gas
transmission and distribution systems.
I-2
Generation
The Generation business line manages the operations of Conectiv's wholly-
owned electric generating units and Conectiv's interests in jointly-owned
electric generating units. Generation's primary business activities are power
plant operations, planned and unplanned maintenance, outage planning and exe-
cution, capital project planning and execution, and assurance of environmental
compliance.
As restructuring of the electric utility industry is implemented across the
region in which Conectiv operates, Conectiv expects to sell some of its gener-
ating units. Conectiv has identified certain generating assets that may be
sold, but has not determined when such sale, or sales, would occur.
Merchant
The Merchant business line manages the output of Conectiv's energy supply
assets, primarily through energy trading, including risk management and bulk
energy-marketing activities. The Merchant business buys and sells electricity,
natural gas, and petroleum products. Most of the Merchant business' customers
are located in the Mid-Atlantic region.
The Merchant business actively participates in the wholesale energy markets
to support wholesale utility and competitive retail marketing activities. En-
ergy market participation results in exposure to commodity market risk when,
at times, net open energy commodity positions are created or allowed to con-
tinue. To the extent that the Merchant business has net open positions, con-
trols are in place that are intended to keep risk exposures within certain
management approved risk tolerance levels.
Retail Energy
During 1998 and 1997, the retail energy business was conducted through DPL
under the tradename, "Conectiv Energy." The retail energy business involves
the sale of natural gas, electricity and energy-related products and services
to residential and commercial customers in competitive markets within the Mid-
Atlantic region. Retail customers' favorable response to the Conectiv brand
coupled with competitive commodity prices have been a key to acquiring new
customers in competitive markets. In 1998, Conectiv Energy added over 45,000
new customers, primarily located in Southeast Pennsylvania and the Maryland
suburbs of Washington D.C. Close to 15,000 of these new customers are small
commercial enterprises. The costs associated with acquiring new customers, the
timing of the opening of new markets, the gross margin on commodity sales and
the regulations governing the transition to competition are all critical to
the success of this business.
Solutions
Solutions provides large commercial and industrial customers with energy and
energy-related products and services designed to satisfy customer needs for
occupant comfort, reliability, and cost effectiveness. Solutions also provides
electric consulting services, mechanical consulting services, energy manage-
ment and controls services, and energy procurement services.
Conectiv Services, Inc. (CSI)
CSI is a full-service HVAC business operating in the Mid-Atlantic region.
Since CSI was formed in 1996 it has developed its HVAC business by acquiring
other established HVAC businesses. CSI provides commercial customers with me-
chanical HVAC/piping construction and installation, design services, sheet
metal fabrication, refrigeration services, preventative maintenance and repair
services. CSI offers residential services such as HVAC installation, mainte-
nance, repair and related plumbing services. The regional HVAC and plumbing
industry is highly competitive, fragmented, and rapidly consolidating. The
sales and earnings of the HVAC businesses are affected by construction cycles
and weather conditions.
I-3
Conectiv Communications, Inc. (CCI)
During 1998, CCI operated as a full service telecommunications company pro-
viding local, regional and long distance voice and data services to business
and residential customers in a 100-mile region around Wilmington, Delaware.
CCI launched its services in Pennsylvania and Delaware in November 1997 and in
New Jersey and Maryland in May 1998. CCI owns and operates a fiber optic net-
work of more than 600 miles, and has collacted its equipment in 35 Bell Atlan-
tic Central Offices in order to provide facilities-based services through a
65,000 line Nortel DMS-500 switch. In the areas where CCI does not yet have
its own facilities, CCI resells Bell Atlantic local and Frontier long distance
services.
In 1998, over 20,000 new customers signed up for service with CCI. CCI be-
lieves that consumers are choosing CCI because of CCI's promise of superior
customer care, product flexibility, ability to provide local and long distance
services, and lower pricing. Most residential and business customers ordering
service from CCI have chosen local and long distance service.
CCI has general tariffs on file in Delaware, Maryland, Pennsylvania, and New
Jersey 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 based model. Tariff filings have also been made with the Fed-
eral Communications Commission for the provision of domestic and international
long distance services.
Conectiv Thermal Systems, Inc. (CTS)
CTS develops, constructs, and operates thermal energy systems which provide
heating, cooling, and other energy services to large commercial, industrial,
and institutional consumers. CTS enters into long-term contracts with its cus-
tomers who pay CTS for the heating, cooling, and other energy services pro-
vided by the thermal energy systems constructed, owned, and operated by CTS.
CTS believes that the potential market for thermal energy projects in the con-
tinental United States is extensive. Targeted customer segments include
hotels/casinos, convention centers, commercial real estate, large retail
malls, industrials, hospitals, universities, and governmental entities.
CTS owns and operates the Midtown Thermal Control Center (MTCC), a district
heating and cooling system built by CTS which serves eight customers, princi-
pally hotels/casinos, located in the midtown region of Atlantic City. The MTCC
began commercial operations on January 1, 1998. CTS also has 50% interests in
two other thermal energy system projects. The "Venetian" project, currently
under construction, will provide heating, cooling, and back-up electric gener-
ation to a 3000-room hotel/casino, exposition center, and retail mall and en-
tertainment complex in Las Vegas, Nevada. The other 50%-owned project has been
operational for over a year, providing heating, cooling, and other energy
services to the Dreamworks Animation Studio located in Glendale, California.
CTS is also currently negotiating a comprehensive energy services agreement
with the Griffis Air Force Base Redevelopment Authority, is involved in devel-
oping a central energy plant which would serve a planned large exposition and
entertainment complex, and is soliciting various other proposals to the
targeted customer segments discussed above.
I-4
Electric Business
Installed Capacity
The megawatts (MW) of net installed summer electric generating capacity
available to DPL and ACE to serve their peak loads as of December 31, 1998,
are presented below. See Item 2, Properties, for additional information.
Consolidated
Sources of Capacity DPL ACE Conectiv
------------------- ----- ----- ------------
Coal-fired generating units...................... 1,153 471 1,624
Oil-fired generating units....................... 598 295 893
Combustion turbines/combined cycle generating
units........................................... 674 524 1,198
Nuclear generating units......................... 328 380 708
Diesel units..................................... 23 9 32
Long-term purchased capacity..................... 237 828 1,065
Customer-owned capacity.......................... 57 -- 57
----- ----- -----
Subtotal......................................... 3,070 2,507 5,577
Short-term purchased capacity.................... 449 9 458
----- ----- -----
Total............................................ 3,519 2,516 6,035
===== ===== =====
The net generating capacity available for operations at any time may be less
than the total net installed generating capacity due to generating units being
out of service for inspection, maintenance, repairs, or unforeseen circum-
stances.
DPL's and ACE's demand-side management programs provide peak load reduction
capability of 302 MW in total.
Electricity Supply
As members of the Pennsylvania-New Jersey-Maryland Interconnection Associa-
tion (PJM Interconnection), DPL and ACE are obligated to maintain capacity
levels based on their allocated shares of estimated aggregate PJM Interconnec-
tion capacity requirements. (The PJM Interconnection is discussed on page I-
6.) DPL and ACE periodically update their forecasts of peak demand and PJM In-
terconnection reserve requirements, and re-evaluate resources available to
supply projected growth. Any short-term capacity deficiencies related to obli-
gations to the PJM Interconnection are expected to be satisfied through short-
term capacity-only purchases. Incremental energy supply needs are expected to
be filled through purchased power.
DPL's peak load in 1998 was 3,085 MW on July 23, an 8.0% increase from DPL's
previous historical peak demand of 2,857 MW which occurred on July 15, 1997.
ACE experienced its highest historical peak demand of 2,162 MW on July 22,
1998, which was 1.6% above the previous peak demand of 2,127 MW recorded on
August 16, 1997. The capacity obligation to the PJM Interconnection, including
a reserve margin, is based on normal weather conditions and full implementa-
tion of demand-side management programs. Under these conditions, DPL's and
ACE's 1998 peak demands would have been approximately 2,952 MW and 2,115 MW,
respectively. Installed capacities at the time of their peaks were 3,481 MW
for DPL and 2,501 for ACE, which resulted in reserve margins (computed under
PJM Interconnection guidelines) of 18% for DPL and ACE. DPL's and ACE's re-
serve obligations to the PJM Interconnection are approximately 18% and 20%,
respectively.
In 1998, kilowatt-hour (kWh) output for load within ACE's and DPL's combined
service territories was provided by 35% net purchased power, 31% coal genera-
tion, 21% nuclear generation, and 13% oil and gas generation.
I-5
Pennsylvania-New Jersey-Maryland Interconnection Association
As members of the PJM Interconnection, DPL's and ACE's generation and trans-
mission facilities 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 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 require-
ments. The PJM Interconnection's installed capacity as of December 31, 1998,
was 57,551 MW. The PJM Interconnection's peak demand during 1998 was 48,663 MW
on August 15, which resulted in a summer reserve margin of 18.2% (based on in-
stalled capacity of 57,511 MW on that date).
On October 15, 1998, the PJM Interconnection began operating a centralized
capacity credit market, providing a new option to participants for procuring
and selling surplus capacity to meet reliability obligations within the PJM
Interconnection region. Capacity is the capability to produce electric power,
typically from owned generation or third-party purchase contracts and differs
from the electric energy markets, which trade the actual energy being generat-
ed. This market facilitates the selling and buying of capacity for partici-
pants by providing a single point of contact for market participants and a
published capacity market clearing price.
Effective April 1, 1998, the PJM Interconnection implemented locational mar-
ginal pricing (LMP) to establish the market clearing prices for electric en-
ergy and to price electric transmission usage based upon costs associated with
transmission system congestion. When there is no congestion on the power sys-
tem and energy is flowing on the grid in an unconstrained manner, energy
prices are cleared at the highest bid accepted by the PJM Interconnection for
the entire PJM Interconnection region. When a limit is reached on the trans-
mission grid, the PJM Interconnection will operate generators to preserve sys-
tem reliability. LMP allows the PJM Interconnection to send price signals to
raise and lower generator output when the power flows are constrained. Differ-
ent energy market clearing prices are paid by wholesale power buyers and sell-
ers on the power grid that reflect the value relative to a system constraint.
LMP provides for an efficient allocation of congestion costs to transmission
users within the PJM Interconnection region. The FERC has approved the use of
the LMP congestion management system to allow electric energy market partici-
pants with power contracts on neighboring electric systems to compensate the
PJM Interconnection for any unintended flows on the PJM Interconnection sys-
tem, rather than forcing those participants to curtail their contracts.
Currently, the PJM Interconnection Operating Agreement requires bids to sell
electricity received from generation located within the PJM Interconnection
control area not to exceed the variable cost of producing such electricity.
Transactions that are bid into the PJM pool from generation located outside
the PJM Interconnection control area are capped at $1,000 per megawatt hour.
All power providers are paid the LMP set through power providers' bids. Cer-
tain PJM Interconnection members have requested that FERC revise the PJM In-
terconnection Operating Agreement to allow the submission of market based bids
to the PJM Interconnection energy market.
Purchased Power
In conjunction with its acquisition of Conowingo Power Company in 1995, DPL
purchases from PECO Energy Company (PECO) 237 MW of base-load capacity and as-
sociated energy, which increases to 279 MW by 2006 when the contract expires.
DPL is also currently purchasing 105 MW of capacity under one-year contracts
and 344 MW of capacity through agreements with terms of less than one year.
The Public Utility Regulatory Policy Act of 1978 (PURPA) established a class
of nonutility power suppliers, known as independent power producers (IPPs),
and required electric utilities to purchase the excess power from IPPs. As a
result of PURPA, ACE has long-term contracts with four IPPs for the purchase
of 659 MW of capacity and energy. In view of electric utility industry re-
structuring, various parties continue to seek the repeal of PURPA; however,
federal action with regard to PURPA is not likely to affect ACE's IPP con-
tracts.
I-6
ACE's NJBPU-approved IPP contracts are shown below.
MW Date of
Project Location Fuel Type Provided Commercial Operation
---------------- ----------- -------- --------------------
Chester, Pennsylvania............. solid waste 75 September 1991
Pedricktown, New Jersey........... gas 116 March 1992
Carney's Point, New Jersey........ coal 249 March 1994
Logan Township, New Jersey........ coal 219 September 1994
---
Total......................... 659
===
ACE is also currently purchasing 125 MW of capacity and energy from PECO un-
der a contract which ends May 31, 2000. This agreement replaced a terminated
agreement with Pennsylvania Power & Light Company, effective March 1998. ACE
also contracts with other electric suppliers on an as-needed basis for the
purchase of short-term generating capacity, energy and transmission capacity.
Nuclear Power Plants
DPL's nuclear capacity is provided by Peach Bottom Atomic Power Station
(Peach Bottom) Units 2 and 3 and by Salem Nuclear Generating Station (Salem)
Units 1 and 2. ACE's nuclear capacity is provided by Peach Bottom, Salem, and
the Hope Creek Nuclear Generating Station (Hope Creek). Peach Bottom is lo-
cated in York County, Pennsylvania, is operated by PECO, and has a summer ca-
pacity of 2,186 MW. Public Service Electric and Gas (PSE&G) operates Salem and
Hope Creek, which are located adjacent to each other in Salem County, New Jer-
sey, and have summer capacities of 2,212 MW and 1,031 MW, respectively.
DPL's and ACE's shares of MW capacity and ownership interests in the nuclear
power plants are shown below.
Consolidated
Plant DPL ACE Conectiv
----- ---- ---- ------------
Peach Bottom
Share of MW....................................... 164 164 328
Ownership %....................................... 7.51% 7.51% 15.02%
Salem
Share of MW....................................... 164 164 328
Ownership %....................................... 7.41% 7.41% 14.82%
Hope Creek
Share of MW....................................... -- 52 52
Ownership %....................................... -- 5.00% 5.00%
DPL's and ACE's ownership interests in nuclear power plants provided approx-
imately 12% of Conectiv's total installed capacity as of December 31, 1998. In
1998, output from the jointly-owned nuclear power plants provided 21% of the
electricity used by Conectiv's customers. See Note 22 to Conectiv's 1998 Con-
solidated Financial Statements, included in Item 8 of Part II, for information
about its investment in jointly-owned generating stations.
The operation of nuclear generating units is regulated by the Nuclear Regu-
latory Commission (NRC). Such regulation requires that all aspects of plant
operation 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.
I-7
As a by-product of nuclear operations, nuclear generating units produce low-
level radioactive waste (LLRW). LLRW is accumulated on-site until shipped to a
federally licensed permanent disposal facility. Salem, Hope Creek, and Peach
Bottom have on-site interim storage facilities with five-year storage capaci-
ties.
For a discussion of the cycle of production, use and disposal of nuclear fu-
el, see "Nuclear" on page I-9.
For a discussion of funding DPL's and ACE's shares of the estimated future
cost of decommissioning the Salem, Hope Creek, and Peach Bottom nuclear reac-
tors, see Note 9 to Conectiv's 1998 Consolidated Financial Statements included
in Part II, Item 8.
The NRC is requiring nuclear plant operators to report by July 1, 1999, that
their nuclear power plants are Year 2000 ready, or will be Year 2000 ready, by
January 1, 2000. PSE&G and PECO have informed DPL and ACE that they are on
schedule to meet the July 1, 1999 response date and that their nuclear opera-
tions' Year 2000 programs will make Salem, Hope Creek, and Peach Bottom Year
2000 ready by January 1, 2000.
Salem Units 1 and 2 were removed from operation by PSE&G in the second quar-
ter of 1995 due to operational problems, and maintenance and safety concerns.
Due to degradation of a significant number of tubes in the Unit 1 steam gener-
ators, PSE&G replaced the Unit 1 steam generators. After receiving NRC autho-
rization, PSE&G returned Unit 2 to service on August 30, 1997, and Unit 1 to
service on April 17, 1998. On July 29, 1998, the NRC removed Salem from its
"watch list" of troubled nuclear plants. The Salem Unit 2 steam generators
will be inspected for tube degradation in upcoming outages.
See Note 18 to Conectiv's 1998 Consolidated Financial Statements included in
Part II, Item 8, for information concerning DPL's and ACE's lawsuit against
Westinghouse Electric Corporation, the designer and manufacturer of the Salem
steam generators, and the financial impact of the outages.
Systematic Assessment of Licensee Performance (SALP) reports issued by the
NRC rate licensee performance in four assessment areas: Operations, Mainte-
nance, Engineering and Plant Support. Ratings range from a high of "1" to a
low of "3." In September 1998, the NRC issued a SALP Report on the performance
of activities at Salem for the period March 1, 1997, to August 1, 1998. Salem
received a rating of 1 in Operations, a 2 in Maintenance, a 2 in Engineering,
and a 1 in Plant Support. The NRC noted that the overall performance at Salem
improved, as demonstrated by a nearly event-free return of both units to oper-
ation following the extended outage.
On June 8, 1998, the NRC issued a SALP report on Hope Creek for the period
November 10, 1996, to May 16, 1998. Hope Creek received a rating of 2 in the
areas of Operations, Maintenance, and Engineering, and a rating of 1 in the
area of plant support. The NRC noted improved performance in all functional
areas during the period.
On July 17, 1997, the NRC issued a SALP report on Peach Bottom for the pe-
riod October 15, 1995, to June 7, 1997. Peach Bottom received a rating of 1 in
the areas of Operations, Maintenance, and Plant Support, and 2 in Engineering.
On September 16, 1998, the NRC announced that it was suspending the SALP re-
port process until it completes a review of its nuclear power plant perfor-
mance assessment process. The SALP process has not yet been resumed or re-
placed.
I-8
Fuel Supply for Electric Generation
DPL's and ACE's electric generating capacity by fuel type are shown under
"Installed Capacity" on page I-5. To facilitate the purchase of adequate
amounts of fuel at reasonable prices, DPL and ACE contract with various sup-
pliers of coal, oil, and natural gas on both a long- and short-term basis.
DPL's long-term coal contracts generally contain provisions for periodic and
limited price adjustments, which are based on current market prices. Oil and
natural gas contracts generally are of shorter term with prices determined by
market-based indices.
Coal
Conectiv's coal fired generation includes DPL's wholly-owned Edge Moor Units
3 and 4 and the Indian River Station, and ACE's wholly-owned B.L. England
Units 1 and 2 and Deepwater Unit 6. Coal is also the fuel source for the Key-
stone and Conemaugh generating plants, in which DPL and ACE have ownership in-
terests. During 1998, 47% of DPL's coal supply was purchased under contracts
less than three years in duration, 48% under long-term contracts (up to ten
years), and the balance on the spot market. During 1998, 92% of ACE's coal
supply was purchased under long-term contracts (up to ten years) and the bal-
ance was purchased on the spot market. Approximately 69% and 56% of DPL's and
ACE's respective projected coal requirements are expected to be provided under
supply contracts. DPL and ACE do not anticipate any difficulty in obtaining
adequate amounts of coal at reasonable prices.
Oil
Currently, 100% of the residual oil used in DPL's Edge Moor Unit 5 is pur-
chased on a spot basis. Natural gas is used when economically feasible. A two-
year residual oil supply contract that expires in 1999 provides 90% to 100% of
the fuel supply requirements for DPL's Vienna Generating Station (Vienna). Any
amount over 90% of Vienna's requirements may be purchased in the spot market.
All of the residual oil used in ACE's B.L. England Unit 3 and Deepwater Unit 1
is supplied under a three-year contract that expires October 31, 2000. Another
three-year contract which expires October 31, 2000, provides all of the dis-
tillate oil supply for ACE's combustion turbines.
Gas
Natural gas is the primary fuel for the three combustion turbines for DPL's
Hay Road combustion turbines and a secondary fuel for DPL's Edge Moor Units 3,
4, and 5. Natural gas for these DPL generating units is purchased on a firm or
interruptible basis from suppliers such as marketers, producers, and utili-
ties. The secondary fuel for DPL's Hay Road combustion turbines is low-sulfur
diesel fuel, which is purchased in the spot market. Six of ACE's combustion
turbines use natural gas as a primary fuel source and ACE's Deepwater Units 1
and 6 use natural gas as secondary fuel. Natural gas for ACE's gas-fired gen-
erating units is primarily purchased from the local gas distribution company
on a firm basis and is also purchased from other suppliers such as marketers,
producers, and utilities. Natural gas is delivered to both DPL and ACE through
the interstate pipeline system under contracts that are a mix of long-term
firm, short-term firm, and interruptible contracts.
Nuclear
The supply of fuel for nuclear generating units involves the mining and
milling of uranium ore to uranium concentrate, conversion of the uranium con-
centrate to uranium hexaflouride, enrichment of the uranium hexaflouride gas,
conversion of the enriched gas to fuel pellets, and fabrication of fuel assem-
blies. After spent fuel is removed from a nuclear reactor, it is placed in
temporary storage for cooling in a spent fuel pool at the nuclear station
site. The federal government has an obligation for the transportation and ul-
timate disposal of the spent fuel, as discussed below.
I-9
PSE&G has informed DPL and ACE that it has several long-term contracts with
uranium ore operators, converters, enrichers and fabricators to process ura-
nium ore to uranium concentrate to meet the currently projected requirements
for Salem. PSE&G has also informed ACE that it has similar contracts to sat-
isfy the fuel requirements of Hope Creek. DPL and ACE have also been advised
by PECO that it has contracts similar to PSE&G's contracts to satisfy the fuel
requirements of Peach Bottom. Currently, there is an adequate supply of nu-
clear fuel for Salem, Hope Creek, and Peach Bottom.
In conformity with the Nuclear Waste Policy Act of 1982 (NWPA), PSE&G and
PECO have entered into contracts with the United States Department of Energy
(DOE) on behalf of the joint owners providing that the federal government
shall for a fee take title to, transport, and dispose of spent nuclear fuel
and high level radioactive waste from the Salem, Hope Creek, and Peach Bottom
reactors. In accordance with the NWPA, DPL and ACE pay the DOE one-tenth of
one cent per kWh of nuclear generation (net of station use) for the future
cost of spent nuclear fuel disposal. Under the NWPA, the DOE was to begin ac-
cepting spent fuel for permanent off-site storage no later than January 1998.
However, no such repositories are in service or under construction. The DOE
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).
PSE&G has advised DPL and ACE that, as a result of reracking the two spent
fuel storage pools at Salem, the availability of spent fuel storage capacity
is estimated to be adequate through 2012 for Unit 1 and 2016 for Unit 2. PSE&G
has also advised ACE that the Hope Creek pool is also fully racked and it is
expected to provide adequate storage capacity until 2006. PECO has advised DPL
and ACE that spent fuel racks at Peach Bottom have storage capacity until 2000
for Unit 2 and until 2001 for Unit 3. PECO has also advised DPL and ACE that
it is constructing an on-site dry storage facility, which is expected to be
operational in 2000, to provide additional storage capacity.
Electric Regulatory Matters
For information concerning restructuring the electric utility industry in
New Jersey, Delaware, Maryland, and Virginia, see Note 6 to Conectiv's 1998
Consolidated Financial Statements included in Item 8 of Part II.
Electric Retail Rates
DPL's base rates for retail electric service are subject to the approval of
the DPSC, MPSC, and VSCC. ACE's base rates for retail electric service are
subject to the approval of the NJBPU. However, the utility ratemaking process
is changing in New Jersey, Delaware, Maryland, and Virginia as discussed in
Note 6 to Conectiv's 1998 Consolidated Financial Statements included in Item 8
of Part II.
For information concerning base rate decreases related to the Merger and
base rate decreases expected in connection with electric utility industry re-
structuring, see Note 6 to Conectiv's 1998 Consolidated Financial Statements
included in Part II, Item 8. Information concerning lower New Jersey customer
rates due to corresponding New Jersey tax reductions is discussed in Note 3 to
Conectiv's 1998 Consolidated Financial Statements included in Part II, Item 8.
Off-Tariff Rates
Legislation enacted in New Jersey in July 1995 allows the NJBPU, upon peti-
tion from any electric or gas utility, to adopt a plan of regulation other
than the traditional rate-base/rate-of-return regulation. In addition, on a
case-by-case basis, the law allows utilities to petition the NJBPU for the
right to offer customers, who meet certain conditions, off-tariff, discounted
rates. Off-tariff pricing arrangements with certain ACE customers have been
arranged.
I-10
For information concerning DPL's "Special Contract Rate Tariffs," see page
I-13 herein.
Electric Energy Adjustment Clauses
DPL's and ACE's regulated retail electric tariffs include energy adjustment
clauses that provide for collection from customers of fuel costs and the en-
ergy costs of purchased and net interchange power. ACE's energy adjustment
clause also provides for the collection of capacity costs incurred under pur-
chased power contracts with IPPs, which are discussed under Purchased Power on
page I-6. DPL's purchased capacity costs are generally subject to base rate
recovery. Any under- or over-collection of energy adjustment clause costs in
the current period is generally deferred until customers' rates are adjusted
to collect or return the under- or over-collection.
In January 1999, ACE filed with the NJBPU a petition requesting that the es-
timated cost of oxides of nitrogen (NOx) allowances in 1999 of $4.8 million be
included in energy adjustment clause rates. A ruling on this matter is ex-
pected during 1999. For information concerning NOx emission regulations, see
"Air Quality Regulations" on page I-15.
On April 11, 1997, the Rate Intervention Steering Committee (RISC) submitted
its brief on its appeal to the Superior Court of New Jersey in response to the
NJBPU's decision which provided for ACE's recovery (through energy adjustment
clause rates) of the cost of power purchased from IPPs. In May 1998, the Supe-
rior Court of New Jersey rejected RISC's appeal and upheld the NJBPU's deci-
sion providing for recovery of IPP purchased power costs through energy ad-
justment clause rates. In May 1998, RISC appealed the Superior Court's deci-
sion to the Supreme Court of New Jersey, which denied RISC's appeal in July
1998.
The current status or results of significant energy adjustment clause rate
issues are discussed below. As of December 31, 1998, DPL's and ACE's accrued
liabilities included amounts which are expected to adequately provide for dis-
allowances of energy adjustment clause costs and penalties related to the is-
sues discussed below.
Both Delaware and Maryland have programs that assess the overall performance
of DPL's 15 major generating units. Under the DPSC's Power Plant Performance
Program (PPPP), DPL can receive financial rewards or penalties, which will not
exceed an estimated cap of $1.7 million in 1998. The 1996 and 1997 PPPP re-
sults were not material to DPL's financial position or results of operations.
If DPL does not meet an overall system performance standard set by Maryland's
Generating Unit Performance Program, the MPSC can disallow certain fuel costs
of units that operated below their individual performance standards. DPL did
not meet the 1996 or 1997 overall system standards due principally to the Sa-
lem outage.
DPL's long-term purchased power agreement with PECO has previously been the
subject of regulatory litigation in Delaware as the result of disallowances
proposed by DPSC Staff and the Delaware Division of the Public Advocate. No
such disallowances were ordered for 1996 or 1997. Delaware's Division of the
Public Advocate has proposed a total disallowance of $17.7 million for 1998
and 1999. DPL will contest the proposed disallowance.
For information concerning ACE's nuclear performance standard, see "Other
Rate Matters" in Note 6 to Conectiv's 1998 Consolidated Financial Statements
included in Item 8 of Part II.
For information concerning replacement power costs not recovered through
customer rates due to a prolonged outage at Salem, see Note 18 to Conectiv's
1998 Consolidated Financial Statements included in Item 8 of Part II.
Energy adjustment clauses are expected to be eliminated under state electric
industry restructuring initiatives. Based on existing restructuring
initiatives in Delaware, Maryland, and Virginia, profits or losses on the en-
ergy portion of electricity sales may affect DPL's earnings after restructur-
ing becomes effective. The New Jersey energy adjustment clause is expected to
be superceded by provisions contained in the Act which permit Basic Generation
Service (BGS) suppliers full and timely recovery of their costs. The Act also
authorizes the NJBPU to allow the deferral and subsequent recovery of BGS
costs if necessary for attainment of the rate
I-11
reductions required by the Act. Regulations governing BGS are expected to be
promulgated by the NJBPU prior to beginning retail choice of electricity sup-
pliers in New Jersey. For additional information concerning the Act, see Note
6 to Conectiv's 1998 Consolidated Financial Statements included in Item 8 of
Part II.
New Jersey Electric Distribution Service Reliability and Quality Standards
On December 30, 1997, the NJBPU directed its Staff to initiate an inquiry
into establishing measurable performance and reliability standards for New
Jersey electric and gas utilities. The Staff's most recent draft proposal does
not propose monetary penalties, but does require establishment of utility spe-
cific standards and contains potentially costly and burdensome reporting re-
quirements. The NJBPU is expected to review this matter in 1999.
New Jersey Demand Side Management
ACE submitted its second Demand Side Management (DSM) Plan for the period
from September 1997 through August 1998 in April 1997. The DSM Plan includes
programs that address energy conservation needs of the residential, commercial
and industrial markets. During the course of DSM Plan proceedings, New Jer-
sey's Division of the Ratepayer Advocate (Ratepayer Advocate) alleged that ACE
has been recovering more in rates for DSM programs than it is spending on such
programs. ACE's position is that the level of DSM expenditures cannot be
viewed in isolation, but must be considered in light of both the overall his-
tory of DSM expenditures under current rates, as well as ACE's overall revenue
requirement needs in a rate proceeding. The Ratepayer Advocate contends that
any over-recovery and treatment of such over-recovery should be addressed out-
side the context of a base rate proceeding. The NJBPU has not yet taken any
action on this matter. ACE cannot predict the outcome of this matter.
New Jersey Public Utility Fault Determination Act
The New Jersey Public Utility Fault Determination Act requires the NJBPU to
make a determination of fault with regard to any past or future accident at
any electric generating or transmission facility, prior to granting a
utility's request for a rate increase to cover accident-related costs in ex-
cess of $10 million. However, the law allows a utility to file for non-acci-
dent related rate increases during such fault determination hearings and to
recover contributions to federally mandated or voluntary cost-sharing plans.
The law further allows the NJBPU to authorize the recovery of certain fault-
related repair, cleanup, replacement power or damage costs, if appropriate.
Gas Business
Deregulation
Effective April 1, 1996, a restructuring of natural gas pricing and service
options enabled DPL's large and medium volume commercial and industrial cus-
tomers to purchase gas from DPL, or directly from other suppliers and make ar-
rangements for transporting gas purchased from these suppliers to their facil-
ities. DPL's transportation customers pay a fee, which may be either fixed or
negotiated, for the use of DPL's gas transmission and distribution facilities.
The restructuring mentioned above also authorized off-system gas sales and
other "nonjurisdictional merchant sales and services." Earnings from gas sales
which are off the Delmarva Peninsula and do not use DPL's gas system assets
are not required to be shared with regulated customers through lower rates.
For other off-system gas sales and nonjurisdictional merchant sales and serv-
ices, 80% of the margin (revenues net of fuel costs) earned reduces energy
rates charged to DPL's firm gas customers.
On December 1, 1998, DPL filed an application with the DPSC, seeking ap-
proval of a pilot program to provide transportation service and a choice of
gas suppliers to a group of retail customers. DPL proposed a one-year pilot
program, starting November 1, 1999, open to 15% of residential customers and
15% of small commercial customers. DPL and intervening parties are engaged in
settlement discussions about the proposed pilot program.
I-12
Gas Operations
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
187,074 Mcf (thousand cubic feet).
Number of Expiration Daily
Contracts Dates Mcf
--------- ---------- -------
Supply......................................... 1 2001 9,180
Transportation................................. 5 2004-2016 82,810
Storage........................................ 6 1999-2011 50,084
Local Peak Shaving (emergency capability)...... 45,000
-------
Total........................................ 187,074
=======
DPL experienced an all-time daily peak in combined firm sales and transpor-
tation sendout of 158,810 Mcf on January 17, 1997. DPL's peak shaving plant
liquefies, stores, and re-gasifies natural gas in order to provide supplemen-
tal gas in the event of pipeline supply shortfalls or system emergencies.
Gas Regulatory Matters
Similar to DPL's Delaware electric energy adjustment clause, a gas cost rate
clause provides for the recovery of gas costs from DPL's regulated gas custom-
ers. 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-
or over-collection of gas costs in a current period is generally deferred un-
til customers' rates are adjusted to collect or return the under- or over-col-
lection.
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 regulated customers exposure to commodity price uncertainty. Costs
and benefits of the program are included in the gas cost rate clause, result-
ing in no effect on DPL's earnings.
Other Regulatory Matters
Special Contract Rate Tariffs
Under programs approved by the MPSC and DPSC, DPL may enter into negotiated
contracts with retail electric customers in Maryland and retail electric and
natural gas customers in Delaware. Also, "Real Time Pricing" (RTP) tariffs are
available to customers in Maryland and in Delaware, and an experimental RTP
tariff is effective in Virginia. The RTP tariffs provide additional flexibil-
ity in providing pricing and service to certain large customers.
Cost Accounting Manual/Code of Conduct
Conectiv and its subsidiaries have cost allocation and direct charging mech-
anisms in place to ensure that there is no cross-subsidization of competitive
activities by regulated utility activities. In 1998, DPL made filings with the
DPSC, the MPSC and VSCC to update and revise its Cost Accounting Manual (CAM)
to reflect the holding company structure created in 1998. The CAM is subject
to review and audit.
DPL is also subject to various Codes of Conduct that affect the relationship
between DPL's regulated and non-regulated activities. In general, these Codes
of Conduct limit information obtained through utility activities from being
disseminated to employees engaged in non-regulated activities, require sepa-
rate telephone numbers for competitive activities and restrict or prohibit
sales leads, joint sales calls, or joint promotions.
I-13
Requirements that separate operational and managerial employees be main-
tained, as required by the MPSC for non-regulated activities making retail
sales of electricity or gas, could impact the way DPL and the Conectiv system
of companies are organized and DPL's ability to capture economies of common
management and deploy personnel efficiently, without duplicating personnel
functions. Prohibitions or restrictions on joint promotions may adversely im-
pact Conectiv's competitive businesses.
ACE has cost allocation and direct charging mechanisms in place to ensure
that there is no cross-subsidization of its competitive activities by regu-
lated utility activities. In accordance with the NJBPU's order which approved
the Merger, ACE filed Conectiv's CAM and the Service Agreement between ACE and
CRP with the NJBPU on October 28, 1998.
Affiliated Transactions
Certain types of transactions between DPL and ACE and their affiliates may
require the prior approval of the VSCC and 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 until 2008 or $2.25 billion, ad-
justed annually for inflation, is collected. The liability accrued for DPL's
and ACE's shares of the D&D Fund was $11.0 million as of December 31, 1998.
DPL and ACE are recovering this cost through energy adjustment clause reve-
nues.
Capital Spending and Financing Program
For financial information concerning Conectiv's capital spending and financ-
ing program, refer to "Liquidity and Capital Resources" in Management's Dis-
cussion and Analysis of Financial Condition and Results of Operations, in-
cluded in Item 7 of Part II, and Notes 12 to 14 to Conectiv's 1998 Consoli-
dated Financial Statements, included in Item 8 of Part II.
Conectiv's ratios of earnings to fixed charges under the SEC Method for
1994-1998 are shown below.
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Conectiv's Ratio of Earnings to Fixed Charges
(SEC Method).................................... 2.38 2.63 2.83 2.92 2.85
Under the SEC Method, earnings, including Allowance For Funds Used During
Construction (AFUDC), have been computed by adding income taxes and fixed
charges to net income. Fixed charges include gross interest expense, the
estimated interest component of rentals, and preferred stock dividend
requirements of subsidiaries. Preferred stock dividend requirements of
subsidiaries for purposes of computing the ratio have been increased to an
amount representing the pre-tax earnings which would be required to cover such
dividend requirements. Excluding the Merger-related pre-tax charge to
operating expenses of $27.7 million, primarily attributable to DPL and
discussed in Note 5 to Conectiv's 1998 Consolidated Financial Statements
included in Item 8 of Part II, Conectiv's 1998 ratio of earnings to fixed
charges was 2.53.
I-14
DPL's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1994-1998 are shown below.
Excluding DPL's Merger-related pre-tax charge of $27.4 million, DPL's 1998
ratio of earnings to fixed charges was 3.21 and its 1998 ratio of earnings to
fixed charges and preferred stock dividends was 2.98.
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
DPL's Ratio of Earnings to Fixed Charges (SEC
Method).......................................... 2.92 2.83 3.33 3.54 3.49
DPL's Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends (SEC Method)........... 2.72 2.63 2.83 2.92 2.85
ACE's ratios of earnings to fixed charges and earnings to fixed charges and
preferred stock dividends under the SEC Methods for 1994-1998 are shown below.
Excluding ACE's Merger-related pre-tax charges of $79.1 million in 1998 and
$22.2 million in 1997, ACE's Ratio of Earnings to Fixed Charges was 2.74 in
1998 and 3.15 in 1997, and ACE's Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends was 2.55 in 1998 and 2.86 in 1997.
Year Ended December 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
ACE's Ratio of Earnings to Fixed Charges (SEC
Method).......................................... 1.66 2.84 2.59 3.19 3.07
ACE's Ratio of Earnings to Fixed Charges and
Preferred Stock Dividends (SEC Method)........... 1.55 2.58 2.16 2.43 2.26
Environmental Matters
Conectiv and its regulated utility subsidiaries, DPL and ACE, are subject to
various federal, regional, state, and local environmental regulations, includ-
ing air and water quality control, oil pollution control, solid and hazardous
waste disposal, and limitation on land use. Permits are required for construc-
tion projects and the operation of existing facilities. Conectiv has incurred,
and expects to continue to incur, capital expenditures and operating costs be-
cause of environmental considerations and requirements. Conectiv has a contin-
uing 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 $12 million in 1999.
Air Quality Regulations
The federal Clean Air Act requires utilities and other industries to signif-
icantly reduce emissions of air pollutants such as sulfur dioxide (SO/2/) and
oxides of nitrogen (NOx). Title IV of the Clean Air Act, the acid rain provi-
sions, established a two-phase program which mandated reductions of SO/2/ and
NOx emissions from certain utility units by 1995 (Phase I) and required other
utility units to begin reducing SO/2/ and NOx emissions in the year 2000
(Phase II). Phase I emission reduction requirements have been achieved by the
jointly-owned Conemaugh generating station and ACE's B.L. England Units 1 and
2. The remainder of DPL's and ACE's wholly- and jointly-owned fossil-fuel
units are required to comply with Phase II emission limits.
DPL's and ACE's facilities also must comply with Title I of the Clean Air
Act, the ozone nonattainment provisions, which require states to promulgate
Reasonably Available Control Technology (RACT) regulations for existing
sources located within ozone nonattainment areas or within the Northeast Ozone
Transport Region (NOTR). To comply with RACT regulations, DPL has installed
low NOx burner technology on six of its generating units. DPL's RACT compli-
ance program has not yet received final regulatory approvals by Delaware and
Maryland. The New Jersey Department of Environmental Protection (NJDEP) has
approved ACE's RACT compliance plan.
Additional "post-RACT" NOx emission regulations are being pursued by states
in the NOTR. Delaware has proposed post-RACT NOx control regulations requiring
attainment of summer seasonal emission reductions of up to 65% below 1990 lev-
els by May 1999 through reduced emissions or the procurement of NOx emission
I-15
allowances. DPL 's post-RACT compliance plan for its Delaware generating units
includes capital expenditures of approximately $12 million. In New Jersey,
post-RACT NOx control regulations require attainment of summer seasonal emis-
sion reductions, of up to 65% below 1990 levels by May 1999 and 90% by 2003.
ACE anticipates spending approximately $5 to $8 million over the next five
years to achieve compliance with New Jersey's post-RACT NOx regulations.
In addition to the above requirements, the United States Environmental Pro-
tection Agency (USEPA) has proposed summer seasonal NOx controls commensurate
with reductions of up to 85% below baseline years by the year 2003 for a 22
state region, including Delaware and New Jersey. Since New Jersey will require
a greater percent reduction than the USEPA, the ACE facilities will most
likely achieve compliance with the USEPA requirement by 2003. Because Delaware
has not yet promulgated regulations to implement the reductions that the USEPA
has mandated by 2003, DPL currently cannot determine the additional operating
and capital costs that will be incurred to comply with these initiatives.
In July 1997, the USEPA adopted new federal air quality standards for par-
ticulate matter and ozone. The new particulate matter standard addresses fine
particulate matter. Attainment of the fine particulate matter standard may re-
quire reductions in NOx and SO/2/. However, under the time schedule announced
by the USEPA, particulate matter non-attainment areas will not be designated
until 2002 and control measures to meet this standard will not be identified
until 2005.
Water Quality Regulations
The federal Water Pollution Control Act, as amended (the Clean Water Act)
provides for the imposition of effluent limitations to regulate the discharge
of pollutants, including heat, into the waters of the United States. National
Pollution Discharge Elimination System (NPDES) permits issued by state envi-
ronmental regulatory agencies specify effluent limitations, monitoring re-
quirements, and special conditions with which facilities discharging
wastewaters must comply. To ensure that water quality is maintained, permits
are issued for a term of five years and are modified as necessary to reflect
requirements of new or revised regulations or changes in facility operations.
ACE holds New Jersey Pollution Discharge Elimination System (NJPDES) permits
issued by the NJDEP for the Deepwater and B.L. England power stations. The
NJDEP has issued a draft revised NJPDES permit for the Deepwater station which
is currently under review. The NJPDES permit for the B.L. England station will
expire in December 1999. Application for renewal will be submitted, as re-
quired, in June 1999.
The Clean Water Act also requires that cooling water intake structures be
designed to minimize adverse environmental impact. The USEPA is required by a
consent order to propose regulations in 1999 for determining whether cooling
water intake structures represent the best technology available for minimizing
adverse environmental impacts. Final action on the proposed regulations is re-
quired in 2001.
Between 1976 and 1979, DPL submitted to the Delaware Department of Natural
Resources and Environmental Control (DNREC) the results of environmental im-
pact studies which demonstrated compliance with the Clean Water Act. DNREC has
required DPL to update its earlier studies to determine if the Indian River
and Edge Moor power plants are still in compliance. In addition, in 1993,
DNREC promulgated increased restrictions on thermal discharges. Studies as-
sessing thermal water quality standards compliance will be completed in 1999
and studies assessing impacts of the cooling water intake structures will be
completed in 2001. If the studies indicate an adverse environmental impact,
then upgrades to the intake structures and/or environmental enhancement pro-
jects to offset adverse impacts will be required. Impact studies would cost up
to $2 million per plant. Costs for intake structure upgrades and enhancement
projects would range from approximately $1 million if little adverse impact is
found, to $45 million if cooling towers are required, which DPL considers to
be an unlikely potential outcome.
PSE&G is implementing the 1994 NJPDES permit issued for the jointly-owned
Salem facility, which requires, among other things, water intake screen modi-
fications and wetlands restoration. Under the 1994 permit, PSE&G is continuing
to restore wetlands and conduct the requisite management and monitoring asso-
ciated with the special conditions of the 1994 permit. In 1999, PSE&G must ap-
ply to renew Salem's NJPDES permit.
I-16
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
substances 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.
As of December 31, 1998, Conectiv's other accrued liabilities included $3
million for clean-up and other potential costs related to federal and state
superfund sites. Conectiv does not expect such future costs to have a material
effect on Conectiv's financial position or results of operations. For addi-
tional information, see Note 19 to Conectiv's 1998 Consolidated Financial
Statements included in Item 8 of Part II.
Executive Officers
The names, ages, and positions of all of the executive officers of Conectiv
as of December 31, 1998, are listed below, along with their business experi-
ences during the past five years. Officers are elected annually by the 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, 1998)
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
Howard E. Cosgrove, 55..................... Elected 1998 as Chairman of the Board and
Chairman of the Board and Chief Chief Executive Officer of Conectiv,
Executive Officer Delmarva Power & Light Company, and
Atlantic City Electric Company. Elected
1992 as Chairman of the Board, President
and Chief Executive Officer and Director of
Delmarva Power & Light Company.
Meredith I. Harlacher, Jr., 56............. Elected 1998 as President and Chief
President Operating Officer of Conectiv, and
President and Chief Operating Officer and
Director of Delmarva Power & Light Company
and Atlantic City Electric Company. Elected
1993 as Senior Vice President of Atlantic
Energy, Inc.
Barry R. Elson, 57......................... Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company
and Atlantic City Electric Company. Elected
1997 as Executive Vice President, Delmarva
Power & Light Company. Executive Vice
President, Cox Communications, Inc.,
Atlanta, Georgia, from 1995 to 1996. Senior
Vice President, Cox Enterprises/Cox
Communications, Inc., Atlanta, Georgia,
from 1984 to 1995.
Thomas S. Shaw, 51......................... Elected 1998 as Executive Vice President of
Executive Vice President Conectiv, and Executive Vice President and
Director of Delmarva Power & Light Company
and Atlantic City Electric Company. Elected
1992 as Senior Vice President, Delmarva
Power & Light Company.
(continued on following page)
I-17
Executive Officers of Conectiv (continued)
Name, Age and Position Business Experience During Past 5 Years
---------------------- ---------------------------------------
Barbara S. Graham, 50...................... Elected 1998 as Senior Vice President and
Senior Vice President and Chief Financial Officer of Conectiv, and
Chief Financial Officer Senior Vice President and Chief Financial
Officer and Director of Delmarva Power &
Light Company and Atlantic City Electric
Company. Elected 1994 as Senior Vice
President, Treasurer and Chief Financial
Officer, Delmarva Power & Light Company.
Vice President and Chief Financial Officer
from 1992 to 1994.
James P. Lavin, 51......................... Elected 1998 as Controller of Conectiv,
Controller and Chief Accounting Officer Delmarva Power & Light Company and Atlantic
City Electric Company. Elected 1993 as
Comptroller, Delmarva Power & Light
Company.
John C. van Roden, 49...................... Elected 1998 as Senior Vice President and
Senior Vice President and Chief Financial Officer, effective January
Chief Financial Officer* 1999, of Conectiv, Delmarva Power & Light
Company, and Atlantic City Electric
Company. Principal, Cook and Belier, Inc.,
in 1998. Senior Vice President/Chief
Financial Officer and Vice
President/Treasurer, Lukens, Inc. from 1987
to 1998.
- --------
*Effective January 1999
Item 2. Properties
Substantially all utility plant and properties of DPL and ACE are subject to
liens of the Mortgages under which First Mortgage Bonds are issued.
DPL's and ACE's electric properties are located in New Jersey, Delaware,
Maryland, Virginia, and Pennsylvania. The following table sets forth the net
installed summer electric capacity available to DPL and ACE on a combined ba-
sis to serve their peak loads as of December 31, 1998.
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
Coal-Fired
Edge Moor....................... Wilmington, DE...................... 260,000
Indian River.................... Millsboro, DE....................... 767,000
B L England..................... Beesley's Pt., NJ................... 284,000
Conemaugh....................... New Florence, PA.................... 128,000 (A)
Keystone........................ Shelocta, PA........................ 105,000 (A)
Deepwater....................... Pennsville, NJ...................... 80,000
---------
1,624,000
---------
Oil-Fired
Edge Moor....................... Wilmington, DE...................... 445,000
B L England..................... Beesley's Pt., NJ................... 155,000
Vienna.......................... Vienna, MD.......................... 153,000
Deepwater....................... Pennsville, NJ...................... 140,000
---------
893,000
---------
Combustion Turbines/Combined Cycle
Hay Road........................ Wilmington, DE...................... 511,000
Cumberland...................... Millville, NJ....................... 84,000
Sherman Avenue.................. Vineland, NJ........................ 81,000
Middle.......................... Rio Grande, NJ...................... 77,000
Carll's Corner.................. Upper Deerfield Twp, NJ............. 73,000
Cedar........................... Cedar Run, NJ....................... 68,000
I-18
Net Installed
Capacity
Station Location (kilowatts)
------- -------- -------------
Missouri Avenue....... Atlantic City, NJ................... 60,000
Mickleton............. Mickleton, NJ....................... 59,000
Christiana............ Wilmington, DE...................... 45,000
Deepwater............. Pennsville, NJ...................... 19,000
Edge Moor............. Wilmington, DE...................... 13,000
Madison Street........ Wilmington, DE...................... 11,000
West.................. Marshallton, DE..................... 15,000
Delaware City......... Delaware City, DE................... 16,000
Indian River.......... Millsboro, DE....................... 17,000
Vienna................ Vienna, MD.......................... 17,000
Tasley................ Tasley, VA.......................... 26,000
Salem................. Lower Alloways Creek Twp., NJ....... 6,000 (A)
---------
1,198,000
---------
Nuclear
Peach Bottom.......... Peach Bottom Twp., PA............... 328,000 (A)
Salem................. Lower Alloways Creek Twp., NJ....... 328,000 (A)
Hope Creek............ Lower Alloways Creek Twp., NJ....... 52,000 (A)
---------
708,000
---------
Diesel Units
Crisfield............. Crisfield, MD....................... 10,000
Bayview............... Bayview, VA......................... 12,000
B L England........... Beesley's Pt., NJ................... 8,000
Keystone.............. Shelocta, PA........................ 700 (A)
Conemaugh............. New Florence, PA.................... 800 (A)
---------
31,500
---------
Customer-Owned Capacity Delaware City, DE 57,000 (B)
Long-term Capacity Purchases................................. 1,065,000
---------
Subtotal................................................... 5,576,500
---------
Short-term Capacity Purchases................................ 458,500
---------
Total...................................................... 6,035,000
=========
(A)DPL's and ACE's portion of jointly-owned plants.
(B) Represents capacity owned by a refinery customer of DPL which is available
to DPL to serve its peak load.
On a combined basis, DPL's and ACE's electric transmission and distribution
systems includes 2,622 transmission poleline miles of overhead lines, 5 trans-
mission cable miles of underground cables, 16,350 distribution poleline miles
of overhead lines, and 6,738 distribution cable miles of underground cables.
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 four natural gas city gate stations
at various locations in its gas service territory. These stations have a total
sendout capacity of 125,000 Mcf per day.
I-19
The following table sets forth DPL's gas pipeline miles:
Transmission Mains................................................. 114*
Distribution Mains................................................. 1,492
Service Lines...................................................... 1,104
- --------
* Includes 11 miles of joint-use gas pipeline that is used 10% for gas opera-
tions and 90% for electric operations.
DPL, ACE, and other Conectiv subsidiaries also own and occupy a number of
properties and buildings that are used for office, service, and other purpos-
es.
Under New Jersey law, the State of New Jersey owns in fee simple for the
benefit of the public schools all lands now or formerly flowed by the tide up
to the mean high-water line, unless it has made a valid conveyance of its in-
terests in such property. In 1981, because of uncertainties raised as to pos-
sible claims of State ownership, the New Jersey Constitution was amended to
provide that lands formerly tidal-flowed, but which were not then tidal-flowed
at any time for a period of 40 years, were not to be subject to State claim
unless the State has specifically defined and asserted a claim within one year
period ending November 2, 1982. As a result, the State published maps of the
eastern (Atlantic) coast of New Jersey depicting claims to portions of many
properties, including certain properties owned by ACE. ACE believes it has
good title to such properties and will defend its title, or will obtain such
grants from the State as may ultimately be required. The cost to acquire any
such grants may be covered by title insurance policies. Assuming that all of
such State claims were determined adversely to ACE, they would relate to land,
which, together with the improvements thereon, would amount to less than 1% of
net utility plant. No maps depicting State claims to property owned by ACE on
the western (Delaware River) side of New Jersey were published within the one
year period mandated by the constitutional amendment. Nevertheless, ACE be-
lieves it has obtained all necessary grants from the State for its improved
properties along the Delaware River.
Item 3. Legal Proceedings
See Note 18 to Conectiv's 1998 Consolidated Financial Statements included in
Part II, Item 8 for information concerning DPL's and ACE's lawsuits against
Westinghouse Electric Corporation, the designer and manufacturer of the Salem
steam generators.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted during the fourth quarter of the fiscal year covered
by this report to a vote of the security holders of Conectiv (the holding com-
pany), through the solicitation of proxies or otherwise.
On October 14, 1998, ACE shareholders approved an amendment to ACE's Char-
ter, removing a restriction on the amount of securities representing unsecured
indebtedness issuable by ACE. For additional information, see Item 4 of ACE's
1998 Report on Form 10-K.
I-20
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Conectiv common stock and Conectiv Class A common stock are listed on the
New York Stock Exchange.
As of December 31, 1998, there were 78,600 holders of Conectiv's common
stock and 35,133 holders of Conectiv's Class A common stock.
Conectiv Common stock
(1)
---------------------
1998 1997
------------------------ ------------------------
Price Price
Dividend ------------- Dividend -------------
Declared High Low Declared High Low
-------- ---- ---- -------- ---- ----
First Quarter........... $0.38 1/2 $22 3/4 $20 7/8 $0.38 1/2 $20 3/8 $18 3/8
Second Quarter.......... 0.38 1/2 22 9/16 19 7/8 0.38 1/2 19 3/8 16 7/8
Third Quarter........... 0.38 1/2 23 1/4 19 11/16 0.38 1/2 19 17 3/16
Fourth Quarter.......... 0.38 1/2 24 1/2 21 7/8 0.38 1/2 23 7/16 18 9/16
Conectiv Class A common stock (2)
---------------------------------
1998
---------------------
Price
Dividend ------------
Declared High Low
-------- ---- ----
First Quarter.................................... $0.80 $34 1/2 $29 9/16
Second Quarter................................... 0.80 36 7/8 31 11/16
Third Quarter.................................... 0.80 37 3/8 34
Fourth Quarter................................... 0.80 39 7/8 35 3/8
(1) Due to the Merger, the 1998 stock price represents DPL for January and
February, and Conectiv for March through December. The 1997 stock price
represents DPL.
(2) Conectiv Class A common stock began trading on March 3, 1998.
Conectiv is in a transition caused by electric utility restructuring in New
Jersey, Delaware, Maryland, Virginia and elsewhere in the region. Conectiv
continues to invest in the establishment and growth of new businesses, with
the objective of providing new sources of earnings in anticipation of the re-
alization of lower margins on electricity sales as the generation portion of
the utility business is restructured.
During this transition, management will remain focused on maximizing total
shareholder return -- the combination of common stock price appreciation and
dividends paid. Conectiv's financial policies will continue to be reviewed pe-
riodically throughout this transition and will reflect results of operations,
financial condition, capital requirements, and other relevant considerations,
such as the progress and outcome of restructuring activities in various states
and the financial requirements of Conectiv's new competitive businesses.
II-1
CONECTIV
ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31,
------------------------------------------------------------------------
1998(1) 1997 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(Dollars in Thousands, Except Per Share Amounts)
Operating Results and
Data
Operating Revenues...... $ 3,071,606 $ 1,415,367 $ 1,168,664 $ 1,055,725 $ 1,033,442
Operating Income........ $ 386,915(2) $ 226,294 $ 250,389 $ 254,425 $ 233,244(3)
Net Income.............. $ 153,201(2) $ 101,218 $ 107,251 $ 107,546 $ 98,940(3)
On System Electric Sales
(kWh 000)(4)........... 20,687,653 13,231,766 12,925,716 12,310,921 12,505,082
On System Gas Sold and
Transported (Mcf 000).. 21,587 22,855 22,424 21,371 20,342
Common Stock Information
Basic and Diluted
Earnings Applicable to:
Common Stock.......... $ 141,292(2) $ 101,218 $ 107,251 $ 107,546 $ 98,940(3)
Class A Common Stock.. $ 11,909 -- -- -- --
Earnings Per Share of:
Common Stock.......... $ 1.50(2) $ 1.66 $ 1.77 $ 1.79 $ 1.67(3)
Class A Common Stock.. $ 1.82 -- -- -- --
Dividends Declared Per
Share of:
Common Stock.......... $ 1.54 $ 1.54 $ 1.54 $ 1.54 $ 1.54
Class A Common Stock.. $ 3.20 -- -- -- --
Average Shares
Outstanding (000):
Common Stock.......... 94,338 61,122 60,698 60,217 59,377
Class A Common Stock.. 6,561 -- -- -- --
Year-End Stock Price:
Common Stock.......... $ 24 1/2 $ 23 1/16 $ 20 3/8 $ 22 3/4 $ 18 9/64
Class A Common Stock.. $ 39 1/2 -- -- -- --
Book Value Per Common
Share(5)................ $ 17.21 $ 15.59 $ 15.41 $ 15.20 $ 14.85
Return on Average Common
Equity.................. 8.3% 10.6% 11.4% 11.7% 11.1%
Capitalization
Variable Rate Demand
Bonds
(VRDB)(6).............. $ 125,100 $ 71,500 $ 85,000 $ 86,500 $ 71,500
Long-Term Debt.......... 1,746,562 983,672 904,033 853,904 774,558
Preferred Stock of
Subsidiaries:
Subject to Mandatory
Redemption........... 188,950 70,000 70,000 -- --
Not Subject to
Mandatory
Redemption........... 95,933 89,703 89,703 168,085 168,085
Common Stockholders'
Equity.................. 1,843,161 954,496 934,913 923,440 884,169
----------- ----------- ----------- ----------- -----------
Total Capitalization
with VRDB............... $ 3,999,706 $ 2,169,371 $ 2,083,649 $ 2,031,929 $ 1,898,312
=========== =========== =========== =========== ===========
Other Information
Total Assets............ $ 6,087,674 $ 3,015,481 $ 2,931,855 $ 2,866,685 $ 2,669,785
Long-Term Capital Lease
Obligation.............. $ 36,603 $ 19,877 $ 20,552 $ 20,768 $ 19,660
Capital Expenditures.... $ 224,831 $ 156,808 $ 165,595 $ 142,833 $ 166,938
- --------
(1) As discussed in Note 4 to the Consolidated Financial Statements, Delmarva
Power & Light Company (DPL) and Atlantic City Electric Company (ACE) be-
came wholly-owned subsidiaries of Conectiv (the Merger) on March 1, 1998.
The Merger was accounted for under the purchase method of accounting, with
DPL as the acquirer. Accordingly, the 1998 Consolidated Statement of In-
come includes 10 months of operating results for ACE and other former sub-
sidiaries of Atlantic Energy, Inc.
(2) Employee separation and other Merger-related costs in 1998 decreased oper-
ating income, net income, and earnings per share by $27.7 million, $16.8
million, and $0.18, respectively.
(3) An early retirement offer in 1994 decreased operating income, net income,
and earnings per share by $17.5 million, $10.7 million, and $0.18, respec-
tively.
(4) Excludes interchange deliveries.
(5) Conectiv common stock and Conectiv Class A common stock have the same book
value per common share.
(6) Although Variable Rate Demand Bonds are classified as current liabilities,
Conectiv intends to use the bonds as a source of long-term financing as
discussed in Note 14 to the Consolidated Financial Statements.
II-2
CONECTIV
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
MERGER WITH ATLANTIC
On March 1, 1998, Delmarva Power & Light Company (DPL) and Atlantic City
Electric Company (ACE) became wholly-owned subsidiaries of Conectiv (the Merg-
er). DPL common stockholders received one share of Conectiv common stock in
exchange for one share of DPL common stock, and Atlantic Energy, Inc. (Atlan-
tic) common stockholders received 0.75 of one share of Conectiv common stock
and 0.125 of one share of Conectiv Class A common stock in exchange for one
share of Atlantic common stock. Effective with the Merger, Atlantic, which
owned ACE and nonutility subsidiaries prior to the Merger, ceased to exist.
The Merger also resulted in Conectiv owning (directly or indirectly) the non-
utility subsidiaries formerly held separately by Atlantic and DPL.
As used in this document, references to Conectiv may mean the activities of
one or more subsidiary companies.
Under the purchase method of accounting, with DPL as the acquirer as of
March 1, 1998, the 1998 Consolidated Statement of Income includes ten months
of results of operations for ACE and the nonutility subsidiaries formerly
owned by Atlantic.
See Note 4 to the Consolidated Financial Statements for additional informa-
tion concerning the Merger.
EARNINGS RESULTS SUMMARY
Results of operations for 1998 include a charge for DPL employee separation
costs and other Merger-related costs of $27.7 million before taxes, $16.8 mil-
lion after taxes, or $0.18 per share. The Merger-related charge reflects cer-
tain costs associated with projected Merger-related cost savings of $500 mil-
lion over the next 10 years. Prior to the merger, DPL, Atlantic and their sub-
sidiaries had approximately 4,600 employees. Employee separation programs re-
duced the number of employees by 785.
Reported earnings applicable to Conectiv common stock were $141.3 million,
or $1.50 per average common share (94,338,000 average common shares) in 1998,
compared to $101.2 million, or $1.66 per average common share (61,122,000 av-
erage common shares) in 1997. Excluding the impact of DPL employee separation
costs and other Merger-related costs, earnings per common share for 1998 were
$1.68 versus $1.66 in 1997. The dilution resulting from Conectiv common shares
issued to Atlantic stockholders was about equal to the net earnings contrib-
uted by the former Atlantic companies. The $0.02 increase in earnings per com-
mon share (as adjusted) was attributed to 2.5% higher DPL retail electric kil-
owatt-hour (kWh) sales and lower DPL utility operating and maintenance ex-
penses, offset substantially by losses from Conectiv's investments in new
businesses and participation in the competitive retail energy markets. These
business activities resulted in a net loss of $38.3 million after taxes in
1998 compared to a net loss of $22.7 million after taxes in 1997. Earnings in
1997 also included a gain of $13.7 million after taxes from the sale of a
landfill and waste-hauling company.
Earnings applicable to Conectiv Class A common stock were $11.9 million or
$1.82 per Conectiv Class A common share in 1998. For additional information,
see Note 12 to the Consolidated Financial Statements.
Earnings per common share for 1997 were $1.66 compared to $1.77 for 1996.
The $0.11 per share earnings decrease was primarily attributed to losses from
investments in new businesses and participation in the competitive energy mar-
kets (including branding expenditures), partly offset by the gain on the sale
of the landfill and waste-hauling company. Regulated utility earnings were
relatively flat in 1997 primarily because higher net electric revenues and
lower outage expenses for the Salem nuclear generating units were offset by
anticipated higher capital costs.
II-3
DIVIDENDS ON COMMON STOCK
In 1998, the Board of Directors declared a dividend on Conectiv common stock
of $1.54 per share ($0.38 1/2 per quarter) and a dividend on Conectiv Class A
common stock of $3.20 per share ($0.80 per quarter).
As discussed below, Conectiv is in a transition caused by electric utility
industry restructuring in New Jersey, Delaware, Maryland, and elsewhere in the
region. Conectiv continues to invest in the establishment and growth of new
businesses, with the objective of providing new sources of earnings in antici-
pation of the realization of lower margins on electricity sales as the genera-
tion portion of the utility business is restructured.
During this transition, management will remain focused on maximizing total
shareholder return--the combination of common stock price appreciation and
dividends paid. Conectiv's financial policies will continue to be reviewed pe-
riodically throughout this transition and will reflect results of operations,
financial condition, capital requirements, and other relevant considerations,
such as the progress and outcome of restructuring activities in various states
and the financial requirements of Conectiv's new competitive businesses.
ELECTRIC UTILITY INDUSTRY RESTRUCTURING
As discussed below, deregulation of the electric utility industry is under-
way in New Jersey, Delaware, Maryland, and Virginia. Generally, with restruc-
turing, the supply component of the price charged to a customer for electric-
ity would be deregulated, and electricity suppliers would compete to supply
electricity to customers. Customers would continue to pay the local utility a
regulated price for the delivery of the electricity over the transmission and
distribution system.
Stranded costs are costs which may not be recoverable in a competitive en-
ergy supply market due to lower prices or customers choosing a different sup-
plier. Stranded costs generally include above-market costs associated with
generation facilities or long-term purchased power agreements, and regulatory
assets. DPL and ACE have quantified stranded costs in Maryland and New Jersey
regulatory filings, respectively, and have proposed plans seeking approval for
recovery of those costs from customers during the transition to a competitive
market.
When a specific plan that deregulates electricity supply becomes final, ACE
or DPL, as appropriate, would cease applying SFAS No. 71 to its electricity
supply business in the regulatory jurisdiction to which the plan applies. To
the extent that a deregulation plan provides for recovery of stranded costs
through cash flows from the regulated transmission and distribution business,
the stranded costs would continue to be recognized as assets under SFAS No.
71. Any stranded costs (including regulatory assets) for which cost recovery
is not provided would be expensed.
The amount of stranded costs ultimately recovered from utility customers, if
any, and the full impact of legislation deregulating the electric utility in-
dustry in any of the jurisdictions in which Conectiv operates cannot be pre-
dicted. Also, the quantification of stranded costs under existing generally
accepted accounting principles (GAAP) differs from methods used in regulatory
filings. Among other differences, GAAP precludes recognition of the gains on
plants (or purchased power contracts) not impaired, but requires write down of
the plants that are impaired. Due to these considerations, market conditions,
timing, and other factors, Conectiv's management currently cannot predict the
ultimate effects that electric utility industry deregulation may have on the
financial statements of Conectiv and its subsidiaries, although deregulation
may have a material adverse effect on Conectiv's results of operations.
New Jersey
The "Electric Discount and Energy Competition Act" (the Act) was signed into
law by the Governor of New Jersey on February 9, 1999. The Act provides for
retail choice of electricity suppliers; deregulation of electric rates and
other competitive services, such as metering and billing; separation of com-
petitive and regulated services; unbundling of rates for electric service; and
licensing of electric and gas suppliers. August 1, 1999 is the effective
starting date for each utility to provide retail choice of electricity suppli-
ers to all of its customers.
II-4
The Act requires each electric utility to reduce its rates by at least 5% at
the start of retail choice and by 10% within 36 months of the start of choice.
If the New Jersey Board of Public Utilities (NJBPU) determines that a rate de-
crease of more than 10% is warranted, a "just and reasonable" financial test
is applied. The mandated rate reductions must be sustained through the end of
the 48th month after choice begins. The Act requires that the rate reductions
be measured against the rates in effect on April 30, 1997. The rate reductions
mandated by the Act could have a material adverse effect upon the results of
operations of ACE and Conectiv.
In connection with the deregulation of electric rates, the Act authorizes
the NJBPU to permit electric public utilities to recover the full amount of
their stranded costs through a non-bypassable market transition charge, as
long as the mandated rate reductions are achieved. The NJBPU will determine
the utility's stranded cost amount. The NJBPU--determined stranded cost amount
will be subject to periodic recalculation and true-up over the recovery
period. The Act establishes an 8-year recovery period for stranded costs asso-
ciated with owned generation. The recovery period can be extended by the NJBPU
so as to allow for the full recovery of the stranded costs and the meeting of
mandated rate reductions. The recovery period for stranded costs associated
with purchased power contracts is to be the remainder of the contract term. In
addition, the Act would allow for the issuance of transition bonds to finance
portions of a given utility's stranded costs, as determined to be appropriate
by the NJBPU. All savings generated through the use of such transition bonds
are to be provided to the customers through rate reductions.
The Act establishes the current incumbent utility as the provider of "de-
fault service" or Basic Generation Service (BGS) for a period of 3 years. Fu-
ture proceedings will be held to determine if the provision of BGS should be
made competitive. The Act contains numerous provisions regarding the providing
of competitive services by each utility. The primary focus is to ensure that
there is no cross subsidization from the utility to competitive entities. The
NJBPU also is required to develop fair competition standards and conduct an
audit to determine that the utilities are in compliance with those standards.
The Act gives the NJBPU the authority to order a utility to divest its gener-
ating assets if it is determined through a hearing that competition or custom-
ers are being adversely affected by plant location, market power or non-com-
petitive rates. The NJBPU may require that the generation function be sepa-
rated from a utility's non-competitive functions.
The NJBPU is authorized to establish standards for the licensing of energy
suppliers, standards for switching customers from one supplier to another, and
standards for issues such as credit and collections. The Act also contains
provisions for protecting workers displaced by the impacts of the restructur-
ing of the utility industry.
Electric utilities in New Jersey, including ACE, previously filed stranded
cost estimates and unbundled rates, as required by the NJBPU. On August 19,
1998, an Administrative Law Judge (ALJ) from the New Jersey Office of Adminis-
trative Law issued an initial decision on ACE's stranded costs and unbundled
rate filing. The ALJ, in reviewing ACE's filing, recognized that ACE's
stranded costs were $812 million for nonutility generation contracts and $397
million for owned generation. The ALJ made no specific recommendations on rate
issues. A final NJBPU decision on this filing is expected by mid-1999.
Delaware
The Alliance for Fair Electric Competition Today, which includes DPL, wor