-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C72h4p2LusGrXQgqRLTuZYXxgHUvDtIV5uvZsVhbHGpvkjp0wYlHjCgLtrTU/ewd P6mOFoAyrip87rcS3Pc3gA== 0000950109-01-504777.txt : 20020410 0000950109-01-504777.hdr.sgml : 20020410 ACCESSION NUMBER: 0000950109-01-504777 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20010930 FILED AS OF DATE: 20011108 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CONECTIV CENTRAL INDEX KEY: 0001029590 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRIC & OTHER SERVICES COMBINED [4931] IRS NUMBER: 510377417 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-13895 FILM NUMBER: 1778047 BUSINESS ADDRESS: STREET 1: 800 KING ST STREET 2: P O BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 BUSINESS PHONE: 3024293114 MAIL ADDRESS: STREET 1: 800 KING ST STREET 2: P O BOX 231 CITY: WILMINGTON STATE: DE ZIP: 19899 10-Q 1 d10q.txt CONECTIV FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q /X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2001 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) (Zip Code) Registrant's telephone number, including area code 302-429-3018 ------------ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Class Shares Outstanding at September 30, 2001 ------------------------------------- ---------------------------------------- Common Stock, $0.01 par value 82,957,613 Class A Common Stock, $0.01 par value 5,742,315
Conectiv -------- Table of Contents -----------------
Page ---- Part I. Financial Information: Item 1. Financial Statements Consolidated Statements of Income for the three and nine months ended September 30, 2001, and September 30, 2000........................... 1-2 Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2001, and September 30, 2000......... 3 Consolidated Balance Sheets as of September 30, 2001, and December 31, 2000.................................................... 4-5 Consolidated Statements of Cash Flows for the nine months ended September 30, 2001, and September 30, 2000..................... 6 Notes to Consolidated Financial Statements........................... 7-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.................................. 22-36 Item 3. Quantitative and Qualitative Disclosures About Market Risk........... 37 Part II. Other Information Item 1. Legal Proceedings.................................................... 38 Item 6. Exhibits and Reports on Form 8-K..................................... 38 Signature......................................................................... 38
i PART I. FINANCIAL INFORMATION Item 1. Financial Statements CONECTIV -------- CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts) (Unaudited)
Three Months Ended Nine Months Ended September 30, September 30, --------------------------- --------------------------- 2001 2000 2001 2000 ----------- --------- ---------- ---------- OPERATING REVENUES Electric $ 1,224,992 $ 915,020 $2,944,253 $ 2,230,156 Gain on sales of electric generating plants - - 297,140 - Gas 325,756 492,780 1,328,824 1,069,816 Other services 118,228 130,392 391,810 412,191 ----------- --------- ---------- ---------- 1,668,976 1,538,192 4,962,027 3,712,163 ----------- --------- ---------- ---------- OPERATING EXPENSES Electric fuel and purchased energy and capacity 894,828 517,967 2,026,097 1,235,290 Gas purchased 321,742 472,830 1,304,425 1,019,859 Other services' cost of sales 104,257 114,816 328,441 359,224 Special charges - - - 25,162 Operation and maintenance 138,631 131,787 374,146 415,201 Depreciation and amortization 55,024 63,328 175,559 188,000 Taxes other than income taxes 20,891 21,715 59,246 62,579 ----------- --------- ---------- ---------- 1,535,373 1,322,443 4,267,914 3,305,315 ----------- --------- ---------- ---------- OPERATING INCOME 133,603 215,749 694,113 406,848 ----------- --------- ---------- ---------- OTHER INCOME 5,096 11,436 74,291 57,230 ----------- --------- ---------- ---------- INTEREST EXPENSE Interest charges 43,689 57,364 146,730 167,322 Capitalized interest and allowance for borrowed funds used during construction (3,206) (2,778) (12,958) (6,924) ----------- --------- ---------- ---------- 40,483 54,586 133,772 160,398 ----------- --------- ---------- ---------- PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES 4,487 5,110 14,689 15,268 ----------- --------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 93,729 167,489 619,943 288,412 INCOME TAXES 31,810 70,798 253,401 124,027 ----------- --------- ---------- ---------- INCOME FROM CONTINUING OPERATIONS 61,919 96,691 366,542 164,385 DISCONTINUED TELECOMMUNICATION OPERATIONS LOSS FROM OPERATIONS, NET OF INCOME TAXES - (7,075) (7,696) (23,871) LOSS FROM DISPOSAL, NET OF INCOME TAXES - - (118,788) - ----------- --------- ---------- ---------- INCOME BEFORE EXTRAORDINARY ITEM 61,919 89,616 240,058 140,514 EXTRAORDINARY ITEM--LOSS ON EXTINGUISHMENT OF DEBT (NET OF $1,885 OF INCOME TAXES) (2,790) - (2,790) - ----------- --------- ---------- ---------- NET INCOME $ 59,129 $ 89,616 $ 237,268 $ 140,514 =========== ========= ========== ==========
(Continued on following page) See accompanying Notes to Consolidated Financial Statements. -1- CONECTIV -------- CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands, Except Per Share Amounts) (Unaudited) (Continued from previous page)
Three Months Ended Nine Months Ended September 30, September 30, -------------------------- --------------------------- 2001 2000 2001 2000 --------- --------- --------- ---------- EARNINGS (LOSS) APPLICABLE TO COMMON STOCK Common stock Continuing operations $ 55,760 $ 90,481 $ 356,365 $ 159,631 Discontinued telecommunication operations Loss from operations - (7,075) (7,696) (23,871) Loss from disposal - - (118,788) - Extraordinary item, loss on extinguishment of debt (2,790) - (2,790) - Class A common stock 6,159 6,210 10,177 4,754 --------- ---------- ---------- ----------- $ 59,129 $ 89,616 $ 237,268 $ 140,514 ========= =========== ========== =========== COMMON STOCK Average shares outstanding (000) Common stock 82,704 82,701 82,704 84,015 Class A common stock 5,742 5,742 5,742 5,742 Basic earnings (loss) per average share of common stock Continuing operations $ 0.68 $ 1.09 $ 4.31 $ 1.90 Discontinued telecommunication operations Loss from operations - $ (0.08) $ (0.09) $ (0.28) Loss from disposal - - $ (1.44) - Extraordinary item--loss on extinguishment of debt $ (0.03) - $ (0.03) - Basic and diluted earnings per average share of Class A common stock $ 1.07 $ 1.08 $ 1.77 $ 0.83 Diluted earnings per average share of common stock from continuing operations $ 0.68 $ 1.09 $ 4.29 $ 1.90 Dividends declared per share Common stock $ 0.22 $ 0.22 $ 0.66 $ 0.66 Class A common stock $ 0.25 $ 0.80 $ 1.30 $ 2.40
See accompanying Notes to Consolidated Financial Statements. -2- CONECTIV CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Dollars in Thousands) (Unaudited)
Three Months Ended September 30, ------------------------ 2001 2000 -------- -------- Net Income $ 59,129 $89,616 -------- -------- Other comprehensive (loss) / income, net of taxes Energy commodity hedging: Cumulative effect of a change in accounting resulting from adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," net of taxes of $2,380 - - Unrealized loss from cash flow hedges net of reclassification adjustments and net of taxes of $8,434 and $46,806 for the three and nine months, respectively, ended September 30, 2001 (12,208) - Unrealized loss on marketable securities net of reclassification adjustments and net of taxes of $4,757 and $5,578 for the three and nine months ended September 30, 2001, respectively, and $157 and $134 for the three and nine months ended September 30, 2000, respectively (8,835) (292) -------- -------- Other comprehensive (loss) / income, net of income taxes (21,043) (292) -------- -------- -------- -------- Comprehensive income $ 38,086 $89,324 ======== ======== Nine Months Ended September 30, 2001 2000 -------- -------- Net Income $ 237,268 $ 140,514 --------- --------- Other comprehensive (loss) / income, net of taxes Energy commodity hedging: Cumulative effect of a change in accounting resulting from adoption of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," net of taxes of $2,380 3,445 - Unrealized loss from cash flow hedges net of reclassification adjustments and net of taxes of $8,434 and $46,806 for the three and nine months, respectively, ended September 30, 2001 (67,746) - Unrealized loss on marketable securities net of reclassification adjustments and net of taxes of $4,757 and $5,578 for the three and nine months ended September 30, 2001, respectively, and $157 and $134 for the three and nine months ended September 30, 2000, respectively (10,360) 248 --------- --------- Other comprehensive (loss) / income, net of income taxes (74,661) 248 --------- --------- --------- --------- Comprehensive income $162,607 $140,762 ======== ========-
See accompanying Notes to Consolidated Financial Statements. -3- CONECTIV CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
September 30, December 31, 2001 2000 --------------- --------------- ASSETS Current Assets Cash and cash equivalents $ 49,746 $ 123,562 Accounts receivable, net of allowances of $46,868 and $31,339, respectively 778,722 792,843 Inventories, at average cost 112,876 117,253 Deferred energy supply costs 27,080 22,094 Prepayments 42,467 23,354 Deferred income taxes, net 2,136 13,155 --------------- --------------- 1,013,027 1,092,261 --------------- --------------- Investments Investment in leveraged leases 50,807 53,706 Funds held by trustee 128,181 122,387 Other investments 54,941 70,780 --------------- --------------- 233,929 246,873 --------------- --------------- Property, Plant and Equipment Electric generation 1,050,904 1,576,550 Electric transmission and distribution 2,773,413 2,711,907 Gas transmission and distribution 288,196 277,650 Other electric and gas facilities 363,435 390,313 Telecommunications, thermal systems, and other property, plant, and equipment 213,222 251,567 --------------- --------------- 4,689,170 5,207,987 Less: Accumulated depreciation 1,892,067 2,179,951 --------------- --------------- Net plant in service 2,797,103 3,028,036 Construction work-in-progress 465,117 406,884 Leased nuclear fuel, at amortized cost 19,549 28,352 Goodwill, net of accumulated amortization of $40,480 and $33,437, respectively 333,057 344,514 --------------- --------------- 3,614,826 3,807,786 --------------- --------------- Deferred Charges and Other Assets Recoverable stranded costs, net 955,362 988,153 Deferred recoverable income taxes 73,571 84,730 Deferred energy supply costs 93,206 - Deferred debt extinguishment costs 30,240 20,656 Deferred other postretirement benefit costs 28,107 29,981 Prepaid pension costs 86,939 69,963 Unamortized debt expense 27,175 25,553 License fees 20,925 21,956 Other 82,661 90,083 --------------- --------------- 1,398,186 1,331,075 --------------- --------------- Total Assets $6,259,968 $6,477,995 =============== ===============
See accompanying Notes to Consolidated Financial Statements. -4- CONECTIV CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
September 30, December 31, 2001 2000 --------------- --------------- CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt $ 829,031 $ 709,530 Long-term debt due within one year 226,071 100,721 Variable rate demand bonds 158,430 158,430 Accounts payable 382,286 490,887 Taxes accrued 129,923 10,877 Interest accrued 38,150 45,296 Dividends payable 24,033 27,111 Deferred energy supply costs - 34,650 Current capital lease obligation 15,605 15,591 Above-market purchased energy contracts and other electric restructuring liabilities 23,274 23,891 Other 118,167 107,025 --------------- --------------- 1,944,970 1,724,009 --------------- --------------- Deferred Credits and Other Liabilities Other postretirement benefits obligation 94,066 90,335 Deferred income taxes, net 767,230 823,094 Deferred investment tax credits 55,529 64,316 Regulatory liability for New Jersey income tax benefit 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities 90,548 103,575 Deferred gain on termination of purchased energy contract - 74,968 Derivative instruments 119,915 17,175 Other 62,277 64,320 --------------- --------------- 1,238,827 1,287,045 --------------- --------------- Capitalization Common stock: $0.01 per share par value; 150,000,000 shares authorized; shares outstanding - - 82,957,613 in 2001, and 82,859,779 in 2000 830 830 Class A common stock, $0.01 per share par value; 10,000,000 shares authorized; shares outstanding - - 5,742,315 in 2001 and 2000 57 57 Additional paid-in capital - - common stock 1,027,795 1,028,780 Additional paid-in capital - - Class A common stock 93,738 93,738 Retained earnings 217,987 42,768 Treasury shares, at cost, 130,604 shares in 2000 - (2,688) Unearned compensation (2,073) (1,172) Accumulated other comprehensive income (76,705) (2,044) --------------- --------------- Total common stockholders' equity 1,261,629 1,160,269 Preferred stock and securities of subsidiaries: Not subject to mandatory redemption 36,063 95,933 Subject to mandatory redemption 177,450 188,950 Long-term debt 1,601,029 2,021,789 --------------- --------------- 3,076,171 3,466,941 --------------- --------------- Commitments and Contingencies (Notes 16 and 17) --------------- --------------- Total Capitalization and Liabilities $6,259,968 $6,477,995 =============== ===============
See accompanying Notes to Consolidated Financial Statements. -5- CONECTIV CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Nine Months Ended September 30, ---------------------------- 2001 2000 ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income $237,268 $140,514 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 187,985 211,002 Deferred income taxes, net 16,319 41,927 Deferred energy supply costs (106,190) 4,268 Gain on sales of electric generating plants (297,140) - Gain on contract termination (73,015) - Provision for loss on sale of businesses 177,245 25,162 Non-cash loss / ( earnings ) of equity method investee 5,223 (34,140) Net change in: Accounts receivable 8,139 (390,187) Inventories (24,961) 2,389 Accounts payable (120,914) 216,049 Accrued / prepaid taxes 104,864 83,497 Other current assets & liabilities (1) (67,988) 13,664 Other, net (4,330) (24,989) ---------- ---------- Net cash provided by operating activities 42,505 289,156 ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sales of electric generating plants 641,734 - Proceeds from other assets sold 24,566 69,726 Capital expenditures (416,439) (260,776) Investments in partnerships (22,974) (4,090) (Increase) / decrease in funds held by trustee 141 (9,028) Leveraged leases, net 606 8,244 Acquisition of businesses, net of cash acquired - (798) Other, net (930) (6,557) ---------- ---------- Net cash provided / (used) by investing activities 226,704 (203,279) ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends paid (65,391) (69,253) Common stock redeemed - (54,651) Preferred stock redeemed (71,370) - Long-term debt issued 59,000 70,140 Long-term debt redeemed (355,306) (111,664) Principal portion of capital lease payments (8,835) (17,810) Net increase in short-term debt 119,501 135,706 Cost of issuances and redemptions (20,624) (2,510) ---------- ---------- Net cash used by financing activities (343,025) (50,042) ---------- ---------- Net change in cash and cash equivalents (73,816) 35,835 Cash and cash equivalents at beginning of period 123,562 56,239 ---------- ---------- Cash and cash equivalents at end of period $ 49,746 $ 92,074 ========== ==========
(1) Other than debt and deferred income taxes classified as current. See accompanying Notes to Consolidated Financial Statements. -6- CONECTIV -------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ (Unaudited) Note 1. Financial Statement Presentation - ------- -------------------------------- Conectiv's consolidated condensed interim financial statements contained herein include the accounts of Conectiv and its majority owned subsidiaries and reflect all adjustments, consisting of only normal recurring adjustments, necessary in the opinion of management for a fair presentation of interim results. In accordance with regulations of the Securities and Exchange Commission (SEC), disclosures that would substantially duplicate the disclosures in Conectiv's 2000 Annual Report on Form 10-K have been omitted. Accordingly, Conectiv's consolidated condensed interim financial statements contained herein should be read in conjunction with Conectiv's 2000 Annual Report on Form 10-K. As discussed in Note 5 to the Consolidated Financial Statements herein, Conectiv entered into an agreement during the second quarter of 2001 to sell substantially all of the assets of the Telecommunication business segment. Accordingly, the operating results for the Telecommunication business segment are classified as discontinued operations within the Consolidated Statements of Income, including operating results reported previously for periods ending prior to April 1, 2001, which have been reclassified from continuing operations to discontinued operations. Certain other reclassifications of prior period data have been made to conform with the current presentation. On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and does not permit the use of the pooling of interests method of accounting for business combinations. Under SFAS No. 142, goodwill that has not been included in the rates of a regulated utility subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," will no longer be amortized. Most goodwill on Conectiv's Consolidated Balance Sheet has not been included in the rates of Conectiv's regulated utility businesses. Intangible assets other than goodwill which have finite useful lives will continue to be amortized under SFAS No. 142. Goodwill and other intangible assets will be tested periodically for impairment. If an impairment occurs, then a charge to earnings would result. An impairment of goodwill that results from adoption of SFAS No. 142 will be recognized as the cumulative effect of a change in accounting principle. Under SFAS No. 142, historical operating results will not be restated; instead pro forma earnings, adjusted to exclude goodwill amortization, will be disclosed. SFAS No. 142 will be effective January 1, 2002 for companies with a calendar fiscal year, including Conectiv. -7- On August 9, 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations," which establishes the accounting requirements for asset retirement obligations (ARO) associated with tangible long-lived assets. If a legal obligation for an ARO exists, then SFAS No. 143 requires recognition of a liability, capitalization of the cost associated with the ARO, and allocation of the capitalized cost to expense. The initial measurement of an ARO is based on the fair value of the obligation, which may result in a gain or loss upon the settlement of the ARO. If the requirements of SFAS No. 71 are met, a regulated entity shall also recognize a regulatory asset or liability for timing differences between financial reporting and rate-making in the recognition of the period costs associated with an ARO. SFAS No. 143 will be effective January 1, 2003 for companies with a calendar fiscal year, including Conectiv. Upon adoption of SFAS No. 143, the difference between the net amount recognized in the balance sheet under SFAS No. 143 and the net amount previously recognized in the balance sheet will be recognized as the cumulative effect of a change in accounting principle. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens discontinued operations to include more disposal transactions. Under SFAS No. 144, operating losses of discontinued operations are recognized in the period in which they occur, instead of accruing future operating losses before they occur. SFAS No. 144 will become effective on January 1, 2002. Conectiv is currently evaluating SFAS No. 141, 142, 143, and 144 and cannot predict the impact that these standards may have on its financial position or results of operations; however, any such impact could be material. Note 2. Supplemental Cash Flow Information - ------- ---------------------------------- Nine Months Ended September 30, ---------------------- 2001 2000 ---------- ---------- (Dollars in Thousands) Cash paid (received) for: Interest, net of amounts capitalized $138,201 $148,556 Income taxes, net of refunds $ 74,303 $(23,872) During the nine months ended September 30, 2000, Conectiv received $96.7 million of income tax refunds. These income tax refunds were primarily related to the tax benefit associated with the payment of $228.5 million on December 28, 1999 by Atlantic City Electric Company (ACE) to terminate ACE's purchase of electricity under a contract with the Pedricktown Co-generation Limited Partnership, as discussed in Note 11 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K. Non-cash Investing Activity During the first quarter of 2001, Conectiv received a distribution from the EnerTech funds (which are discussed in Note 7 to the Consolidated Financial Statements) of common stock of Capstone Turbine Corporation (Capstone), which had a fair value of approximately $29.8 million at the time of distribution. -8- Note 3. Income Taxes - ------- ------------ The amount computed by multiplying "Income From Continuing Operations Before Income Taxes" by the federal statutory rate is reconciled in the table below to income tax expense on continuing operations.
Three Months Ended September 30, Nine Months Ended September 30, ------------------------------------ ----------------------------------- 2001 2000 2001 2000 ----------------- ----------------- ---------------- ---------------- Amount Rate Amount Rate Amount Rate Amount Rate -------- ------ -------- ------ -------- ------ -------- ------ (Dollars in Thousands) Statutory federal income tax expense $ 32,805 35% $58,621 35% $216,980 35% $100,944 35% State income taxes, net of federal benefit 7,505 8 10,826 7 41,062 7 20,249 7 Depreciation 1,474 2 1,475 1 4,421 1 4,427 2 Regulatory asset basis difference - - - - 4,876 1 - - Non-deductible goodwill 632 1 632 - 1,897 - 6,688 2 Investment tax credit amortization (936) (1) (1,272) (1) (8,787) (1) (4,452) (2) Resolution of income tax matters * (10,000) (11) - - (10,000) (2) (6,195) (2) Other, net 330 - 516 - 2,952 - 2,366 1 -------- --- ------- -- -------- -- -------- -- $ 31,810 34% $70,798 42% $253,401 41% $124,027 43% ======== === ======= == ======== == ======== ==
* Reflects changes in estimates of previously accrued income taxes due to resolution of uncertainties. Note 4. Agreement for the Acquisition of Conectiv - ------- ----------------------------------------- As previously disclosed, on February 9, 2001, the Boards of Directors of Conectiv and Potomac Electric Power Company (Pepco) approved an Agreement and Plan of Merger under which Pepco will acquire Conectiv for a combination of cash and stock (Conectiv/Pepco Merger). The stockholders of Conectiv and Pepco voted on July 17 and 18, 2001, respectively, to approve the Conectiv/Pepco Merger agreement. Consummation of the transaction is subject to various statutory and regulatory approvals. Recently, certain necessary merger-related approvals were obtained, including the Federal Energy Regulatory Commission, the Virginia State Corporation Commission and the Pennsylvania Public Utility Commission. Merger clearance was also obtained from the Federal Trade Commission and the U.S. Justice Department. The Conectiv/Pepco Merger is scheduled for review during the fourth quarter of 2001 by various regulatory commissions in Delaware, Maryland, New Jersey, and the District of Columbia. See Note 5 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K for additional information about the planned Conectiv/Pepco Merger. Note 5. Discontinued Telecommunication Operations - ------- ----------------------------------------- On June 4, 2001, Conectiv reached an agreement (Telecommunication Asset Purchase Agreement) to sell substantially all of the telecommunication business assets of Conectiv Communications, Inc. (CCI) to Cavalier Telephone, L.L.C. (Cavalier) for $20 million, subject to certain adjustments. Under the Telecommunication Asset Purchase Agreement, Cavalier has the option of paying $11 million of the purchase price at closing and also providing certain future services. -9- CCI's telecommunication business was previously reported as the Telecommunication business segment in Conectiv's Notes to Consolidated Financial Statements and Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). Due to the Telecommunication Asset Purchase Agreement, the operating results for CCI's telecommunication business, including previously reported periods, are classified in Conectiv's Consolidated Statements of Income as "Discontinued Telecommunication Operations." No interest expense has been allocated to discontinued operations. Conectiv's earnings for the nine months ended September 30, 2001 include the estimated loss on the disposal of the telecommunication business segment of $177.2 million before taxes ($118.8 million after taxes or $1.44 per share of common stock), which includes a $13.7 million after-tax provision for operating losses during the period expected to elapse through completion of the transaction (June 2001 through December 2001). For the three months ended September 30, 2001 and 2000, revenues from the discontinued telecommunication operations were $12.6 million and $13.4 million, respectively. For the nine months ended September 30, 2001 and 2000, revenues from the discontinued telecommunication operations were $39.9 million and $37.1 million, respectively. The assets and liabilities of the discontinued telecommunication business segment included in Conectiv's Consolidated Balance Sheets are summarized below. The balances as of September 30, 2001 reflect the write-down of assets that resulted from the Telecommunication Asset Purchase Agreement. September 30, December 31, 2001 2000 ------------- ------------ (Dollars in Thousands) Current assets $13,890 $ 20,964 Property plant & equipment 16,340 154,903 Current liabilities 13,352 9,288 Note 6. Special Charges - ------- --------------- "Special charges" of $25.2 million before income taxes, or $23.4 million after income taxes ($0.28 per share of common stock), which were recorded in the second quarter of 2000, are reflected in the operating results for the nine months ended September 30, 2000. The special charges resulted from losses on the sales of Conectiv Services, Inc. (CSI) and portions of Conectiv Thermal Systems, Inc. (CTS). CSI provided heating, ventilation, and air conditioning (HVAC) services and its results of operations are presented as the "HVAC" business segment in Note 18 to the Consolidated Financial Statements included herein. CTS constructs and operates district heating and cooling systems and its results of operations are included in the Energy business segment. -10- Note 7. Investments - ------- ----------- As discussed in Note 8 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K, an indirect Conectiv subsidiary holds a limited partner interest in EnerTech Capital Partners, L.P. and EnerTech Capital Partners II, L.P. (the EnerTech funds). The EnerTech funds are venture capital funds that invest in technology and service companies related to energy, utility, and communication industries. Conectiv's other investments include other venture capital funds and marketable equity securities. Investment income associated with the EnerTech funds, marketable securities, and other investments resulted in earnings of $8.5 million after taxes ($0.10 per share of common stock) for the three months ended September 30, 2001 and $3.5 million after taxes ($0.04 per share of common stock) for the nine months ended September 30, 2001. In comparison, net gains associated primarily with the EnerTech funds resulted in earnings of $0.8 million after taxes ($0.01 per share of common stock) for the three months ended September 30, 2000 and $20.5 million after taxes ($0.24 per share of common stock) for the nine months ended September 30, 2000. As of September 30, 2001, the carrying amount of Conectiv's investments in marketable equity securities and the EnerTech funds were $5.4 million and $17.4 million, respectively. An unrealized net holding loss on marketable equity securities of $12.4 million after taxes is included in accumulated other comprehensive income as of September 30, 2001. Note 8. Regulatory Matters - ------- ------------------ An update to the information previously reported in Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K is presented below. New Jersey Electric Utility Industry Restructuring Final Decision and Order As previously disclosed, the New Jersey Board of Public Utilities (NJBPU) issued a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity supply business and indicated that a more detailed order would be issued at a later time. The Final Decision and Order of the NJBPU, dated March 30, 2001, for ACE was publicly posted on the NJBPU's internet website in mid-May 2001. Management believes that the substantive provisions of the Final Decision and Order are not materially different from the substantive provisions of the Summary Order filed with and discussed in Conectiv's July 15, 1999 Form 8-K filing. Petition for Securitization of Stranded Costs As previously disclosed in Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K, New Jersey's Electric Discount and Energy Competition Act (the New Jersey Act) permits securitization of stranded costs through the issuance of transition bonds. On June 25, 2001, ACE filed a petition with the NJBPU, seeking the authority to: (i) issue through a special purpose entity up to $2 billion in transition bonds in one or more series; (ii) collect from ACE's customers a non- bypassable, per kilowatt-hour (kWh) delivered, transition bond charge (TBC) sufficient to fund principal and interest payments on the bonds and related expenses and fees; (iii) collect from ACE's customers a separate non-bypassable, per kWh delivered, charge for recovery of the income tax expense associated with the revenues from the TBC; and (iv) sell "bondable transition property," which is the irrevocable right to collect TBC, to a special purpose financing entity. -11- The transition bonds are expected to be issued after the NJBPU issues a bondable stranded costs rate order (Financing Order) establishing "bondable transition property," as provided for in the New Jersey Act. To facilitate the issuance of transition bonds, ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) on March 28, 2001. Assuming that the NJBPU issues a Financing Order containing terms and conditions satisfactory to ACE, subsequent to issuance of such order, ACE Transition Funding is expected to issue transition bonds and use the proceeds to purchase the bondable transition property from ACE. The New Jersey Act requires utilities, including ACE, to use the proceeds from the sale of bondable transition property to redeem debt or equity or both, restructure purchased power contracts with non-utility generators, or otherwise reduce costs in order to decrease regulated electricity rates. NJBPU Order On Stranded Costs For Nuclear Electric Generating Units On September 17, 2001, the NJBPU issued a Decision and Order concerning the stranded costs associated with ACE's ownership interests in nuclear electric generating plants. The NJBPU determined the amount of such stranded costs eligible for recovery by ACE to be approximately $298 million, after income taxes, (or $504 million before income taxes) as of December 31, 1999, subject to further adjustments. The NJBPU also found that ACE shall have the opportunity to recover the eligible stranded costs through its market transition charge, in a time frame and manner to be determined by NJBPU. Basic Generation Service The New Jersey Act requires electric utilities to supply electricity to Basic Generation Service (BGS) customers for at least the first three years from the start of customer choice of electricity suppliers, or until July 31, 2002. On June 29, 2001, New Jersey electric utilities, including ACE, filed with the NJBPU a proposal to use an auction process to procure electricity supply for BGS customers. ACE and the other New Jersey electric utilities proposed that the BGS supply period, which would be subject to the auction, be the final year of the transition period provided for in the New Jersey Act (August 1, 2002-July 31, 2003). Under the proposal, ACE, as agent for its BGS customers, would pay for electricity from the suppliers selected by the auction process and the costs associated with this supply would be subject to the regulated cost-based, rate- recovery mechanism for BGS. ACE would continue to collect BGS revenues. Note 9. Gain on Contract Termination - ------- ---------------------------- The following disclosure updates information previously reported in Note 11 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K. Prior to June 29, 2001, Conectiv subsidiaries held a 50% interest in the Pedricktown Cogeneration Limited Partnership (Pedricktown), a non-utility electric generator. ACE had purchased electricity from Pedricktown until December 1999, when ACE paid $228.5 million to terminate its contract with Pedricktown, which realized a gain on the contract termination. Conectiv's subsidiaries share of Pedricktown's gain on the contract termination was deferred on Conectiv's balance sheet because the gain arose from a transaction with a related party and ACE had not received the Final Decision and Order of the NJBPU concerning restructuring. -12- On June 29, 2001, the 50% interest owned by Conectiv's subsidiaries in Pedricktown was redeemed for approximately $9 million and Pedricktown became owned solely by entities not affiliated with Conectiv. Also, as a result of ACE receiving the Final Decision and Order of the NJBPU, the previously deferred gain discussed above was recognized in Conectiv's earnings for the second quarter of 2001. The redemption of Conectiv's subsidiaries 50% interest in Pedricktown and recognition of the previously deferred gain resulted in a net pre-tax gain of $73.0 million ($41.4 million after income taxes or $0.50 per share of common stock) that is included in the nine-month period ended September 30, 2001. Note 10. Derivative Instruments and Hedging Activities - -------- --------------------------------------------- Conectiv implemented the provisions of Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133), as amended, effective January 1, 2001. During the three months ended September 30, 2001, for derivative instruments designated as cash flow hedges and for the related hedged transaction, (i) the net loss recognized in earnings for hedge ineffectiveness was $0.8 million before taxes ($0.5 million after taxes) and (ii) the net loss recognized in earnings for the portion of the derivative instruments' loss excluded from the assessment of hedge effectiveness was $0.2 million before taxes ($0.1 million after taxes). These losses are included in operating revenues in the Consolidated Statement of Income. During the three months ended September 30, 2001, there were no reclassifications from accumulated other comprehensive income into earnings due to forecasted energy commodity transactions no longer being probable. For the three months ended September 30, 2001, a $24.0 million loss ($14.2 million after taxes) related to energy commodity cash flow hedges was reclassified from accumulated other comprehensive income into earnings. During the nine months ended September 30, 2001, for derivative instruments designated as cash flow hedges and for the related hedged transaction, (i) the net loss recognized in earnings for hedge ineffectiveness was $1.2 million before taxes ($0.7 million after taxes) and (ii) the net gain recognized in earnings for the portion of the derivative instruments' gain excluded from the assessment of hedge effectiveness was $1.6 million before taxes ($0.9 million after taxes). These gains and losses are reported as operating revenues in the Consolidated Statement of Income. During the nine months ended September 30, 2001, a net loss of $0.8 million before taxes ($0.4 million after taxes) was reclassified from accumulated other comprehensive income into earnings because the forecasted energy commodity transactions were no longer expected to occur within the forecasted period. For the nine months ended September 30, 2001, a $32.7 million loss ($19.4 million after taxes) related to energy commodity cash flow hedges was reclassified from accumulated other comprehensive income into earnings. A $64.3 million after-tax unrealized net loss on derivative instruments designated as cash flow hedges, primarily associated with natural gas used for electric generation, is included in accumulated other comprehensive income as of September 30, 2001. Note 11. Agreements for the Sales of Electric Generating Plants - -------- ------------------------------------------------------ The following disclosure updates the information concerning agreements for the sales of electric generating plants included in Note 14 to the Consolidated Financial Statements in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K. The operating results of the electric generating plants that have been sold and the electric generating plants that are expected to be sold are included in the Energy business segment shown in Note 18 to the Consolidated Financial Statements included herein. -13- For information about the sale of ACE's interests in nuclear electric generating plants after September 30, 2001, see Note 19 to the Consolidated Financial Statements. On June 22, 2001, pursuant to the agreements for sale, the ownership interests of Delmarva Power & Light Company (DPL) and another Conectiv subsidiary in plants that had a net book value of approximately $276 million and electric generating capacity of 1,080.8 megawatts (MW) were sold to NRG Energy, Inc. (NRG) for cash proceeds of approximately $641.7 million, subject to final adjustments for inventory and other items. As a result of these sales, Conectiv's results of operations for the nine months ended September 30, 2001 include a gain of $297.1 million before taxes ($175.0 million after taxes or $2.12 per share of common stock). The $297.1 million before-tax gain is included in operating revenues in the Consolidated Statement of Income. Effective June 22, 2001, to facilitate completion of the sales of their fossil fuel-fired electric generating plants, ACE and DPL agreed to amendments to their respective agreements with NRG, and NRG Power Marketing, Inc. (NRG Power). The amendments included: (i) extension of the termination dates of the sale agreements between ACE and NRG relating to Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station, and (ii) a short-term arrangement under which NRG Power supplied part of DPL's electric energy and capacity requirements through the summer months ended August 30, 2001 and September 30, 2001, respectively. DPL's long-term agreement to purchase 500 megawatt-hours (MWh) of firm electricity per hour from NRG Power through December 31, 2005 was not changed and became effective June 22, 2001. DPL expects to assign the rights and obligations associated with this contract to Conectiv Energy Supply, Inc. (CESI), a Conectiv subsidiary. As of September 30, 2001, ACE's fossil fuel-fired electric generating plants (Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station) that are under agreements for sale to NRG had an agreed upon total sales price of approximately $178 million (before certain adjustments and expenses), a net book value of approximately $116 million and electric generating capacity of 740 MW. Any gain that may be realized on the sale of these plants is expected to reduce the amount of stranded costs to be recovered from ACE's utility customers. On October 25, 2001, the NJBPU re-opened the record for additional proceedings concerning the sale of ACE's fossil fuel-fired electric generating plants. The focus of the supplementary proceedings will be to supplement and update the record as to whether the proposed sale price of the fossil fuel-fired electric generating plants reflects the current market price of the assets and other related issues. The supplementary proceedings are scheduled to conclude in the first quarter of 2002, and the sale, if approved on terms satisfactory to ACE and NRG, would be expected to close within a reasonable time thereafter. ACE cannot predict the outcome of these proceedings. Note 12. Proceeds from Termination of Membership in Mutual Insurance Company - -------- ------------------------------------------------------------------- As discussed in Note 17 to the Consolidated Financial Statements, NEIL is a nuclear industry mutual insurance company, which provides replacement power cost coverage in the event of a major accidental outage at a nuclear power plant. NEIL members that sold their interests in nuclear electric generating plants on or before December 31, 2000 could elect prior to February 28, 2001 to receive cash for their member account balances. DPL sold its ownership interests in nuclear electric generating plants on December 29, 2000 and elected to terminate its NEIL membership on February 19, 2001. As a result of DPL's NEIL membership termination, DPL received $16.3 million ($9.8 million after taxes or $0.12 per share of common stock), which is classified as a credit in Conectiv's operation and maintenance expenses for the nine months ended September 30, 2001. -14- Note 13. Conectiv Class A Common Stock - -------- ----------------------------- For general information about Class A common stock, and information about dividend payments, conversion and redemption provisions, and allocation of consideration in a subsequent merger, refer to Note 19 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K. During the three-year period ended March 31, 2001, or the "Initial Period," the quarterly dividend on shares of Class A common stock was $0.80. As disclosed in connection with the transactions by which DPL and ACE became wholly owned subsidiaries of Conectiv (1998 Merger), Conectiv intends, following the Initial Period, subject to declaration by Conectiv's Board of Directors and the obligation of the Board of Directors to consider the financial condition and regulatory environment of Conectiv and the results of its operations, to pay annual dividends on the Class A common stock at a rate equal to 90% of annualized earnings of the Class A common stock (taking into account the notional fixed charge of $40 million per year in accordance with Conectiv's Restated Certificate of Incorporation). During the Initial Period the earnings applicable to Class A common stock were substantially less than the dividends on the Class A common stock and Conectiv's Board of Directors may consider this fact in determining the dividend rate on Class A common stock for periods subsequent to March 31, 2001. Conectiv's Board of Directors declared quarterly dividends per share of Class A common stock of $0.80 for the first quarter of 2001, $0.25 per share for the second quarter of 2001, and $0.25 per share for the third quarter of 2001, or $1.30 per share for the nine months ended September 30, 2001. For the nine months ended September 30, 2001, earnings per share of Class A common stock were $1.77, compared to dividends declared per share of Class A common stock of $1.30. For additional information concerning dividends on Class A common stock, see "Dividends on Class A Common Stock" on page II-12 of the MD&A included in Item 7 of Part II of Conectiv's 2000 Annual Report on Form 10-K. Computation of Earnings Applicable to Conectiv Class A Common Stock
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (Dollars in Thousands)(unaudited) Net earnings of ACE $ 27,399 $ 27,621 $ 58,962 $ 42,242 Exclude non-utility activities of ACE 31 46 68 92 Net earnings of Conectiv Atlantic Generation, LLC (CAG) 5,129 5,079 8,249 5,079 -------- -------- -------- -------- Net income of Atlantic Utility Group 32,559 32,746 67,279 47,413 Pro-rata portion of fixed notional charge of $40 million per year (10,000) (10,000) (30,000) (30,000) -------- -------- -------- -------- Company Net Income Attributable to the Atlantic Utility Group 22,559 22,746 37,279 17,413 Percentage applicable to Class A Common Stock 27.3% 27.3% 27.3% 27.3% -------- -------- -------- -------- Earnings applicable to Class A Common Stock $ 6,159 $ 6,210 $ 10,177 $ 4,754 ======== ======== ======== ========
-15- Summarized Combined Financial Information of ACE and CAG Income Statement Information
Three Months Ended Nine Months Ended September 30, September 30, -------------------- -------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (Dollars in Thousands)(unaudited) Operating revenues $424,917 $303,547 $971,985 $748,682 Operating income $ 70,757 $ 74,666 $162,149 $133,757 Net income $ 32,836 $ 33,234 $ 68,585 $ 48,920 Earnings applicable to common stock $ 32,528 $ 32,700 $ 67,211 $ 47,321
Balance Sheet Information
September 30, December 31, 2001 2000 ------------ ------------ (Dollars in Thousands)(unaudited) Current assets $ 276,329 $ 348,958 Noncurrent assets 2,302,437 2,239,297 ---------- ---------- Total assets $2,578,766 $2,588,255 ========== ========== Current liabilities $ 286,763 $ 308,801 Noncurrent liabilities 1,465,731 1,481,548 Preferred stock 113,681 125,181 Common stockholder's equity 712,591 672,725 ---------- ---------- Total capitalization and liabilities $2,578,766 $2,588,255 ========== ==========
Note 14. Preferred Stock - -------- --------------- Under mandatory redemption provisions, ACE redeemed 115,000 shares of its $7.80 annual dividend rate preferred stock on May 1, 2001 at the $100 per share stated value or $11.5 million in total. On September 6, 2001, DPL paid $45.0 million to purchase all 450,000 outstanding shares of its Auction Rate Preferred Stock for par value of $100 per share. During the third quarter of 2001, DPL paid $14.66 million to repurchase 148,700 shares of its Adjustable Rate Preferred Stock which had a par value of $14.87 million ($100 par value per share). -16- Note 15. Debt - -------- ---- As of September 30, 2001, Conectiv had $829.0 million of short-term debt outstanding, which had an average interest rate of 4.2%. Conectiv received authorization from the SEC on June 7, 2001 to have up to a $2.0 billion outstanding balance of short-term debt. Conectiv has a $300 million credit agreement with a five-year term that expires in February 2003 and a $735 million credit agreement that expires in April 2002. Conectiv's credit agreements require that Conectiv maintain a ratio of total indebtedness to total capitalization of 70% or less and the ratio was 62.5% as of September 30, 2001, computed in accordance with the terms of the credit agreements. DPL has a $105 million commitment under its revolving credit facility, which expires January 31, 2003, and provides liquidity for DPL's $104.8 million of Variable Rate Demand Bonds. This facility also may be used for general corporate purposes. On behalf of DPL, the Delaware Economic Development Authority issued $59.0 million of long-term bonds on May 11, 2001, and loaned the proceeds to DPL. The bonds issued included $24.5 million of variable rate (set by auction procedures) Exempt Facilities Refunding Revenue Bonds, due May 1, 2031, and $34.5 million of 4.9% Pollution Control Refunding Revenue Bonds, subject to mandatory tender on May 1, 2011 and due May 1, 2026. All of the bonds which were issued are not secured by a mortgage or security interest in property of DPL. On July 2, 2001, the proceeds from the bonds issued and additional cash were used to refund $59.0 million of long-term bonds, with a 7.2% average interest rate and maturity dates in 2018 and 2021, at 102% of their principal amounts. On May 15, 2001, ACE redeemed $10 million of 7.0%, Medium Term Notes at maturity. On June 1, 2001, DPL redeemed $1.7 million of 6.95% Amortizing First Mortgage Bonds. On August 1, 2001, ACE redeemed $30 million of 6.81% Medium Term Notes at maturity. Excluding the $59.0 million of bonds that DPL refunded on July 2, 2001, DPL repaid $253.7 million of long-term debt during the third quarter of 2001. The $253.7 million of long-term debt repurchased included $192.2 million of Medium Term Notes, with maturity dates from 2005 to 2027 and an 8.0% average interest rate, and $61.5 million of First Mortgage Bonds, with maturity dates from 2003 to 2022 and an 8.1% average interest rate. The estimated portion of debt extinguishment costs which may not be recoverable through utility rates was expensed as a $2.8 million extraordinary item, after-taxes of $1.9 million ($4.7 million before taxes). Note 16. Long-Term Purchased Power Contracts - -------- ----------------------------------- As discussed in Note 11 to the Consolidated Financial Statements, an agreement between DPL and NRG Power for DPL to purchase 500 MWh of firm electricity from NRG became effective June 22, 2001 and extends to December 31, 2005. As of September 30, 2001, the commitments of Conectiv's subsidiaries under all long- term purchased power contracts, including DPL's contract with NRG Power, aggregated to 1,921 MW of capacity and varying amounts of firm electricity per hour during each month of a given year. The commitments of Conectiv's subsidiaries for capacity and energy under long-term purchased power contracts are estimated to be as follows: $508 million in 2001; $541 million in 2002; $440 million in 2003; $425 million in 2004; and $456 million in 2005. -17- Effective September 1, 2001, DPL entered into an agreement with a Conectiv subsidiary, CESI, under which DPL purchases from CESI the electricity required for DPL to fulfill its obligation to supply default service and certain other customers. In connection with the agreement, CESI assumed the rights and obligations that DPL had under certain agreements to purchase electricity on a long-term basis. DPL's contract with CESI extends until January 31, 2002, with an automatic extension until June 30, 2004 upon the receipt of necessary regulatory approvals. Note 17. Contingencies - -------- -------------- Environmental Matters Conectiv's subsidiaries are subject to regulation with respect to the environmental effects of their operations, including air and water quality control, solid and hazardous waste disposal, and limitations on land use by various federal, regional, state, and local authorities. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. Costs may be incurred to clean up facilities found to be contaminated due to past disposal practices. Conectiv's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including whether a Conectiv subsidiary or a corporate predecessor is responsible for conditions on a particular parcel). Conectiv's current liabilities include $19.1 million as of September 30, 2001 ($9.8 million as of December 31, 2000) for potential clean-up and other costs related to sites at which a Conectiv subsidiary is a potentially responsible party or alleged to be a third party contributor. The accrued liability as of September 30, 2001 includes $13.1 million for remediation and other costs associated with environmental contamination that resulted from an oil leak at the Indian River power plant (which was sold on June 22, 2001) and reflects the terms of a related consent agreement reached with the Delaware Department of Natural Resources and Environmental Control during the second quarter of 2001. Conectiv does not expect such future costs to have a material effect on its financial position or results of operations. On July 11, 2001, the New Jersey Department of Environmental Protection (NJDEP) denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. The NJDEP has issued a stay of the denial to authorize ACE to operate Unit 1 with the current fuel until February 28, 2002 and an addendum to the permit/certificate to operate authorizing a trial burn of coal with a sulfur content less than 2.6%. Management is not able to predict the outcome of ACE's appeal. Nuclear Insurance As discussed in Note 19 to the Consolidated Financial Statements, on October 18, 2001, ACE sold its ownership interests in nuclear electric generating plants and the related nuclear fuel to PSEG Nuclear LLC (as assignee of PSEG Power LLC) and Exelon Generation Company, LLC (as assignee of PECO Energy Company). -18- In conjunction with the ownership interests of ACE in Peach Bottom Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and Hope Creek Nuclear Generating Station (Hope Creek), ACE could be assessed for a portion of any third-party claims associated with an incident at any commercial nuclear power plant in the United States which occurred before the sales of ACE's ownership interests in nuclear electric generating plants on October 18, 2001. Under the provisions of the Price Anderson Act, if third-party claims relating to such an incident exceed $200 million (the amount of primary insurance), ACE could be assessed up to $30.7 million on an aggregate basis for such third-party claims. The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance coverage of approximately $1.8 billion for each unit for loss or damage to the units, including coverage for decontamination expense and premature decommissioning. An industry mutual insurance company (NEIL) provides replacement power cost coverage to members in the event of a major accidental outage at a nuclear power plant. Under these coverages, ACE is subject to potential retrospective loss experience assessments of up to $1.9 million on an aggregate basis for events that occurred before the sales of ACE's ownership interests in nuclear electric generating plants on October 18, 2001. Other On October 24, 2000, the City of Vineland, New Jersey, filed an action in a New Jersey Superior Court to acquire ACE electric distribution facilities located within the City limits by eminent domain. The City has offered approximately $11 million for these assets, including the right to provide electric service in this area. ACE believes that, properly evaluated, the assets sought by the City are worth approximately $40 million. The City's Superior Court action has been dismissed, based on the failure to hold a referendum, and the City has appealed this decision. On November 6, 2001, the City held a referendum and City residents voted to approve the City's proposal to acquire ACE electric distribution facilities located within the City limits. Management cannot predict the outcome of this matter. Note 18. Business Segments - -------- ----------------- The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Conectiv's business segments under SFAS No. 131 are as follows: "Energy" includes (a) the generation, purchase, trading and sale of electricity, including the obligations of DPL and ACE to supply electricity to customers who do not choose an alternative electricity supplier; (b) gas and other energy supply and trading activities, (c) power plant operation services, and (d) district heating and cooling systems operation and construction services provided by CTS. "Power Delivery" includes activities related to delivery of electricity and gas to customers at regulated prices over transmission and distribution systems. "HVAC" represents heating, ventilation, and air conditioning services provided by CSI, prior to the sale of this business in the latter-half of 2000, as discussed in Note 6 to the Consolidated Financial Statements. The results of CCI's discontinued Telecommunication business have been excluded from "Income From Continuing Operations" and, accordingly, are excluded from the business segment results shown below. For information about the planned disposal of CCI's telecommunication business, see Note 5 to the Consolidated Financial Statements. -19- The operating results for business segments are evaluated based on "Earnings Before Interest and Taxes," which is generally equivalent to Operating Income plus Other Income, less certain interest charges allocated to the business segments. "Earnings Before Interest and Taxes" for the Energy business segment include the operating results of certain electric generating plants that have been sold and certain electric generating plants that are expected to be sold subsequent to receipt of required regulatory approvals, as discussed in Note 11 and Note 19 to the Consolidated Financial Statements. The "Earnings Before Interest and Taxes" of "All Other" business segments include the equity in earnings of the EnerTech funds and other investment income, which are discussed in Note 7 to the Consolidated Financial Statements. "Earnings Before Interest and Taxes" for the three months and the nine months ended September 30, 2001 exclude costs associated with the Conectiv/Pepco Merger. "Earnings Before Interest and Taxes" for the nine months ended September 30, 2001 exclude the gain on sales of electric power plants and recognition of the previously deferred gain related to termination of a contract with the Pedricktown partnership (discussed in Note 9 to the Consolidated Financial Statements). "Earnings Before Interest and Taxes" for the nine months ended September 30, 2000 exclude the $25.2 million charge for the pre-tax loss on the sale of HVAC and other businesses (discussed in Note 6 to the Consolidated Financial Statements).
Three Months Ended Three Months Ended September 30, 2001 September 30, 2000 -------------------------------- --------------------------------- Earnings Earnings Before Interest Before Interest Business Segments Revenues and Taxes Revenues and Taxes - ----------------- ------------ --------------- ------------- --------------- (Dollars in Thousands) Energy $ 1,591,065 $ 77,033 $ 1,588,592 $ 143,397 Power Delivery 216,201 78,964 212,174 83,881 HVAC - - 17,203 (2,510) All Other 1,240 (6,730) 1,923 (998) ------------ ------------- ------------- --------------- Total $ 1,808,506 (1) $ 149,267 (2) $ 1,819,892 (3) $ 223,770 (4) ============ ============= ============= ===============
(1) Intercompany revenues that are eliminated in consolidation are included in business segment revenues as follows: Energy business segment-$138,262 and Power Delivery business segment-$1,268. (2) "Earnings before interest and taxes" less $14,573 of costs associated with the Conectiv/Pepco Merger, $40,458 of interest expense and preferred stock dividends and $507 of consolidation and other adjustments equals consolidated income from continuing operations before income taxes. (3) Includes $281,700 of intercompany revenues from the Energy business segment which are eliminated in consolidation. (4) "Earnings before interest and taxes" less $55,777 of interest expense and preferred stock dividends, and $504 of consolidation adjustments equals consolidated income from continuing operations before income taxes.
Nine Months Ended Nine Months Ended September 30, 2001 September 30, 2000 -------------------------------- --------------------------------- Earnings Earnings Before Interest Before Interest Business Segments Revenues and Taxes Revenues and Taxes - ----------------- ------------ --------------- ------------- --------------- (Dollars in Thousands) Energy $ 4,592,233 $ 230,399 $ 3,598,766 $ 269,903 Power Delivery 594,752 201,092 581,553 195,321 HVAC - - 86,250 (7,315) All Other 5,642 (23,725) 5,524 20,868 ------------ ------------ ------------ --------------- Total $ 5,192,627 (1) $ 407,766 (2) $ 4,272,093 (3) $ 478,777 (4) ============ ============ ============ ===============
-20- (1) The $297,140 pre-tax gain from the sale of electric generating plants is excluded from business segment revenues. Intercompany revenues that are eliminated in consolidation are included in business segment revenues as follows: Energy business segment-$526,121; Power Delivery business segment-$1,431; All Other business segments-$188. (2) "Earnings before interest and taxes" plus the $297,140 pre-tax gain from the sale of electric generating plants and the $73,015 pre-tax gain primarily from recognition of a previously deferred gain related to termination of a contract with the Pedricktown partnership and less $14,573 of costs associated with the Conectiv/Pepco Merger, $140,312 of interest expense and preferred stock dividends and $3,093 of consolidation and other adjustments equals consolidated income from continuing operations before income taxes. (3) Includes intercompany revenues, which are eliminated in consolidation as follows: Energy business segment-$558,428 and All Other business segments-$1,502. (4) "Earnings before interest and taxes" less $163,691 of interest expense and preferred stock dividends, $1,512 of consolidation adjustments, and the $25,162 pre-tax loss on the sale of businesses (HVAC and two thermal heating and cooling system projects) equals consolidated income from continuing operations before income taxes. Note 19. Subsequent Events - -------- ----------------- On October 18, 2001, ACE sold its ownership interests in nuclear electric generating plants and the related nuclear fuel to PSEG Nuclear LLC (as assignee of PSEG Power LLC) and Exelon Generation Company, LLC (as assignee of PECO Energy Company) for approximately $30 million, subject to additional adjustment. ACE's interests in the nuclear units that were sold included a 7.51% (164 MW) interest in Peach Bottom, a 7.41% interest (167 MW) in Salem and a 5.0% interest (52 MW) in Hope Creek. Subsequent to the sale, ACE used approximately $21 million of the proceeds to repay the lease obligations related to the nuclear fuel. In accordance with the sales agreements, ACE transferred its nuclear decommissioning funds and related obligation for decommissioning to the purchasers. On October 31, 2001, Conectiv repaid a $215 million short-term bank loan at maturity and entered into a $142 million bank loan, 2.98%, which matures March 31, 2002. Subsequent to September 30, 2001, DPL redeemed $15 million of 8.96% Medium Term Notes which were scheduled to mature in 2021. -21- ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements - -------------------------- The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act) provides a "safe harbor" for forward-looking statements to encourage such disclosures without the threat of litigation, provided those statements are identified as forward-looking and are accompanied by meaningful, cautionary statements identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been made in this report. Such statements are based on management's beliefs as well as assumptions made by and information currently available to management. When used herein, the words "intend," "will," "anticipate," "estimate," "expect," "believe," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward- looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: the effects of deregulation of energy supply and the unbundling of delivery services; the ability to enter into purchased power agreements on acceptable terms; market demand and prices for energy, capacity, and fuel; weather variations affecting energy usage; operating performance of power plants; an increasingly competitive marketplace; results of any asset sales; sales retention and growth; federal and state regulatory actions; future litigation results; costs of construction; operating restrictions; increased costs and construction delays attributable to environmental regulations; nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel; and credit market concerns. Conectiv undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing list of factors pursuant to the Litigation Reform Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made prior to the effective date of the Litigation Reform Act. Common Stock Earnings Summary for Continuing Operations - ------------------------------------------------------- Earnings applicable to common stock for continuing operations were $55.8 million, or $0.68 per share of common stock (82,704,000 average shares outstanding) for the third quarter of 2001, compared to $90.5 million, or $1.09 per share of common stock (82,701,000 average shares outstanding) for the third quarter of 2000. Earnings applicable to common stock for continuing operations were $356.4 million, or $4.31 per share of common stock (82,704,000 average shares outstanding) for the nine months ended September 30, 2001, compared to $159.6 million, or $1.90 per share of common stock (84,015,000 average shares outstanding) for the nine months ended September 30, 2000. After-tax contribution to earnings per share of common stock from continuing operations
Three Months Ended Nine Months Ended September 30, September 30, -------------------- ------------------- 2001 2000 2001 2000 -------- -------- -------- -------- (1) Gain on sales of electric generating plants $ - $ - $ 2.12 $ - (2) Gain on contract termination - - 0.50 - (3) Investment income 0.10 0.01 0.04 0.24 (4) Special Charges-Loss on sale of CSI and other businesses - - - (0.28) (5) HVAC (CSI) operations - (0.03) - (0.08) (6) Conectiv/Pepco Merger costs (0.11) - (0.11) - (7) Energy, Power Delivery, and Other 0.69 1.11 1.76 2.02 -------- -------- -------- -------- $ 0.68 $ 1.09 $ 4.31 $ 1.90 ======== ======== ======== ========
-22- (1) Gain on sales of electric generating plants ------------------------------------------- On June 22, 2001, pursuant to the agreements for sale, the ownership interests of DPL and another Conectiv subsidiary in plants that had a net book value of $276 million and electric generating capacity of 1,080.8 MW were sold to NRG for approximately $641.7 million, subject to final adjustments for inventory and other items. As a result of these sales, Conectiv's results of operations for the nine months ended September 30, 2001 include a gain of $297.1 million before taxes ($175.0 million after taxes or $2.12 per share of common stock), which is included in operating revenues. For information concerning the status of the expected sale of the electric generating plants of ACE, see "Agreements for the Sales of Electric Generating Plants" within the MD&A. (2) Gain on contract termination ---------------------------- Prior to June 29, 2001, Conectiv subsidiaries held a 50% interest in Pedricktown, a non-utility electric generator. ACE had purchased electricity from Pedricktown until December 1999, when ACE paid $228.5 million to terminate its contract with Pedricktown. As a result of the contract termination, Conectiv's subsidiaries received a cash distribution from Pedricktown in December 1999 and their share of Pedricktown's gain on the contract termination was deferred on Conectiv's balance sheet because the gain arose from a transaction with a related party and ACE had not received the Final Decision and Order of the NJBPU concerning restructuring. On June 29, 2001, the 50% interest owned by Conectiv's subsidiaries in Pedricktown was redeemed for approximately $9 million. As a result of this transaction, Pedricktown is owned solely by entities not affiliated with Conectiv. Also, as a result of ACE receiving the Final Decision and Order of the NJBPU, the previously deferred gain discussed above was recognized in Conectiv's earnings. The redemption of Conectiv's subsidiaries 50% interest in Pedricktown and recognition of the previously deferred gain resulted in a net pre-tax gain of $73.0 million ($41.4 million after income taxes or $0.50 per share of common stock) for the nine-month period ended September 30, 2001. (3) Investment income ----------------- Investment income associated with the EnerTech funds, marketable securities, and other investments resulted in earnings of $8.5 million after taxes ($0.10 per share of common stock) for the three months ended September 30, 2001 and $3.5 million after taxes ($0.04 per share of common stock) for the nine months ended September 30, 2001. In comparison, net gains associated primarily with the EnerTech funds resulted in earnings of $0.8 million after taxes ($0.01 per share of common stock) for the three months ended September 30, 2000 and $20.5 million after taxes ($0.24 per share of common stock) for the nine months ended September 30, 2000. As of September 30, 2001, the carrying amounts of Conectiv's investments in marketable equity securities and the EnerTech funds were $5.4 million and $17.4 million, respectively. An unrealized net holding loss on marketable equity securities of $12.4 million after taxes is included in accumulated other comprehensive income as of September 30, 2001. -23- (4) Special Charges-Loss on sale of CSI and other businesses -------------------------------------------------------- Operating results for the nine months ended September 30, 2000 include "Special charges" of $25.2 million before income taxes, or $23.4 million after income taxes ($0.28 per share of common stock) for losses on the sales of CSI and two thermal heating and cooling system projects. (5) HVAC (CSI) operations --------------------- Prior to the sale of CSI in mid- to late-2000, CSI's operations resulted in losses that decreased earnings per share of common stock by $0.03 and $0.08 for the three months and nine months ended September 30, 2000, respectively. (6) Conectiv/Pepco Merger costs --------------------------- Conectiv incurred costs directly related to the planned Conectiv/Pepco Merger of $8.8 million after taxes ($0.11 per share of common stock) and $9.5 million after taxes ($0.11 per share of common stock) for the three and nine months ended September 30, 2001, respectively. (7) Energy, Power Delivery, and Other --------------------------------- The contribution to earnings per share of common stock outstanding by "Energy, Power Delivery, and Other" decreased by $0.42 for the third quarter of 2001 compared to the third quarter of 2000 and by $0.26 for the nine months ended September 30, 2001 compared to the nine months ended September 30, 2000. These decreases were mainly attributed to the Energy business segment. As disclosed in Note 18 to the Consolidated Financial Statements, "Earnings Before Interest and Taxes" for the Energy business segment decreased by $66.4 million and $39.5 million for the three and nine months ended September 30, 2001, respectively. Earnings of the Energy business segment were adversely affected by higher average energy costs experienced in supplying electricity to DPL's default electric service customers, reflecting the sales of DPL's fossil fuel-fired electric generating plants on June 22, 2001 and nuclear electric generating plants on December 29, 2000. ACE also incurred higher costs in supplying its BGS customers as a result of purchasing more power; however, ACE's earnings were not affected because ACE's revenues reflect BGS costs due to the regulated cost-based, rate-recovery mechanism for BGS. The earnings decreases also reflect the effect of lower average market prices for natural gas, which resulted in lower earnings from gas trading and hedging losses for natural gas burned by electric generating plants. Earnings for the three and nine months ended September 30, 2001 were favorably impacted by lower interest expense, primarily a result of debt redemptions and lower rates on variable rate debt. For the nine month period, the earnings decrease was mitigated by gains on coal trading, and receipt of $16.3 million ($9.8 million after taxes, or $0.12 per share of common stock) for DPL's termination of its membership in a nuclear industry mutual insurance company (NEIL). Conectiv's participation in energy markets results in exposure to commodity market risk. Conectiv has controls in place that are intended to keep risk exposures within certain management-approved risk tolerance levels. For additional information concerning commodity market risk, see "Item 3. Quantitative and Qualitative Disclosures About Market Risk," included herein. -24- Discontinued Telecommunication Operations - ----------------------------------------- As discussed in Note 5 to the Consolidated Financial Statements, Conectiv reached an agreement (Telecommunication Asset Purchase Agreement) on June 4, 2001 to sell substantially all of the assets of CCI's telecommunication business to Cavalier Telephone, L.L.C. for $20 million, subject to certain adjustments. The operating results for CCI's telecommunication business, including previously reported periods, are classified in Conectiv's Consolidated Statements of Income as "Discontinued Telecommunication Operations." Conectiv's earnings for the nine months ended September 30, 2001 include the estimated loss on the disposal of the telecommunication business segment of $177.2 million before taxes ($118.8 million after taxes or $1.44 per share of common stock), which includes a $13.7 million after-tax provision for operating losses during the period expected to elapse through completion of the transaction (June 2001 through December 2001). The after-tax operating loss of the discontinued telecommunication operations decreased earnings applicable to common stock as follows: (i) third quarter of 2000-$7.1 million or $0.08 per share of common stock; (ii) nine months ended September 30, 2001-$7.7 million or $0.09 per share of common stock; and (iii) nine months ended September 30, 2000-$23.9 million or $0.28 per share of common stock. For the three months ended September 30, 2001 and 2000, revenues from the discontinued telecommunication operations were $12.6 million and $13.4 million, respectively. For the nine months ended September 30, 2001 and 2000, revenues from the discontinued telecommunication operations were $39.9 million and $37.1 million, respectively. Extraordinary Item - ------------------ During the third quarter of 2001, DPL repaid $253.7 million of long-term debt and refinanced $59.0 million of long-term bonds. The estimated portion of debt extinguishment costs which may not be recoverable through utility rates was expensed as a $2.8 million extraordinary item, after-taxes of $1.9 million ($4.7 million before taxes). Dividends on Common Stock - ------------------------- Conectiv's Board of Directors declared quarterly dividends per share of common stock of $0.22 for each of the first three quarters of 2001, or $0.66 for the nine months ended September 30, 2001. Dividends declared per share of common stock for the nine months ended September 30, 2001 represented approximately 39% of earnings from continuing operations per share of common stock, adjusted to exclude the gain on sales of electric generating plants ($2.12 per share of common stock) and gain on the termination of a contract with Pedricktown ($0.50 per share of common stock). For additional information concerning dividends on common stock, see "Dividends on Common Stock" on page II-10 in the MD&A included in Item 7 of Part II of Conectiv's 2000 Annual Report on Form 10-K. -25- Class A Common Stock Earnings Summary - ------------------------------------- As provided in Conectiv's Restated Certificate of Incorporation, Class A common stock has an interest in earnings of the Atlantic Utility Group (AUG) in excess of a notional fixed charge of $40 million per year. The AUG includes the assets and liabilities of the electric generation, transmission, and distribution businesses of ACE that existed on August 9, 1996 and were regulated by the NJBPU. Accordingly, the AUG includes the earnings of the power plants that were transferred on July 1, 2000, from ACE to Conectiv Atlantic Generation, LLC (CAG). If the AUG earns less than the pro-rata portion of the annual fixed notional charge, a loss will be applicable to Class A common stock. For additional information concerning the computation of earnings applicable to Class A common stock and other general information concerning Class A common stock, including information about dividend payments, conversion and redemption provisions, and allocation of consideration in a subsequent merger, refer to Note 19 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K. Earnings applicable to Class A common stock were $6.2 million, or $1.07 per share of Class A common stock, for the third quarter of 2001, compared to $6.2 million, or $1.08 per share of Class A common stock, for the third quarter of 2000. For the nine months ended September 30, 2001, earnings applicable to Class A common stock were $10.2 million, or $1.77 per share of Class A common stock, compared to a $4.8 million, or $0.83 per share of Class A common stock, for the nine months ended September 30, 2000. The increase in earnings per share of Class A common stock for the nine-month period was mainly due to higher volumes of electricity sold and delivered, reflecting positive effects on sales of weather variances and growth in the number of customers. Dividends on Class A Common Stock - --------------------------------- During the three-year period ended March 31, 2001, or the "Initial Period," the quarterly dividend on shares of Class A common stock was $0.80. As disclosed in connection with the transactions by which DPL and ACE became wholly owned subsidiaries of Conectiv (1998 Merger), Conectiv intends, following the Initial Period, subject to declaration by Conectiv's Board of Directors and the obligation of the Board of Directors to consider the financial condition and regulatory environment of Conectiv and the results of its operations, to pay annual dividends on the Class A common stock at a rate equal to 90% of annualized earnings of the Class A common stock (taking into account the notional fixed charge of $40 million per year in accordance with Conectiv's Restated Certificate of Incorporation). During the Initial Period the earnings applicable to Class A common stock were substantially less than the dividends on the Class A common stock and Conectiv's Board of Directors may consider this fact in determining the dividend rate on Class A common stock for periods subsequent to March 31, 2001. Conectiv's Board of Directors declared quarterly dividends per share of Class A common stock of $0.80 for the first quarter of 2001, $0.25 per share for the second quarter of 2001, and $0.25 per share for the third quarter of 2001, or $1.30 per share for the nine months ended September 30, 2001. For the nine months ended September 30, 2001, earnings per share of Class A common stock were $1.77, compared to dividends declared per share of Class A common stock of $1.30. For additional information concerning dividends on Class A common stock, see "Dividends on Class A Common Stock" on page II-12 of the MD&A included in Item 7 of Part II of Conectiv's 2000 Annual Report on Form 10-K. -26- Electricity Supply for DPL Default Service Customers - ---------------------------------------------------- Effective September 1, 2001, DPL entered into an agreement with a Conectiv subsidiary, CESI, under which DPL purchases from CESI the electricity required for DPL to fulfill its obligation to supply default service and certain other customers. In connection with the agreement, CESI assumed the rights and obligations that DPL had under certain agreements to purchase electricity on a long-term basis. DPL's contract with CESI extends until January 31, 2002, with an automatic extension until June 30, 2004 upon the receipt of necessary regulatory approvals. The agreement is intended to increase CESI's Energy business and sharpen DPL's focus on the Power Delivery business. Agreements for the Sales of Electric Generating Plants - ------------------------------------------------------ Fossil Fuel-Fired Electric Generating Plants Effective June 22, 2001, ACE amended its sales agreements with NRG to extend the termination dates of the sale agreements for Deepwater Station, Conemaugh and Keystone Stations and B.L. England Station. As of September 30, 2001, ACE's fossil fuel-fired plants that are under agreements for sale had an agreed upon total sales price of approximately $178 million (before certain adjustments and expenses), a net book value of approximately $116 million and electric generating capacity of 740 MW. Any gain that may be realized on the sale of these plants is expected to reduce the amount of stranded costs to be recovered from ACE's utility customers. On October 25, 2001, the NJBPU re-opened the record for additional proceedings concerning the sale of ACE's fossil fuel-fired electric generating plants. The focus of the supplementary proceedings will be to supplement and update the record as to whether the proposed sale price of the fossil fuel-fired electric generating plants reflects the current market price of the assets and other related issues. The supplementary proceedings are scheduled to conclude in the first quarter of 2002, and the sale, if approved on terms satisfactory to ACE and NRG, would be expected to close within a reasonable time thereafter. ACE cannot predict the outcome of these proceedings. Nuclear Electric Generating Plants On October 18, 2001, ACE sold its ownership interests in nuclear electric generating plants and the related nuclear fuel to PSEG Nuclear LLC (as assignee of PSEG Power LLC) and Exelon Generation Company, LLC (as assignee of PECO Energy Company) for approximately $30 million, subject to additional adjustment. ACE's interests in the nuclear units that were sold included a 7.51% (164 MW) interest in Peach Bottom, a 7.41% interest (167 MW) in Salem and a 5.0% interest (52 MW) in Hope Creek. Subsequent to the sale, ACE used approximately $21 million of the proceeds to repay the lease obligations related to the nuclear fuel. In accordance with the sales agreements, ACE transferred its nuclear decommissioning funds and related obligation for decommissioning to the purchasers. -27- Mid-Merit Electric Generation - ----------------------------- The following discussion updates the "Mid-Merit Electric Generation" disclosure, which begins on page II-15 in the MD&A included in Item 7 of Part II of Conectiv's 2000 Annual Report on Form 10-K. Conectiv is increasing its mid-merit electric generating capacity by building combined cycle units, which are constructed with combustion turbines, waste heat recovery boilers and a steam turbine. In 2000, Conectiv ordered 21 combustion turbines, which, with additional equipment, could be configured into 8 combined cycle plants. Each combined cycle plant would have approximately 550 MW of capacity and allow Conectiv to add up to 4,400 MW of electric generating capacity, representing a potential total investment of about $2.6 billion. Under an accelerated schedule, construction would occur in phases and would be completed by the end of 2004, with delivery of combustion turbines occurring in phases through 2003. Conectiv is actively developing sites for combined cycle plants within the region of the PJM Interconnection, L.L.C. (PJM) and, as discussed below, is currently constructing a new plant at the Hay Road site. Three new combustion turbines at the Hay Road site became operational during June through August of 2001, adding approximately 360 MW of capacity. The waste heat recovery boiler and steam turbine needed for the new combined cycle operation at Hay Road are expected to be completed by the third quarter of 2002. After completion, this combined cycle plant will have approximately 550 MW of capacity. In May 2001, Conectiv purchased a 50% interest in a partnership that owns an 80 MW co-generation plant in North East, Pennsylvania. The number of combined cycle plants ultimately built under Conectiv's mid-merit construction program and the timing of construction will depend on various factors including the following: growth in demand for electricity; construction of generating units by competitors; the availability and price of fuel; availability of suitable financing; possible construction delays; and the timing and ability to obtain required permits and licenses. The construction program could also potentially be affected by the planned Conectiv / Pepco Merger. Conectiv's Board of Directors has authorized cumulative expenditures of approximately $860 million for new mid-merit construction, including (i) $650 million of expenditures expected to be required to complete construction of 2 combined cycle plants (utilizing a total of 6 combustion turbines) at Hay Road and another site, and (ii) $210 million of expenditures related to building up to 6 additional combined cycle plants, including payments on 15 combustion turbines (total commitment of $466 million), other equipment, and sites necessary for construction of these 6 combined cycle plants. Management expects to fund these and all other future capital requirements from internally generated funds, leasing, external financings (including securitization of stranded costs), and proceeds from the sales of electric generating units. Should Conectiv choose not to build all 8 combined cycle plants, then Conectiv would attempt to sell some or all of its related investment, including combustion turbines, other equipment and site development. The ability to find a buyer and the amount of the proceeds from such a sale would be determined by market conditions. The current market for combustion turbines is uncertain due to a weaker economy which has reduced demand for combustion turbines in the region served by the PJM and other regions throughout the United States. The units would be portable to other markets. Through September 30, 2001, Conectiv had invested approximately $147 million in the 15 combustion turbines, other equipment, and sites needed to build up to 6 combined cycle plants in addition to the 2 combined cycle plants for which full funding has been approved. -28- New Jersey Electric Utility Industry Restructuring - -------------------------------------------------- Final Decision and Order As previously disclosed, the NJBPU issued a Summary Order to ACE in July 1999 concerning restructuring ACE's electricity supply business and indicated that a more detailed order would be issued at a later time. The Final Decision and Order of the NJBPU, dated March 30, 2001, for ACE was publicly posted on the NJBPU's internet website in mid-May 2001. Management believes that the substantive provisions of the Final Decision and Order are not materially different from the substantive provisions of the Summary Order filed with and discussed in Conectiv's July 15, 1999 Form 8-K filing. Petition for Securitization of Stranded Costs As previously disclosed in Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K, New Jersey's Electric Discount and Energy Competition Act (the New Jersey Act) permits securitization of stranded costs through the issuance of transition bonds. On June 25, 2001, ACE filed a petition with the NJBPU, seeking the authority to: (i) issue through a special purpose entity up to $2 billion in transition bonds in one or more series; (ii) collect from ACE's customers a non- bypassable, per kilowatt-hour (kWh) delivered, transition bond charge (TBC) sufficient to fund principal and interest payments on the bonds and related expenses and fees; (iii) collect from ACE's customers a separate non-bypassable, per kWh delivered, charge for recovery of the income tax expense associated with the revenues from the TBC; and (iv) sell "bondable transition property," which is the irrevocable right to collect TBC, to a special purpose financing entity. The transition bonds are expected to be issued after the NJBPU issues a bondable stranded costs rate order (Financing Order) establishing "bondable transition property," as provided for in the New Jersey Act. To facilitate the issuance of transition bonds, ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) on March 28, 2001. Assuming that the NJBPU issues a Financing Order containing terms and conditions satisfactory to ACE, subsequent to issuance of such order, ACE Transition Funding is expected to issue transition bonds and use the proceeds to purchase the bondable transition property from ACE. The New Jersey Act requires utilities, including ACE, to use the proceeds from the sale of bondable transition property to redeem debt or equity or both, restructure purchased power contracts with non-utility generators, or otherwise reduce costs in order to decrease regulated electricity rates. NJBPU Order On Stranded Costs For Nuclear Electric Generating Units On September 17, 2001, the NJBPU issued a Decision and Order concerning the stranded costs associated with ACE's ownership interests in nuclear electric generating plants. The NJBPU determined the amount of such stranded costs eligible for recovery by ACE to be approximately $298 million, after income taxes, (or $504 million before income taxes) as of December 31, 1999, subject to further adjustments. The NJBPU also found that ACE shall have the opportunity to recover the eligible stranded costs through its market transition charge, in a time frame and manner to be determined by NJBPU. -29- Basic Generation Service The New Jersey Act requires electric utilities to supply electricity to Basic Generation Service (BGS) customers for at least the first three years from the start of customer choice of electricity suppliers, or until July 31, 2002. On June 29, 2001, New Jersey electric utilities, including ACE, filed with the NJBPU a proposal to use an auction process to procure electricity supply for BGS customers. ACE and the other New Jersey electric utilities proposed that the BGS supply period, which would be subject to the auction, be the final year of the transition period provided for in the New Jersey Act (August 1, 2002-July 31, 2003). Under the proposal, ACE, as agent for its BGS customers, would pay for electricity from the suppliers selected by the auction process and the costs associated with this supply would be subject to the regulated cost-based, rate- recovery mechanism for BGS. ACE would continue to collect BGS revenues. Electric Revenues - -----------------
Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------ 2001 2000 2001 2000 --------- -------- -------- -------- (Dollars in millions) Regulated electric revenues $ 716.6 $559.6 $1,750.8 $1,510.8 Non-regulated electric revenues 508.4 355.4 1,193.5 719.4 --------- -------- -------- -------- Total electric revenues $1,225.0 $915.0 $2,944.3 $2,230.2 ========= ======== ======== ========
The table above shows the amounts of electric revenues earned that are subject to price regulation (regulated) and that are not subject to price regulation (non-regulated). "Regulated electric revenues" include revenues for delivery (transmission and distribution) service and electricity supply service within the service areas of DPL and ACE. The gross margin earned (revenues less related energy and capacity costs) from electric revenues decreased by $66.9 million and $76.7 million for the three- and nine-month periods, respectively. These decreases were mainly due to lower gross margins earned on "regulated electric revenues," which resulted from higher average energy costs incurred in supplying the default service customers of DPL. Regulated Electric Revenues "Regulated electric revenues" increased by $157.0 million to $716.6 million for the three months ended September 30, 2001, from $559.6 million for the three months ended September 30, 2000. "Regulated electric revenues" increased by $240.0 million to $1,750.8 million for the nine months ended September 30, 2001, from $1,510.8 million for the nine months ended September 30, 2000. Details of the variances in "regulated electric revenues" are shown below.
Increase (Decrease) in Regulated Electric Revenues --------------------------- Three Months Nine Months ------------- ------------ (Dollars in millions) Additional revenues recognized under the regulated cost-based, rate-recovery mechanism for BGS $ 71.2 $120.9 Fewer customers choosing alternative electricity suppliers 39.2 74.7 Retail sales volume and other variances 46.6 44.4 ------ ------ $157.0 $240.0 ====== ======
-30- Non-regulated electric revenues "Non-regulated electric revenues" result primarily from electricity trading activities, strategic generation, (the sale of electricity, capacity and ancillary services from deregulated electric generating plants), and competitive retail sales. Conectiv began exiting its competitive retail energy business in late-2000, which has caused revenues from this activity to decrease. For the nine months ended September 30, 2001, the composition of "non-regulated electric revenues" was approximately 62% electricity trading, 36% strategic generation and 2% competitive retail sales. "Non-regulated electric revenues" increased by $153.0 million, to $508.4 million for the three months ended September 30, 2001 from $355.4 million for the three months ended September 30, 2000. "Non-regulated electric revenues" increased by $474.1 million, to $1,193.5 million for the nine months ended September 30, 2001 from $719.4 million for the nine months ended September 30, 2000. The amount of gross margin earned in the current-year periods remained about the same as the prior-year periods despite higher volumes due to reduced gross margin percentages attributed to higher costs of natural gas (including hedging costs) burned by electric generating plants. The "non-regulated electric revenue" increases were primarily attributed to increased volumes of electricity traded, and also reflect higher trading prices. Other significant "non-regulated electric revenue" variances for the nine-month periods include higher strategic generation revenues, largely offset by lower competitive retail energy sales. Part of the strategic generation sales increase occurred because more of last year's output from the deregulated power plants was used to supply the default service customers of DPL. Gas Revenues - ------------
Three Months Ended Nine Months Ended September 30, September 30, ---------------- ------------------ 2001 2000 2001 2000 ------ ------ -------- -------- (Dollars in millions) Regulated gas revenues $ 16.3 $ 12.9 $ 119.6 $ 79.9 Non-regulated gas revenues 309.5 479.9 1,209.2 989.9 ------ ------ -------- -------- Total gas revenues $325.8 $492.8 $1,328.8 $1,069.8 ====== ====== ======== ========
DPL earns gas revenues from on-system natural gas sales, which generally are subject to price regulation, and from the transportation of natural gas for customers. Conectiv subsidiaries also trade and sell natural gas in transactions that are not subject to price regulation. The table above shows the amounts of gas revenues earned from sources that were subject to price regulation (regulated) and that were not subject to price regulation (non- regulated). The gross margin from gas revenues (gas revenues less gas purchased) decreased by $15.9 million and $25.6 million for the three- and nine-month periods, respectively, mainly due to gas trading losses which decreased the margins earned from "non-regulated gas revenues." "Regulated gas revenues" increased by $3.4 million and $39.7 million for the three months and nine months ended September 30, 2001, respectively, mainly due to customer rate increases for recovery of higher costs of purchased natural gas. DPL's gross margin from supplying regulated gas customers is insignificant, so earnings were not affected by the additional revenues from the rate increase under the gas rate clause. -31- "Non-regulated gas revenues" decreased by $170.4 million, to $309.5 million for the three months ended September 30, 2001 from $479.9 million for the three months ended September 30, 2000. "Non-regulated gas revenues" increased by $219.3 million, to $1,209.2 million for the nine months ended September 30, 2001 from $989.9 million for the nine months ended September 30, 2000. These revenue increases were primarily due to fluctuations in the average market prices of natural gas. Other Services Revenues - ------------------------ Other services revenues were comprised of the following:
Three Months Ended Nine Months Ended September 30, September 30, ---------------- --------------- 2001 2000 2001 2000 ------ ------ ------ ------ (Dollars in millions) Petroleum sales and trading $ 81.6 $ 80.3 $268.0 $242.1 HVAC -- 17.2 -- 86.3 Operation of third parties' power plants 20.3 14.5 52.9 35.3 Coal trading 1.4 -- 23.4 -- All Other 14.9 18.4 47.5 48.5 ------ ------ ------ ------ Total $118.2 $130.4 $391.8 $412.2 ====== ====== ====== ======
"Other services" revenues decreased $12.2 million for the three-month period and $20.4 million for the nine-month period mainly due to the revenue loss associated with the sale of the HVAC business, partly offset by revenue increases for other business activities. For the three and nine months ended September 30, 2001, revenues increased from the operation of more power plants for third-parties. The nine months ended September 30, 2001 also reflects increases from coal trading and petroleum sales and trading. The gross margin from "other services" revenues (revenues less costs of sales) increased $10.4 million for the nine months ended September 30, 2001 primarily due to gains on coal trading, partly offset by a decrease due to the sale of the HVAC business. Operating Expenses - ------------------- Electric Fuel and Purchased Energy and Capacity "Electric fuel and purchased energy and capacity" increased by $376.9 million to $894.8 million for the third quarter of 2001, from $517.9 million for the third quarter of 2000. "Electric fuel and purchased energy and capacity" increased by $790.8 million to $2,026.1 million for the nine months ended September 30, 2001, from $1,235.3 million for the nine months ended September 30, 2000. These increases were primarily due to more purchased power at higher average prices for expanded electricity trading activities and for electricity supplied to the default service customers of DPL and BGS customers of ACE. Losses on hedging the cost of natural gas burned in electric generating plants also contributed to the increases. -32- Gas Purchased Gas purchased decreased by $151.1 million to $321.7 million for the third quarter of 2001, from $472.8 million for the third quarter of 2000. Gas purchased increased by $284.5 million to $1,304.4 million for the nine months ended September 30, 2001, from $1,019.9 million for the nine months ended September 30, 2000. These variances were mainly due to fluctuations in the average market prices of natural gas purchased for non-regulated trading activities. The increases also reflect higher costs for natural gas supplied to customers in DPL's regulated service area. Other Services' Cost of Sales Other service's cost of sales decreased $10.6 million in the third quarter of 2001 primarily due to the sale of the HVAC business, partly offset by cost increases from more power plant operating services. Other services' cost of sales decreased $30.8 million for the nine months ended September 30, 2001 mainly due to the sale of the HVAC business, partly offset by cost increases from more power plant operating services provided and more petroleum purchased for resale. Special Charges Special charges of $25.2 million before income taxes ($23.4 million after income taxes or $0.28 per share of common stock), from losses on the sales of the HVAC business and two thermal heating and cooling system projects, are included in operating results for the nine months ended September 30, 2000. Operation and Maintenance Expenses Operation and maintenance expenses for the third quarter of 2001 increased by $6.8 million primarily due to costs related to the planned Conectiv/Pepco Merger and higher pension expense, partly offset by decreases related to the sale of the HVAC business and the sales of DPL's ownership interests in nuclear and fossil fuel-fired electric generating plants. Operation and maintenance expenses for the nine months ended September 30, 2001 decreased by $41.1 million primarily due to a credit for the proceeds received by DPL for termination of its membership in NEIL ($16.3 million), sales of the HVAC business, and the sales of DPL's ownership interests in nuclear and fossil fuel-fired electric generating plants, partly offset by costs related to the planned Conectiv/Pepco Merger and higher pension expense. Depreciation and Amortization Depreciation and amortization expenses decreased by $8.3 million for the three- month period and $12.4 million for the nine-month period primarily due to the sales of DPL's ownership interests in nuclear and fossil fuel-fired electric generating plants and expiration of the amortization of a regulatory asset, partly offset by higher depreciation expense for improvements to the electric transmission and distribution systems. -33- Other Income - ------------- Other income decreased by $6.3 million for the third quarter of 2001 mainly due to lower pre-tax income associated with the EnerTech funds. As discussed in Note 9 to the Consolidated Financial Statements, other income for the nine months ended September 30, 2001 includes a $73.0 million pre-tax gain from the redemption of the 50% interest of Conectiv's subsidiaries in Pedricktown and recognition of the previously deferred gain associated with termination of the ACE's purchased power contract with Pedricktown. Excluding the $73.0 million pre-tax gain, other income decreased $55.9 million for the nine months ended September 30, 2001, primarily due to lower pre-tax income from the EnerTech funds and investment losses. The decrease for the nine-month period also reflects prior year earnings from a non-utility generation joint venture, a prior year gain on the sale of an investment in a leveraged lease, and prior year earnings from jointly-owned projects of CTS which were sold. Interest Expense - ---------------- Interest expense, net of capitalized amounts, decreased $14.1 million and $26.6 million for the three-months and nine-months ended September 30, 2001, respectively. These decreases were primarily due to lower interest rates on short-term debt and variable rate long-term debt, redemptions and refinancings of debt, including $253.7 million of debt repaid by DPL in the third quarter of 2001, increased capitalization of interest expense due to higher levels of construction work-in-progress associated with mid-merit electric generation plants, and other decreases. Income Taxes - ------------ Income taxes decreased $39.0 million for the third quarter of 2001 mainly due to lower income before income taxes, and also due to a lower effective income tax rate attributed to resolution of certain income tax matters. For the nine months ended September 30, 2001, income taxes increased $129.4 million primarily due to higher pre-tax income from continuing operations. Liquidity and Capital Resources - -------------------------------- Due to $42.5 million of cash provided by operating activities, $226.7 million of cash provided by investing activities, and $343.0 million of cash used by financing activities, cash and cash equivalents decreased by $73.8 million during the nine months ended September 30, 2001. Net cash flows provided by operating activities decreased by $246.7 million to $42.5 million of cash provided for the nine months ended September 30, 2001, from $289.2 million of cash provided for the nine months ended September 30, 2000. The $246.7 million decrease was mainly due to prior year income tax refunds received, working capital requirements for energy trading and hedging, and higher costs incurred in supplying the BGS customers of ACE and the default electric service customers of DPL. Mainly due to higher costs paid to supply BGS, deferred energy supply costs increased to a $120.3 million asset as of September 30, 2001, from a net $12.6 million liability as of December 31, 2000. -34- Cash Flows From Investing Activities for the nine months ended September 30, 2001 provided $226.7 million of net cash primarily due to $641.7 million of cash provided by proceeds received from the sale of fossil fuel-fired electric generating plants on June 22, 2001 and $416.4 million of cash used for capital expenditures. Approximately $260 million of the $416.4 million of capital expenditures were for the capital requirements of Conectiv's mid-merit electric generation strategy, including payments for combustion turbines. The remainder of the capital expenditures were primarily for the electric transmission and distribution systems of ACE and DPL. Cash Flows From Financing Activities for the nine months ended September 30, 2001 used $343.0 million of net cash mainly due to redemptions of long-term debt and preferred stock and the payment of common dividends. DPL issued $59.0 million of refunding bonds ($24.5 million variable rate and $34.5 million 4.9% fixed rate) in May 2001 and used the proceeds on July 2, 2001 to refund $59.0 million of bonds (7.2% average interest rate). DPL also repaid $253.7 million of long-term debt during the third quarter of 2001, including $192.2 million of Medium Term Notes, with maturity dates from 2005 to 2027 and an 8.0% average interest rate, and $61.5 million of First Mortgage Bonds, with maturity dates from 2003 to 2022 and an 8.1% average interest rate. Debt redemptions during the nine months ended September 30, 2001, also included $40 million of ACE's Medium Term Notes, with 6.81%-7.0% annual interest rates. During the nine months ended September 30, 2001, financing activities also used cash for the payment of $65.4 million of dividends to Conectiv stockholders and to redeem $71.37 million of preferred stock, which included $45.0 million of DPL's Auction Rate Preferred Stock, $14.87 million of DPL's Adjustable Rate Preferred Stock, and $11.5 million of ACE's preferred stock ($7.80 annual dividend per each $100 share). Conectiv and its subsidiaries raised $119.5 million of cash by issuing short- term debt during the nine months ended September 30, 2001, which resulted in a short-term debt balance of $829.0 million as of September 30, 2001. Conectiv has a $300 million credit agreement with a five-year term that expires in February 2003 and a $735 million credit agreement that expires in April 2002. Conectiv's capital structure including short-term debt and current maturities of long-term debt, expressed as a percentage of total capitalization, is shown below. September 30, December 31, 2001 2000 ------------- ------------ Common stockholders' equity 29.4% 26.2% Preferred stock of subsidiaries 5.0% 6.4% Long-term debt and variable rate demand bonds 41.0% 49.2% Short-term debt and current maturities of long-term debt 24.6% 18.2% -35- Conectiv's ratio of earnings to fixed charges under the SEC Method is shown below. See Exhibit 12, Ratio of Earnings to Fixed Charges, for additional information. 9 Months Year Ended December 31, Ended ----------------------------- September 30, 2001 2000 1999 1998 1997 1996 ------------------ ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method) 4.50 2.33 1.98 2.38 2.63 2.83 New Accounting Standards - ------------------------ On July 20, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires that business combinations initiated after June 30, 2001 be accounted for under the purchase method of accounting and does not permit the use of the pooling of interests method of accounting for business combinations. Under SFAS No. 142, goodwill that has not been included in the rates of a regulated utility subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," will no longer be amortized. Most goodwill on Conectiv's Consolidated Balance Sheet has not been included in the rates of Conectiv's regulated utility businesses. Intangible assets other than goodwill which have finite useful lives will continue to be amortized under SFAS No. 142. Goodwill and other intangible assets will be tested periodically for impairment. If an impairment occurs, then a charge to earnings would result. An impairment of goodwill that results from adoption of SFAS No. 142 will be recognized as the cumulative effect of a change in accounting principle. Under SFAS No. 142, historical operating results will not be restated; instead pro forma earnings, adjusted to exclude goodwill amortization, will be disclosed. SFAS No. 142 will be effective January 1, 2002 for companies with a calendar fiscal year, including Conectiv. On August 9, 2001, the FASB issued SFAS No. 143, "Accounting For Asset Retirement Obligations," which establishes the accounting requirements for asset retirement obligations (ARO) associated with tangible long-lived assets. If a legal obligation for an ARO exists, then SFAS No. 143 requires recognition of a liability, capitalization of the cost associated with the ARO, and allocation of the capitalized cost to expense. The initial measurement of an ARO is based on the fair value of the obligation, which may result in a gain or loss upon the settlement of the ARO. If the requirements of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," are met, a regulated entity shall also recognize a regulatory asset or liability for timing differences between financial reporting and rate-making in the recognition of the period costs associated with an ARO. SFAS No. 143 will be effective January 1, 2003 for companies with a calendar fiscal year, including Conectiv. Upon adoption of SFAS No. 143, the difference between the net amount recognized in the balance sheet under SFAS No. 143 and the net amount previously recognized in the balance sheet will be recognized as the cumulative effect of a change in accounting principle. In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" which requires that one accounting model be used for long-lived assets to be disposed of by sale and broadens discontinued operations to include more disposal transactions. Under SFAS No. 144, operating losses of discontinued operations are recognized in the period in which they occur, instead of accruing future operating losses before they occur. SFAS No. 144 will become effective on January 1, 2002. Conectiv is currently evaluating SFAS No. 141, 142, 143, and 144 and cannot predict the impact that these standards may have on its financial position or results of operations; however, any such impact could be material. -36- Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------- ---------------------------------------------------------- As previously disclosed under "Quantitative and Qualitative Disclosures About Market Risk" on pages II-26 to II-27 of Conectiv's 2000 Annual Report on Form 10-K, Conectiv is subject to market risks, including interest rate risk, equity price risk, and commodity price risk. An update appears below. Interest Rate Risk Conectiv is subject to the risk of fluctuating interest rates in the normal course of business. Conectiv manages interest rates through the use of fixed and, to a lesser extent, variable rate debt. The effect of a hypothetical 10% change in interest rates on the annual interest costs for short-term and variable rate debt was approximately $4.0 million as of September 30, 2001 and $6.1 million as of December 31, 2000. The decrease in the effect of a 10% change in interest rates was mainly due to lower short-term interest rates. Equity Price Risk As discussed in Note 7 to the Consolidated Financial Statements included herein and in Note 8 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2000 Annual Report on Form 10-K, Conectiv holds investments in marketable equity securities and venture capital funds, which invest in securities of technology and service companies related to energy, utility, and communication industries. Conectiv is exposed to equity price risk through the securities held by the venture capital funds and the marketable equity securities held directly by Conectiv. The potential change in the fair value of these investments resulting from a hypothetical 10% change in quoted securities prices was approximately $4.2 million as of September 30, 2001 compared to $4.0 million as of December 31, 2000. Due to the nature of these investments and market conditions, the fair value of these instruments may change by substantially more than 10%. Commodity Price Risk Conectiv's participation in wholesale energy markets includes trading and arbitrage activities, which expose Conectiv to commodity market risk. To the extent Conectiv has net open positions, controls are in place that are intended to keep risk exposures within management-approved risk tolerance levels. Conectiv engages in commodity hedging activities to minimize the risk of market fluctuations associated with the purchase and sale of energy commodities (natural gas, petroleum and electricity). Some of Conectiv's hedging activities are conducted using derivative instruments designated as "cash flow hedges," which are designed to hedge the variability in cash flows of forecasted transactions. Conectiv also hedges by backing physical transactions with offsetting physical positions. Conectiv's energy commodity hedging objectives, in accordance with its risk management policy, are primarily the assurance of stable and known cash flows and the fixing of favorable prices and margins when they become available. Conectiv believes the commodity markets to be sufficiently liquid to support its market participation. Conectiv is at risk for a decrease in market liquidity to levels that affect its capability to execute its commodity participation strategies. Conectiv uses a value-at-risk model to assess the market risk of its electricity, gas, and petroleum products commodity activities. The model includes fixed price sales commitments, physical forward contracts, and commodity derivative instruments. Value-at-risk represents the potential gain or loss on instruments or portfolios due to changes in market factors, for a specified time period and confidence level. Conectiv estimates value-at-risk across its power, gas, and petroleum commodity businesses using a delta-normal variance/covariance model with a 95 percent confidence level and assuming a five-day holding period. Conectiv's calculated value-at-risk with respect to its commodity price exposure associated with contractual arrangements was approximately $22.7 million as of September 30, 2001, in comparison to $16.9 million as of December 31, 2000. The increase in value-at-risk was primarily due to an increased level of gas trading activities. The average, high and low value-at-risk for the nine months ended September 30, 2001 was $24.1 million, $39.2 million, and $16.6 million, respectively. -37- PART II. OTHER INFORMATION Item 1. Legal Proceedings - ------- ----------------- Information reported under the heading "Other" in Note 17 to the Consolidated Financial Statements under Item 1 in Part I herein, concerning an action filed in a New Jersey Superior Court by the City of Vineland, is incorporated by reference. Item 6. Exhibits and Reports on Form 8-K - ------- --------------------------------- (a) Exhibits - ------------- Exhibit 10-C, Second Amendment to the Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc., dated as of October 31, 2001 (wholly owned electric generating plants) (Filed herewith). Exhibit 10-D, Second Amendment to the Purchase and Sale Agreement by and between Atlantic City Electric Company and NRG Energy, Inc., dated as of October 31, 2001 (jointly owned electric generating plants) (Filed herewith). Exhibit 12, Ratio of Earnings to Fixed Charges (filed herewith) (b) Reports on Form 8-K - ------------------------ No Current Reports on Form 8-K were filed during the third quarter of 2001. On October 22, 2001, Conectiv filed a Current Report on Form 8-K dated October 18, 2001 reporting on Item 5. Other Events, and Item 7. Financial Statements and Exhibits. On October 29, 2001, Conectiv filed a Current Report on Form 8-K dated October 26, 2001 reporting on Item 5. Other Events. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Conectiv ------------ (Registrant) Date: November 8, 2001 /s/ John C. van Roden ---------------- ---------------------------------------- John C. van Roden, Senior Vice President and Chief Financial Officer -38- EX-10.C 3 dex10c.txt SECOND AMENDMENT TO THE PURCHASE AND SALE AGREEMENT Exhibit 10-C ------------ ACE WHOLLY OWNED AGREEMENT SECOND AMENDMENT TO THE PURCHASE AND SALE AGREEMENT BY AND BETWEEN ATLANTIC CITY ELECTRIC COMPANY AND NRG ENERGY, INC. SECOND AMENDMENT TO THE PURCHASE AND SALE AGREEMENT (the "Second Amendment") by and between Atlantic City Electric Company, a New Jersey corporation ("ACE" or "Seller"), and NRG Energy, Inc., a Delaware corporation ("Buyer"), dated as of October 31, 2001. Seller and Buyer may each be referred to herein individually as a "Party" and collectively as the "Parties." Capitalized terms used and not otherwise defined in this Second Amendment shall have the respective meanings assigned to them in the Amended Agreement (as defined below). WHEREAS, Seller and Buyer are Parties to the Purchase and Sale Agreement, dated as of January 18, 2000 (the "Agreement"), and the Amendment to the Agreement, dated as of June 22, 2001 (the "First Amendment" and, together with the Agreement, the "Amended Agreement"), providing for the sale and assignment by Seller of the Purchased Assets and the Assumed Liabilities and the purchase and assumption by Buyer of the Purchased Assets and the Assumed Liabilities, upon the terms and conditions set forth in the Amended Agreement; and WHEREAS, the Closing of the transactions contemplated by the Amended Agreement and the ACE Related Purchase Agreement, as amended, has been unexpectedly delayed; and WHEREAS, as a result of the delay of the Closing, the Parties desire to further amend the Amended Agreement as set forth herein and the ACE Related Purchase Agreement, as amended, as set forth in the amendment thereto, which is being entered into simultaneously with this Second Amendment, to, among other things, extend the termination date of the Amended Agreement and the ACE Related Purchase Agreement, as amended. NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller and Buyer hereby agree as follows: ARTICLE I Amendment of Certain Provisions of the Amended Agreement -------------------------------------------------------- Section 1.1 Certain Definitions. Section 1.1 of the Agreement is ------------------- hereby amended to include the following additional provision: "(165) "Special Access Agreement" means the easement and license agreement ------------------------ between Buyer and Seller, or any Affiliate thereof, to be delivered at the Closing, pursuant to which Buyer will provide Seller, or an Affiliate thereof, with rights with respect to certain Excluded Assets, comprised of microwave antennae, transmission lines and associated equipment located at the B.L. England Station, relating to the transmission and delivery of electric power or the operation of B.L. England Station." Section 1.2 Deliveries by Seller. Section 3.6(f) is hereby amended -------------------- and restated in its entirety to read as follows: "(f) The Access Agreement and the Special Access Agreement, in each case, duly executed by Seller, or an Affiliate thereof, and in recordable form;" Section 1.3 Deliveries by Buyer. Section 3.7(e) is hereby amended ------------------- and restated in its entirety to read as follows: "(e) The Access Agreement and the Special Access Agreement, in each case, duly executed by Buyer and in recordable form;" 2 Section 1.4 Certain Representations and Warranties of Seller. ------------------------------------------------ Section 4.2 of the Agreement is hereby amended and restated in its entirety to read as follows: "Seller has full corporate power and authority to execute and deliver this Agreement and each Additional Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. Except for the approval of the respective provisos to clauses (iii) and (iv) of Section 9.1(b) hereof by the Board of Directors of Seller, the execution and delivery by Seller of this Agreement and each Additional Agreement to which it is a party and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller. This Agreement has been duly and validly executed and delivered by Seller and, subject to the receipt of Seller's Required Regulatory Approvals, this Agreement constitutes, and upon the execution and delivery by Seller of each Additional Agreement to which it is a party, each such Additional Agreement will constitute, the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity)." Section 1.5 Certain Covenants of the Parties. -------------------------------- (a) Section 6.5 of the Agreement is hereby amended to include the following additional provisions: "(e) Without limiting the generality of Section 6.5(b) of the Agreement, from and after the date of this Second Amendment, Seller and Buyer shall reasonably cooperate with each other to supplement the testimony provided to the NJBPU prior to the date hereof." "(f) Seller and Buyer shall use their respective Commercially Reasonable Efforts to promptly enter into a Joint Defense Agreement relating to B.L. England Station, in form and substance satisfactory to each of Seller and Buyer. Notwithstanding any provision of such Joint Defense Agreement to the contrary, the provisions of this Agreement shall govern and control any 3 conflict or inconsistency between or among the provisions hereof and the provisions of such Joint Defense Agreement." (b) Article VI of the Agreement is hereby amended to include the following additional provision: "Section 6.18 Special Access Agreement. Without limiting the generality of ------------------------ Section 6.4(a), Buyer and Seller shall prepare, negotiate and enter into, or cause to be entered into, the Special Access Agreement, in form and substance satisfactory to each of Buyer and Seller, on or prior to the Closing Date." Section 1.6 Certain Termination Provisions. Section 9.1(b) of the ------------------------------ Agreement, as amended by Section 1.9 of the First Amendment, is hereby amended and restated in its entirety to read as follows: "This Agreement may be terminated by Seller, on the one hand, or Buyer, on the other hand, upon written notice to the other Party, (i) at any time prior to the Closing if any court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable; (ii) at any time prior to the Closing if any Law shall have been enacted or issued by any Governmental Authority which, directly or indirectly, prohibits the consummation of the transactions contemplated by this Agreement or by any Additional Agreement; (iii) solely with respect to the Deepwater Station Transactions, at any time after December 31, 2001, if the Closing of the Deepwater Station Transactions shall not have occurred on or before such date, provided, however, that neither Seller nor Buyer shall be permitted to so terminate this Agreement, solely with respect to the Deepwater Station Transactions, at any time prior to March 1, 2002, if the Board of Directors of Seller shall have approved this proviso to this clause (iii) on or prior to December 31, 2001; or (iv) solely with respect to the B.L. England Station Transactions, at any time after December 31, 2001, if the Closing of the B.L. England Station Transactions shall not have occurred on or before such date, provided, however, that neither Seller nor Buyer shall be permitted to so terminate this Agreement, solely with respect to the B.L. England Station Transactions, at any time prior to March 1, 2002, if the Board of Directors of Seller shall have approved this proviso to this clause (iv) on or prior to December 31, 2001; and, provided, 4 further, that the right to terminate this Agreement under Section 9.1(b)(iii) or Section 9.1(b)(iv) shall not be available to any Party whose breach of this Agreement has caused, or resulted in, the failure of the Closing to occur on or before such applicable date." ARTICLE II Release, Waiver and Additional Provisions ----------------------------------------- Section 2.1 Release and Waiver of Claims Against Seller Parties. --------------------------------------------------- (a) Buyer and each of its Affiliates hereby unconditionally and irrevocably releases, acquits and forever discharges Seller and its Affiliates, shareholders, officers, directors, employees, agents, representatives, successors and assigns (collectively, the "Seller Parties"), effective as of the -------------- date hereof, of and from, and hereby unconditionally and irrevocably waives, any and all claims, demands, debts, losses, costs, expenses, proceedings, judgments, damages, actions, causes of action, suits, contracts, agreements, obligations, accounts and liabilities of any kind or character whatsoever, known or unknown, suspected or unsuspected, in contract or in tort, at law or in equity ("Claims"), that the Buyer or any of its Affiliates alone or with any other Person had, now has, or might hereafter have against the Seller Parties or any of them jointly and/or severally, for or by reason of any matter, circumstance, event, action, omission, cause or thing whatsoever occurring or existing on or before the date of this Second Amendment, arising under, relating to or in connection with the Amended Agreement (or any of the Exhibits or Schedules thereto) and which are set forth in Schedule 2.1 to this Second Amendment. -------- (b) Buyer hereby represents and warrants to Seller that, as of the date of this Second Amendment, to Buyer's knowledge, Buyer does not have any Claims against any Seller Party, other than as set forth in Schedule 2.1 to -------- this Second Amendment, which Claims have been released and waived pursuant to Section 2.1(a). 5 Section 2.2 Release and Waiver of Claims Against Buyer Parties. -------------------------------------------------- (a) Seller and each of its Affiliates hereby unconditionally and irrevocably releases, acquits and forever discharges Buyer and its Affiliates, shareholders, officers, directors, employees, agents, representatives, successors and assigns (collectively, the "Buyer Parties"), effective as of the date hereof, of and from, and hereby unconditionally and irrevocably waives, any and all Claims, that the Seller or any of its Affiliates alone or with any other Person had, now has, or might hereafter have against the Buyer Parties or any of them jointly and/or severally, for or by reason of any matter, circumstance, event, action, omission, cause or thing whatsoever occurring or existing on or before the date of this Second Amendment, arising under, relating to or in connection with the Amended Agreement (or any of the Exhibits or Schedules thereto) and which are set forth in Schedule 2.2 to this Second Amendment. -------- (b) Seller hereby represents and warrants to Buyer that, as of the date of this Second Amendment, to Seller's knowledge, Seller does not have any Claims against any Buyer Party, other than as set forth in Schedule 2.2 to -------- this Second Amendment, which Claims have been released and waived pursuant to Section 2.2(a). Section 2.3 Disclosed Matters. Pursuant to Section 6.7 of the ----------------- Agreement, Buyer and Seller hereby acknowledge and agree that the supplemental or amended disclosure set forth in the Schedules to the Amended Agreement being delivered by Seller to Buyer contemporaneously with this Second Amendment and dated as of the date hereof shall, for purposes of the Amended Agreement, as further amended hereby, including for purposes of determining whether the conditions to Closing set forth in Article VII of the Agreement are satisfied, be deemed to have been disclosed as of January 18, 2000. 6 ARTICLE III Miscellaneous Provisions ------------------------ Section 3.1 Amendment and Modification. Subject to applicable Law, -------------------------- this Second Amendment may be amended, supplemented or otherwise modified only by written agreement entered into by all Parties. Section 3.2 Waiver of Compliance; Consents. To the extent ------------------------------ permitted by applicable Law, any failure of any of the Parties to comply with any covenant, agreement or condition set forth herein may be waived by the Party entitled to the benefit thereof only by a written instrument signed by such Party, but any such waiver shall not operate as a waiver of, or estoppel with respect to, any prior or subsequent failure to comply therewith. Section 3.3 Notices. All notices and other communications hereunder ------- shall be in writing and shall be given in accordance with Section 10.8 of the Agreement. Section 3.4 Assignment. This Second Amendment shall be binding upon ---------- and inure to the benefit of the Parties and their respective successors and permitted assigns, but neither this Second Amendment nor any of the rights, interests, obligations or remedies hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of the other Parties, nor is this Second Amendment intended to confer upon any other Person any rights, interests, obligations or remedies hereunder. Without limiting the generality of the foregoing, no provision of this Second Amendment shall create any third-party beneficiary rights in any Employee or former employee of Seller (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Second Amendment shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement except as expressly provided for thereunder. Notwithstanding the foregoing, (i) Seller may assign all or any portion of its rights, interests, obligations and remedies hereunder to Conectiv, a Delaware corporation, or any of Conectiv's wholly owned subsidiaries; provided, however, that no such -------- ------- assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or by the Amended Agreement or (B) relieve or discharge Seller from any of its obligations hereunder or under the Amended Agreement; and (ii) Buyer may assign all or any portion of its 7 rights, interests, obligations and remedies hereunder to (A) any of its wholly owned subsidiaries or (B) a trustee, lending institution or other Person solely for purposes of financing the transactions contemplated hereby; provided, -------- however, that no such assignment shall (A) materially impair or delay the - ------- consummation of the transactions contemplated hereby or by the Amended Agreement or (B) relieve or discharge Buyer from any of its obligations hereunder or under the Amended Agreement. Section 3.5 Governing Law. This Second Amendment shall be governed ------------- by and construed in accordance with the laws of the State of Delaware (without giving effect to conflicts of law principles) as to all matters, including validity, construction, effect, performance and remedies. Venue in any and all suits, actions and proceedings related to the subject matter of this Second Amendment shall be in the state and federal courts located in and for the State of Delaware (the "Courts"), which shall have exclusive jurisdiction for such ------ purpose, and the Parties hereby irrevocably submit to the exclusive jurisdiction of such courts and irrevocably waive the defense of an inconvenient forum to the maintenance of any such suit, action or proceeding. Service of process may be made in any manner recognized by such Courts. Each of the Parties hereby irrevocably waives its right to a jury trial arising out of any dispute in connection with this Second Amendment or the transactions contemplated hereby. Section 3.6 Counterparts. This Second Amendment may be executed in ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 3.7 Interpretation. The article and section headings -------------- contained in this Second Amendment are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or construction of this Second Amendment. Ambiguities and uncertainties in the wording of this Second Amendment shall not be construed for or against any Party, but shall be construed in the manner that most accurately reflects the Parties' intent as of the date of this Second Amendment. Each Party acknowledges that it has been represented by counsel in connection with the review and execution of this Second Amendment, and, accordingly, there shall be no presumption that this Second Amendment or any provision hereof be construed against the Party that drafted this Second Amendment. 8 Section 3.8 Effect; Entire Agreement. Except as amended, ------------------------ supplemented or otherwise modified by this Second Amendment, the Amended Agreement shall remain in full force and effect, and the valid and binding obligation of each Party. The Amended Agreement, as further amended hereby (including the Schedules and Exhibits thereto), together with the Confidentiality Agreement and the ACE Related Purchase Agreement, as amended, embody the entire agreement and understanding of the Parties hereto and thereto in respect of the transactions contemplated by the Amended Agreement, as further amended hereby, the Additional Agreements and the ACE Related Purchase Agreement, as amended, and supersedes all prior agreements and understandings between or among the Parties with respect to the transactions contemplated hereby or thereby. [Signature Page Follows] 9 IN WITNESS WHEREOF, the Parties have caused this Second Amendment to be duly executed and delivered as of the date and year first written above. ATLANTIC CITY ELECTRIC COMPANY By:___________________________________ Name: Title: NRG ENERGY, INC. By:___________________________________ Name: Title: (ACE WHOLLY OWNED STATIONS) EX-10.D 4 dex10d.txt SECOND AMENDMENT TO THE PURCHASE AND SALE AGREEMENT Exhibit 10-D ------------ ACE JOINTLY OWNED AGREEMENT SECOND AMENDMENT TO THE PURCHASE AND SALE AGREEMENT BY AND BETWEEN ATLANTIC CITY ELECTRIC COMPANY AND NRG ENERGY, INC. SECOND AMENDMENT TO THE PURCHASE AND SALE AGREEMENT (the "Second Amendment") by and between Atlantic City Electric Company, a New Jersey corporation ("ACE" or "Seller"), and NRG Energy, Inc., a Delaware corporation ("Buyer"), dated as of October 31, 2001. Seller and Buyer may each be referred to herein individually as a "Party" and collectively as the "Parties." Capitalized terms used and not otherwise defined in this Second Amendment shall have the respective meanings assigned to them in the Amended Agreement (as defined below). WHEREAS, Seller and Buyer are Parties to the Purchase and Sale Agreement, dated as of January 18, 2000 (the "Agreement"), and the Amendment to the Agreement, dated as of June 22, 2001 (the "First Amendment" and, together with the Agreement, the "Amended Agreement"), providing for the sale and assignment by Seller of the Purchased Assets and the Assumed Liabilities and the purchase and assumption by Buyer of the Purchased Assets and the Assumed Liabilities, upon the terms and conditions set forth in the Amended Agreement; and WHEREAS, the Closing of the transactions contemplated by the Amended Agreement and the ACE Related Purchase Agreement, as amended, has been unexpectedly delayed; and WHEREAS, as a result of the delay of the Closing, the Parties desire to further amend the Amended Agreement as set forth herein and the ACE Related Purchase Agreement, as amended, as set forth in the amendment thereto, which is being entered into simultaneously with this Second Amendment, to, among other things, extend the termination date of the Amended Agreement and the ACE Related Purchase Agreement, as amended. NOW THEREFORE, for good and valuable consideration, the receipt and adequacy of which are hereby acknowledged, Seller and Buyer hereby agree as follows: ARTICLE 1 Amendment of Certain Provisions of the Amended Agreement -------------------------------------------------------- Section 1.1 Certain Representations and Warranties of Seller. ------------------------------------------------ Section 4.2 of the Agreement is hereby amended and restated in its entirety to read as follows: "Seller has full corporate power and authority to execute and deliver this Agreement and each Additional Agreement to which it is a party and to consummate the transactions contemplated hereby and thereby. Except for the approval of the proviso to clauses (iii) of Section 9.1(b) hereof by the Board of Directors of Seller, the execution and delivery by Seller of this Agreement and each Additional Agreement to which it is a party and the consummation by Seller of the transactions contemplated hereby and thereby have been duly and validly authorized by all necessary corporate action required on the part of Seller. This Agreement has been duly and validly executed and delivered by Seller and, subject to the receipt of Seller's Required Regulatory Approvals, this Agreement constitutes, and upon the execution and delivery by Seller of each Additional Agreement to which it is a party, each such Additional Agreement will constitute, the legal, valid and binding obligation of Seller, enforceable against Seller in accordance with its terms, except that such enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance, moratorium or other similar Laws affecting or relating to enforcement of creditors' rights generally and general principles of equity (regardless of whether enforcement is considered in a proceeding at law or in equity)." 2 Section 1.2 Certain Covenants of the Parties. Section 6.4 of the -------------------------------- Agreement is hereby amended to include the following additional provisions: "(e) Without limiting the generality of Section 6.4(b) of the Agreement, from and after the date of this Second Amendment, Seller and Buyer shall reasonably cooperate with each other to supplement the testimony provided to the NJBPU prior to the date hereof." Section 1.3 Certain Termination Provisions. Section 9.1(b) of the ------------------------------ Agreement, as amended by Section 1.3 of the First Amendment, is hereby amended and restated in its entirety to read as follows: "This Agreement may be terminated by Seller, on the one hand, or Buyer, on the other hand, upon written notice to the other Party, (i) at any time prior to the Closing if any court of competent jurisdiction shall have issued an order, judgment or decree permanently restraining, enjoining or otherwise prohibiting the Closing, and such order, judgment or decree shall have become final and nonappealable; (ii) at any time prior to the Closing if any Law shall have been enacted or issued by any Governmental Authority which, directly or indirectly, prohibits the consummation of the transactions contemplated by this Agreement or by any Additional Agreement; or (iii) at any time after December 31, 2001, if the Closing shall not have occurred on or before such date, provided, however, that neither Seller nor Buyer shall be permitted to so terminate this Agreement at any time prior to March 1, 2002, if the Board of Directors of Seller shall have approved this proviso to this clause (iii) on or prior to December 31, 2001; and, provided, further, that the right to terminate this Agreement under Section 9.1(b)(iii) shall not be available to any Party whose breach of this Agreement has caused, or resulted in, the failure of the Closing to occur on or before such applicable date." ARTICLE II Release, Waiver and Additional Provisions ----------------------------------------- 3 Section 2.1 Release and Waiver of Claims Against Seller Parties. (a) Buyer and each of its Affiliates hereby unconditionally and irrevocably releases, acquits and forever discharges Seller and its Affiliates, shareholders, officers, directors, employees, agents, representatives, successors and assigns (collectively, the "Seller Parties"), effective as of the -------------- date hereof, of and from, and hereby unconditionally and irrevocably waives, any and all claims, demands, debts, losses, costs, expenses, proceedings, judgments, damages, actions, causes of action, suits, contracts, agreements, obligations, accounts and liabilities of any kind or character whatsoever, known or unknown, suspected or unsuspected, in contract or in tort, at law or in equity ("Claims"), that the Buyer or any of its Affiliates alone or with any other Person had, now has, or might hereafter have against the Seller Parties or any of them jointly and/or severally, for or by reason of any matter, circumstance, event, action, omission, cause or thing whatsoever occurring or existing on or before the date of this Second Amendment, arising under, relating to or in connection with the Amended Agreement (or any of the Exhibits or Schedules thereto) and which are set forth in Schedule 2.1 to this Second Amendment. -------- (b) Buyer hereby represents and warrants to Seller that, as of the date of this Second Amendment, to Buyer's knowledge, Buyer does not have any Claims against any Seller Party, other than as set forth in Schedule 2.1 to this -------- Second Amendment, which Claims have been released and waived pursuant to Section 2.1(a). Section 2.2 Release and Waiver of Claims Against Buyer Parties. -------------------------------------------------- (a) Seller and each of its Affiliates hereby unconditionally and irrevocably releases, acquits and forever discharges Buyer and its Affiliates, shareholders, officers, directors, employees, agents, representatives, successors and assigns (collectively, the "Buyer Parties"), effective as of the date hereof, of and from, and hereby unconditionally and irrevocably waives, any and all Claims, that the Seller or any of its Affiliates alone or with any other Person had, now has, or might hereafter have against the Buyer Parties or any of them jointly and/or severally, for or by reason of any matter, circumstance, event, action, omission, cause or thing whatsoever occurring or existing on or before the date of this Second Amendment, arising under, relating to or in connection with the Amended Agreement (or any of the Exhibits or Schedules thereto) and which are set forth in Schedule 2.2 to this Second Amendment. -------- 4 (b) Seller hereby represents and warrants to Buyer that, as of the date of this Second Amendment, to Seller's knowledge, Seller does not have any Claims against any Buyer Party, other than as set forth in Schedule 2.2 to -------- this Second Amendment, which Claims have been released and waived pursuant to Section 2.2(a). Section 2.3 Disclosed Matters. Pursuant to Section 6.6 of the ----------------- Agreement, Buyer and Seller hereby acknowledge and agree that the supplemental or amended disclosure set forth in the Schedules to the Amended Agreement being delivered by Seller to Buyer contemporaneously with this Second Amendment and dated as of the date hereof shall, for purposes of the Amended Agreement, as further amended hereby, including for purposes of determining whether the conditions to Closing set forth in Article VII of the Agreement are satisfied, be deemed to have been disclosed as of January 18, 2000. ARTICLE III Miscellaneous Provisions ------------------------ Section 3.1 Amendment and Modification. Subject to applicable Law, -------------------------- this Second Amendment may be amended, supplemented or otherwise modified only by written agreement entered into by all Parties. Section 3.2 Waiver of Compliance; Consents. To the extent -------------------------------- permitted by applicable Law, any failure of any of the Parties to comply with any covenant, agreement or condition set forth herein may be waived by the Party entitled to the benefit thereof only by a written instrument signed by such Party, but any such waiver shall not operate as a waiver of, or estoppel with respect to, any prior or subsequent failure to comply therewith. Section 3.3 Notices. All notices and other communications hereunder ------- shall be in writing and shall be given in accordance with Section 10.8 of the Agreement. 5 Section 3.4 Assignment. This Second Amendment shall be binding upon ---------- and inure to the benefit of the Parties and their respective successors and permitted assigns, but neither this Second Amendment nor any of the rights, interests, obligations or remedies hereunder shall be assigned by any Party hereto, including by operation of law, without the prior written consent of the other Parties, nor is this Second Amendment intended to confer upon any other Person any rights, interests, obligations or remedies hereunder. Without limiting the generality of the foregoing, no provision of this Second Amendment shall create any third-party beneficiary rights in any Employee or former employee of Seller (including any beneficiary or dependent thereof) in respect of continued employment or resumed employment, and no provision of this Second Amendment shall create any rights in any such Persons in respect of any benefits that may be provided, directly or indirectly, under any employee benefit plan or arrangement except as expressly provided for thereunder. Notwithstanding the foregoing, (i) Seller may assign all or any portion of its rights, interests, obligations and remedies hereunder to Conectiv, a Delaware corporation, or any of Conectiv's wholly owned subsidiaries; provided, however, that no such -------- ------- assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or by the Amended Agreement or (B) relieve or discharge Seller from any of its obligations hereunder or under the Amended Agreement; and (ii) Buyer may assign all or any portion of its rights, interests, obligations and remedies hereunder to (A) any of its wholly owned subsidiaries or (B) a trustee, lending institution or other Person solely for purposes of financing the transactions contemplated hereby; provided, however, -------- ------- that no such assignment shall (A) materially impair or delay the consummation of the transactions contemplated hereby or by the Amended Agreement or (B) relieve or discharge Buyer from any of its obligations hereunder or under the Amended Agreement. Section 3.5 Governing Law. This Second Amendment shall be governed ------------- by and construed in accordance with the laws of the State of Delaware (without giving effect to conflicts of law principles) as to all matters, including validity, construction, effect, performance and remedies. Venue in any and all suits, actions and proceedings related to the subject matter of this Second Amendment shall be in the state and federal courts located in and for the State of Delaware (the "Courts"), which shall have exclusive jurisdiction for such ------ purpose, and the Parties hereby irrevocably submit to the exclusive jurisdiction of such courts and irrevocably waive the defense of an inconvenient forum to the maintenance of any such suit, action or proceeding. Service of process may be made in any manner recognized by such Courts. Each of the Parties hereby irrevocably waives its right to a jury trial 6 arising out of any dispute in connection with this Second Amendment or the transactions contemplated hereby. Section 3.6 Counterparts. This Second Amendment may be executed in ------------ counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. Section 3.7 Interpretation. The article and section headings -------------- contained in this Second Amendment are solely for the purpose of reference, are not part of the agreement of the parties and shall not in any way affect the meaning or construction of this Second Amendment. Ambiguities and uncertainties in the wording of this Second Amendment shall not be construed for or against any Party, but shall be construed in the manner that most accurately reflects the Parties' intent as of the date of this Second Amendment. Each Party acknowledges that it has been represented by counsel in connection with the review and execution of this Second Amendment, and, accordingly, there shall be no presumption that this Second Amendment or any provision hereof be construed against the Party that drafted this Second Amendment. Section 3.8 Effect; Entire Agreement. Except as amended, ------------------------ supplemented or otherwise modified by this Second Amendment, the Amended Agreement shall remain in full force and effect, and the valid and binding obligation of each Party. The Amended Agreement, as further amended hereby (including the Schedules and Exhibits thereto), together with the Confidentiality Agreement and the ACE Related Purchase Agreement, as amended, embody the entire agreement and understanding of the Parties hereto and thereto in respect of the transactions contemplated by the Amended Agreement, as further amended hereby, the Additional Agreements and the ACE Related Purchase Agreement, as amended, and supersedes all prior agreements and understandings between or among the Parties with respect to the transactions contemplated hereby or thereby. [Signature Page Follows] 7 IN WITNESS WHEREOF, the Parties have caused this Second Amendment to be duly executed and delivered as of the date and year first written above. ATLANTIC CITY ELECTRIC COMPANY By:___________________________________ Name: Title: NRG ENERGY, INC. By:___________________________________ Name: Title: (ACE JOINTLY OWNED STATIONS) EX-12 5 dex12.txt RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Conectiv Ratio of Earnings to Fixed Charges (Dollars in Thousands)
9 Months Year Ended December 31, Ended September 30, ------------------------------------------------------------------ 2001 2000 1999 1998 1997 1996 ---------- ---------- ---------- --------- --------- --------- Income from continuing operations $366,542 $203,815 $113,578 $153,201 $101,218 $107,251 ---------- ---------- ---------- --------- --------- --------- Income taxes 253,401 151,275 105,816 105,817 72,155 78,340 ---------- ---------- ---------- --------- --------- --------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 111,410 166,256 149,732 133,796 78,350 69,329 Other interest 43,299 60,818 37,743 26,199 12,835 12,516 Preferred dividend require- ments of subsidiaries 14,689 20,383 19,894 17,871 10,178 10,326 ---------- ---------- ---------- --------- --------- --------- Total fixed charges 169,398 247,457 207,369 177,866 101,363 92,171 ---------- ---------- ---------- --------- --------- --------- Non-utility capitalized interest (11,961) (9,278) (3,264) (1,444) (208) (311) ---------- ---------- ---------- --------- --------- --------- Undistributed earnings of equity method investees - (4,496) - - - - ---------- ---------- ---------- --------- --------- --------- Income from continuing operations before income taxes and fixed charges $777,380 $588,773 $423,499 $435,440 $274,528 $277,451 ========== ========== ========== ========= ========= ========= Total fixed charges shown above $169,398 $247,457 $207,369 $177,866 $101,363 $ 92,171 Increase preferred stock dividend requirements of subsidiaries to a pre-tax amount 3,255 5,253 6,123 4,901 3,065 6,025 ---------- ---------- ---------- --------- --------- --------- Fixed charges for ratio computation $172,653 $252,710 $213,492 $182,767 $104,428 $ 98,196 ========== ========== ========== ========= ========= ========= Ratio of earnings to fixed charges 4.50 2.33 1.98 2.38 2.63 2.83
For purposes of computing the ratio, earnings are income from continuing operations item plus income taxes and fixed charges, less non-utility capitalized interest and undistributed earnings of equity method investees. Fixed charges include gross interest expense, the estimated interest component of rentals, and preferred stock dividend requirements of subsidiaries. Preferred stock dividend requirements for purposes of computing the ratio have been increased to an amount representing the pre-tax earnings which would be required to cover such dividend requirements. -----END PRIVACY-ENHANCED MESSAGE-----