-----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, PfvUM9xHXcM8pXMR9ZtpfNYsP7P240RkD4dmIy5o2wkiVGNuAv+WNtPtY8aow+KW +mbvbz3ZuJF4PIFq3B4Ixg== 0001036050-00-000903.txt : 20000515 0001036050-00-000903.hdr.sgml : 20000515 ACCESSION NUMBER: 0001036050-00-000903 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000512 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: SEC FILE NUMBER: 001-13895 FILM NUMBER: 628479 BUSINESS ADDRESS: STREET 1: 800 KING STREET 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 FORM 10-Q FOR CONECTIV 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 March 31, 2000 OR - -- / / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13895 CONECTIV -------- (Exact name of registrant as specified in its charter) Delaware 51-0377417 - -------------------------- ------------ (State of incorporation) (I.R.S. Employer Identification No.) 800 King Street, P.O. Box 231, Wilmington, Delaware 19899 - --------------------------------------------------- ------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 302-429-3114 ------------ 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 March 31, 2000 - ---------------------------------- ------------------------------------ Common Stock, $0.01 par value 84,715,675 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 months ended March 31, 2000, and March 31, 1999.................. 1 Consolidated Balance Sheets as of March 31, 2000, and December 31, 1999......................................... 2-3 Consolidated Statements of Cash Flows for the three months ended March 31, 2000, and March 31, 1999..... 4 Notes to Consolidated Financial Statements................ 5-10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....................... 11-19 Item 3. Quantitative and Qualitative Disclosures About Market Risk 20 Part II. Other Information Item 1. Legal Proceedings......................................... 21 Item 4. Submission of Matters to a Vote of Security Holders....... 21 Item 6. Exhibits and Reports on Form 8-K.......................... 21 Signature .......................................................... 22 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 March 31, ----------------------------- 2000 1999 ------------- ------------- OPERATING REVENUES Electric $ 630,295 $ 563,313 Gas 274,493 291,850 Other services 140,557 91,422 ------------- ------------- 1,045,345 946,585 ------------- ------------- OPERATING EXPENSES Electric fuel and purchased energy and capacity 331,304 278,614 Gas purchased 251,619 271,613 Other services' cost of sales 118,437 73,933 Operation and maintenance 156,878 134,251 Depreciation and amortization 63,930 66,883 Taxes other than income taxes 21,231 18,753 ------------- ------------- 943,399 844,047 ------------- ------------- OPERATING INCOME 101,946 102,538 ------------- ------------- OTHER INCOME 12,315 23,113 ------------- ------------- INTEREST EXPENSE Interest charges 54,157 40,260 Allowance for borrowed funds used during construction and capitalized interest (1,693) (1,566) ------------- ------------- 52,464 38,694 ------------- ------------- PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES 5,049 4,948 ------------- ------------- INCOME BEFORE INCOME TAXES 56,748 82,009 INCOME TAXES 24,211 33,314 ------------- ------------- NET INCOME $ 32,537 $ 48,695 ============= ============= EARNINGS (LOSS) APPLICABLE TO COMMON STOCK Common stock $ 34,990 $ 47,358 Class A common stock (2,453) 1,337 ------------- ------------- $ 32,537 $ 48,695 ============= ============= COMMON STOCK Average shares outstanding (000) Common stock 85,568 100,532 Class A common stock 5,742 6,561 Earnings (loss) per average share--basic and diluted Common stock $0.41 $0.47 Class A common stock ($0.43) $0.20 Dividends declared per share Common stock $0.22 $0.385 Class A common stock $0.80 $0.80
See accompanying Notes to Consolidated Financial Statements. -1- CONECTIV CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
March 31, December 31, 2000 1999 -------------- -------------- ASSETS Current Assets Cash and cash equivalents $ 80,545 $ 56,239 Accounts receivable, net of allowances of $14,578 and $11,564, respectively 674,387 544,463 Inventories, at average cost Fuel (coal, oil and gas) 51,640 65,360 Materials and supplies 59,386 58,177 Deferred energy supply costs 2,116 8,612 Other prepayments 11,500 20,295 Prepaid taxes - 15,674 Deferred income taxes, net 28,047 25,175 -------------- -------------- 907,621 793,995 -------------- -------------- Investments Investment in leveraged leases 62,024 72,161 Funds held by trustee 175,396 173,247 Other investments 101,563 100,764 -------------- -------------- 338,983 346,172 -------------- -------------- Property, Plant and Equipment Electric generation 1,572,919 1,571,556 Electric transmission and distribution 2,650,274 2,633,375 Gas transmission and distribution 266,452 265,708 Other electric and gas facilities 400,527 405,303 Telecommunications, thermal systems, and other property, plant, and equipment 242,339 238,229 -------------- -------------- 5,132,511 5,114,171 Less: Accumulated depreciation 2,139,678 2,097,529 -------------- -------------- Net plant in service 2,992,833 3,016,642 Construction work-in-progress 219,201 199,390 Leased nuclear fuel, at amortized cost 51,039 55,983 Goodwill, net 369,512 369,468 -------------- -------------- 3,632,585 3,641,483 -------------- -------------- Deferred Charges and Other Assets Recoverable stranded costs 1,020,406 1,030,049 Deferred recoverable income taxes 93,764 93,853 Unrecovered purchased power costs 25,318 28,923 Unrecovered New Jersey state excise tax 19,600 22,567 Deferred debt refinancing costs 20,163 21,113 Deferred other postretirement benefit costs 31,855 32,479 Prepaid pension costs 42,451 35,005 Unamortized debt expense 28,147 28,045 License fees 22,987 23,331 Other 41,925 41,447 -------------- -------------- 1,346,616 1,356,812 -------------- -------------- Total Assets $6,225,805 $6,138,462 ============== ==============
See accompanying Notes to Consolidated Financial Statements. -2- CONECTIV CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) (Unaudited)
March 31, December 31, 2000 1999 -------------- -------------- CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt $ 608,219 $ 579,688 Long-term debt due within one year 2,937 48,937 Variable rate demand bonds 158,430 158,430 Accounts payable 337,236 307,764 Taxes accrued 97,527 - Interest accrued 45,214 41,137 Dividends payable 26,703 27,545 Deferred energy supply costs 55,542 46,375 Current capital lease obligation 28,718 28,715 Above-market purchased energy contracts and other electric restructuring liabilities 35,140 41,101 Other 93,240 91,353 -------------- -------------- 1,488,906 1,371,045 -------------- -------------- Deferred Credits and Other Liabilities Other postretirement benefits obligation 93,134 96,388 Deferred income taxes, net 719,038 730,987 Deferred investment tax credits 73,158 74,431 Regulatory liability for New Jersey income tax benefit 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities 115,607 119,704 Deferred gain on termination of purchased energy contract 70,849 70,849 Long-term capital lease obligation 25,197 30,395 Other 57,872 47,447 -------------- -------------- 1,204,117 1,219,463 -------------- -------------- Capitalization Common stock: $0.01 per share par value; 150,000,000 shares authorized; shares outstanding - - 84,715,675 in 2000, and 86,173,169 in 1999 849 863 Class A common stock, $0.01 per share par value; 10,000,000 shares authorized; shares outstanding - - 5,742,315 in 2000 and 1999 57 57 Additional paid-in capital - - common stock 1,063,946 1,085,060 Additional paid-in capital - - Class A common stock 93,738 93,738 Accumulated deficit (27,131) (36,472) -------------- -------------- 1,131,459 1,143,246 Treasury shares, at cost: 167,608 shares in 2000; 167,514 shares in 1999 (3,447) (3,446) Unearned compensation (2,663) (1,627) -------------- -------------- Total common stockholders' equity 1,125,349 1,138,173 Preferred stock of subsidiaries: Not subject to mandatory redemption 95,933 95,933 Subject to mandatory redemption 188,950 188,950 Long-term debt 2,122,550 2,124,898 -------------- -------------- 3,532,782 3,547,954 -------------- -------------- Commitments and Contingencies (Notes 4 and 7) Total Capitalization and Liabilities $6,225,805 $6,138,462 ============== ==============
See accompanying Notes to Consolidated Financial Statements. -3- CONECTIV -------- CONSOLIDATED STATEMENTS OF CASH FLOWS (Dollars in Thousands) (Unaudited)
Three Months Ended March 31, --------------------------- 2000 1999 ------------ ------------ CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 32,537 $ 48,695 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 70,280 72,805 Allowance for equity funds used during construction (351) (736) Investment tax credit adjustments, net (1,273) (1,274) Deferred income taxes, net (14,733) 2,876 Net change in: Accounts receivable (114,397) (28,497) Inventories 12,511 11,467 Accounts payable 27,136 (14,693) Accrued / Prepaid taxes 113,201 28,085 Other current assets & liabilities (1) 26,892 41,059 Other, net (2,899) (10,801) ------------ ------------ Net cash provided by operating activities 148,904 148,986 ------------ ------------ CASH FLOWS FROM INVESTING ACTIVITIES Acquisition of businesses, net of cash acquired (798) (1,950) Capital expenditures (63,455) (58,909) Investments in partnerships (2,845) (10,292) Deposits to nuclear decommissioning trust funds - (2,672) Decrease in bond proceeds held in trust funds - 11,536 Decrease in investment in leveraged leases, net 13,644 974 Other, net 2,456 626 ------------ ------------ Net cash used by investing activities (50,998) (60,687) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES Common stock dividends paid (23,496) (43,723) Common stock redeemed (22,678) (22) Long-term debt redeemed (48,414) (211) Principal portion of capital lease payments (6,350) (5,922) Net change in short-term debt 28,531 (1,650) Cost of issuances and refinancings (1,193) (606) ------------ ------------ Net cash used by financing activities (73,600) (52,134) ------------ ------------ Net change in cash and cash equivalents 24,306 36,165 Cash and cash equivalents at beginning of period 56,239 65,884 ------------ ------------ Cash and cash equivalents at end of period $ 80,545 $102,049 ============ ============
(1) Other than debt and deferred income taxes classified as current. See accompanying Notes to Consolidated Financial Statements. -4- 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 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 which would substantially duplicate the disclosures in Conectiv's 1999 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 1999 Annual Report on Form 10-K and Part II of this Quarterly Report on Form 10-Q for additional relevant information. Within the Consolidated Statements of Income, amounts previously reported for the three months ended March 31, 1999 as "Electric fuel and purchased power" and "Purchased electric capacity" have been combined and reported as "Electric fuel and purchased energy and capacity." Certain other reclassifications of prior period data have been made to conform with the current presentation. NOTE 2. PLANNED ASSET SALES - ------- ------------------- For information concerning agreements for the sale of the nuclear and non- strategic baseload fossil electric generating plants of Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE), see Note 13 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K. The operating results of the electric generating plants to be sold are included in the Energy business segment shown in Note 9 to the Consolidated Financial Statements included herein. On March 22, 2000, Conectiv announced its plans to sell Conectiv Services, Inc. (CSI) and Conectiv Thermal Systems, Inc. (CTS). CSI provides heating, ventilation, and air conditioning (HVAC) services and had total assets of approximately $84 million as of March 31, 2000. The results of operations for CSI are presented as the "HVAC" business segment in Note 9 to the Consolidated Financial Statements included herein. CTS constructs and operates thermal energy systems and had total assets of approximately $186 million as of March 31, 2000. The results of operations for CTS are included in the Energy business segment in Note 9 to the Consolidated Financial Statements included herein. NOTE 3. RATE MATTERS - ------- ------------ An update to the information previously reported in Note 9 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K is presented below. NEW JERSEY ELECTRIC UTILITY INDUSTRY RESTRUCTURING 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 NJBPU's final order for ACE has been delayed due to appeals of the NJBPU's final order concerning restructuring the electricity supply business of Public Service Electric and Gas Company (PSE&G). In April 2000, the appeals of the NJBPU's restructuring -5- order for PSE&G were denied by the Appellate Division of the New Jersey Superior Court. On May 2, 2000, one of the appellants filed a notice of its intention to request the New Jersey Supreme Court to exercise its discretion to review the unanimous Appellate Division decision. NOTE 4. LONG-TERM PURCHASED POWER CONTRACTS - ------- ----------------------------------- As of March 31, 2000, the commitments of ACE and DPL under long-term purchased power contracts were as follows: ACE--708 megawatts (MW) of capacity; DPL--593 MW of capacity; and DPL--100 megawatt-hours of firm energy. Based on these contracts, Conectiv's commitments during the next five years for capacity and energy under long-term purchased power contracts are estimated to be $374 million in 2000; $379 million in 2001; $385 million in 2002; $325 million in 2003; and $319 million in 2004. As previously disclosed in Notes 1 and 13 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, the electric generating plants of DPL and ACE are expected to be divested during 2000 through sales to third parties and transfers to other Conectiv subsidiaries. Subsequent to these divestitures, DPL and ACE will supply electricity to their customers entirely with purchased power. In addition to the commitments for purchased power discussed above, DPL will purchase 500 megawatt-hours of firm electricity per hour from NRG Energy, Inc., beginning upon completion of the sale of DPL's non-strategic fossil-fired electric generating plants; the term of this purchased power agreement will extend through December 31, 2005. ACE expects to enter into additional long- term purchased power agreements in the third quarter of 2000 in order to supply its Basic Generation Service (BGS) customers. NOTE 5. COMMON STOCKHOLDERS' EQUITY - ------- --------------------------- (A) GENERAL ------- As previously disclosed in Note 16 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, as a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA), Conectiv may not pay dividends on the shares of common stock and Class A common stock from an accumulated deficit or paid-in-capital without SEC approval. As of March 31, 2000, Conectiv had an accumulated deficit of $27.1 million. On April 27, 2000, the SEC approved Conectiv's payment of dividends on common stock and Class A common stock for the first and second quarters of 2000. Conectiv expects to have retained earnings sufficient to offset dividends declared on shares of common stock and Class A common stock beginning in the third quarter of 2000, when the sale of certain electric generating units is expected to be completed. There can be no assurances, however, that the sales of these electric generating units will be completed, or that any gain will be realized from the sales of these electric generating units. Conectiv expects that, if additional SEC approvals are required for quarterly payment of dividends, such approvals would be received. (B) CONECTIV COMMON STOCK --------------------- During the three months ended March 31, 2000, Conectiv purchased 1,541,500 shares of Conectiv common stock for $22.7 million. As of March 31, 2000, 4,630,300 shares of common stock remained authorized for purchase under the stock purchase program announced in January 2000. -6- Conectiv's Board of Directors declared a $0.22 dividend per share of common stock for the first quarter of 2000, which represented approximately 54% of the $0.41 of earnings per average share of common stock outstanding for the first quarter of 2000. For additional information concerning dividends on common stock, see "Dividends on Common Stock" on page II-7 in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in Conectiv's 1999 Annual Report on Form 10-K. (C) CONECTIV CLASS A COMMON STOCK ----------------------------- For general information concerning Class A common stock and information about conversion and redemption provisions related to Class A common stock, refer to Note 17 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K. For the three months ended March 31, 2000, dividends declared per share of Class A common stock were $0.80 in comparison to a loss per share of Class A common stock of $0.43. For additional information concerning dividends on Class A common stock, see "Dividends on Class A Common Stock" on page II-8 of the MD&A included in Conectiv's 1999 Annual Report on Form 10-K. COMPUTATION OF EARNINGS APPLICABLE TO CONECTIV CLASS A COMMON STOCK (Dollars in Thousands)(unaudited)
THREE MONTHS ENDED MARCH 31, ------------------- 2000 1999 -------- -------- Net earnings of ACE $ 1,040 $ 14,558 Exclude net income of non-utility activities (24) (102) -------- -------- Net income of Atlantic Utility Group 1,016 14,456 Pro-rata portion of fixed notional charge of $40 million per year (10,000) (10,000) -------- -------- Company Net Income (Loss) Attributable to the Atlantic Utility Group (8,984) 4,456 Percentage applicable to Class A Common Stock * 27.3% 30.0% -------- -------- Earnings (loss) applicable to Class A Common Stock $ (2,453) $ 1,337 ======== ========
* For information concerning the percentage of "Company Net Income (Loss) Attributable to the Atlantic Utility Group" which is applicable to Class A common stock, refer to Note 17 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K. SUMMARIZED FINANCIAL INFORMATION OF ATLANTIC CITY ELECTRIC COMPANY (Dollars in Thousands)(unaudited) INCOME STATEMENT INFORMATION
THREE MONTHS ENDED MARCH 31 ------------------------ 2000 1999 ---------- ---------- Operating revenues $ 208,886 $ 244,839 Operating income $ 22,680 $ 38,034 Net income $ 1,573 $ 15,091 Earnings applicable to common stock $ 1,040 $ 14,558
-7- BALANCE SHEET INFORMATION
MARCH 31, DECEMBER 31, 2000 1999 ---------- ---------- Current assets $ 280,383 $ 340,774 Noncurrent assets 2,286,818 2,313,885 ---------- ---------- Total assets $2,567,201 $2,654,659 ========== ========== Current liabilities $ 221,252 $ 300,837 Noncurrent liabilities 1,558,604 1,550,690 Preferred stock 125,181 125,181 Common stockholder's equity 662,164 677,951 ---------- ---------- Total capitalization and liabilities $2,567,201 $2,654,659 ========== ==========
(D) CHANGES IN CONSOLIDATED COMMON STOCKHOLDERS' EQUITY --------------------------------------------------- Conectiv's consolidated common stockholders' equity decreased from $1,138.2 million as of December 31, 1999, to $1,125.3 million as of March 31, 2000, primarily due to $23.2 million of common dividends declared and Conectiv's purchase of 1,541,500 shares of Conectiv common stock for $22.7 million, partly offset by net income of $32.5 million. NOTE 6. DEBT - ------- ---- The $608.2 million of short-term debt outstanding as of March 31, 2000 represented borrowings at the holding company level by Conectiv and had an average interest rate of 6.2%. Conectiv (the holding company) has credit agreements which provide borrowing capability of up to $1.03 billion. ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000. On February 1, 2000, DPL redeemed $2.1 million of 7 1/8% Pollution Control Bonds. On January 31, 2000, DPL arranged a $150 million revolving credit facility which expires January 31, 2003. The credit facility will provide liquidity for DPL's $104.8 million of Variable Rate Demand Bonds and for general corporate purposes. NOTE 7. 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 current liabilities include $3.0 million as of March 31, 2000 and December 31, 1999, respectively, 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. Conectiv does not expect such future costs to have a material effect on its financial position or results of operations. -8- NUCLEAR INSURANCE In conjunction with the ownership interests of DPL and ACE in Peach Bottom Atomic Power Station (Peach Bottom), Salem Nuclear Generating Station (Salem), and Hope Creek Nuclear Generating Station (Hope Creek), DPL and 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. 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), DPL and ACE could be assessed up to $57.0 million on an aggregate basis for such third-party claims. In addition, Congress could impose a revenue-raising measure on the nuclear industry to pay such claims. The co-owners of Peach Bottom, Salem, and Hope Creek maintain property insurance coverage of approximately $2.8 billion for each unit for loss or damage to the units, including coverage for decontamination expense and premature decommissioning. In addition, Conectiv is a member of an industry mutual insurance company, which provides replacement power cost coverage in the event of a major accidental outage at a nuclear power plant. Under these coverages, Conectiv is subject to potential retrospective loss experience assessments of up to $7.3 million on an aggregate basis. NOTE 8. SUPPLEMENTAL CASH FLOW INFORMATION - ------- ----------------------------------
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 -------- ------- (Dollars in thousands) CASH PAID (RECEIVED) FOR: Interest, net of amounts capitalized $ 46,103 $34,489 Income taxes, net of refunds $(74,832) $ 152
As shown above, Conectiv received $74.8 million of income tax refunds during the three months ended March 31, 2000. The income tax refunds were primarily related to the tax benefit associated with ACE's payment of $228.5 million on December 28, 1999 to terminate ACE's purchase of electricity under a contract with the Pedricktown Co-generation Limited Partnership (Pedricktown). For additional information concerning the contract termination, see Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K. NOTE 9. BUSINESS SEGMENTS - ------- ----------------- The following information is presented in accordance with Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). Conectiv's business segments under SFAS No. 131 are as follows: "ENERGY" represents (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 supply and trading activities, (c) power plant operation services, and (d) thermal heating and cooling systems operation and construction services; "POWER DELIVERY" includes activities related to delivery of electricity and gas to customers at regulated prices over transmission and distribution systems; "TELECOMMUNICATIONS" represents services provided by Conectiv Communications Inc. (CCI), including local and long-distance telephone service and internet services; "HVAC" represents heating, ventilation, and air conditioning services provided by CSI. -9- As discussed in Note 9 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, Conectiv's electricity supply businesses were deregulated in the third quarter of 1999. Prior to deregulation, amounts included in billings to electric customers for electricity supply and delivery were not separately identified; during this period, revenues were allocated directly to the Energy and Power Delivery business segments based on the cost of services provided. The operating results for business segments are evaluated based on "earnings before interest and income taxes," which is generally equivalent to Operating Income plus Other Income, less certain interest charges allocated to the business segments. The "earnings before interest and income taxes" of "All Other" business segments for the three months ended March 31, 1999 include $16.0 million from equity in earnings of Enertech Capital Partners, L.P. (Enertech). For additional information concerning Enertech, see Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K.
THREE MONTHS ENDED THREE MONTHS ENDED MARCH 31, 2000 MARCH 31, 1999 ---------------------------------- ---------------------------------- EARNINGS EARNINGS BEFORE INTEREST BEFORE INTEREST BUSINESS SEGMENTS REVENUES AND TAXES REVENUES AND TAXES - ------------------------ -------------- ---------------- --------------- --------------- (Dollars in Thousands) Energy (1) $ 950,295 $ 64,973 $ 763,358 $ 39,088 Power Delivery 188,060 63,262 196,966 80,934 Telecommunications 12,563 (13,577) 6,819 (8,289) HVAC 31,863 (3,506) 26,696 (3,328) All Other 2,640 (344) 1,784 14,359 -------------- ---------------- --------------- --------------- $ 1,185,421 (2) $ 110,808 (3) $ 995,623 (4) $ 122,764 (5) ============== ================ =============== ===============
(1) Includes the operating results of non-strategic electric generating plants which are expected to be sold by the third quarter of 2000 and CTS, which Conectiv plans to sell during 2000. (2) Includes intercompany revenues which are eliminated in consolidation as follows: Energy business segment--$137,654; Telecommunications business segment--$1,026; All Other business segments--$1,396. (3) "Earnings before interest and income taxes" less $53,555 of interest expense and preferred stock dividends and $505 of net Merger-related consolidation adjustments equals consolidated income before income taxes. (4) Includes intercompany revenues which are eliminated in consolidation as follows: Energy business segment--$45,204; Telecommunications business segment--$729; All Other business segments--$3,105. (5) "Earnings before interest and income taxes" less $40,404 of interest expense and preferred stock dividends and $351 of net Merger-related consolidation adjustments equals consolidated income before income taxes. -10- 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 terms acceptable to Conectiv; market demand and prices for energy, capacity, and fuel; weather variations affecting energy usage; operating performance of power plants; an increasingly competitive marketplace; results of any asset dispositions; sales retention and growth; federal and state regulatory 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 - ------------------------------ Earnings applicable to common stock were $35.0 million, or $0.41 per average share of common stock outstanding (85,568,000 average shares outstanding) for the first quarter of 2000, compared to earnings applicable to common stock of $47.4 million, or $0.47 per average share of common stock outstanding (100,532,000 average shares outstanding) for the first quarter of 1999. As discussed further below, the $0.06 decrease in earnings per share reflects lower investment income, rate decreases for electric delivery retail customers, increased losses for the telecommunications business, and higher interest expense. These variances were largely offset by additional revenues, net of related energy costs, from non-regulated electricity sales and the positive effect of fewer average shares of common stock outstanding. The table shown below shows contributions to earnings per average share of common stock outstanding for the first quarter of 2000 compared to the first quarter of 1999. AFTER-TAX CONTRIBUTION TO EARNINGS (LOSS) PER AVERAGE SHARE OF COMMON STOCK OUTSTANDING
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ------ ------ Equity in earnings of Enertech $ - $ 0.09 CCI (telecommunications) (0.12) (0.05) CSI (HVAC) (0.03) (0.02) Energy, Power Delivery, and Other 0.56 0.45 ------ ------ $ 0.41 $ 0.47 ====== ======
-11- As shown in the table above, Conectiv's equity in the earnings of Enertech, a venture capital fund that invests in energy-related technology and internet service companies, contributed $0.09 to earnings per average share of common stock outstanding in the first quarter of 1999. In the first quarter of 2000, Conectiv's equity in earnings of Enertech were not significant. As discussed in Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K, the earnings of Enertech may be volatile from period to period due to the nature of its investments. Enertech's investments include, among others, essential.com, Capstone Turbine Corporation, Coastal Security Systems, Inc., Extant, Inc., Sagemaker and Whisper Communications, Inc. As of March 31, 2000, the carrying amount of Conectiv's subsidiary's investment in Enertech was $29.5 million. On March 22, 2000, Conectiv announced plans which included the intent to find a strategic partner in the telecommunications business and increase focus on business markets and internet related data services. For the first quarter of 2000, CCI's telecommunications operations resulted in a $0.12 loss per average share of common stock outstanding compared to a $0.05 loss per average share of common stock outstanding for the first quarter of 1999. The higher loss per average share of common stock outstanding resulted from a larger operating loss after taxes and fewer average shares outstanding of common stock. CCI's after- tax operating loss increased due to higher customer service, sales and network operations expenses. Expansion of the telecommunications business caused these expenses to increase. The strategic plans announced by Conectiv on March 22, 2000 included the intent to sell CSI. The operations of CSI resulted in a $0.03 loss per average share of common stock outstanding for the first quarter of 2000 compared to a $0.02 loss per average share of common stock outstanding for the first quarter of 1999. The loss per average share of common stock outstanding increased primarily due to fewer average shares outstanding of common stock. As shown in the preceding table, "Energy, Power Delivery, and Other" contributed $0.56 to earnings per average share of common stock outstanding for the first quarter of 2000, compared to $0.45 per average share of common stock outstanding for the first quarter of 1999. This $0.11 increase was primarily due to fewer average common shares outstanding and higher earnings from the Energy business segment, partly offset by lower earnings from the Power Delivery business segment. As disclosed in Note 9 to the Consolidated Financial Statements, earnings before interest and income taxes of the Energy business segment increased $25.9 million and earnings before interest and income taxes of the Power Delivery business segment decreased by $17.7 million. Earnings before interest and income taxes of the Energy business segment increased primarily due to additional revenues from non-regulated electricity generation, trading and sales. The Energy business segment also benefited from lower depreciation and energy costs due to the effects of discontinuing the application of Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation" (SFAS No. 71) in the third quarter of 1999. The impact of the electricity delivery customers of DPL and ACE choosing alternative electricity suppliers was minimized by (a) selling electricity generated by the deregulated power plants to other customers, and (b) some customers selecting "Conectiv Energy" (the trade name under which DPL markets competitive retail energy) as their alternative electricity supplier. Customers representing approximately 6% of the 1999 peak loads of DPL and ACE were purchasing electricity marketed under the Conectiv Energy trade name as of March 31, 2000. Also, delivery customers representing approximately 8% of the 1999 peak loads of DPL and ACE were purchasing electricity from electricity suppliers other than Conectiv as of March 31, 2000. -12- Earnings before interest and income taxes of the Power Delivery business segment decreased primarily due to revenue decreases from lower rates for electric delivery customers and higher customer care expenses. As previously disclosed in the MD&A under "Deregulated Generation and Power Plant Sales" on page II-12 of Conectiv's 1999 Annual Report on Form 10-K, Conectiv is building 1,100 MW of combined cycle units under its mid-merit electric generation strategy and is selling the nuclear and non-strategic baseload fossil electric generating plants of DPL and ACE. The sales of the electric generating plants are expected to be completed by the third quarter of 2000 and may cause a temporary decrease in earnings from the Energy business since the new mid-merit electric generation plants under construction are expected to be phased into service from the third quarter of 2001 through 2003. The proceeds from sales of the electric generating plants are expected to be used for debt repayment, repurchases of common stock, expansion of the mid-merit electric generation business, and general corporate purposes. Conectiv's Board of Directors declared a $0.22 dividend per share of common stock for the first quarter of 2000, which represented approximately 54% of the $0.41 of earnings per average share of common stock outstanding for the first quarter of 2000. For additional information concerning dividends on common stock, see "Dividends on Common Stock" on page II-7 in the MD&A included in Conectiv's 1999 Annual Report on Form 10-K. CLASS A COMMON STOCK EARNINGS SUMMARY - -------------------------------------- For general information concerning Class A common stock and information about conversion and redemption provisions related to Class A common stock, refer to Note 17 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K. For the first quarter of 2000, a $2.5 million loss was applicable to Class A common stock, or a $0.43 loss per average share of Class A common stock outstanding (5,742,000 average shares outstanding). Under 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 which existed on August 9, 1996 and were regulated by the NJBPU.) For any quarterly reporting period, if the AUG earns less than $10.0 million (the quarterly pro-rata portion of the annual fixed notional charge), a loss will be applicable to Class A common stock. As shown in Note 5 to the Consolidated Financial Statements, the net income of the AUG was $1.0 million for the first quarter of 2000, which resulted in a $2.5 million loss applicable to Class A common stock. In the first quarter of 1999, based on $14.5 million of net income of the AUG, $1.3 million of earnings were applicable to Class A common stock, or $0.20 per average share of Class A common stock outstanding (6,561,000 average shares outstanding). As discussed above, lower earnings of the AUG caused the earnings applicable to Class A common stock to decrease from earnings of $0.20 per share in the first quarter of 1999 to a loss of $0.43 per share in the first quarter of 2000. Earnings of the AUG decreased primarily due to lower electric revenues of ACE, reflecting the effect of customer rate decreases and lower volume of electricity delivered, and higher operation and maintenance expenses of ACE. For the three months ended March 31, 2000, dividends declared per share of Class A common stock were $0.80 in comparison to a loss per share of common stock of $0.43. For additional information concerning dividends on Class A common stock, see "Dividends on Class A Common Stock" on page II-8 of the MD&A included in Conectiv's 1999 Annual Report on Form 10-K. -13- PLANNED FORMATION OF CONECTIV ENERGY HOLDING COMPANY - ---------------------------------------------------- As discussed below, the strategic electric generating plants of DPL and ACE which are being retained by Conectiv are expected to be transferred to other Conectiv subsidiaries during mid-2000. By late-2000, the principal businesses of DPL and ACE are expected to be the transmission and distribution of energy as a result of the transfers and expected sales of electric generating plants, as well as the expected transfer of energy trading and marketing activities from DPL to another Conectiv subsidiary. The businesses of DPL and ACE will also include supplying electricity to customers who do not choose an alternative electricity supplier; power purchased by DPL and ACE will be the source of the electricity supplied to their customers. Conectiv expects to receive SEC approval in the second quarter of 2000 to establish a new subsidiary, Conectiv Energy Holding Company (CEH), which will own Conectiv Energy Supply, Inc (CESI), Conectiv Delmarva Generation Inc. (CDG), and ACE REIT, Inc. and its subsidiary, Conectiv Atlantic Generation, LLC (CAG). Through its subsidiaries, CEH will be engaged in non-regulated electricity production and sales, and energy trading and marketing. The strategic electric generating plants of DPL, with 1,364 MW of capacity, and the strategic electric generating plants of ACE, with 502 MW of capacity, are expected to be transferred to CDG and CAG, respectively. Despite these changes, the electric generating plants transferred to CAG will remain part of the AUG. The combined cycle units of Conectiv which are currently being constructed are also expected to be transferred to CDG by early 2001. CESI's activities are expected to include purchasing and selling the electricity generated by the power plants of CDG and CAG, as well as energy trading and marketing, and other energy-related services. The electricity and gas competitive energy activities currently conducted by DPL are expected to be phased out by DPL and assumed by CESI over the next six to twelve months. ELECTRIC UTILITY INDUSTRY RESTRUCTURING - ---------------------------------------- An update to the information previously reported in the MD&A under "Electric Utility Industry Restructuring," beginning on page II-9 of Conectiv's 1999 Annual Report on Form 10-K is presented below. NEW JERSEY ELECTRIC UTILITY INDUSTRY RESTRUCTURING 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 NJBPU's final order for ACE has been delayed due to appeals of the NJBPU's final order concerning restructuring the electricity supply business of PSE&G. In April 2000, the appeals of the NJBPU's restructuring order for PSE&G were denied by the Appellate Division of the New Jersey Superior Court. On May 2, 2000, one of the appellants filed a notice of its intention to request the New Jersey Supreme Court to exercise its discretion to review the unanimous Appellate Division decision. ELECTRIC REVENUES - -----------------
THREE MONTHS ENDED MARCH 31, -------------- 2000 1999 ------ ------ (Dollars in millions) Regulated electric revenues $461.9 $500.1 Non-regulated electric revenues 168.4 63.2 ------ ------ Total electric revenues $630.3 $563.3 ====== ======
-14- The table above shows the amounts of electric revenues earned which are subject to price regulation (Regulated) and which 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. Regulated electric revenues decreased by $38.2 million, from $500.1 million for the first quarter of 1999 to $461.9 million for the first quarter of 2000. The $38.2 million decrease reflects a $23.3 million decrease due to customers choosing alternative electricity suppliers and an $18.7 million reduction due to retail rate decreases for electric utility industry restructuring, partly offset by a $3.8 million increase primarily from higher volumes of electricity sold through the interchange. The change in the volume of electricity delivered to retail customers was not significant on a consolidated basis. "Non-regulated electric revenues" result primarily from electricity trading activities, bulk sales of electricity including sales of output from deregulated electric generating plants, and competitive retail sales. Conectiv actively participates in the wholesale energy markets to support wholesale utility and competitive retail marketing activities. Energy market participation results in exposure to commodity market risk when, at times, net open energy commodity positions are created or allowed to continue. To the extent that Conectiv has net open positions, controls are 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. Non-regulated electric revenues increased by $105.2 million, from $63.2 million for the first quarter of 1999 to $168.4 million for the first quarter of 2000. The $105.2 million increase was mainly due to higher wholesale sales of electricity generated by deregulated power plants, increased volumes of electricity traded, and higher competitive retail electricity sales. Deregulation of the electric generating plants, high plant availability, and lower load obligations due to some customers choosing alternative suppliers made more electricity output of electric generating plants available for sale in non- regulated markets. Sales of competitive retail electricity increased due to increased marketing to large commercial and industrial customers outside Conectiv's service area and sales to the delivery customers of DPL and ACE who selected "Conectiv Energy" (trade name) as their alternative electricity supplier. GAS REVENUES - ------------
THREE MONTHS ENDED MARCH 31, -------------- 2000 1999 ------ ------ (Dollars in millions) Regulated gas revenues $ 44.9 $ 52.6 Non-regulated gas revenues 229.6 239.3 ------ ------ Total gas revenues $274.5 $291.9 ====== ======
DPL earns gas revenues from on-system sales which generally are subject to price regulation, off-system trading and sales of natural gas which are not subject to price regulation, and from the transportation of gas for customers. CESI also markets natural gas. The table above shows the amounts of gas revenues earned from sources which were subject to price regulation (Regulated) and which were not subject to price regulation (Non-regulated). -15- Regulated gas revenues decreased $7.7 million for the first quarter of 2000 in comparison to the first quarter of 1999. The decrease resulted from some commercial and industrial customers electing to buy gas from alternative suppliers. However, because DPL's gross margin (gas revenues less gas purchased) from supplying regulated gas customers is insignificant, the $7.7 million gas revenue decrease did not affect pre-tax profits. Non-regulated gas revenues decreased $9.7 million due to lower volumes of gas traded, partly offset by increased competitive retail gas sales. Although non- regulated gas revenues decreased, the gross margin earned from non-regulated gas revenues increased by $2.4 million. OTHER SERVICES REVENUES - ------------------------ Other services revenues were comprised of the following:
THREE MONTHS ENDED MARCH 31, ------------------ 2000 1999 ------ ------ (Dollars in millions) Fuel oil and gasoline $ 71.4 $37.5 CSI (HVAC) 31.9 26.7 CCI (Telecommunications) 12.6 6.8 Thermal systems 6.1 5.9 Operation of power plants 9.3 5.8 Solutions * 3.3 4.7 Other 6.0 4.0 ------ ----- Total $140.6 $91.4 ====== =====
* Customized energy-related products and services "Other services" revenues increased $49.2 million in the first quarter of 2000 primarily due to increases of $33.9 million for fuel oil and gasoline sales, $5.2 million for HVAC services, and $5.8 million for telecommunications. Revenues from fuel oil and gasoline sales increased due to higher volume and higher market prices for oil. The gross margin (revenues less cost of sales) earned from "Other services" increased by $4.6 million, which was primarily attributed to CCI's telecommunications business and CSI's HVAC business. The improvement in CCI's gross margin reflects the benefit of having a greater proportion (about two- thirds) of access lines on its network facilities in comparison to last year. CCI had sold approximately 85,000 access lines as of March 31, 2000, which represented a 102% increase from a year ago. OPERATING EXPENSES - ------------------- Electric Fuel and Purchased Energy and Capacity "Electric fuel and purchased energy and capacity" increased $52.7 million in the first quarter of 2000 due to higher volumes of non-regulated electricity generated and purchased for resale, partly offset by lower costs due to the effects of discontinuing application of SFAS No. 71 to the electricity supply businesses of DPL and ACE. -16- Gas Purchased Gas purchased decreased by $20.0 million in the first quarter of 2000 due to lower volumes of gas purchased for resale off-system and for supply of commercial and industrial customers in DPL's service area. Other Services Cost of Sales Other services cost of sales increased by $44.5 million in the first quarter of 2000 primarily due to higher volumes and market prices of fuel oil and gasoline purchased for resale, and higher volumes of HVAC and telecommunication services provided. Operation and Maintenance Expenses Operation and maintenance expenses increased by $22.6 million in the first quarter of 2000 primarily due to increases in the operating expenses of jointly- owned power plants, customer care expenses associated with Power Delivery customers, and expenses related to expanding the telecommunications business. Depreciation and amortization Depreciation and amortization expenses decreased $3.0 million mainly due to the write-downs in the third and fourth quarters of 1999 of the electric generating plants in connection with restructuring the electric utility industry in Delaware, Maryland, and New Jersey. Amortization of "Recoverable stranded costs" partly offset the decrease from lower depreciation of power plants. Taxes other than income taxes Taxes other than income taxes increased $2.5 million primarily due to higher revenues from non-regulated electricity sales. OTHER INCOME - ------------- Other income decreased $10.8 million in the first quarter of 2000 primarily because Conectiv's equity in earnings of Enertech was not significant in the first quarter of 2000 compared to $16.0 million in the first quarter of 1999. Excluding the decrease due to Enertech, other income increased $5.2 million primarily due to a gain on the sale of an investment in a leveraged lease, higher equity in earnings of a non-utility generation joint venture, partly offset by income in the first quarter of 1999 from implementation of mark-to- market accounting for energy trading activities. FINANCING COSTS - ---------------- Financing costs reflected in the Consolidated Statements of Income include interest charges, allowance for funds used during construction, and preferred stock dividend requirements of subsidiaries. Financing costs increased $14.2 million in the first quarter mainly due to approximately $6.4 million of additional interest expense for financing purchases of Conectiv common stock, $4.1 million of interest charges on the $228.5 million borrowing in December 1999 to finance the payment to terminate the Pedricktown purchased power contract, and $1.0 million of interest expense accrued on ACE's regulatory liability related to BGS. The net impact of the additional interest expense from purchasing common stock and fewer shares of common stock outstanding resulted in an increase in earnings per share of common stock of approximately $0.02. -17- INCOME TAXES - ------------ Income taxes decreased $9.1 million mainly due to lower income before income taxes. LIQUIDITY AND CAPITAL RESOURCES - -------------------------------- Due to $148.9 million of cash provided by operating activities, $51.0 million of cash used by investing activities, and $73.6 million of cash used by financing activities, cash and cash equivalents increased by $24.3 million during the first quarter of 2000. Net cash provided by operating activities for the first quarter of 2000 included positive cash flow from $74.8 million of income tax refunds which were primarily related to the tax benefit associated with ACE's payment of $228.5 million on December 28, 1999 to terminate the Pedricktown purchased power contract. In the first quarter of 1999, $0.2 million of income taxes were paid. Excluding the $75.0 million positive variance in cash flow attributed to income taxes, net cash flow from operations decreased by $75.1 million primarily due to slower collection of accounts receivable, higher interest expense payments, and prior- year over-collections of energy costs from customers. Excluding changes due to reclassifications, accounts receivable as of March 31, 2000 increased by $114.4 million in comparison to December 31, 1999. This increase reflects higher revenues and slower collections of accounts receivable caused by conversion to a new customer billing system in December 1999. Management expects that the average time period for collection of accounts receivable will decrease in future periods. As of March 31, 2000, Conectiv had an accrued tax liability of $97.5 million. In comparison, as of December 31, 1999, Conectiv had prepaid income taxes of $15.7 million primarily due to the expected tax benefit for the December 1999 payment to terminate the Pedricktown purchased power contract. The $113.2 million increase in accrued taxes was mainly due to the $74.8 million of income tax refunds received and income taxes accrued on taxable income in the first quarter of 2000. Capital expenditures were $63.5 million for the first quarter of 2000 compared to $58.9 million for the first quarter of 1999. Increased capital expenditures due to expansion of CCI's telecommunications network, upgrades of the electric transmission and distribution systems, and expenditures for construction of the combined cycle units, were largely offset by last year's expenditures for a new customer service center and other shared infrastructure assets. The $13.6 million of positive cash flow in the first quarter of 2000 from "Decrease in investment in leveraged leases" was mainly due to the sale of an aircraft which was owned through a leveraged lease. Common dividends paid were $23.5 million for the first quarter of 2000 in comparison to $43.7 million for the first quarter of 1999. The decrease in common dividends paid was due to fewer shares of common stock and Class A common stock and lower dividends per share of common stock. For information concerning the 1999 offer to purchase shares of common stock and the 1999 reduction in dividends per share of common stock, see Note 16 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 1999 Annual Report on Form 10-K. As previously disclosed, as a registered holding company under PUHCA, Conectiv may not pay dividends on the shares of common stock and Class A common stock from an accumulated deficit or paid-in-capital without SEC approval. As of March 31, 2000, Conectiv had an accumulated deficit of $27.1 million. On April 27, 2000, the SEC approved Conectiv's payment of dividends on common stock and Class A common stock for the first and second quarters of 2000. Conectiv expects to have retained -18- earnings sufficient to offset dividends declared on shares of common stock and Class A common stock beginning in the third quarter of 2000, when the sale of certain electric generating units is expected to be completed. There can be no assurances, however, that the sales of these electric generating units will be completed, or that any gain will be realized from the sales of these electric generating units. Conectiv expects that, if additional SEC approvals are required for quarterly payment of dividends, such approvals would be received. During the three months ended March 31, 2000, Conectiv purchased 1,541,500 shares of Conectiv common stock for $22.7 million. As of March 31, 2000, 4,630,300 shares of common stock remained authorized for purchase under the stock purchase program announced in January 2000. ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000. On February 1, 2000, DPL redeemed $2.1 million of 7 1/8% Pollution Control Bonds. Conectiv's short-term debt balance as of March 31, 2000 increased by $28.5 million from the balance as of December 31, 1999 primarily due to financing purchases of Conectiv common stock. Conectiv's capital structure, including short-term debt, current maturities of long-term debt, and variable rate demand bonds, is shown below.
MARCH 31, DECEMBER 31, 2000 1999 --------- ------------ Common stockholders' equity 26.2% 26.2% Preferred stock of subsidiaries 6.6% 6.6% Long-term debt and variable rate demand bonds 53.0% 52.7% Short-term debt and current maturities of long-term debt 14.2% 14.5%
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. 12 Months Ended Year Ended December 31, March 31, ---------------------------- 2000 1999 1998 1997 1996 1995 --------- ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method) 1.81 1.98 2.38 2.63 2.83 2.92 -19- ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK - ------- ---------------------------------------------------------- As previously disclosed under "Quantitative and Qualitative Disclosures About Market Risk" on pages II-24 to II-25 of Conectiv's 1999 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 concerning Conectiv's commodity price risk is below. Conectiv is exposed to the impact of market fluctuations in the price and transportation costs of natural gas, electricity, and petroleum products. 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 hedging activities are conducted using energy derivatives (futures, option, and swaps). The remainder of Conectiv's hedging activity is conducted by backing physical transactions with offsetting physical positions. The hedging objectives include the assurance of stable and known minimum cash flows and the fixing of favorable prices and margins when they become available. Conectiv also engages in energy commodity trading and arbitrage activities, which expose Conectiv to commodity market risk when, at times, Conectiv creates net open energy commodity positions or allows net open positions to continue. To the extent that Conectiv has net open positions, controls are in place that are intended to keep risk exposures within management-approved risk tolerance levels. Conectiv uses a value-at-risk model to assess the market risk of its electricity, gas, and petroleum 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 business 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 was approximately $18.3 million as of March 31, 2000, in comparison to $4.0 million as of December 31, 1999. The increase in value-at-risk was primarily due to increased hedging, with forward contracts, of the deregulated portion of the electricity output of Conectiv's power plants. -20- PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS - -------------------------- The municipal utility within the City of Vineland has built electric distribution facilities to a previously undeveloped area that is both within the city limits and ACE's franchised service area. After unsuccessful negotiations with the City of Vineland, ACE has initiated litigation before the NJBPU to defend its franchise right to serve. Because the area has previously been undeveloped, the outcome of the litigation, even if negative, will have no immediate effects on revenue. In addition, the City of Vineland has recently initiated a process to appraise all of ACE's electric distribution property located within the municipal boundaries. This process may or may not lead to an effort by the City of Vineland to condemn ACE's electric distribution property. ACE intends to oppose any involuntary condemnation and, alternatively, to ensure that there is adequate compensation for any property condemned. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - ------------------------------------------------------------ On March 28, 2000, Conectiv held its 2000 Annual Meeting of Stockholders. Pursuant to "Proposal No. 1 - Election of Directors" included in the Definitive Proxy Statement filed with the SEC on February 22, 2000, Conectiv's stockholders voted on the election of one Class 1 Director (Cyrus H. Holley) and three Class II Directors (Robert D. Burris, Sarah I. Gore, and George F. MacCormack). Class I Directors serve until the Annual Meeting in 2002 and Class II Directors serve until the Annual Meeting in 2003. All four nominees for Directors of Conectiv were elected, with the voting results shown below:
Votes For Votes Withheld ---------- -------------- Cyrus H. Holley 68,069,038 2,636,115 Robert D. Burris 68,090,986 2,614,167 Sarah I. Gore 68,032,026 2,673,127 George F. MacCormack 68,069,803 2,635,350
No other matters were submitted to a vote of Conectiv's security holders. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K - ------------------------------------------ Exhibits - -------- Exhibit 12, Ratio of Earnings to Fixed Charges Exhibit 27, Financial Data Schedule Reports on Form 8-K - -------------------- On January 31, 2000, Conectiv filed a Current Report on Form 8-K dated January 18, 2000 reporting on Item 5, Other Events, and Item 7, Financial Statements and Exhibits. On March 22, 2000, Conectiv filed a Current Report on Form 8-K dated March 22, 2000 reporting on Item 5, Other Events. -21- 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: May 12, 2000 /s/ John C. van Roden ------------ ---------------------------------------- John C. van Roden, Senior Vice President and Chief Financial Officer -22- Exhibit Index ------------- Exhibit 12, Ratio of Earnings to Fixed Charges Exhibit 27, Financial Data Schedule EX-12 2 RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 Conectiv Ratio of Earnings to Fixed Charges ---------------------------------- (Dollars in Thousands)
12 Months Ended Year Ended December 31, March 31, ------------------------------------------------------ 2000 1999 1998 1997 1996 1995 ---------- ---------- --------- --------- -------- ---------- Income before extraordinary item $ 97,420 $113,578 $153,201 $101,218 $107,251 $107,546 ---------- ---------- --------- --------- -------- ---------- Income taxes 96,713 105,816 105,817 72,155 78,340 75,540 ---------- ---------- --------- --------- -------- ---------- Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 157,695 149,732 133,796 78,350 69,329 65,572 Other interest 43,635 37,743 26,199 12,835 12,516 10,353 Preferred dividend require- ments of subsidiaries 19,995 19,894 17,871 10,178 10,326 9,942 ---------- ---------- --------- --------- -------- ---------- Total fixed charges 221,325 207,369 177,866 101,363 92,171 85,867 ---------- ---------- --------- --------- -------- ---------- Nonutility capitalized interest (3,563) (3,264) (1,444) (208) (311) (304) ---------- ---------- --------- --------- -------- ---------- Earnings before extraordinary item, income taxes, and fixed charges $411,895 $423,499 $435,440 $274,528 $277,451 $268,649 ========== ========== ========= ========= ======== ========== Total fixed charges shown above $221,325 $207,369 $177,866 $101,363 $ 92,171 $ 85,867 Increase preferred stock dividend requirements of subsidiaries to a pre-tax amount 6,639 6,123 4,901 3,065 6,025 6,243 ---------- ---------- --------- --------- -------- ---------- Fixed charges for ratio computation $227,964 $213,492 $182,767 $104,428 $ 98,196 $ 92,110 ========== ========== ========= ========= ======== ========== Ratio of earnings to fixed charges 1.81 1.98 2.38 2.63 2.83 2.92
For purposes of computing the ratio, earnings are income before extraordinary item plus income taxes and fixed charges, less nonutility capitalized interest. 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. EX-27 3 FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM CONECTIV'S 1ST QUARTER 2000 10-Q AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 3-MOS DEC-31-2000 JAN-01-2000 MAR-31-2000 PER-BOOK 2,786,962 544,854 908,621 1,346,616 638,752 6,225,805 906 1,157,684 (27,131) 1,125,349 188,950 95,933 2,122,550 608,219 0 0 2,937 0 25,197 28,718 2,027,952 6,225,805 1,045,345 24,211 943,399 967,610 77,735 12,315 90,050 57,513 32,537 0 32,537 23,196 0 148,904 $0.41 $0.41
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