-----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, TpmHsj6ABsmRaCjRc6njDTdb6mpAe+hQi342gOeWNbv9+cM2Gp0VbzqAL3E47XrW es6Ggmjwfinx9tZ/LRyy3w== 0001036050-01-000404.txt : 20010316 0001036050-01-000404.hdr.sgml : 20010316 ACCESSION NUMBER: 0001036050-01-000404 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010315 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-K SEC ACT: SEC FILE NUMBER: 001-13895 FILM NUMBER: 1569569 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-K 1 0001.txt CONECTIV FORM 10-K - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------- FORM 10-K [X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 or [_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Commission file number 1-13895 ---------------- CONECTIV (Exact name of registrant as specified in its charter) Delaware 51-0377417 (State of incorporation) (I.R.S. Employer Identification No.) 800 King Street, P. O. Box 231 Wilmington, Delaware 19899 (Address of principal executive offices) Registrant's telephone number (302) 429-3069 ---------------- Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange Title of each class on which registered ------------------- ----------------------- Common stock, $0.01 par value New York Stock Exchange Class A common stock, $0.01 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None ---------------- Indicate by check mark whether the registrant (1) has filed all reports re- quired to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the reg- istrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [_] The aggregate market value of Conectiv common stock and Conectiv Class A common stock held by non-affiliates as of December 31, 2000 was $1,730.4 mil- lion based on the New York Stock Exchange Composite Transaction closing pric- es. The number of shares outstanding of each class of Conectiv's common stock, as of the latest practicable date, was as follows:
Class Outstanding at January 31, 2001 ----- ------------------------------- Common stock, $0.01 par value 82,972,179 shares Class A common stock, $0.01 par value 5,742,315 shares
Documents Incorporated by Reference
Part of Form 10-K Document Incorporated by Reference ----------------- ---------------------------------- III Portions of the Preliminary Joint Proxy Statement/Prospectus for New RC Inc. on Form S-4 which was filed with the Securities and Exchange Commission on March 14, 2001.
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Page ---- PART I Item 1.Business Overview.................................................................. I-1 General.................................................................. I-1 Business Segments........................................................ I-1 Regulation............................................................... I-2 Sources of Revenues...................................................... I-2 Certain Business Focus Changes During 2000............................... I-3 Earnings Outlook......................................................... I-3 Power Delivery............................................................ I-3 Energy.................................................................... I-3 Electric Utility Industry Restructuring.................................. I-4 Basic Generation Service................................................. I-4 Default Service.......................................................... I-4 Conectiv Energy Holding Company.......................................... I-4 Mid-merit Electric Generation............................................ I-5 Agreements for the Sales of Electric Generating Plants................... I-5 Telecommunications........................................................ I-6 HVAC...................................................................... I-7 Other Businesses.......................................................... I-7 Capacity.................................................................. I-7 Electric Generating Plants............................................... I-7 Purchased Power.......................................................... I-8 Supplying Forecasted Peak Loads.......................................... I-8 PJM Interconnection, L.L.C. .............................................. I-8 Nuclear Power Plants...................................................... I-9 Fuel Supply for Electric Generation....................................... I-9 Coal..................................................................... I-10 Oil...................................................................... I-10 Gas...................................................................... I-10 Nuclear.................................................................. I-10 Energy Adjustment Clauses................................................. I-11 Retail Electric Rates..................................................... I-11 Customer Billing.......................................................... I-12 New Jersey Electric System Reliability Standards.......................... I-12 New Jersey Demand Side Management......................................... I-12 Cost Accounting Manual/Code of Conduct.................................... I-13 Affiliated Transactions................................................... I-13 Federal Decontamination & Decommissioning Fund............................ I-13 Regulated Gas Delivery and Supply......................................... I-13 Capital Spending and Financing Program.................................... I-14 Environmental Matters..................................................... I-14 Air Quality Regulations.................................................. I-14 Water Quality Regulations................................................ I-15 Hazardous Substances..................................................... I-16 Executive Officers........................................................ I-17 Item 2.Properties.......................................................... I-18 Item 3.Legal Proceedings................................................... I-19 Item 4.Submission of Matters to a Vote of Security Holders................. I-19
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Page ----- PART II Item 5.Market for Registrant's Common Equity and Related Stockholder Matters................................................................ II-1 Item 6.Selected Financial Data.......................................... II-3 Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations.................................................. II-5 Item 7A.Quantitative and Qualitative Disclosures About Market Risk...... II-26 Item 8.Financial Statements and Supplementary Data...................... II-28 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure............................................ II-81 PART III Item 10.Directors and Executive Officers of the Registrant.............. III-1 Item 11.Executive Compensation.......................................... III-1 Item 12.Security Ownership of Certain Beneficial Owners and Management.. III-1 Item 13.Certain Relationships and Related Transactions.................. III-1 PART IV Item 14.Exhibits, Financial Statement Schedules, and Reports on Form 8- K...................................................................... IV-1 Signatures.............................................................. IV-9
ii ITEM 1. BUSINESS Overview General Conectiv was formed on March 1, 1998 (the 1998 Merger), through a series of merger transactions and an exchange of common stock with Delmarva Power & Light Company (DPL) and Atlantic Energy, Inc. (Atlantic). For additional in- formation about the 1998 Merger, refer to Note 4 to the Consolidated Financial Statements included in Item 8 of Part II. As used in this document, references to Conectiv may mean the activities of one or more subsidiaries. Conectiv's primary businesses are the supply and delivery of electricity and gas in mar- kets subject to price regulation ("regulated") and the supply and trading of electricity and gas in markets not subject to price regulation ("non-regulat- ed"). These businesses, particularly the regulated businesses, are weather sensitive and seasonal because sales of electricity are usually higher during the summer months, due to air conditioning usage, and natural gas sales are usually higher in the winter when gas is used for space-heating. On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for a combination of cash and stock. The transaction is subject to various statu- tory and regulatory approvals and approval by the stockholders of Conectiv and Pepco. For information about the Conectiv/Pepco Merger Agreement, see Note 5 to the Consolidated Financial Statements included in Item 8 of Part II or "Agreement For The Acquisition Of Conectiv" in Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) included in Item 7 of Part II. Conectiv's two largest subsidiaries, DPL and Atlantic City Electric Company (ACE), are public utilities that supply and deliver electricity to their cus- tomers under the trade name Conectiv Power Delivery. A transition to market pricing and terms of service for supplying electricity to customers in the regulated service areas of DPL and ACE began in 1999. Substantially all of the customers of DPL and ACE can now elect to choose an alternative electricity supplier. DPL also supplies and delivers natural gas to its customers. Conectiv Energy Holding Company (CEH) was formed during 2000. CEH and its sub- sidiaries are engaged in non-regulated electricity production and sales, en- ergy trading and marketing. Conectiv is changing the types of electric generating plants it owns. Based on megawatts (MW) of generating capacity, approximately 54% (2,203.5 MW) of the electric generating plants owned by Conectiv as of December 31, 2000 (4,079.5 MW) were under agreements for sale. Conectiv is also building new "mid-merit" electric generating plants, which management expects will provide a better strategic fit with Conectiv's energy trading activities and have more profitable operating characteristics than the plants to be sold. See "Mid- merit Electric Generation" beginning on I-5 for additional information. At December 31, 2000, Conectiv had 3,573 employees, including 1,871 employ- ees represented by labor organizations. The number of employees as of December 31, 2000 decreased by 1,274 from December 31, 1999, primarily due to the sale of the heating, ventilation, and cooling (HVAC) businesses in 2000 and staff- ing reductions for the telecommunications businesses of Conectiv Communica- tions, Inc. (CCI). Business Segments A brief description of Conectiv's business segments is presented below. Also see the more detailed discussions about the business segments, which begin on page I-3 within Part I and see Note 27 to Conectiv's Consolidated Financial Statements included in Item 8 of Part II for financial information about the business segments. "Power Delivery" includes activities related to delivery of electricity and gas to customers at regulated prices over transmission and distribution sys- tems. The Power Delivery business is conducted by DPL and ACE. I-1 "Energy" includes (a) the generation, purchase, trading and sale of elec- tricity, including the obligations of DPL and ACE to supply electricity to customers who do not choose an alternative electricity supplier; (b) gas and other energy supply and trading activities, (c) power plant operation servic- es, and (d) district heating and cooling systems operation and construction services provided by Conectiv Thermal Systems, Inc. (CTS). "Telecommunications" represents services provided by CCI, including local and long-distance telephone service and Internet services. "HVAC" represents heating, ventilation, and air conditioning services, which were provided by Conectiv Services, Inc. (CSI) prior to the sale of this busi- ness in the latter half of 2000. Regulation Conectiv is a registered holding company under the Public Utility Holding Company Act of 1935, as amended (PUHCA). PUHCA imposes certain restrictions on the operations of registered holding companies and their subsidiaries. Pursu- ant to PUHCA regulations, Conectiv formed a subsidiary service company, Conectiv Resource Partners, Inc. (CRP) in 1998. CRP provides a variety of sup- port services to Conectiv subsidiaries. The costs of CRP are directly assigned and allocated to the Conectiv subsidiaries. Certain aspects of Conectiv's electric and gas utility businesses are sub- ject to regulation by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively), the New Jersey Board of Public Utilities (NJBPU), the Virginia State Corporation Commission (VSCC), and the Federal En- ergy Regulatory Commission (FERC). As discussed below and under "Energy" be- ginning on page I-3, the nature of regulation of retail electricity sales by these regulatory commissions changed during 1999. Retail gas sales are subject to regulation by the DPSC. Excluding sales not subject to price regulation, the percentages of retail electric and gas utility operating revenues regu- lated by each regulatory commission for the year ended December 31, 2000, were as follows: NJBPU, 45.9%; DPSC, 34.0%; MPSC, 18.4%; and VSCC, 1.7%. Wholesale electricity sales are subject to FERC regulation. Sources of Revenues The sources of Conectiv's consolidated revenues on a percentage basis are shown in the table below. Regulated electric and gas revenues include the sup- ply and delivery of these commodities within the service areas of DPL and ACE.
2000 1999 1998 ----- ----- ----- Regulated electric revenues *........................... 39.8% 57.4% 62.4% Non-regulated electric revenues......................... 18.0 8.3 9.3 Regulated gas revenues.................................. 2.2 3.1 3.5 Non-regulated gas revenues.............................. 28.2 18.7 13.9 Other services.......................................... 11.8 12.5 10.9 ----- ----- ----- Total revenues.......................................... 100.0% 100.0% 100.0% ===== ===== =====
- -------- * In 2000, Conectiv's consolidated regulated electric retail revenues were earned from the following customer classes: residential--48.0%; commer- cial--37.2%; industrial--12.4%; and other--2.4%. During 1998-2000, the percentage of Conectiv's revenues provided by non-reg- ulated electricity and gas sales have increased and the percentage of Conectiv's revenues provided by regulated electricity and gas sales have de- creased. This change in the composition of Conectiv's revenues has primarily resulted from growth of Conectiv's energy trading activities, deregulation of Conectiv's electric generating plants in 1999, customers within the service areas of DPL and ACE choosing alternative suppliers, and rate reductions asso- ciated with restructuring the electric utility industry. The business activi- ties included in "other services" revenues are telecommunications, HVAC, pe- troleum sales, and other activities. I-2 Certain Business Focus Changes During 2000 During mid- to late-2000, Conectiv sold its HVAC business and portions of CTS, which constructs and operates district heating and cooling systems. Conectiv also began exiting from the competitive retail energy business (the supply of electricity and gas in deregulated retail markets). In addition, Conectiv initiated a process in 2000 to identify a strategic partner for CCI. Due to weaknesses in the valuations of telecommunications businesses, Conectiv continues to evaluate its partnering or other options. Earnings Outlook Conectiv's businesses have undergone significant change during 2000 and are expected to continue to change. Among other things, deregulated electricity generation and energy trading now constitute a greater portion of Conectiv's earnings. The sale of the HVAC businesses during 2000 has removed an unprofit- able operation from Conectiv. On-going business developments are also expected to cause future operating results to differ from the past. Accordingly, past results are not an indication of future business prospects or financial re- sults. As Conectiv exits from the regulated electricity production business and builds mid-merit electric generation, operating earnings may temporarily decrease and may also be more volatile. For additional information concerning factors that are expected to influence future operating results, see "Common Stock Earnings Outlook" and "Class A Common Stock Earnings Outlook" in the MD&A included in Item 7 of Part II. Power Delivery In addition to the topics that are discussed within this section, informa- tion about the "Power Delivery" business is included in Part I under the fol- lowing captions: "Retail Electric Rates," "Customer Billing," "New Jersey Electric System Reliability Standards," "New Jersey Demand Side Management," "Cost Accounting Manual/Code of Conduct," "Affiliated Transactions," and "Reg- ulated Gas Delivery and Supply." The Power Delivery business segment is responsible for the transmission and distribution of electricity and natural gas to customers within the service territories of DPL and ACE. Rates charged to DPL's customers for delivery services are subject to regulation primarily by the DPSC, MPSC, and VSCC. Rates charged to ACE's customers for electric delivery service are subject to regulation primarily by the NJBPU. DPL and ACE deliver electricity within their service areas to approximately 973,600 customers through their respective transmission and distribution sys- tems and also supply electricity to most of their electricity delivery custom- ers. DPL has about 472,600 customers in its service area and ACE has about 501,000 customers in its service area. DPL's regulated electric service area has a population of approximately 1.2 million and covers an area of about 6,000 square miles on the Delmarva Peninsula (Delaware and portions of Mary- land and Virginia). ACE's regulated service area is located in the southern one-third of New Jersey, covers an area of about 2,700 square miles, and has a population of approximately 0.9 million. DPL delivers natural gas through its gas transmission and distribution sys- tems to approximately 110,800 customers in a service territory that covers about 275 square miles in northern Delaware and has a population of approxi- mately 0.5 million. The electricity delivered by Power Delivery may be supplied to customers by alternative suppliers, DPL or ACE. Gas delivered may be supplied to customers by alternative suppliers or DPL. Energy In addition to the topics that are discussed within this section, informa- tion about the "Energy" business is included in Part I under the following captions: "Capacity," "PJM Interconnection, L.L.C.," "Nuclear Power Plants," "Fuel Supply for Electric Generation," "Energy Adjustment Clauses," "Retail Electric Rates," "Fed- I-3 eral Decontamination & Decommissioning Fund," "Regulated Gas Delivery and Sup- ply," and "Environmental Matters." Electric Utility Industry Restructuring The electric utility businesses of DPL and ACE were restructured in 1999 pursuant to legislation enacted in Delaware, Maryland, and New Jersey and or- ders issued by the DPSC, MPSC, and NJBPU. Among other things, the electric re- structuring orders provided for the choice of alternative electricity suppli- ers by customers, decreases in customer electric rates, recovery of stranded costs (which are the uneconomic portion of assets and long-term contracts that resulted from electric utility industry restructuring), securitization of ACE's stranded costs, and the regulatory treatment of any gain or loss arising from the divestiture of electric power plants. For information about restruc- turing the electricity supply business of DPL and ACE, see Notes 1, 7, 10, 11 and 17 to the Consolidated Financial Statements, included in Item 8 of Part II, and "Electric Utility Industry Restructuring" within the MD&A, included in Item 7 of Part II. All customers in ACE's service area could choose an alternative electricity supplier, effective August 1, 1999. All of DPL's Delaware and Maryland custom- ers, or about 95% of DPL's customers, could choose an alternative electricity supplier by October 1, 2000. Power Delivery customers representing approxi- mately 6% of the combined peak loads of DPL and ACE were purchasing electric- ity from suppliers other than Conectiv as of December 31, 2000. Basic Generation Service Through July 31, 2002, under New Jersey's Basic Generation Service (BGS), ACE is obligated to supply electricity to customers who do not choose an al- ternative electricity supplier. ACE supplies the BGS load requirement with purchased power and the output generated by certain units to be sold. To re- place the output of the generating units to be sold, ACE plans to increase the amount of power it purchases to supply the BGS load. ACE intends to manage BGS supply requirements (net of sources otherwise available to it at any particu- lar time) through the use of a portfolio approach, including the use of com- petitive bidding. ACE's customer rates are designed to recover the costs of providing BGS service, including above-market portions of long-term purchased power contracts. As a result, ACE recognizes revenues for BGS service equal to the related costs incurred. Any difference between such revenues and costs re- sults in a related adjustment to "Deferred energy supply costs." ACE had a regulatory liability of $34.7 million as of December 31, 2000 and $46.4 mil- lion as of December 31, 1999 for over-recovered energy supply costs. ACE's customer rates are to be adjusted for any deferred balance remaining after the initial four-year transition period ends July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the NJBPU. Default Service DPL is obligated to supply electricity to customers who do not choose an al- ternative electricity supplier for three years for non-residential customers and four years for residential customers during the transition periods that began on October 1, 1999, in Delaware and July 1, 2000, in Maryland. Differ- ences between DPL's actual energy costs and the related amounts included in customer rates began affecting Conectiv's earnings as of October 1, 1999, for DPL's Delaware business and July 1, 2000, for DPL's Maryland business. Conectiv Energy Holding Company CEH and its subsidiaries are engaged in non-regulated electricity production and sales, energy trading and marketing. CEH was formed effective July 1, 2000 by transferring (a) certain strategic electric generating plants of DPL and ACE to subsidiaries of CEH and (b) trading, arbitrage and competitive sales of electricity and natural gas from DPL to Conectiv Energy Supply, Inc. (CESI), a subsidiary of CEH. CESI uses futures, options, swap agreements, and forward contracts to hedge firm commitments or anticipated transactions of energy com- modities and also creates net open energy commodity positions, or trading po- sitions. For additional information concerning energy hedging and trading ac- tivities, see Note 12 to the Consolidated Financial Statements included in I-4 Item 8 of Part II. As of December 31, 2000, the electric generating plants of CEH's subsidiaries had 2,002.8 MW of capacity, which includes 126.8 MW for certain jointly-owned fossil plants expected to be sold during 2001. During 2001 CESI is expected to seek to supply some or all the electricity necessary to meet the load requirements of customers of DPL who have not cho- sen an alternative electricity supplier. Mid-merit Electric Generation Conectiv is changing the types of electric generating plants it owns in con- junction with implementing its asset-backed, "merchant" strategy focusing on "mid-merit" electric generating plants. Mid-merit electric generating plants can quickly increase or decrease their kilowatt-hour (kWh) output level on an economic basis. Mid-merit plants typically have relatively low fixed operating and maintenance costs and also can use different types of fuel. These plants are generally operated during times when demand for electricity rises and prices are higher. In contrast, baseload electric generating plants run almost continuously to supply the base level of demand for electricity, or the mini- mum demand level which generally always exists on an electrical system. Man- agement expects that mid-merit electric generating plants will be more profit- able and provide higher returns on invested capital than baseload electric generating plants. As discussed below, DPL sold its ownership interests in baseload nuclear electric generating plants on December 29, 2000, and the own- ership interests of Conectiv subsidiaries in other baseload electric generat- ing plants are expected to be sold during 2001, pursuant to existing agree- ments. Conectiv plans to add to its mid-merit electric generating plants by build- ing combined cycle units, which are constructed with combustion turbines, waste heat recovery boilers and a steam turbine. On September 21, 2000, Conectiv announced that it had ordered 21 combustion turbine units, which, with additional equipment, could be configured into 8 combined cycle plants. Each combined cycle plant would have approximately 550 MW of capacity, al- lowing Conectiv to add up to 4,400 MW of electric generating capacity, repre- senting a potential total investment of about $2.6 billion. Under an acceler- ated schedule, construction would occur in phases and would be completed by the end of 2004. Conectiv is actively working on developing sites for combined cycle plants within the region of the PJM Interconnection, L.L.C. (PJM). The three new combustion turbines planned for the Hay Road site are expected to be operational during the summer of 2001 (adding 330 MW of capacity). The waste heat recovery boiler and steam turbine needed for the new combined cycle operation at Hay Road are expected to be completed by the third quarter of 2002 (resulting in 550 MW of total capacity for the combined cycle plant). The number of combined cycle plants ultimately built under Conectiv's mid- merit construction program and the timing of construction will depend on vari- ous factors including the following: growth in demand for electricity; con- struction of generating units by competitors; fuel prices; availability of suitable financing; possible construction delays; and the timing and ability to obtain required permits and licenses. The level of the construction program could also potentially be affected by the planned acquisition of Conectiv by Pepco. Conectiv has made progress payments on the 21 combustion turbines that have been ordered. However, Conectiv's Board of Directors has thus far ap- proved construction of 2 combined cycle plants, for which only 6 combustion turbines would be needed. Should Conectiv choose not to build all 8 combined cycle plants, then Conectiv would attempt to sell its related investment in such combustion turbines and development sites. The ability to find a buyer and the amount of the proceeds from such a sale would be determined by market conditions. Through January 31, 2001, Conectiv had made $49 million in pro- gress payments on the 15 combustion turbines needed to build up to 6 combined cycle plants in addition to the 2 combined cycle plants currently approved by the Board of Directors. Agreements for the Sales of Electric Generating Plants DPL and ACE have entered into agreements for the sale of their respective ownership interests in non-strategic baseload fossil fuel-fired electric gen- erating plants and ACE has executed agreements for the sale of its ownership interests in nuclear electric generating plants. Pursuant to agreements, DPL sold its ownership interests in nuclear electric generating plants (331 MW) on December 29, 2000 and the related nuclear fuel for I-5 approximately $32 million. As of December 31, 2000, the electric generating plants of Conectiv subsidiaries that are subject to sales agreements had a net book value of $423.2 million and aggregate capacity of 2,203.5 MW. These elec- tric generating plants held for sale include the following: (i) The ownership interests of ACE in nuclear electric generating plants: (a) The agreed upon selling price is $11 million plus the net book value of ACE's interests in nuclear fuel as of the closing date; (b) As of December 31, 2000, the capacity and the net book value of ACE's interests in these plants were 383 MW and $14.5 million, respectively. (ii) The ownership interests of Conectiv subsidiaries in certain wholly and jointly owned fossil fuel-fired electric generating units: (a) The agreed upon selling price is $800 million, before certain adjustments and selling expenses; (b) As of December 31, 2000, the capacity and the net book value for Conectiv subsidiaries' ownership interests in these electric generating units were 1,820.5 MW and $408.7 million, respectively. Consummation of the sales of the electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL would occur simultaneously. Appeals related to the NJBPU's final order concerning restructuring the electricity supply business of Public Service Electric and Gas Company (PSE&G) and recent electricity shortages and price increases in California have resulted in delays in the is- suance of required regulatory approvals, the NJBPU's final order concerning restructuring the electricity supply business of ACE, and the closings of the sales of the electric generating units. Effective October 3, 2000, the agree- ments relating to the sale of the nuclear plants were amended to, among other things, permit separate closings of the sales of the ACE and DPL interests in the nuclear plants. DPL's ownership interests in the nuclear electric generat- ing plants were sold on December 29, 2000, as discussed above. On December 6, 2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Su- perior Court Appellate Division, which had previously upheld the NJBPU's final order concerning the PSE&G restructuring. Management currently expects the sales of ACE's nuclear and fossil, and DPL's fossil, electric generating plants to take place during 2001. However, management cannot predict the tim- ing of the issuance of required NJBPU approvals, the timing or outcome of ap- peals, if any, of such approvals, the effect of any of the foregoing on the ability of ACE or DPL to consummate the sales of various electric generating plants or the impact of any of the foregoing on ACE's ability to recover or securitize any related stranded costs. For additional information, see "Agreements for the Sales of Electric Gener- ating Plants" within the MD&A, included in Item 7 of Part II, and Note 14 to the Consolidated Financial Statements included in Item 8 of Part II. Telecommunications As discussed under "Common Stock Earnings Summary" in the MD&A included in Item 7 of Part II, the telecommunication operations of CCI resulted in losses during 1998-2000. Conectiv continues to evaluate its partnering or other op- tions for CCI. CCI is a competitive local exchange carrier (CLEC) providing local, region- al, and long distance voice and data services to business and residential cus- tomers in Delaware, Pennsylvania, New Jersey, and Maryland. CCI owns and oper- ates a fiber optic network of more than 856 route miles and 45,296 fiber miles. CCI has installed its equipment in 64 Verizon central offices in order to provide facilities-based services through its Nortel DMS-500 switch. CCI had installed approximately 111,000 access line equivalents (comprised of 24,000 residential access lines, 36,000 business access lines, and 51,000 business voice grade equivalents) as of December 31, 2000. In comparison, CCI had installed approximately 77,000 access line equivalents (comprised of 26,000 residential access lines, 20,000 business access lines, and 31,000 business voice grade equivalents) as of December 31, 1999. I-6 CCI has general tariffs on file in Delaware, Pennsylvania, New Jersey, and Maryland, which detail the pricing and descriptions of each service offering. These tariffs are based on a market pricing system rather than the traditional cost-of-service model. Tariff filings have also been made with the Federal Communications Commission for the provision of domestic and international long distance services. HVAC As discussed under "Common Stock Earnings Summary" in the MD&A included in Item 7 of Part II, the HVAC operations of CSI resulted in losses during 1998- 2000. During mid- to late-2000, Conectiv sold the HVAC businesses of CSI. Prior to its sale, CSI was a full-service HVAC business operating in the Mid- Atlantic region. CSI provided customers with mechanical HVAC/piping construc- tion and installation, design services, sheet metal fabrication, refrigeration services, preventive maintenance and repair services. Other Businesses As discussed in Note 8 to the Consolidated Financial Statements included in Item 8 of Part II, an indirect Conectiv subsidiary holds a limited partner in- terest in EnerTech Capital Partners, L.P. and EnerTech Capital Partners II, L.P. (the EnerTech funds). The EnerTech funds are venture capital funds that invest in energy related technology and Internet service companies. The in- vestments of the EnerTech funds include, among others, Capstone Turbine Corpo- ration, essential.com, ICG Commerce, Inc., and Sagemaker, Inc. Due to the na- ture of the investments of the EnerTech funds, the earnings of the funds may be volatile from period to period. Capacity Capacity is the capability to produce electric power from owned electric generating units and differs from the electric energy markets, which trade the actual energy being generated. Capacity may also be purchased through third- party contracts. As discussed below, the PJM power pool operates a centralized capacity market, which allows PJM member companies such as Conectiv to buy or sell capacity as needed for electric utility operations. As a member of the PJM, Conectiv is obligated to maintain capacity levels based on its allocated share of estimated aggregate PJM capacity requirements. More capacity will need to be purchased after the electric generating units subject to sales agreements are sold. Electric Generating Plants The capacity provided by the electric generating plants of Conectiv's sub- sidiaries as of December 31, 2000 is summarized in the chart below. For a more detailed listing, see Item 2, Properties. The net generating capacity avail- able for operations at any time may be less than the total net installed gen- erating capacity due to generating units being out of service for inspection, maintenance, repairs, or unforeseen circumstances.
MW of Electric Generating Capacity ------------------------------------------ As of Units Expected Units Expected to 12/31/00 to be Sold to be Retained** -------- -------------- ----------------- Coal-fired generating units..... 1,624.0 1,364.0 260.0 Oil-fired generating units...... 839.0 394.0 445.0 Combustion turbines/combined cycle generating units......... 1,205.0 56.0 1,149.0 Nuclear generating units........ 380.0* 380.0 -- Diesel units.................... 31.5 9.5 22.0 ------- ------- ------- Electric Generating Capacity.. 4,079.5 2,203.5 1,876.0 ======= ======= =======
- -------- * Excludes a 3 MW ownership interest of ACE in a combustion turbine located at the Salem Nuclear Generating Station ** Represents the electric generating units as of December 31, 2000 less the units expected to be sold during 2001. I-7 Purchased Power As discussed in Note 23 to the Consolidated Financial Statements included in Item 8 of Part II, as of December 31, 2000, Conectiv's subsidiaries had long- term purchased power contracts, which provided 1,421 MW of capacity and vary- ing amounts of firm electricity per hour during each month of a given year. Also, the terms of the agreement for the sale of DPL's wholly owned electric generating plants provides for DPL to purchase 500 megawatt-hours of firm electricity per hour from the buyer of the plants beginning upon completion of the sale and continuing through December 31, 2005. Supplying Forecasted Peak Loads Management currently forecasts peak loads in 2001 of 2,530 MW for DPL's de- fault service and 2,074 MW for ACE's BGS. During 2001, DPL expects to enter into contracts with one or more suppliers that would supply all electricity requirements for DPL's default service obli- gation. CESI, a subsidiary of CEH, may seek to supply some or all of DPL's de- fault service load obligation. Once DPL has secured such supply contract(s), it expects to sell the capacity and energy of its electric generating plants to CESI and also assign its rights and obligations under purchased power agreements to CESI. Should DPL not enter into such supply contracts, then ap- proximately 65% of DPL's forecasted 2001 default service load requirement would be supplied from a combination of long-term power purchases and elec- tricity generated by plants of DPL. The balance of the supply would be pur- chased from the spot market. ACE intends to manage its BGS supply requirement through the use of a port- folio approach, including the use of competitive bidding. Approximately 50% of ACE's forecasted 2001 BGS load requirement will be supplied from a combination of existing bilateral long-term power purchases and electricity generated by plants of ACE. The balance of the supply is expected to be provided through additional bilateral contracts and the spot market. PJM Interconnection, L.L.C As a member of the PJM, the generation and transmission facilities of Conectiv are operated on an integrated basis with other electricity suppliers in Pennsylvania, New Jersey, Maryland, and the District of Columbia, and are interconnected with other major utilities in the eastern half of the United States. This power pool improves the reliability and operating economies of the systems in the group and provides capital economies by permitting shared reserve requirements. The PJM's installed capacity as of December 31, 2000, was 58,701 MW. The PJM's peak demand during 2000 was 49,430 MW on August 9, which resulted in a summer reserve margin of 18.4% (based on installed capac- ity of 58,524 MW on that date). The PJM operates a centralized capacity credit market, enabling participants to procure or sell surplus capacity to meet reliability obligations within the PJM region. The PJM Operating Agreement allows bids to sell electricity (energy) re- ceived from generation located within the PJM control area. Transactions that are bid into the PJM pool are capped at $1,000 per megawatt hour. All power providers are paid the locational marginal price (LMP) set through power prov- iders' bids. The LMP will be higher in congested areas reflecting the price bids of those higher cost generating units that are dispatched to supply de- mand and alleviate the transmission constraint. Furthermore, in the event that all available generation within the PJM control area is insufficient to sat- isfy demand, the PJM may institute emergency purchases from adjoining regions. The cost of such emergency purchases is not subject to any PJM price cap. There are a number of factors that distinguish the PJM market from Califor- nia, and make the types of problems recently experienced there less likely. The most prominent difference is the extent to which there is adequate gener- ating capacity to meet demand in the region. The PJM's reserve margin is 18 percent, which is considerably higher than the reserve margin in California. The two markets have also operated differently. I-8 Considerable price risk for California utilities resulted from requirements to sell a significant portion of their generation assets and, until recently, buy their energy from the spot market (longer-term forward contracts were not per- mitted). In contrast, PJM utilities have not been required to divest of their generation assets and have been permitted to lock in prices through long-term contracts, and to mitigate risk with use of other hedging instruments. Final- ly, California is highly dependent on gas-fired and hydro electric generation, both of which are highly dependent on weather. In contrast, PJM has a more di- verse fuel mix, including a substantial base of coal and nuclear generators. Nuclear Power Plants As discussed in Note 14 to the Consolidated Financial Statements included in Item 8 of Part II, DPL and ACE entered into agreements during 1999 for the sale of their nuclear electric generating plants to PSEG Power LLC (a subsidi- ary of Public Service Enterprise Group) and PECO Energy Company (PECO). Pursu- ant to the agreements, DPL sold its 7.51% (164 MW) interest in Peach Bottom Atomic Power Station (Peach Bottom) and 7.41% (167 MW) interest in Salem Nu- clear Generating Station (Salem) on December 29, 2000. As a result, DPL no longer has an ownership interest in any nuclear electric generating plants. In accordance with the sales agreements, DPL transferred its decommissioning trust funds and related obligation for decommissioning the plants to the pur- chasers. ACE owns 5% of Hope Creek Nuclear Generating Station (Hope Creek), which has 1,031 MW of capacity, 7.41% of Salem, which has 2,212 MW of capacity excluding the on-site combustion turbine, and 7.51% of Peach Bottom, which has 2,186 MW of capacity. The Hope Creek Unit and Salem Units 1 and 2 are located adjacent to each other in Salem County, New Jersey, and are operated by PSE&G. Peach Bottom Units 2 and 3 are located in York County, Pennsylvania, and are oper- ated by PECO. The agreements for the sale of ACE's interests in the nuclear plants (164 MW in Peach Bottom, 167 MW in Salem, and 52 MW in Hope Creek) pro- vide for (a) a sales price of approximately $11 million plus the net book value of the interests of ACE in nuclear fuel on-hand as of the closing date and (b) the transfer of ACE's nuclear decommissioning funds and related obli- gation for decommissioning the plants to the purchasers upon completion of the sales. The operation of nuclear generating units is regulated by the Nuclear Regu- latory Commission (NRC). Such regulation requires that all aspects of plant operations be conducted in accordance with NRC safety and environmental re- quirements and that continuous demonstrations be made to the NRC that plant operations meet applicable requirements. The NRC has the ultimate authority to determine whether any nuclear generating unit may operate. For information concerning funding ACE's share of the estimated future cost of decommissioning the Salem, Hope Creek, and Peach Bottom nuclear reactors, see Note 16 to the Consolidated Financial Statements included in Item 8 of Part II. Fuel Supply for Electric Generation The electric generating capacity of Conectiv by fuel type is shown above un- der "Electric Generating Plants." To facilitate the purchase of adequate amounts of fuel, Conectiv contracts with various suppliers of coal, oil, and natural gas on both a long- and short-term basis. Conectiv's long-term coal contracts generally contain provisions for periodic and limited price adjust- ments, which are based on current market prices. Oil and natural gas contracts generally are of shorter term with prices determined by market-based indices. Conectiv's obligations for coal and oil supply contracts related to the fos- sil fuel-fired electric generating units to be sold are expected to be assumed by NRG Energy, Inc., the party which has agreed to purchase the fossil fuel- fired plants. The agreements for sale of the ownership interests of ACE in nu- clear generating units provide for ACE to receive proceeds for the book value of the nuclear fuel inventories, which management expects would be used to liquidate ACE's obligations for the lease of the nuclear fuel inventories. I-9 Management does not anticipate any difficulty in obtaining adequate amounts of fuel for Conectiv's electric generating plants. Coal Conectiv's wholly and jointly owned electric generating plants that use coal as a source of fuel have 1,624 MW of capacity and are listed in Item 2. During 2000, the coal supply for certain electric generating units with 1,153 MW of capacity was purchased as follows: 70% under contracts of less than three years in duration, 10% under long-term contracts (up to ten years), and 20% on the spot market. For the other 471 MW of coal-fired electric generating plants, approximately 80% of the coal supply was purchased under contracts ex- piring in 2002 and 20% was purchased on the spot market. During 2001, manage- ment expects that approximately 75% of the coal requirements will be purchased under supply contracts and the other 25% purchased on the spot market. Oil A two-year residual oil supply contract that expires in 2001 provides 90% to 100% of the fuel supply requirements for the Vienna Generating Station (153 MW). Oil supply for the other electric generating units, which use oil as a primary or secondary fuel, is purchased on the spot market. Gas Natural gas is the primary fuel for the three combustion turbines at the Hay Road site (521 MW) and a secondary fuel for the Edge Moor units (705 MW). Nat- ural gas for these generating units is purchased on a firm or interruptible basis from suppliers such as marketers, producers, and utilities. The second- ary fuel for the Hay Road combustion turbines is low-sulfur diesel fuel, which is purchased in the spot market. Five combustion turbines (316 MW), in addi- tion to those located at Hay Road, use natural gas as a primary fuel source and the units at the Deepwater station, which use coal and oil as primary fu- els, use natural gas as a secondary fuel. Natural gas for these five combus- tion turbines and the Deepwater station is primarily purchased from a local gas distribution company on a semi-firm basis and is also purchased from other suppliers such as marketers, producers, and utilities. Natural gas is deliv- ered through the interstate pipeline system under a mix of long-term firm, short-term firm, and interruptible contracts. Nuclear PSE&G has informed ACE that it has several long-term contracts with uranium ore operators, converters, enrichers and fabricators to meet the currently projected fuel requirements for Salem and Hope Creek. ACE has also been ad- vised by PECO that it has contracts similar to PSE&G's contracts to satisfy the fuel requirements of Peach Bottom. Currently, there is an adequate supply of nuclear fuel for Salem, Hope Creek, and Peach Bottom. On December 29, 2000, DPL's former nuclear fuel disposal obligations were assumed by the purchasers of DPL's ownership interests in nuclear electric generating units. After spent fuel is removed from a nuclear reactor, it is placed in tempo- rary storage for cooling in a spent fuel pool at the nuclear station site. Un- der the Nuclear Waste Policy Act of 1982 (NWPA), the federal government en- tered into contracts with utilities operating nuclear power plants for trans- portation and ultimate disposal of spent nuclear fuel and high level radioac- tive waste. However, no permanent government-owned and operated repositories are in service or under construction. The United States Department of Energy has stated that it would not be able to open a permanent, high level nuclear waste storage facility until 2010, at the earliest. Pursuant to NRC rules, spent nuclear fuel generated in any reactor can be stored in reactor facility storage pools or in independent spent nuclear fuel storage installations located at or away from reactor sites for at least 30 years beyond the licensed life for operation (which may include the term of a revised or renewed license). I-10 PSE&G has advised ACE that adequate spent fuel storage capacity is estimated to be available through 2011 for Salem Unit 1, 2015 for Salem Unit 2, and 2007 for Hope Creek. PECO has advised ACE that it has constructed an on-site dry storage facility at Peach Bottom which provides adequate storage capacity through the end of the current licenses for the two Peach Bottom units. Energy Adjustment Clauses As a result of electric utility industry restructuring, energy adjustments in DPL's regulated retail electric tariffs were eliminated effective October 1, 1999 in Delaware and effective June 30, 2000 in Maryland and Virginia. The energy adjustment clauses provided for collection from customers of fuel costs and purchased energy costs. Earnings volatility may increase due to elimina- tion of DPL's energy adjustment clauses. A gas cost rate clause provides for the recovery of gas costs through regu- lated tariffs from DPL's regulated gas customers. Gas costs for regulated, on- system customers are charged to operations based on costs billed to customers under the gas cost rate clause. Any under-collection or over-collection of gas costs in a current period is generally deferred. Customers' rates are adjusted periodically to reflect amounts actually paid by DPL for purchased gas. Natural gas commodity prices and futures rose to unprecedented levels during 2000 due to increased demand for gas to generate electricity, low storage lev- els nationally, and cold weather. DPL's Gas Cost Rate (GCR) was increased by 9.6% on December 1, 2000 to recover those increases in the natural gas commod- ities. On December 8, 2000, DPL was required by its gas service tariff to file for an additional increase of 23%, which became effective on February 1, 2001. DPL is currently involved in an evidentiary process to prove the reasonable- ness of those rate increases, and expects final approval in 2001. As of Decem- ber 31, 2000, DPL had deferred $16.9 million of natural gas costs in anticipa- tion of recovering such costs from customers through the gas cost rate clause. Through July 31, 1999, ACE's tariffs for its electric customers included en- ergy adjustments for fuel costs, purchased energy costs, and capacity pur- chased from non-utility electricity suppliers. Effective August 1, 1999, through various components of regulated rates, the rates charged to ACE's BGS customers for electricity supply, include ACE's fuel costs, purchased energy costs, and capacity purchased from non-utility electricity suppliers. Under the terms of the NJBPU's Summary Order concerning restructuring ACE's elec- tricity business, ACE's regulatory liability for over-recovered energy supply costs as of July 31, 1999 is to be offset by any subsequent under-recoveries of BGS and certain other costs. Similarly, any over-recoveries would increase the regulatory liability. ACE had a regulatory liability of $34.7 million as of December 31, 2000 and $46.4 million as of December 31, 1999 for over-recov- ered energy supply costs. Customer rates are to be adjusted for any deferred balance remaining after the initial four-year transition period, which ends July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the NJBPU. Retail Electric Rates Changes in DPL's and ACE's customer rates other than those related to the energy adjustment clauses are discussed below. Changes in customer rates due to the electric and gas energy adjustment clause generally do not affect earn- ings. Effective October 1, 1999, DPL's Delaware residential electric rates were reduced 7.5% in connection with the restructuring of the Delaware electric utility industry. Also, electric rates in effect on October 1, 1999 are to re- main unchanged for four years for Delaware residential customers and three years for Delaware non-residential customers. The 7.5% Delaware residential rate reduction reduced revenues by approximately $17.5 million on an annualized basis. I-11 A 7.5% reduction in DPL's Maryland residential electric rates became effec- tive July 1, 2000, in connection with the restructuring of the Maryland elec- tric utility industry. Also, the electric rates in effect on July 1, 2000 are to remain unchanged for four years for Maryland residential customers and three years for Maryland non-residential customers. Management estimates that the initial 7.5% Maryland residential rate reduction will reduce revenues by approximately $12.5 million on an annualized basis. In its Summary Order, the NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999 and an additional 2% rate reduction by January 1, 2001. By August 1, 2002, rates must be reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual revenues by approximately $50 million. The additional 2% rate reduction required by January 1, 2001 was implemented through two separate 1% rate reductions effective January 1, 2000 and 2001, respectively. Each of the 1% rate reductions reduced annual revenues by ap- proximately $10 million, or $20 million in total. The final rate reduction, which is required by August 1, 2002, is expected to reduce revenues by an ad- ditional $30 million, which would result in a cumulative rate reduction of $100 million since August 1, 1999. Customer Billing In December 1999, a new customer billing system was installed primarily to accommodate the unbundled utility bills required by electric utility industry restructuring. As with any complex billing system changeover, errors occurred. The financial impact for Conectiv of the conversion to the new customer bill- ing system was primarily slower collection of accounts receivable. In a set- tlement to conclude a DPSC review of the billing system, DPL agreed to provide a credit of approximately $2.5 million to customers bills. The credits were reflected on customers bills in February 2001. New Jersey Electric System Reliability Standards In November 1999, the NJBPU began a general review of the reliability of the electric systems of ACE and all other New Jersey utilities. The NJBPU began its review as a result of electric service outages which occurred during an extended period of hot and humid weather in July 1999. On November 28, 2000, the NJBPU approved interim reliability standards which are in effect through 2002 and are designed to reduce outage frequency and duration, as well as im- prove maintenance and inspection of electric facilities. Final reliability standards are expected to be adopted in late-2002, after the NJBPU reviews data submitted by the utilities. Expenditures of approximately $5 million are expected by ACE during 2001 in order to comply. The NJBPU could fine utilities up to $50,000 per violation of the rule requirements. New Jersey Demand Side Management The NJBPU adopted rules in 1991 to encourage utilities to offer demand side management (DSM) and conservation services. The Electric Discount and Energy Competition Act, enacted February 9, 1999 in New Jersey, requires the continu- ation of these energy efficiency programs and the initiation of renewable en- ergy programs, the costs of which are to be recovered through a societal bene- fits charge to electric and gas customers of New Jersey public utilities. On June 9, 1999, the NJBPU initiated the Comprehensive Resource Analysis (CRA) proceeding causing a comprehensive resource analysis of energy programs to be undertaken including the re-evaluation of existing DSM programs and the incor- poration of new energy efficiency and renewable energy programs. A key issue in the CRA proceeding is the determination of the appropriate level of funding for energy efficiency and renewable energy programs on a statewide basis. Hearings have been conducted and a record has been established to permit the NJBPU to render decisions for each New Jersey utility in lieu of settlements, if necessary. A decision by the NJBPU is expected in 2001. I-12 Cost Accounting Manual/Code of Conduct Conectiv and its subsidiaries have cost allocation and direct charging mech- anisms in place to prevent cross-subsidization of competitive activities by regulated utility activities. DPL and ACE are also subject to various Codes of Conduct that affect the relationship between their regulated activities and the unregulated activities that they or other Conectiv subsidiaries perform. Most of Conectiv's unregulated activities are now conducted by subsidiaries other than DPL and ACE. In general, these Codes of Conduct limit information obtained through utility activities from being disseminated to employees en- gaged in non-regulated activities, restrict or prohibit sales leads, joint sales calls and joint promotions; require separation of certain employees and functions; and require separation of certain office space and facilities. Affiliated Transactions Certain types of transactions between DPL and ACE and their affiliates may require the prior approval of the VSCC and the NJBPU. On March 15, 2000, the NJBPU adopted Interim Affiliate Relations, Fair Com- petition and Accounting Standards and Related Reporting Requirements (Interim Standards). These Interim Standards will remain in effect for no longer than 18 months, until final standards are issued by the NJBPU. A compliance audit of these interim standards was conducted during 2000 and a final order is pending by the NJBPU. Federal Decontamination & Decommissioning Fund The Energy Policy Act of 1992 provided for creation of a Decontamination & Decommissioning (D&D) Fund to pay for the future clean-up of DOE gaseous dif- fusion enrichment facilities. Domestic utilities and the federal government are required to make payments to the D&D Fund. On December 29, 2000, DPL's former liability to the D&D Fund was assumed by the purchasers of DPL's owner- ship interests in nuclear electric generating units. The liability accrued for ACE's D&D Fund liability was $5.1 million as of December 31, 2000. The terms of agreements for the sale of ACE's interests in the nuclear power plants pro- vide for the buyers of the plants to assume the amount of this liability which exists at the time the sale is completed. Regulated Gas Delivery and Supply DPL's large and medium volume commercial and industrial customers may pur- chase gas from DPL, or directly from other suppliers and make arrangements for transporting gas purchased from these suppliers to the customers' facilities. DPL's transportation customers pay a fee, which may be either fixed or negoti- ated, for the use of DPL's gas transmission and distribution facilities. On November 1, 1999, DPL instituted a pilot program to provide transporta- tion service and a choice of gas suppliers to a group of retail customers. The program was open to 15% of residential and 15% of small commercial customers. Approximately 40% of residential and 80% of small commercial customers who were eligible for the program actually enrolled. Primarily due to high natural gas prices and market price volatility, most of the customers participating in the pilot program were returned to DPL by their supplier in the last quarter of 2000. As of March 1, 2001, no customers remained in the pilot program, which expires in October 2001. DPL purchases gas supplies from marketers and producers under spot market, short-term, and long-term agreements. As shown in the table below, DPL's maxi- mum 24-hour system capability, including natural gas purchases, storage deliv- eries, and the emergency sendout capability of its peak shaving plant, is 190,416 Mcf (thousand cubic feet). I-13
Number of Expiration Daily Contracts Dates Mcf --------- ---------- ------- Supply......................................... 1 2001 9,180 Transportation................................. 19 2001-2016 86,152 Storage........................................ 11 2001-2013 50,084 Local Peak Shaving (emergency capability)...... 45,000 ------- Total........................................ 190,416 =======
DPL experienced an all-time daily peak in combined firm sales and transpor- tation sendout of 175,059 Mcf on January 17, 2000. DPL's peak shaving plant liquefies, stores, and re-gasifies natural gas in order to provide supplemen- tal gas in the event of pipeline supply shortfalls or system emergencies. In 1998, DPL implemented a DPSC-approved gas price hedging/risk management program with respect to gas supply for regulated customers. The program seeks to limit exposure to commodity price uncertainty. Costs and benefits of the program are included in the gas cost rate clause, resulting in no effect on DPL's earnings. Capital Spending and Financing Program For financial information concerning Conectiv's capital spending and financ- ing program, refer to "Liquidity and Capital Resources" in the MD&A included in Item 7 of Part II, and Notes 18 to 21 to the Consolidated Financial State- ments, included in Item 8 of Part II. Conectiv's ratios of earnings to fixed charges under the Securities and Ex- change Commission (SEC) Method for 1996-2000 are shown below.
Year Ended December 31, ------------------------ 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Ratio of Earnings to Fixed Charges (SEC Method)... 2.13 1.98 2.38 2.63 2.83
Under the SEC Method, earnings, including Allowance For Funds Used During Construction, are income before extraordinary item plus income taxes and fixed charges, less non-utility capitalized interest and undistributed earnings of equity method investees. Fixed charges include gross interest expense, the es- timated interest component of rentals, and preferred stock dividend require- ments of subsidiaries. Preferred stock dividend requirements for purposes of computing the ratio have been increased to an amount representing the pre-tax earnings that would be required to cover such dividend requirements. Environmental Matters Conectiv's subsidiaries are subject to various federal, regional, state, and local environmental regulations, including air and water quality control, oil pollution control, solid and hazardous waste disposal, and limitation on land use. Permits are required for construction projects and the operation of ex- isting facilities. Conectiv has incurred, and expects to continue to incur, capital expenditures and operating costs because of environmental considera- tions and requirements. Conectiv has a continuing program to assure compliance with the environmental standards adopted by various regulatory authorities. Included in Conectiv's forecasted capital requirements are construction ex- penditures for compliance with environmental regulations, which are estimated to be $10 million in 2001. Air Quality Regulations The federal Clean Air Act required utilities and other industries to signif- icantly reduce emissions of air pollutants such as sulfur dioxide (SO\\2\\) and oxides of nitrogen (NOx) by the year 2000. All wholly or jointly owned electric generating units of Conectiv are in compliance with these require- ments. I-14 The electric generating plants of Conectiv also must comply with Title I of the Clean Air Act, the ozone non-attainment provisions, which require states to promulgate Reasonably Available Control Technology (RACT) regulations for existing sources located within ozone non-attainment areas or within the Northeast Ozone Transport Region (NOTR). To comply with RACT regulations, low NOx burner technology has been installed on a number of electric generating units. Additional "post-RACT" NOx emission regulations are being pursued by states in the NOTR. In 2000, the electric generating plants of Conectiv com- plied with post-RACT requirements. In addition to the above requirements, the United States Environmental Protection Agency (USEPA) has proposed summer sea- sonal NOx controls commensurate with reductions of up to 85% below baseline years by the year 2003 for a 22-state region, including Delaware and New Jer- sey. Since the State of New Jersey will require a greater percent reduction than that required by the USEPA, the ACE facilities will most likely achieve compliance with the USEPA requirement by 2003. The estimated cost to comply is approximately $5-$8 million over the next five years. Because Delaware has not yet promulgated regulations to implement the reductions that the USEPA has mandated by 2003, DPL currently cannot determine the additional operating and capital costs that will be incurred to comply with these initiatives. In July 1997, the USEPA adopted new federal air quality standards for par- ticulate matter and ozone. The new particulate matter standard addresses fine particulate matter. Attainment of the fine particulate matter standard may re- quire reductions in NOx and SO\\2\\. However, under the time schedule an- nounced by the USEPA, particulate matter non-attainment areas will not be des- ignated until 2002 and control measures to meet this standard will not be identified until 2005. The USEPA requested data from a number of electric utilities regarding older coal-fired units in order to determine compliance with the regulations for the Prevention of Significant Deterioration of Air Quality (PSD). A number of set- tlements have been announced throughout the utility industry. On February 23, 2000, ACE received a request for data from the USEPA and the New Jersey De- partment of Environmental Protection (NJDEP) on coal-fired operations at the Deepwater and B.L. England electric generating stations. Data was submitted, as requested by the USEPA throughout 2000. At this time it is not possible to predict the impact of this request, if any, on Deepwater or B.L. England oper- ations. Water Quality Regulations The Clean Water Act provides for the imposition of effluent limitations to regulate the discharge of pollutants, including heat, into the waters of the United States. National Pollution Discharge Elimination System (NPDES) permits issued by state environmental regulatory agencies specify effluent limita- tions, monitoring requirements, and special conditions with which facilities discharging waste-waters must comply. To ensure that water quality is main- tained, permits are issued for a term of five years and are modified as neces- sary to reflect requirements of new or revised regulations or changes in fa- cility operations. ACE holds New Jersey Pollution Discharge Elimination System (NJPDES) permits issued by the NJDEP for the Deepwater and B.L. England power stations. The NJPDES permit for the Deepwater Station expired in 1991. The permit has been administratively extended and the plant continues to operate under the condi- tions of the existing permit while negotiations are underway for permit renew- al. The NJPDES permit for the B.L. England station expired in December 1999, but has been administratively extended and the plant continues to operate un- der the conditions of the existing permit until a renewal permit is issued by NJDEP. Conectiv's subsidiaries hold NPDES permits for the Vienna, Indian River, and Edge Moor power plants. The NPDES permit for the Vienna power plant is ex- pected to be renewed, maintaining the current permit limitations, in early 2001. The NPDES permit issued by the Delaware Department of Natural Resources and Environmental Control (DNREC) for the Indian River power plant expired in 1992 but has been administratively extended and the plant continues to operate under the conditions of the existing permit. Studies have been conducted to determine thermal impacts and the results of the studies are currently under evaluation by DNREC. The studies are intended to support a request for a vari- ance from thermal water quality standards in order to allow the plant to con- tinue operating under the current discharge temperature limitations. In addi- tion, the NPDES I-15 permits for the Indian River and Edge Moor power plants require studies to de- termine impacts on aquatic organisms by the plants' intake structures. The studies began in 1999 and will be completed in 2001. The results of these studies will determine whether upgrades to intake structures are required to minimize environmental impacts. Hazardous Substances The nature of the electric and gas utility businesses results in the produc- tion or handling of various by-products and substances, which may contain sub- stances defined as hazardous under federal or state statutes. The disposal of hazardous substances can result in costs to clean up facilities found to be contaminated due to past disposal practices. Federal and state statutes autho- rize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. Conectiv's exposure is mini- mized by adherence to environmental standards for Conectiv-owned facilities and through a waste disposal contractor screening and audit process. In December 1999, DPL discovered an oil leak at the Indian River power plant. DPL took action to determine the source of the leak and cap it, contain the oil to minimize impact to a nearby waterway and recover oil from the soil. Remediation costs are expected to be approximately $10 million, including ap- proximately $3 million of cumulative expenditures which had been incurred as of December 31, 2000. In addition, DPL paid $350,000 in penalties and $100,000 for an environmental improvement project to DNREC in connection with the oil leak and another matter related to the Indian River power plant. Conectiv's current liabilities included $9.8 million as of December 31, 2000 and $3.0 million as of December 31, 1999 for potential clean-up and other costs related to sites at which a Conectiv subsidiary is a potentially respon- sible party or alleged to be a third-party contributor, including the Indian River power plant discussed above. Conectiv does not expect such future costs to have a material effect on its financial position or results of operations. I-16 Executive Officers The names, ages, and positions of all of the executive officers of Conectiv as of December 31, 2000, are listed below, along with their business experi- ences during the past five years. Officers are elected annually by Conectiv's Board of Directors. There are no family relationships among these officers, nor any arrangement or understanding between any officer and any other person pursuant to which the officer was selected. Executive Officers of Conectiv (As of December 31, 2000)
Name, Age and Position Business Experience During Past 5 Years ---------------------- --------------------------------------- Howard E. Cosgrove, 57........ Elected 1998 as Chairman of the Board and Chief Chairman of the Board and Executive Officer of Conectiv. Elected 1992 as Chief Executive Officer Chairman of the Board, President and Chief Executive Officer and Director of Delmarva Power & Light Company. Thomas S. Shaw, 53............ Elected 2000 as President and Chief Operating President and Chief Operating Officer of Conectiv. Elected 1998 as Executive Officer Vice President of Conectiv. Elected 1992 as Senior Vice President of Delmarva Power & Light Company. John C. van Roden, 51......... Elected 1998 as Senior Vice President and Chief Senior Vice President and Financial Officer of Conectiv. Principal, Cook Chief Financial Officer and Belier, Inc. in 1998. Senior Vice President/Chief Financial Officer and Vice President/Treasurer, Lukens, Inc. from 1987 to 1998. Barbara S. Graham, 52......... Elected 1999 as Senior Vice President of Senior Vice President Conectiv. Elected 1998 as Senior Vice President and Chief Financial Officer of Conectiv. Elected 1994 as Senior Vice President, Treasurer and Chief Financial Officer of Delmarva Power & Light Company. Joseph M. Rigby, 44........... Elected 2000 as Senior Vice President of Senior Vice President Conectiv. 1999, Vice President, Electric Delivery, Conectiv. 1998, Vice President, Gas Delivery, Conectiv. 1997, Vice President, Merger Integration Team, Conectiv. 1996, Director of Human Resources, Atlantic Energy, Inc. William H. Spence, 43......... Elected 2000 as Senior Vice President of Senior Vice President Conectiv. Vice President and General Manager of Merchant Energy, Conectiv, 1998-1999. Director of Merchant Energy, Delmarva Power & Light Company, 1996-1997. James P. Lavin, 53............ Elected 1998 as Controller of Conectiv. Elected Controller and Chief 1993 as Comptroller, Delmarva Power & Light Accounting Officer Company.
I-17 ITEM 2. PROPERTIES
Generating Electric Generating Capacity Station Location (kilowatts) ------------------- -------- ----------- Coal-Fired Edge Moor............... Wilmington, DE...................... 260,000 Indian River............ Millsboro, DE....................... 767,000 B L England............. Beesley's Pt., NJ................... 284,000 Conemaugh............... New Florence, PA.................... 128,000* Keystone................ Shelocta, PA........................ 105,000* Deepwater............... Pennsville, NJ...................... 80,000 --------- 1,624,000 --------- Oil-Fired Edge Moor............... Wilmington, DE...................... 445,000 B L England............. Beesley's Pt., NJ................... 155,000 Vienna.................. Vienna, MD.......................... 153,000 Deepwater............... Pennsville, NJ...................... 86,000 --------- 839,000 --------- Combustion Turbines/Combined Cycle Hay Road................ Wilmington, DE...................... 521,000 Cumberland.............. Millville, NJ....................... 84,000 Sherman Avenue.......... Vineland, NJ........................ 81,000 Middle.................. Rio Grande, NJ...................... 77,000 Carll's Corner.......... Upper Deerfield Twp., NJ............ 73,000 Cedar................... Cedar Run, NJ....................... 68,000 Missouri Avenue......... Atlantic City, NJ................... 60,000 Mickleton............... Mickleton, NJ....................... 59,000 Christiana.............. Wilmington, DE...................... 45,000 Deepwater............... Pennsville, NJ...................... 19,000 Edge Moor............... Wilmington, DE...................... 13,000 Madison Street.......... Wilmington, DE...................... 11,000 West.................... Marshallton, DE..................... 15,000 Delaware City........... Delaware City, DE................... 16,000 Indian River............ Millsboro, DE....................... 17,000 Vienna.................. Vienna, MD.......................... 17,000 Tasley.................. Tasley, VA.......................... 26,000 Salem................... Lower Alloways Creek Twp., NJ....... 3,000* --------- 1,205,000 --------- Nuclear Peach Bottom............ Peach Bottom Twp., PA............... 164,000* Salem................... Lower Alloways Creek Twp., NJ....... 164,000* Hope Creek.............. Lower Alloways Creek Twp., NJ....... 52,000* --------- 380,000 --------- Diesel Units Crisfield............... Crisfield, MD....................... 10,000 Bayview................. Bayview, VA......................... 12,000 B L England............. Beesley's Pt., NJ................... 8,000 Keystone................ Shelocta, PA........................ 700* Conemaugh............... New Florence, PA.................... 800* --------- 31,500 --------- Total Electric Generating Capacity............................. 4,079,500 ---------
- -------- * Represents Conectiv's subsidiaries ownership interests in jointly owned plants. I-18 The electric properties of Conectiv's subsidiaries are located in New Jer- sey, Delaware, Maryland, Virginia, and Pennsylvania. The above table sets forth the summer electric generating capacity of the electric generating plants owned by Conectiv's subsidiaries. Substantially all utility plant and properties of Conectiv's subsidiaries are subject to liens of the Mortgages under which First Mortgage Bonds are is- sued. On a combined basis, the electric transmission and distribution systems of DPL and ACE include 2,624 transmission poleline miles of overhead lines, 5 transmission cable miles of underground cables, 16,350 distribution poleline miles of overhead lines, and 6,738 distribution cable miles of underground ca- bles. DPL has a liquefied natural gas plant located in Wilmington, Delaware, with a storage capacity of 3.045 million gallons and an emergency sendout capabil- ity of 45,000 Mcf per day. DPL also owns eight natural gas city gate stations at various locations in its gas service territory. These stations have a total sendout capacity of 200,000 Mcf per day. The following table sets forth Conectiv's gas pipeline miles: Transmission Mains.................................................... 111* Distribution Mains.................................................... 1,605 Service Lines......................................................... 1,179
- -------- * Includes 7.2 miles of joint-use gas pipeline that is used 10% for gas oper- ations and 90% for electric generation. Conectiv's subsidiaries also own and occupy a number of properties and buildings that are used for office, service, and other purposes. ITEM 3. LEGAL PROCEEDINGS On October 24, 2000, the City of Vineland, New Jersey, filed an action in a New Jersey Superior Court to acquire by eminent domain ACE electric distribu- tion facilities located within the City limits. The City has offered approxi- mately $11 million for these assets, including the right to provide electric service in this area. ACE believes that, properly evaluated, the assets sought by the City are worth approximately $40 million. For information concerning penalties paid in connection with the environ- ment, see "Hazardous Substances," under "Environmental Matters," which is above and within Item 1 of Part I. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of the security holders of Conectiv, through the so- licitation of proxies or otherwise. I-19 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Conectiv common stock and Conectiv Class A common stock are listed on the New York Stock Exchange. As of December 31, 2000, there were 62,318 holders of Conectiv's common stock and 28,249 holders of Conectiv's Class A common stock. Conectiv Common stock
2000 1999 ----------------------------- ------------------------ Price Price Dividend -------------------- Dividend --------------- Declared High Low Declared High Low -------- --------- ---------- -------- ------- ------- First Quarter............ $0.220 $18 1/4 $13 7/16 $0.385 $24 3/8 $19 3/8 Second Quarter........... 0.220 18 13/16 15 0.220 25 1/2 19 3/8 Third Quarter............ 0.220 19 3/16 15 1/2 0.220 25 1/4 19 Fourth Quarter........... 0.220 20 3/4 15 13/16 0.220 20 3/4 16 1/4
Conectiv Class A common stock
2000 1999 -------------------------- --------------------------- Price Price Dividend ----------------- Dividend ------------------ Declared High Low Declared High Low -------- --------- ------- -------- --------- -------- First Quarter............ $0.80 $32 1/4 $21 3/4 $0.80 $40 $34 7/8 Second Quarter........... 0.80 24 5/8 19 3/8 0.80 42 1/4 34 3/8 Third Quarter............ 0.80 25 9/16 17 3/4 0.80 43 37 5/16 Fourth Quarter........... 0.80 20 1/4 8 1/2 0.80 40 13/16 26 1/2
Stock Stock Symbol Conectiv common stock CIV (New York Stock Exchange) Conectiv Class A common stock CIV A (New York Stock Exchange) Dividends on Common Stock As discussed in Note 5 to the Consolidated Financial Statements, during the period the Conectiv/Pepco Merger Agreement is in effect, Conectiv's dividend payments cannot exceed $0.22 per share of Conectiv common stock per quarter. In 2000, Conectiv's Board of Directors declared quarterly dividends per share of common stock of $0.22, or $0.88 for the year, which represented ap- proximately 45% of earnings per share of common stock of $1.97. In the second quarter of 1999, Conectiv established the objective of having a dividend pay- out ratio on common stock of 40% to 60% of earnings per share of common stock and also reduced the quarterly dividend from $0.385 per share to $0.22 per share. Dividends on Class A Common Stock Conectiv's Board of Directors intends that the quarterly dividend on shares of Class A common stock will remain $0.80 per share ($3.20 annualized rate) until March 31, 2001 (the "Initial Period"), subject to declaration by Conectiv's Board of Directors and the obligations of Conectiv's Board of Di- rectors to consider the financial condition and regulatory environment of Conectiv and the results of its operations; and also subject to the limita- tions under applicable law and the provisions of Conectiv's Restated Certifi- cate of Incorporation. II-1 As disclosed at the time of the 1998 Merger, Conectiv intends, following the Initial Period, subject to declaration by Conectiv's Board of Directors and the obligation of the Board of Directors to consider the financial condition and regulatory environment of Conectiv and the results of its operations, to pay annual dividends on the Class A common stock at a rate equal to 90% of annualized earnings of the Class A common stock (taking into account the notional fixed charge of $40 million per year in accordance with Conectiv's Restated Certificate of Incorporation). Notwithstanding Conectiv's intention with respect to dividends on the Class A common stock following the Initial Period, if and to the extent that the annual dividends paid on the Class A common stock during the Initial Period exceed the earnings that were applica- ble to the Class A common stock during the Initial Period, Conectiv's Board of Directors may consider such fact in determining the appropriate annual divi- dend rate on the Class A common stock following the Initial Period. Management expects that during the Initial Period the earnings applicable to Class A com- mon stock will be less than the dividends on the Class A common stock. Divi- dends declared per share of Class A common stock were $3.20 for 2000, $3.20 for 1999 and $3.20 for 1998. In comparison, earnings excluding special charges and the extraordinary item which were applicable to Class A common stock were $1.06 for 2000, $1.44 for 1999 and $1.82 for 1998. As discussed in Note 5 to the Consolidated Financial Statements, after March 31, 2001 and during the period the Conectiv/Pepco Merger Agreement is in ef- fect, dividends on Conectiv Class A common stock may be paid at an annual rate up to 90% of annualized earnings of Class A common stock. Dividend Restriction Under PUHCA, Conectiv may not pay dividends on the shares of common stock and Class A common stock from an accumulated deficit or paid-in-capital with- out SEC approval. In the first and second quarters of 2000, Conectiv had accu- mulated deficits and received SEC approval for the payment of quarterly divi- dends on shares of common stock and Class A common stock. Conectiv's common dividends paid to public stockholders are currently funded from the common dividends DPL and ACE pay to Conectiv. Under PUHCA, DPL and ACE are prohibited from paying a dividend from an accumulated deficit or paid- in-capital, unless SEC approval is obtained. Also, certificates of incorpora- tion of DPL and ACE require payment of all preferred dividends in arrears (if any) prior to payment of common dividends to Conectiv, and have certain other limitations on the payment of common dividends to Conectiv. II-2 CONECTIV ITEM 6. SELECTED FINANCIAL DATA
Year Ended December 31, ------------------------------------------------------------------- 2000 1999 1998(1) 1997 1996 ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands, Except Per Share Amounts) Operating Results Operating Revenues...... $5,029,124 $3,744,897 $3,071,606 $1,415,367 $1,168,664 Operating Income........ $ 487,834(2) $ 345,589 (2) $ 386,915(2) $ 226,294 $ 250,389 Income Before Extraordinary Item..... $ 170,830(2) $ 113,578 (2) $ 153,201(2) $ 101,218(3) $ 107,251 Extraordinary Item, Net of $188,254 of Income Taxes (4).............. -- $ (311,718) -- -- -- Net Income (Loss)....... $ 170,830(2) $ (198,140)(2) $ 153,201(2) $ 101,218(3) $ 107,251 Common Stock Information Basic and Diluted Earnings (Loss) Applicable to: Common Stock Income Before Extraordinary Item.... $ 164,719(5) $ 106,639 (5) $ 141,292(5) $ 101,218(3) $ 107,251 Extraordinary Item, Net of Income Taxes (4)................... -- (295,161) -- -- -- ---------- ---------- ---------- ---------- ---------- Total................ $ 164,719 $ (188,522) $ 141,292 $ 101,218 $ 107,251 ---------- ---------- ---------- ---------- ---------- Class A Common Stock Income Before Extraordinary Item.... $ 6,111 $ 6,939 (6) $ 11,909 -- -- Extraordinary Item, Net of Income Taxes (4)................... -- (16,557) -- -- -- ---------- ---------- ---------- ---------- ---------- Total................ $ 6,111 $ (9,618) $ 11,909 -- -- ---------- ---------- ---------- ---------- ---------- Earnings (Loss) Per Share of: Common Stock Before Extraordinary Item.................. $ 1.97(5) $ 1.14 (5) $ 1.50(5) $ 1.66(3) $ 1.77 Extraordinary Item (4)................... -- (3.16) -- -- -- ---------- ---------- ---------- ---------- ---------- Total................ $ 1.97 $ (2.02) $ 1.50 $ 1.66 $ 1.77 ---------- ---------- ---------- ---------- ---------- Class A Common Stock Before Extraordinary Item.................. $ 1.06 $ 1.14 (6) $ 1.82 -- -- Extraordinary Item (4)................... -- (2.71) -- -- -- ---------- ---------- ---------- ---------- ---------- Total................ $ 1.06 $ (1.57) $ 1.82 -- -- ---------- ---------- ---------- ---------- ---------- Dividends Declared Per Share of: Common Stock........... $ 0.88 $ 1.045 $ 1.54 $ 1.54 $ 1.54 Class A Common Stock... $ 3.20 $ 3.20 $ 3.20 -- -- Average Shares Outstanding (000): Common Stock........... 83,686 93,320 94,338 61,122 60,698 Class A Common Stock... 5,742 6,110 6,561 -- -- Year-End Stock Price: Common Stock........... $ 20 1/16 $ 16 13/16 $ 24 1/2 $ 23 1/16 $ 20 3/8 Class A Common Stock... $ 12 7/8 $ 29 5/8 $ 39 1/2 -- -- Book Value Per Common Share (7).............. $ 13.10 $ 12.38 $ 17.21 $ 15.59 $ 15.41 Return on Average Common Stockholders' Equity (8).................... 15.1% 8.0% 8.3% 10.6% 11.4% Capitalization Common Stockholders' Equity................. $1,160,269 $1,138,173 $1,843,161 $ 954,496 $ 934,913 Preferred Stock of Subsidiaries: Not Subject to Mandatory Redemption............ 95,933 95,933 95,933 89,703 89,703 Subject to Mandatory Redemption............ 188,950 188,950 188,950 70,000 70,000 Variable Rate Demand Bonds (VRDB) (9)....... 158,430 158,430 125,100 71,500 85,000 Long-Term Debt.......... 2,021,789 2,124,898 1,746,562 983,672 904,033 ---------- ---------- ---------- ---------- ---------- Total Capitalization with VRDB.............. $3,625,371 $3,706,384 $3,999,706 $2,169,371 $2,083,649 ========== ========== ========== ========== ========== Other Information Total Assets............ $6,477,995 $6,138,462 $6,087,674 $3,015,481 $2,931,855 Long-Term Capital Lease Obligation............. $ 13,744 $ 30,395 $ 36,603 $ 19,877 $ 20,552 Capital Expenditures.... $ 390,540 $ 320,395 $ 224,831 $ 156,808 $ 165,595
- -------- (1) As discussed in Note 4 to the Consolidated Financial Statements, Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE) be- came wholly owned subsidiaries of Conectiv (the 1998 II-3 Merger) on March 1, 1998. The 1998 Merger was accounted for under the pur- chase method of accounting, with DPL as the acquirer. Accordingly, the 1998 Consolidated Statement of Income includes 10 months of operating re- sults for ACE and other former subsidiaries of Atlantic Energy, Inc. (2) Special Charges, as discussed in Note 6 to the Consolidated Financial Statements, decreased operating income, income before extraordinary item, and net income by $25.2 million, $23.4 million and $23.4 million, respec- tively, in 2000; $105.6 million, $71.6 million, and $71.6 million, respec- tively, in 1999; and $27.7 million, $16.8 million and $16.8 million, re- spectively in 1998. In 2000, a gain on the sale of the ownership interests of DPL in nuclear electric generating plants increased operating income, income before extraordinary item, and net income by $16.6 million, $12.8 million, and $12.8 million, respectively, as discussed in Note 14 to the Consolidated Financial Statements. (3) In 1997, the gain on the sale of a landfill and waste-hauling company in- creased income before extraordinary item, net income and earnings per com- mon share by $13.7 million, $13.7 million, and $0.22, respectively. (4) As discussed in Note 7 to the Consolidated Financial Statements, the ex- traordinary item resulted from the restructuring of the electric utility industry and discontinuing the application of Statement of Financial Ac- counting Standards No. 71, "Accounting for the Effects of Certain Types of Regulation." (5) Special Charges, as discussed in Note 6 to the Consolidated Financial Statements, decreased income before extraordinary item applicable to Conectiv common stock by $23.4 million ($0.28 per average share outstand- ing) in 2000, $69.7 million ($0.75 per average share outstanding) in 1999 and $16.8 million ($0.18 per average share outstanding) in 1998. In 2000, a gain on the sale of the ownership interests of DPL in nuclear electric generating plants increased income before extraordinary item applicable to Conectiv common stock by $12.8 million ($0.15 per average share outstand- ing), as discussed in Note 14 to the Consolidated Financial Statements. (6) Special Charges, as discussed in Note 6 to the Consolidated Financial Statements, decreased income before extraordinary item applicable to Conectiv Class A common stock by $1.9 million ($0.30 per average share outstanding) in 1999. (7) Due to the terms of Conectiv's Restated Certificate of Incorporation, Conectiv common stock and Conectiv Class A common stock have the same book value per common share. (8) Before extraordinary charge of $311,718, net of $188,254 of income taxes, in 1999. (9) Although Variable Rate Demand Bonds are classified as current liabilities, management intends to use the bonds as a source of long-term financing, as discussed in Note 21 to the Consolidated Financial Statements. II-4 CONECTIV ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS The Private Securities Litigation Reform Act of 1995 (Litigation Reform Act) provides a "safe harbor" for forward-looking statements to encourage such dis- closures without the threat of litigation, provided those statements are iden- tified as forward-looking and are accompanied by meaningful, cautionary state- ments identifying important factors that could cause the actual results to differ materially from those projected in the statement. Forward-looking statements have been made in this report. Such statements are based on manage- ment's beliefs as well as assumptions made by and information currently avail- able to management. When used herein, the words "intend," "will," "antici- pate," "estimate," "expect," "believe," and similar expressions are intended to identify forward-looking statements. In addition to any assumptions and other factors referred to specifically in connection with such forward-looking statements, factors that could cause actual results to differ materially from those contemplated in any forward-looking statements include, among others, the following: the effects of deregulation of energy supply and the unbundling of delivery services; the ability to enter into purchased power agreements on acceptable terms; market demand and prices for energy, capacity, and fuel; weather variations affecting energy usage; operating performance of power plants; an increasingly competitive marketplace; results of any asset sales; sales retention and growth; federal and state regulatory actions; future liti- gation results; costs of construction; operating restrictions; increased costs and construction delays attributable to environmental regulations; nuclear decommissioning and the availability of reprocessing and storage facilities for spent nuclear fuel; and credit market concerns. Conectiv undertakes no ob- ligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing list of factors pursuant to the Litigation Reform Act should not be construed as exhaustive or as any admission regarding the adequacy of disclosures made prior to the effective date of the Litigation Reform Act. OVERVIEW Conectiv was formed on March 1, 1998 (the 1998 Merger), through a series of merger transactions and an exchange of common stock with Delmarva Power & Light Company (DPL) and Atlantic Energy, Inc. (Atlantic). Conectiv's two larg- est subsidiaries, DPL and Atlantic City Electric Company (ACE), supply and de- liver electricity. DPL also supplies and delivers gas to its customers. A transition to market pricing and terms of service for supplying electricity to customers in the regulated service areas of DPL and ACE began in 1999. Sub- stantially all of the customers of DPL and ACE can now elect to choose an al- ternative electricity supplier. On July, 1, 2000, certain strategic electric generating plants of DPL and ACE were transferred to subsidiaries of Conectiv Energy Holding Company (CEH). CEH and its subsidiaries are engaged in non-regulated electricity production and sales, energy trading and marketing. On December 29, 2000, DPL sold its ownership interests in nuclear electric generating plants. Certain other elec- tric generating plants are expected to be sold during 2001, pursuant to exist- ing agreements. After the sales of these plants, the principal remaining busi- nesses of DPL and ACE will be the transmission and distribution, or delivery, of electricity. Proceeds from these sales and securitization of ACE's stranded costs (securitization is discussed under "Stranded Cost Recovery and Securitization") are expected to be used to repay debt and fund expansion of the "mid-merit" electric generation business. As discussed under "Mid-Merit Electric Generation," mid-merit electric generating plants can quickly in- crease or decrease their output level on an economic basis and are expected to have relatively low operating costs. Conectiv is building combustion turbines and combined cycle units as part of its mid-merit electric generation busi- ness, which also includes most of the plants operated by subsidiaries of CEH. During 2000, Conectiv began exiting from certain business activities. During mid- to late-2000, Conectiv sold its heating, ventilation, and air condition- ing (HVAC) business and portions of Conectiv Thermal Systems, Inc. (CTS), which constructs and operates district heating and cooling systems. Conectiv also began exiting from II-5 the competitive retail energy business (the supply of electricity and gas in deregulated retail markets). In addition, Conectiv initiated a process in 2000 to identify a strategic partner for CCI. Due to weaknesses in the valuations of telecommunications businesses, Conectiv continues to evaluate its partnering or other options. Under the purchase method of accounting for the 1998 Merger, with DPL as the acquirer, the Consolidated Statements of Income include the results of opera- tions for ACE and formerly Atlantic-owned non-utility businesses from March 1, 1998 and thereafter. See Note 4 to the Consolidated Financial Statements for additional information concerning the 1998 Merger. As used in this document, references to Conectiv may mean the activities of one or more subsidiary companies. AGREEMENT FOR THE ACQUISITION OF CONECTIV On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for a combination of cash and stock. The transaction is subject to various statu- tory and regulatory approvals and approval by the stockholders of Conectiv and Pepco. Upon completion of the transaction, Conectiv and Pepco will become sub- sidiaries of a new holding company (HoldCo), to be named at a later date. HoldCo is expected to be a registered holding company under PUHCA. Approxi- mately 67% of the shares of HoldCo are expected to be owned by Pepco stock- holders and 33% of the shares of HoldCo are expected to be owned by Conectiv stockholders. Under the terms of the Conectiv/Pepco Merger Agreement, holders of Pepco's common stock will receive one share of HoldCo common stock for each share of Pepco common stock owned. Under the Conectiv/Pepco Merger Agreement, holders of Conectiv common stock and Conectiv Class A common stock may elect to exchange their shares for cash, HoldCo common stock, or a combination of cash and HoldCo common stock. Howev- er, such elections will be subject to a proration procedure that will cause the aggregate consideration paid to holders of Conectiv common stock and Conectiv Class A common stock to be 50% cash and 50% HoldCo common stock. Sub- ject to certain restrictions described below, (i) Conectiv stockholders elect- ing to receive cash would receive $25 per share of Conectiv common stock ex- changed and $21.69 per share of Conectiv Class A common stock exchanged, and (ii) Conectiv stockholders electing to receive HoldCo common stock would re- ceive a number of shares of HoldCo common stock determined by the exchange ra- tio described below. Subject to certain limitations, the exchange ratio is de- signed to provide holders of Conectiv common stock with a number of shares of HoldCo common stock having a market value of $25.00 and holders of Conectiv Class A common stock with a number of shares of HoldCo common stock having a market value of $21.69. The exchange ratio will be $25.00 divided by the volume-weighted average of the closing trading prices of Pepco common stock for 20 trading days randomly selected by lot out of 30 consecutive trading days ending on the fifth busi- ness day immediately preceding the closing date of the transaction (Average Final Price). If the Average Final Price is below $19.50, then Conectiv common stockhold- ers will have the right to receive 1.28205 shares of HoldCo common stock for each share of stock exchanged and Conectiv Class A common stockholders will have the right to receive 1.11227 shares of HoldCo common stock for each share of stock exchanged. In this instance, the fair value of HoldCo common stock received for each share of Conectiv common stock exchanged and each share of Conectiv Class A common stock exchanged will be less than $25.00 and $21.69, respectively. If the Average Final Price is above $24.50, then Conectiv common stockhold- ers will have the right to receive 1.02041 shares of HoldCo common stock for each share of stock exchanged and Conectiv Class A common stockholders will have the right to receive 0.88528 shares of HoldCo common stock for each share of II-6 stock exchanged. In this instance, the fair value of HoldCo common stock re- ceived for each share of Conectiv common stock exchanged and each share of Conectiv Class A common stock exchanged will be more than $25.00 and $21.69, respectively. Conectiv may terminate the Conectiv/Pepco Merger Agreement if the Average Final Price is less than $16.50, unless Pepco, at its option, chooses to in- crease the consideration that will be paid to Conectiv's stockholders for their shares of Conectiv stock. If the Average Final Price is less than $16.50, Pepco has the option of (i) adjusting the exchange ratio so as to pro- vide Conectiv's stockholders with HoldCo common stock having a value of $21.25 for each share of Conectiv common stock and $18.35 for each share of Conectiv Class A common stock, (ii) paying additional cash to the stockholders so that they receive a total consideration of $21.25 for each share of Conectiv common stock and $18.35 for each share of Conectiv Class A common stock, or (iii) un- dertaking a combination of (i) and (ii), provided that any such combination must be in the same proportion with respect to the Conectiv common stock and the Conectiv Class A common stock. The Conectiv/Pepco Merger Agreement may be terminated by either Conectiv or Pepco if the transaction has not occurred by August 9, 2002 (18 months after the date of the Conectiv/Pepco Merger Agreement). If however, on August 9, 2002, the conditions required to complete the merger have been satisfied, ex- cept that additional time is needed to obtain the necessary statutory and reg- ulatory approvals, then the Conectiv/Pepco Merger Agreement is extended for six additional months. If Conectiv terminates the Conectiv/Pepco Merger Agree- ment under certain circumstances, Conectiv is required to pay a $60 million termination fee to Pepco. For example, if Conectiv's Board of Directors con- cludes that a business combination with another party is more favorable to Conectiv's stockholders and Conectiv terminates the Conectiv/Pepco Merger Agreement, then Conectiv is obligated to pay a $60 million termination fee to Pepco. COMMON STOCK EARNINGS SUMMARY Earnings applicable to common stock for 2000 were $164.7 million, or $1.97 per share of common stock (83,686,000 average shares outstanding) and reflect a gain ($12.8 million after-taxes, or $0.15 per common share) on the sale of DPL's ownership interests in nuclear power plants and special charges ($23.4 million after-taxes, or $0.28 per share of common stock) for losses on the sales of the HVAC business and two CTS projects. For 1999, Conectiv reported a net loss applicable to common stock of $188.5 million, or a loss of $2.02 per share of common stock (93,320,000 average shares outstanding). The net loss resulted from (i) a $295.1 million extraordinary charge applicable to common stock ($3.16 per share of common stock) for discontinuing the application of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation," (SFAS No. 71) to the electricity sup- ply businesses of DPL and ACE because of deregulation, and (ii) $69.7 million of special charges applicable to common stock ($0.75 per share of common stock) primarily for write-downs of investments in non-utility businesses and employee separation costs. For 1998, earnings applicable to common stock were $141.3 million, or $1.50 per share of common stock (94,338,000 average shares outstanding), after special charges of $16.8 million ($0.18 per share of com- mon stock). For additional information concerning the gain on the sale of the ownership interests of DPL in nuclear electric generating plants, see "Agreements for the Sales of Electric Generating Plants" in "Management's Discussion and Anal- ysis of Financial Condition and Results of Operations" (MD&A) and Note 14 to the Consolidated Financial Statements. For additional information concerning special charges, see "Special Charges" in the MD&A and Note 6 to the Consoli- dated Financial Statements. For additional information concerning deregulation and the extraordinary charge to earnings, see "Electric Utility Industry Re- structuring" in the MD&A and Notes 1, 7, 10, 11 and 17 to the Consolidated Fi- nancial Statements. As discussed in Note 10 to the Consolidated Financial Statements, ACE's por- tion of the 1999 extraordinary charge was based on a Summary Order issued by the New Jersey Board of Public Utilities (NJBPU) which addressed stranded costs, unbundled rates, and other matters related to restructuring. The NJBPU indicated that a more detailed order would be issued at a later time. If the NJBPU's final detailed order were to differ materially from the Summary Order, then another extraordinary item may result due to adjustment of the 1999 ex- traordinary II-7 charge. For information concerning a delay in the issuance of the NJBPU's fi- nal detailed order, see "Agreements for the Sales of Electric Generating Plants" in the MD&A. A summary of common stock earnings is shown in the table below.
2000 1999 1998 -------- --------- -------- (Dollars in Millions, Except Per Share Amounts) After-tax Contribution to Earnings (Loss) Applicable to Common Stock Income Excluding Special Charges, Gain on Sale of DPL's Interest in Nuclear Plants, and Extraordinary Item..................... $ 175.3 $ 176.3 $ 158.1 Special Charges............................. (23.4) (69.7) (16.8) Gain on Sale of DPL's Interest in Nuclear Plants..................................... 12.8 -- -- -------- --------- -------- Income Before Extraordinary Item............. $ 164.7 $ 106.6 $ 141.3 Extraordinary Item........................... -- (295.1) -- -------- --------- -------- Earnings (Loss) Applicable to Common Stock... $ 164.7 $ (188.5) $ 141.3 ======== ========= ======== Average Shares of Common Stock Outstanding (000)....................................... 83,686 93,320 94,338 -------- --------- -------- After-tax Contribution to Earnings (Loss) Per Average Share of Common Stock (1) CCI (telecommunications)............... $ (0.46) $ (0.33) $ (0.19) (2) CSI (HVAC)............................. (0.09) (0.10) (0.15) (3) Investment income...................... 0.13 0.27 -- (4) Energy, Power Delivery, and Other...... 2.52 2.05 2.02 -------- --------- -------- Income Excluding Special Charges, Gain on Sale of DPL's Interest in Nuclear Plants, and Extraordinary Item.................... $ 2.10 $ 1.89 $ 1.68 Special Charges............................ (0.28) (0.75) (0.18) Gain on Sale of DPL's Interest in Nuclear Plants.................................... 0.15 -- -- -------- --------- -------- Earnings (Loss) Per Average Share of Common Stock: Before Extraordinary Item.................. $ 1.97 $ 1.14 $ 1.50 Extraordinary Item......................... -- (3.16) -- -------- --------- -------- Earnings (Loss) Per Average Share of Common Stock....................................... $ 1.97 $ (2.02) $ 1.50 ======== ========= ========
(1) CCI (Telecommunications) As shown above, the loss per share of common stock that resulted from CCI's operations was $0.46 for 2000, $0.33 for 1999, and $0.19 for 1998. The higher losses per share of common stock resulted from increased operating and inter- est expenses due to expansion of CCI's operations and fewer average shares outstanding of common stock. As discussed above, Conectiv initiated a process in 2000 to identify a strategic partner for CCI. In the fourth quarter of 2000, CCI reduced the number of its employees in order to minimize expected operating losses while Conectiv continues to evaluate its partnering or other options. (2) CSI (HVAC) As discussed above, Conectiv sold the HVAC businesses of CSI during mid- to late-2000. The loss per share of common stock that resulted from CSI's opera- tions was $0.09 for 2000, $0.10 for 1999, and $0.15 for 1998. In 1999, CSI's operating losses decreased compared to 1998 due to higher sales and improved operational efficiencies. (3) Investment Income As discussed in Note 8 to the Consolidated Financial Statements, Conectiv earns investment income primarily from investments in three venture capital funds, including the EnerTech funds and Tech Leaders II. II-8 Mainly as a result of distributions of marketable securities received from these funds, Conectiv also owns marketable securities. Earnings per share of common stock that resulted from Conectiv's equity in earnings of the EnerTech funds were $0.16 in 2000, $0.27 in 1999, and insig- nificant in 1998. The earnings of the EnerTech funds in 2000 resulted primar- ily from an unrealized gain on the initial public offering of common shares of Capstone Turbine Corporation (Capstone). Capstone develops, designs, assem- bles, and sells micro-turbines worldwide in the distributed power generation market and hybrid electric vehicle market. In 1999, Conectiv's equity in earn- ings of the EnerTech funds resulted primarily from the initial public offering of common shares of a business-to-business Internet company. The earnings of the EnerTech funds may be volatile from period to period due to the nature of their investments in energy related technology and Internet service companies. As of December 31, 2000, the carrying amount of Conectiv's investment in the EnerTech funds was $38.6 million. Conectiv's other investments that affect its results of operations include marketable securities (other than those held in nuclear decommissioning trust funds) and minority interests in a venture capital fund and an Internet start- up project. For 2000, these investments resulted in a net loss, including $3.0 million before taxes ($2.0 million after taxes, or $0.02 per share of common stock), which was recognized in earnings and $3.1 million before taxes ($2.0 million after taxes), which was recognized in other comprehensive income (a separate component of common stockholders' equity). The earnings on these in- vestments in 1999 and 1998 were insignificant. The carrying value of these in- vestments was $4.6 million as of December 31, 2000. (4) Energy, Power Delivery, and Other The Energy business segment 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 suppli- er; (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. The Power Delivery business segment in- cludes activities related to delivery of electricity and gas to customers at regulated prices over transmission and distribution systems. Operating Results for 2000 Compared to 1999 The contribution to earnings per share of common stock by "Energy, Power De- livery, and Other" increased to $2.52 in 2000 from $2.05 in 1999. The $0.47 increase in contribution to earnings per share of common stock was primarily due to higher profits from Conectiv's non-regulated wholesale energy marketing and trading operations, higher earnings from a non-utility generation joint venture, and lower pension and other postretirement benefit costs. The in- crease in earnings per share of common stock was also enhanced by fewer aver- age common shares outstanding. Conectiv repurchased 3.4 million and 14.4 mil- lion shares of Conectiv common stock during 2000 and 1999, respectively. These common stock repurchases increased earnings per share of common stock for 2000 compared to 1999 by $0.09, after considering the interest expense incurred to finance the common stock repurchases. These positive variances were partly offset by the revenue decrease from reductions in regulated Power Delivery customer rates that resulted from electric utility restructuring in mid- to late-1999 and the effect of higher average energy prices incurred by DPL in supplying electricity to customers, as discussed below. Discontinuing the application of SFAS No. 71 in the third quarter of 1999 benefited the Energy business in 2000 due to related decreases in purchased capacity and depreciation costs. On the other hand, regulated energy adjust- ment clauses prior to deregulation had generally eliminated the effect of sea- sonal and other energy price fluctuations on costs expensed. Since DPL's aver- age energy costs for supplying electricity increased in 2000, the absence of the energy adjustment clauses unfavorably affected earnings for 2000 compared to 1999. Operating Results for 1999 Compared to 1998 The contribution to earnings per share of common stock by "Energy, Power De- livery, and Other" increased to $2.05 in 1999 from $2.02 in 1998. The $0.03 increase in contribution to earnings per share of common stock II-9 was due to higher earnings from electric and gas utility operations attributed to additional revenue from increased retail sales, partly offset by electric rate decreases and higher operating expenses. Also, the repurchase of 14.4 million shares of common stock during 1999 contributed $0.06 to the increase in earnings per share. Lower earnings of a non-utility generation joint ven- ture partly offset the positive variances from utility operations and the re- purchase of common stock. Energy Commodity Market Risk Conectiv's participation in energy markets results in exposure to commodity market risk. Conectiv has controls in place that are intended to keep risk ex- posures within certain management-approved risk tolerance levels. For addi- tional information concerning commodity market risk, see "Quantitative and Qualitative Disclosures About Market Risk," included herein. COMMON STOCK EARNINGS OUTLOOK As discussed above under "Overview," Conectiv's businesses have undergone significant change and are expected to continue to change. Among other things, deregulated electricity generation and energy trading now constitute a greater portion of Conectiv's earnings. The sale of the HVAC businesses during 2000 has removed an unprofitable operation from Conectiv. On-going business devel- opments are also expected to cause future operating results to differ from the past. Accordingly, past results are not an indication of future business pros- pects or financial results. As Conectiv exits from the regulated electricity production business and builds mid-merit generation, operating earnings may temporarily decrease and may also be more volatile. A summary of the key fac- tors that are expected to affect Conectiv's future earnings are shown below. . The returns on the proceeds from the expected sale of power plants com- pared to returns earned on such power plants prior to their sale; . The performance and operating results of deregulated power plants, which previously were subject to rate regulation; . The operating results of energy trading activities, including the impact of implementing SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is expected to increase the volatility of earnings; . The profit or loss that results from supplying electricity to customers who do not choose an alternative energy supplier; . The amount of income from investments, including the EnerTech funds; . The level of success encountered in minimizing the expected operating losses of CCI and finding a partner in the telecommunications business; . The effect of changes in short-term interest rates on Conectiv's inter- est expense; and . Conectiv's ability to achieve cost reductions and streamline operations. DIVIDENDS ON COMMON STOCK As discussed in Note 5 to the Consolidated Financial Statements, during the period the Conectiv/Pepco Merger Agreement is in effect, Conectiv's dividend payments cannot exceed $0.22 per share of Conectiv common stock per quarter. Conectiv's Board of Directors declared dividends per share of common stock of $0.88 in 2000, $1.045 in 1999, and $1.54 in 1998. The decrease in dividends per share of common stock from 1998-2000 resulted from changing the quarterly dividend per share in the second quarter of 1999 to $0.22, from $0.385. On May 11, 1999, Conectiv announced that it intended to reduce the dividends on com- mon stock to a targeted payout ratio of 40% to 60% of earnings per share of common stock. In 2000, dividends declared per share of common stock repre- sented approximately 45% of earnings per share of common stock of $1.97. II-10 CLASS A COMMON STOCK EARNINGS SUMMARY A summary of Class A common stock earnings is shown in the table below.
2000 1999 1998 ------ ------ ------ (Dollars in Millions, Except Per Share Amounts) After-tax Contribution to Earnings (Loss) Applicable to Class A Common Stock Income Excluding Special Charges and Extraordinary Item............................................. $ 6.1 $ 8.8 $ 11.9 Special Charges................................... -- (1.9) -- ------ ------ ------ Income Before Extraordinary Item.................... $ 6.1 $ 6.9 $ 11.9 Extraordinary Item.................................. -- (16.5) -- ------ ------ ------ Earnings (Loss) Applicable to Class A Common Stock.. $ 6.1 $ (9.6) $ 11.9 ====== ====== ====== Average Shares of Class A Common Stock Outstanding (000).............................................. 5,742 6,110 6,561 ------ ------ ------ After-tax Contribution to Earnings Per Average Share of Class A Common Stock Income Excluding Special Charges and Extraordinary Item............................................. $ 1.06 $ 1.44 $ 1.82 Special Charges................................... -- (0.30) -- ------ ------ ------ Earnings (Loss) Per Average Share of Class A Common Stock: Before Extraordinary Item......................... $ 1.06 $ 1.14 $ 1.82 Extraordinary Item................................ -- (2.71) -- ------ ------ ------ Earnings (Loss) Per Average Share of Class A Common Stock.............................................. $ 1.06 $(1.57) $ 1.82 ====== ====== ======
Earnings applicable to Class A common stock are equal to a percentage of "Company Net Income Attributable to the Atlantic Utility Group," which con- sists of earnings of the Atlantic Utility Group (AUG) less $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. Combustion turbines of ACE that were transferred on July 1, 2000 to another Conectiv subsidiary, Conectiv Atlantic Generation, LLC (CAG), remain in the AUG. The percentage of "Company Net In- come Attributable to the Atlantic Utility Group" that is applicable to Class A common stock is the "Outstanding Atlantic Utility Fraction" (as defined in Conectiv's Restated Certificate of Incorporation). The Outstanding Atlantic Utility Fraction was 27.3% as of December 31, 2000, and 1999, and 30.0% as of December 31, 1998. Earnings applicable to Class A common stock were $6.1 million, or $1.06 per share of Class A common stock, for 2000. For 1999, there was a net loss appli- cable to Class A common stock of $9.6 million, or $1.57 per share of Class A common stock. Excluding the $16.5 million extraordinary item that resulted from deregulation of the electricity supply business of ACE (as discussed in Notes 1, 7, 10, 11 and 17 to the Consolidated Financial Statements) and $1.9 million of special charges applicable to Class A common stock, earnings appli- cable to Class A common stock for 1999 were $8.8 million, or $1.44 per share of Class A common stock. Based on income excluding the special charges and ex- traordinary item, earnings per share of Class A common stock decreased $0.38 in 2000 compared to 1999. This decrease was mainly due to rate reductions as- sociated with deregulation of ACE's electricity supply business and the ad- verse effect of cooler summer weather on ACE's regulated electricity sales. A lower effective income tax rate for ACE mitigated these unfavorable variances. Based on income excluding special charges and extraordinary item, earnings per share of Class A common stock decreased to $1.44 for 1999 from $1.82 for 1998. This $0.38 decrease was mainly due to higher operating expenses for ACE's electricity delivery and generation businesses and rate decreases, which became effective on August 1, 1999 due to restructuring of the electric util- ity industry in New Jersey. II-11 CLASS A COMMON STOCK EARNINGS OUTLOOK Any change in the earnings of the AUG impacts the earnings per share of Class A common stock much more than the earnings per share of Conectiv's com- mon stock primarily due to the apportionment of the earnings of the AUG be- tween Conectiv common stock and Conectiv Class A common stock, in accordance with Conectiv's Restated Certificate of Incorporation, and because a greater diversity of businesses contribute to earnings applicable to Conectiv common stock. The earnings of the AUG have been and will continue to be affected by the implementation of electric utility industry restructuring in New Jersey, in- cluding related rate decreases. (See Note 10 to the Consolidated Financial Statements for information concerning New Jersey electric utility industry re- structuring.) The planned sales of most of ACE's electric generating plants (discussed under "Agreements for the Sales of Electric Generating Plants") are expected to decrease the earnings capacity of the AUG. The extent of the de- crease in earnings capacity will be affected by how the proceeds from the sales of the generating plants are utilized. Currently, the proceeds are ex- pected to be used to repay debt and fund expansion of the mid-merit electric generation business (which is discussed under "Mid-Merit Electric Genera- tion"). Under certain circumstances, the Outstanding Atlantic Utility Fraction may be adjusted. Due to the aforementioned factors, past results are not an indication of future business prospects or financial results of the AUG. DIVIDENDS ON CLASS A COMMON STOCK Conectiv's Board of Directors intends that the quarterly dividend on shares of Class A common stock will remain $0.80 per share ($3.20 annualized rate) until March 31, 2001 (the "Initial Period"), subject to declaration by Conectiv's Board of Directors and the obligations of Conectiv's Board of Di- rectors to consider the financial condition and regulatory environment of Conectiv and the results of its operations; and also subject to the limita- tions under applicable law and the provisions of Conectiv's Restated Certifi- cate of Incorporation. As disclosed at the time of the 1998 Merger, Conectiv intends, following the Initial Period, subject to declaration by Conectiv's Board of Directors and the obligation of the Board of Directors to consider the financial condition and regulatory environment of Conectiv and the results of its operations, to pay annual dividends on the Class A common stock at a rate equal to 90% of annualized earnings of the Class A common stock (taking into account the notional fixed charge of $40 million per year in accordance with Conectiv's Restated Certificate of Incorporation). Notwithstanding Conectiv's intention with respect to dividends on the Class A common stock following the Initial Period, if and to the extent that the annual dividends paid on the Class A common stock during the Initial Period exceed the earnings that were applica- ble to the Class A common stock during the Initial Period, Conectiv's Board of Directors may consider such fact in determining the appropriate annual divi- dend rate on the Class A common stock following the Initial Period. Management expects that during the Initial Period the earnings applicable to Class A com- mon stock will be less than the dividends on the Class A common stock. Divi- dends declared per share of Class A common stock were $3.20 for 2000, $3.20 for 1999 and $3.20 for 1998. In comparison, earnings excluding special charges (discussed in Note 6 to the Consolidated Financial Statements) and the ex- traordinary item which were applicable to Class A common stock were $1.06 for 2000, $1.44 for 1999 and $1.82 for 1998. As discussed in Note 5 to the Consolidated Financial Statements, after March 31, 2001 and during the period the Conectiv/Pepco Merger Agreement is in ef- fect, dividends on Conectiv Class A common stock may be paid at an annual rate up to 90% of annualized earnings of Class A common stock. ELECTRIC UTILITY INDUSTRY RESTRUCTURING During the latter half of 1999, as discussed in Notes 1, 7, 10, and 17 to the Consolidated Financial Statements, the NJBPU issued a Summary Order to ACE, and the Delaware Public Service Commission (DPSC) and Maryland Public Service Commission (MPSC) issued orders to DPL, concerning restructuring the electricity supply businesses of ACE and DPL, respectively. Based on these or- ders, ACE and DPL determined that the requirements of SFAS No. 71 no longer applied to their electricity supply businesses as of August 1, 1999 and II-12 September 30, 1999, respectively. As a result, ACE and DPL discontinued apply- ing SFAS No. 71 and applied the requirements of SFAS No. 101, "Regulated En- terprises--Accounting for the Discontinuation of Application of FASB Statement No. 71" (SFAS No. 101) and Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity-- Issues Related to the Applica- tion of FASB Statements No. 71 and No. 101" (EITF 97-4), which among other things, resulted in an extraordinary charge to earnings of $311.7 million, net of $188.3 million of income taxes. Implementation Dates The table below shows when DPL's Delaware and Maryland and ACE's New Jersey retail electric customers could first elect to choose an alternative electric- ity supplier. DPL has proposed to the Virginia State Corporation Commission (VSCC) to offer all of its Virginia retail customers the option of choosing an alternative electricity supplier beginning on January 1, 2002. Revenues from regulated retail electricity sales in Virginia represented approximately 1.7% of Conectiv's regulated retail electric and gas revenues for 2000.
State Customer Group Effective Date for Choice - ----- -------------- ------------------------- New Jersey.............. All customers August 1, 1999 Delaware................ Customers with peak loads of 1,000 kilowatts or more October 1, 1999 Delaware................ Customers with peak loads of 300 kilowatts or more January 15, 2000 Delaware................ All other Delaware retail electric customers October 1, 2000 Maryland................ All customers July 1, 2000
Revenue Reductions Pursuant to the electric utility restructuring orders issued by the NJBPU, DPSC, and MPSC, electric rate decreases became effective on the dates shown in the table below.
Estimated Annualized State Revenue Decrease Effective Date - ----- ------------------------- --------------- New Jersey........................... $50.0 million, or 5% August 1, 1999 New Jersey........................... $10.0 million, or 1% January 1, 2000 New Jersey........................... $10.0 million, or 1% (1) January 1, 2001 Delaware............................. $17.5 million, or 7.5% (2) October 1, 1999 Maryland............................. $12.5 million, or 7.5% (2) July 1, 2000
- -------- (1) In addition, by August 1, 2002, rates must be ten percent lower than the rates that were in effect April 30, 1997. This rate decrease is expected to result in an additional $30 million revenue reduction. (2) Represents a 7.5% reduction in residential rates, which are held constant for four years. Non-residential rates are held constant for three years. Regulatory Implications on Sales of Electric Generating Plants Under the restructuring orders issued by the DPSC and MPSC, DPL's Delaware and Maryland retail electric rates will not be changed in the event DPL sells or transfers generating assets. Based on the terms of the restructuring orders and agreements for the sale of certain electric generating plants, management expects to recognize a net gain in earnings when the sales of certain electric generating plants are completed. There can be no assurances, however, that the sales of the electric generating plants will be completed pursuant to the agreements, or that any gain will be realized from such sales of electric gen- erating plants. Except for the Deepwater plant (185 megawatts of capacity), any gain or loss realized upon the sale of electric generating plants of ACE that are subject to the agreements discussed below under "Agreements for the Sales of Electric Generating Plants" will affect the amount of ACE's recoverable stranded costs, due to the terms of the Summary Order. Accordingly, any gain or loss realized by ACE on the sale of these plants would not II-13 affect future earnings. Any loss on a sale by July 31, 2002, of the Deepwater plant, or the combustion turbines formerly owned by ACE before the transfer to CAG, cannot be recovered from ACE's customers. The agreements for the sale of electric generating units include the sale of the Deepwater plant at a loss, which was recorded in the fourth quarter of 1999 as an extraordinary item. Stranded Cost Recovery and Securitization Stranded costs are the uneconomic portion of assets and long-term contracts that resulted from electric utility industry restructuring. The NJBPU's Sum- mary Order provides ACE the opportunity to recover 100% of the net stranded costs related to certain generation units to be divested and the stranded costs associated with power purchased from non-utility generators (NUGs). The Summary Order, in conjunction with the New Jersey Act, also permits securitization of stranded costs through the issuance of transition bonds in the amount of the after-tax stranded cost recovery approved by the NJBPU. Man- agement expects the transition bonds will be issued after completion of the sale of the electric generating units of ACE. The ability to issue transition bonds would depend not only upon approval of the NJBPU, but also on the condi- tions in the relevant capital markets at the times of the offerings. Proceeds from the transition bonds may be used to refinance ACE's debt and preferred securities, finance the restructuring of purchased power contracts, or other- wise reduce costs in order to decrease regulated electricity rates. Amounts designed to repay the principal of and interest on the transition bonds will be collected from customers through a transition bond charge. The income tax expense associated with the revenues from transition bond charges will be col- lected from customers through a separate market transition charge. As of De- cember 31, 2000, the balance for ACE's pre-tax recoverable stranded costs was approximately $959 million, which includes the stranded costs estimated and recorded as a result of discontinuing the application of SFAS No. 71 during 1999 and the $228.5 million payment in December 1999 to terminate a NUG con- tract (see "Termination and Restructuring of Purchased Power Contracts" be- low). ACE's amount of recoverable stranded costs remains subject to adjustment based on the actual gains and losses realized on the sale of certain electric generating plants, additional buyouts or buydowns of NUG contracts, the NJBPU's final restructuring order, and the final amount determined to be re- coverable through customer rates under the New Jersey Act. Based on the DPSC and MPSC restructuring orders, DPL recorded recoverable stranded costs in the third quarter of 1999, which had a pre-tax balance of approximately $29 million as of December 31, 2000. Although only partial stranded cost recovery was provided for by the restructuring orders of the DPSC and MPSC, any gain that may be realized on the sale of the electric gen- erating units that were owned by DPL at the time of deregulation will increase future earnings. Basic Generation Service Through July 31, 2002, under New Jersey's Basic Generation Service (BGS), ACE is obligated to supply electricity to customers who do not choose an al- ternative electricity supplier. In accordance with the Summary Order, ACE sup- plies the BGS load requirement primarily with power purchased under its NUG contracts and the output generated by certain units to be sold. To replace the output of the generating units to be sold, ACE plans to increase the amount of power it purchases to supply the BGS load. ACE intends to manage BGS supply requirements (net of sources otherwise available to it at any particular time) through the use of a portfolio approach, including the use of competitive bid- ding. ACE's customer rates are designed to recover the costs of providing BGS service, including above-market portions of NUG power. As a result, ACE recog- nizes revenues for BGS service equal to the related costs incurred. Any dif- ference between such revenues and costs results in a related adjustment to "Deferred energy supply costs." ACE's customer rates are to be adjusted for any deferred balance remaining after the initial four-year transition period ends July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the NJBPU. Default Service DPL is obligated to supply electricity to customers who do not choose an al- ternative electricity supplier for three years for non-residential customers and four years for residential customers during the transition periods II-14 that began on October 1, 1999, in Delaware and July 1, 2000, in Maryland. Dif- ferences between DPL's actual energy costs and the related amounts included in customer rates began affecting Conectiv's earnings as of October 1, 1999, for DPL's Delaware business and July 1, 2000, for DPL's Maryland business. Shopping Credits Customers who choose an alternative electricity supplier receive a credit to their bill, or a shopping credit, which generally represents the cost of elec- tricity supply and transmission service. Termination and Restructuring of Purchased Power Contracts On November 10, 1999, the NJBPU issued an order approving termination of a contract under which ACE had purchased energy and 116 megawatts (MW) of capac- ity from a NUG partnership (Pedricktown Co-generation Limited Partnership, or "Pedricktown"), which is owned 50% by other Conectiv subsidiaries. The NJBPU order provided that ACE is entitled to recover from customers the contract termination payment of $228.5 million, transaction costs, and interim financ- ing costs. The NJBPU order also found that the contract termination payment and related transaction costs are eligible for long-term financing through the issuance of transition bonds. On December 28, 1999, ACE paid $228.5 million to terminate the contract and borrowed funds to finance the contract termination payment (as discussed in Note 21 to the Consolidated Financial Statements). The contract termination payment and related costs are included in "Recover- able Stranded Costs" on the Consolidated Balance Sheets. ACE's customer rates were reduced by about 1% (approximately $10 million of revenues on an annualized basis) effective January 1, 2000 as a result of the net savings from the contract termination. On December 6, 2000, the NJBPU approved ACE's payment on January 22, 2001 of $3.45 million in connection with restructuring ACE's purchased power contract with a NUG, American Ref-Fuel Company of Delaware Valley, L.P. Management anticipates that securitization will ultimately be used to fi- nance the stranded costs associated with the buyout or buydown of ACE's NUG contracts. On December 28, 1999, the Conectiv subsidiaries that own 50% of the Pedricktown NUG partnership with which ACE terminated its contract received an $82.2 million distribution from Pedricktown. The distribution was primarily the result of a gain realized by Pedricktown from the contract termination; the Conectiv subsidiaries' share of the gain was estimated at $75.0 million as of December 31, 2000 and $70.8 million as of December 31, 1999. Conectiv's subsidiaries share of the gain is deferred in Conectiv's Consolidated Balance Sheets and classified under "Deferred Credits and Other Liabilities." The de- ferred gain is expected to be either (a) amortized to income over the period revenues are collected from ACE's customers to repay the transition bonds ex- pected to be issued to recover the contract termination payment, or (b) recog- nized in income if the Conectiv subsidiaries no longer hold an ownership in- terest in Pedricktown. MID-MERIT ELECTRIC GENERATION Conectiv is changing the types of electric generating plants it owns in con- junction with implementing its asset-backed, "merchant" strategy focusing on "mid-merit" electric generating plants. Mid-merit electric generating plants can quickly increase or decrease their kWh output level on an economic basis. Mid-merit plants typically have relatively low fixed operating and maintenance costs and also can use different types of fuel. These plants are generally op- erated during times when demand for electricity rises and prices are higher. In contrast, baseload electric generating plants run almost continuously to supply the base level of demand for electricity, or the minimum demand level which generally always exists on an electrical system. Management expects that mid-merit electric generating plants will be more profitable and provide higher returns on invested capital than baseload electric generating plants. As discussed below, DPL sold its ownership interests in baseload nuclear elec- tric generating plants on December 29, 2000, and the ownership interests of Conectiv subsidiaries in other baseload electric generating plants are ex- pected to be sold during 2001, pursuant to existing agreements. II-15 As a result of electric utility industry restructuring orders issued in 1999, deregulated operation of the electric generating plants owned by Conectiv subsidiaries was phased in from August 1, 1999 to July 1, 2000. As of July 1, 2000, approximately 79% of Conectiv's electric generating capacity was being operated on a deregulated basis and the remaining 21% was dedicated to supplying BGS customers, in accordance with the terms of the Summary Order is- sued by the NJBPU. Conectiv plans to add to its mid-merit electric generating plants by build- ing combined cycle units, which are constructed with combustion turbines, waste heat recovery boilers and a steam turbine. On September 21, 2000, Conectiv announced that it had ordered 21 combustion turbine units, which, with additional equipment, could be configured into 8 combined cycle plants. Each combined cycle plant would have approximately 550 MW of capacity, al- lowing Conectiv to add up to 4,400 MW of electric generating capacity, repre- senting a potential total investment of about $2.6 billion. Under an acceler- ated schedule, construction would occur in phases and would be completed by the end of 2004. Conectiv is actively working on developing sites for combined cycle plants within the region of the PJM Interconnection, L.L.C. (PJM). The three new combustion turbines planned for the Hay Road site are expected to be operational during the summer of 2001 (adding 330 MW of capacity). The waste heat recovery boiler and steam turbine needed for the new combined cycle operation at Hay Road are expected to be completed by the third quarter of 2002 (resulting in 550 MW of total capacity for the combined cycle plant). The number of combined cycle plants ultimately built under Conectiv's mid- merit construction program and the timing of construction will depend on vari- ous factors including the following: growth in demand for electricity; con- struction of generating units by competitors; fuel prices; availability of suitable financing; possible construction delays; and the timing and ability to obtain required permits and licenses. The level of the construction program could also potentially be affected by the planned acquisition of Conectiv by Pepco. Conectiv has made progress payments on the 21 combustion turbines that have been ordered. However, Conectiv's Board of Directors has thus far ap- proved construction of 2 combined cycle plants, for which only 6 combustion turbines would be needed. Should Conectiv choose not to build all 8 combined cycle plants, then Conectiv would attempt to sell its related investment in such combustion turbines and development sites. The ability to find a buyer and the amount of the proceeds from such a sale would be determined by market conditions. Through January 31, 2001, Conectiv had made $49 million in pro- gress payments on the 15 combustion turbines needed to build up to 6 combined cycle plants in addition to the 2 combined cycle plants currently approved by the Board of Directors. AGREEMENTS FOR THE SALES OF ELECTRIC GENERATING PLANTS As discussed below, DPL and ACE have entered into agreements for the sale of their respective ownership interests in non-strategic baseload fossil fuel- fired electric generating plants and ACE has executed agreements for the sale of its ownership interests in nuclear electric generating plants. Excluding the ownership interests of DPL in nuclear electric generating plants that were sold on December 29, 2000, the plants that are subject to sales agreements had a net book value of $423.2 million and aggregate capacity of 2,203.5 MW as of December 31, 2000. On September 30, 1999, Conectiv announced that DPL and ACE reached agree- ments to sell their ownership interests in nuclear plants to PSEG Power LLC (a subsidiary of Public Service Enterprise Group Incorporated) and PECO Energy Company (PECO). Pursuant to the agreements, DPL sold its 7.51% (164 MW) inter- est in Peach Bottom and 7.41% (167 MW) interest in Salem on December 29, 2000 and the related nuclear fuel for approximately $32 million. DPL used approxi- mately $26 million of the proceeds to repay the lease obligation related to the nuclear fuel. In accordance with the sales agreements, DPL transferred its decommissioning trust funds and related obligation for decommissioning the plants to the purchasers. Completion of these sales resulted in a gain of $16.6 million before income taxes ($12.8 million after income taxes, or $0.15 per share of Conectiv common stock). The pre-tax gain primarily resulted from the reversal of previously accrued liabilities associated with the nuclear plants and is classified as a reduction of operating expenses in the 2000 Con- solidated Statement II-16 of Income. ACE's interests in the nuclear units that are subject to the sales agreements had a $14.5 million net book value as of December 31, 2000 and in- clude 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. The agreements for the sale of ACE's interests in the nuclear plants provide for (a) a sales price of ap- proximately $11 million plus the net book value of the interests of ACE in nu- clear fuel on-hand as of the closing date and (b) the transfer of ACE's nu- clear decommissioning funds and related obligation for decommissioning the plants to the purchasers upon completion of the sales. On January 19, 2000, Conectiv announced that DPL and ACE reached agreements to sell certain wholly and jointly owned fossil fuel-fired units to NRG Ener- gy, Inc. (NRG), a subsidiary of Northern States Power Company, for $800 mil- lion. The units to be sold to NRG have a total capacity of 1,820.5 MW, and had a net book value of $408.7 million as of December 31, 2000. Management expects the proceeds from the planned sales of the electric generating plants will be used to repay debt and to fund expansion of the mid-merit generation business. The terms of DPL's agreement with NRG provide for DPL to purchase from NRG 500 megawatt-hours of firm electricity per hour from completion of the sale through December 31, 2005. Upon completion of the sales of the non-strategic baseload electric generating plants, DPL and ACE will purchase power to supply electricity to customers who do not choose alternative electricity suppliers. For information concerning long-term purchased power contracts, see Note 23 to the Consolidated Financial Statements. Consummation of the sales of the electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL would occur simultaneously. Appeals related to the NJBPU's final order concerning restructuring the electricity supply business of Public Service Electric and Gas Company (PSE&G) and recent electricity shortages and price increases in California have resulted in delays in the is- suance of required regulatory approvals, the NJBPU's final order concerning restructuring the electricity supply business of ACE, and the closings of the sales of the electric generating units. Effective October 3, 2000, the agree- ments relating to the sale of the nuclear plants were amended to, among other things, permit separate closings of the sales of the ACE and DPL interests in the nuclear plants. DPL's ownership interests in the nuclear electric generat- ing plants were sold on December 29, 2000, as discussed above. On December 6, 2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Su- perior Court Appellate Division, which had previously upheld the NJBPU's final order concerning the PSE&G restructuring. Management currently expects the sales of ACE's nuclear and fossil, and DPL's fossil, electric generating plants to take place during 2001. However, management cannot predict the tim- ing of the issuance of required NJBPU approvals, the timing or outcome of ap- peals, if any, of such approvals, the effect of any of the foregoing on the ability of ACE or DPL to consummate the sales of various electric generating plants or the impact of any of the foregoing on ACE's ability to recover or securitize any related stranded costs. Based on the terms of the restructuring orders and the sales agreements with NRG, management expects to recognize a net gain in earnings when DPL completes the sale of its electric generating plants. There can be no assurances, howev- er, that the sales of the electric generating plants will be completed pursu- ant to the agreements, or that any gain will be realized from such sales of electric generating plants. As of December 31, 2000, approximately $20 million of costs associated with selling the electric generating plants had been de- ferred as an adjustment to the expected future gain or loss on the sales. In the event the sales are not completed, these costs would be expensed. OPERATING REVENUES Electric Revenues
2000 1999 1998 -------- -------- -------- (Dollars in millions) Regulated electric revenues...................... $2,000.3 $2,150.1 $1,918.2 Non-regulated electric revenues.................. 906.0 309.9 285.5 -------- -------- -------- Total electric revenues.......................... $2,906.3 $2,460.0 $2,203.7 ======== ======== ========
II-17 The table above shows the amounts of electric revenues earned that are sub- ject to price regulation (regulated) and that are not subject to price regula- tion (non-regulated). "Regulated electric revenues" include revenues for de- livery (transmission and distribution) service and electricity supply service within the service areas of DPL and ACE. Regulated Electric Revenues In 2000, "Regulated electric revenues" decreased by $149.8 million to $2,000.3 million, from $2,150.1 million for 1999. In 1999, "Regulated electric revenues" increased by $231.9 million to $2,150.1 million, from $1,918.2 mil- lion in 1998. Details of the variances in "Regulated electric revenues" are shown below.
Increase (Decrease) in Regulated Electric Revenues --------------------------- 2000 compared 1999 compared to 1999 to 1998 ------------- ------------- (Dollars in millions) Customers choosing alternative electricity suppliers..................................... $(164.0) $ (7.5) Decrease in retail rates due to electric utility industry restructuring, the 1998 Merger, and other............................. (58.9) (27.6) Variance in volumes of interchange and resale sales......................................... 33.3 14.6 Revenue adjustment related to BGS cost recovery...................................... 0.3 17.2 Two additional months of revenues for ACE *.... -- 163.5 Retail sales volume, sales mix, and all other.. 39.5 71.7 ------- ------ $(149.8) $231.9 ======= ======
- -------- * As a result of the purchase method of accounting and a date of March 1, 1998 for the 1998 Merger, there are two additional months of ACE's revenues in 1999 compared to 1998. As discussed above under "Electric Utility Industry Restructuring," the op- tion of choosing an alternative electricity supplier: (a) became effective Au- gust 1, 1999 for ACE's customers; (b) was phased-in from October 1, 1999 to October 1, 2000 for DPL's Delaware customers; and (c) became effective July 1, 2000 for DPL's Maryland customers. Power Delivery customers representing ap- proximately 6% of the combined peak loads of DPL and ACE were purchasing elec- tricity from suppliers other than Conectiv as of December 31, 2000. Regulated retail electricity delivery sales increased by approximately 3% in 2000 and in 1999. Since average customer rates are higher during the summer, sales variances caused by summer weather have a more significant revenue im- pact than changes in sales at other times of the year. Summer weather was hot- ter in 1999 than in 1998 and in 2000; as a result, the positive revenue asso- ciated with sales for 1999 compared to 1998 was greater than the positive rev- enue variance for 2000 compared to 1999. Non-regulated Electric Revenues "Non-regulated electric revenues" result primarily from electricity trading activities, bulk sales of electricity including sales of output from deregu- lated electric generating plants, and competitive retail sales (the supply of electricity and gas in deregulated retail markets). For 2000, electricity trading and strategic generation electricity sales each provided about 40% of "non-regulated electric revenues," and the remaining approximate 20% of "non- regulated electric revenues" was earned from competitive retail sales. Customers representing approximately 3% of the combined peak loads of DPL and ACE were purchasing electricity marketed by "Conectiv Energy" (the trade name under which Conectiv subsidiaries market competitive retail and wholesale energy) as of December 31, 2000. Conectiv is in the process of terminating its competitive retail energy business. Revenues from the competitive retail sales by Conectiv Energy are included in "non-regulated electric revenues." II-18 As discussed in Note 12 to the Consolidated Financial Statements, the net pre-tax gains or gross margin (revenues less related purchased power costs) from electricity trading activities were $12.5 million in 2000, $6.0 million in 1999, and $11.4 million in 1998. The gross margin as a percentage of reve- nues (gross margin percentage) from electricity trading activities is gener- ally lower than the gross margin percentage for electric generation and deliv- ery activities. Thus, as Conectiv's electricity trading program has grown over the past several years, Conectiv's gross margin percentage on total electric revenues has decreased. In 2000, "Non-regulated electric revenues" increased by $596.1 million to $906.0 million, from $309.9 million for 1999. This revenue increase resulted from higher wholesale sales of electricity generated by deregulated power plants, increased volumes of electricity traded, and higher competitive retail electricity sales. A significant portion of the revenue increase is due to the timing of the deregulation of the electric generating plants. Since DPL's electric generating plants were deregulated October 1, 1999 in Delaware and July 1, 2000 in Maryland, the operations of the DPL electric generating plants for the first nine months of 1999 did not result in any non-regulated electric revenues. Similarly, since certain electric generating plants of ACE began to operate on a deregulated basis effective August 1, 1999, only five months of electricity sales from these plants were included in non-regulated electric revenues for 1999. In 1999, "Non-regulated electric revenues" increased by $24.4 million to $309.9 million, from $285.5 million for 1998. The $24.4 million increase was mainly due to higher bulk sales of electricity, including sales of the output of the power plants deregulated during the latter half of 1999, partially off- set by lower electricity trading volumes. Higher competitive retail electric- ity sales in Pennsylvania and revenues from ACE's deregulated electric gener- ating units also contributed to the increase. Gas Revenues
2000 1999 1998 -------- ------ ------ (Dollars in millions) Regulated gas revenues............................... $ 112.3 $115.9 $106.7 Non-regulated gas revenues........................... 1,417.5 700.3 428.4 -------- ------ ------ Total gas revenues................................... $1,529.8 $816.2 $535.1 ======== ====== ======
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 transac- tions that are not subject to price regulation. The table above shows the amounts of gas revenues earned from sources that were subject to price regula- tion (regulated) and that were not subject to price regulation (non-regulat- ed). For 2000, "Regulated gas revenues" decreased $3.6 million primarily because some commercial and industrial customers elected to buy gas from alternative suppliers. Since DPL's gross margin from supplying regulated gas customers is insignificant, the effect of the revenue decrease on pre-tax profits was mini- mal. For 1999, "Regulated gas revenues" increased $9.2 million mainly due to colder winter weather, which caused an increase in residential customers' gas usage levels for home heating. "Non-regulated gas revenues" increased by $717.2 million in 2000 and $271.9 million in 1999, primarily due to higher volumes of natural gas traded. In 2000, significantly higher natural gas prices also contributed to the revenue increase. Revenues from competitive retail gas sales were also higher; howev- er, Conectiv Energy is phasing-out its competitive retail gas business. As discussed in Note 12 to the Consolidated Financial Statements, the net pre-tax gains or gross margin (revenues less related purchased gas costs) from gas trading activities were $19.7 million in 2000, $5.0 million in 1999, and in- significant in 1998. The gross margin as a percentage of revenues (gross mar- gin percentage) from gas trading activities is generally lower than the gross margin percentage for regulated gas delivery services. Thus, as Conectiv's gas trading program has grown over the past several years, Conectiv's gross margin percentage on total gas revenues has decreased. II-19 Other Services Revenues Other services revenues were comprised of the following:
2000 1999 1998 ------ ------ ------ (Dollars in millions) Petroleum sales and trading............................ $338.5 $201.4 $140.6 HVAC................................................... 89.6 134.9 94.9 Telecommunications..................................... 56.1 36.2 10.6 Operation of power plants.............................. 53.6 32.8 26.0 Thermal systems........................................ 27.4 26.1 22.0 Other.................................................. 27.8 37.3 38.7 ------ ------ ------ Total................................................ $593.0 $468.7 $332.8 ====== ====== ======
Other services revenues increased $124.3 million for 2000 compared to 1999, primarily due to a $137.1 million increase attributed to higher volumes and market prices for petroleum sold and traded. The pre-tax gains (revenues less commodity costs) from petroleum trading activities were $6.6 million in 2000 and $1.3 million in 1999. Other significant revenue variances for 2000 in- cluded a $20.8 million increase from the operation of additional power plants for others, a $19.9 million increase in revenue from growth of CCI's telecom- munications business, and a $45.3 million decrease in HVAC revenues, which re- sulted from the sale of that business during mid- to late-2000. CCI's revenue growth is expected to slow as CCI shifts its focus to cost containment while Conectiv continues to evaluate its partnering or other options for CCI. Other services revenues for 1999 compared to 1998 increased $135.9 million primarily due to an additional three months of revenues from a business ac- quired by Conectiv in March 1998 which sells and trades petroleum, acquisi- tions of HVAC service businesses, and expansion of CCI's telecommunications business. OPERATING EXPENSES Electric Fuel and Purchased Energy and Capacity For 2000 compared to 1999, "Electric fuel and purchased energy and capacity" increased $444.8 million mainly due to more purchased energy for expanded trading activities and supplying demand within the service areas of ACE and DPL that were previously supplied by electric generating plants, which are now deregulated and selling their output in the open market. The increases were mitigated by lower costs due to termination of the Pedricktown purchased power contract in the fourth quarter of 1999 and lower capacity costs due to discon- tinuance of SFAS No. 71 for the electricity supply business. "Electric fuel and purchased energy and capacity" increased $110.3 million in 1999 mainly due to expenses associated with the additional two months of ACE's operations included in the 1999 operating results compared to 1998. Gas Purchased Gas purchased increased by $690.9 million for 2000 mainly due to higher vol- umes of non-regulated natural gas trading activities and higher natural gas prices, partly offset by lower volumes of gas supplied under regulated tariffs to commercial and industrial customers in DPL's service area. In 1999, gas purchased increased $268.6 million primarily due to larger volumes of gas pur- chased for resale off-system. Other Services' Cost of Sales For 2000 compared to 1999, other services' cost of sales increased by $129.7 million, primarily due to higher volumes and market prices of petroleum pur- chased for resale. The variance also reflects increases associ- II-20 ated with higher volumes of power plant operation and telecommunication serv- ices provided, and decreases from the sale of HVAC divisions. In 1999, other services' cost of sales increased by $111.6 million principally due to in- creased volumes of petroleum sold and higher volumes of HVAC services provid- ed. Special Charges In 2000, special charges of $25.2 million before income taxes ($23.4 million after income taxes or $0.28 per share of common stock) resulted from losses on sales of the HVAC business and two CTS projects. Proceeds of $56 million have been received from the sales of these businesses, which had total assets of $79 million at the time of sale. In 1999, special charges of $105.6 million before taxes were recorded pri- marily for impairments of assets, including a $43.7 million write-down of in- vestments in leveraged leases and a $35.6 million write-down of goodwill asso- ciated with HVAC businesses. The remaining $26.3 million of special charges were mainly for employee separation costs and costs related to the 1998 Merg- er. The 1999 special charges decreased net income $71.6 million, earnings per share of Conectiv common stock by $0.75 and earnings per share of Conectiv Class A common stock by $0.30. Conectiv's operating results for 1998 include special charges of $27.7 mil- lion before taxes ($16.8 million after taxes, or $0.18 per share of Conectiv common stock) for the cost of DPL employee separations associated with the 1998 Merger-related workforce reduction and other 1998 Merger-related costs. The 1998 employee separation, relocation, and other 1998 Merger-related costs for Atlantic and its former subsidiaries were capitalized as costs of the 1998 Merger. For additional information concerning special charges, see Note 6 to the Consolidated Financial Statements. Gain on Sale of Interest in Nuclear Plants For information concerning the gain in 2000 on the sale of the ownership in- terests of DPL in nuclear electric generating plants, see the discussion above under "Agreements for the Sales of Electric Generating Plants." Operation and Maintenance Expenses For 2000 compared to 1999, operation and maintenance expenses decreased by $7.3 million primarily due to lower costs of pension and other postretirement benefits and a decrease from the sale of the HVAC business, partly offset by higher operating expenses for electric generating plants and the telecommuni- cations business. After excluding the $35.5 million of operation and maintenance expenses at- tributed to the two additional months of ACE's operations included in 1999 op- erating results compared to 1998, operation and maintenance expenses increased by $67.0 million in 1999. This increase was attributed to increased costs as- sociated with operating and expanding the telecommunications business, operat- ing electric generating plants, and customer care services for the Power De- livery business. Depreciation and Amortization Depreciation and amortization expenses decreased $11.3 million in 2000 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 util- ity industry in Delaware, Maryland, and New Jersey. Depreciation of capital improvements to the electric transmission and distribution systems placed in- service during 2000, depreciation of a larger telecommunications system asset base, and increased amortization of "Recoverable stranded costs" partly offset the decrease from lower depreciation expense for power plants. After excluding the two additional months of operating results of ACE and other former Atlantic-owned businesses included in 1999 operating results com- pared to 1998, depreciation and amortization expense increased II-21 $10.8 million in 1999. This increase was primarily due to depreciation of new computer networks and other shared infrastructure assets, as well as increased depreciation for the telecommunications and HVAC businesses. Taxes Other Than Income Taxes "Taxes other than income taxes" decreased $7.8 million for 2000 compared to 1999 mainly due to a decrease in New Jersey's transitional energy facility as- sessment, which is being phased out over a five-year period that ends December 31, 2003. The $13.7 million increase in "taxes other than income taxes" for 1999 was principally due to the inclusion of two additional months of operat- ing results of ACE and other former Atlantic-owned businesses in 1999 compared to 1998. OTHER INCOME Other income for 2000 decreased $21.4 million from 1999 primarily due to a $21.8 million decrease in Conectiv's equity in earnings of the EnerTech funds, as discussed above under "Common Stock Earnings Summary." Additional other in- come from higher equity in earnings of a non-utility generation joint venture and a gain on the sale of an investment in a leveraged lease was offset by the write-down of marketable securities, losses on an investment in an Internet start-up project, prior year income from implementation of mark-to-market ac- counting for energy trading activities, and other items. Other income for 1999 increased $34.0 million from 1998 due to the following items: (a) a $42.1 million increase from the 1999 equity in earnings of the EnerTech funds; (b) a $17.7 million decrease due to the 1998 equity in earn- ings of a non-utility generation joint venture; and (c) a $9.6 million in- crease due to the 1998 write-off of a non-utility investment, 1999 interest income related to a successful tax appeal, two additional months of ACE's op- erating results in 1999, and implementation of mark-to-market accounting for energy trading activities in January 1999. FINANCING COSTS Financing costs reflected in the Consolidated Statements of Income include interest expense and preferred stock dividend requirements of subsidiaries. In 2000, financing costs increased $35.9 million from 1999 mainly due to ad- ditional interest expense on borrowings to finance repurchases of Conectiv common stock, the $228.5 million payment in December 1999 for termination of the Pedricktown purchased power contract, and the operations of CCI and other non-utility subsidiaries. Higher short-term interest rates also contributed to the increases in financing costs. After excluding the financing costs from the two additional months of oper- ating results of ACE and other former Atlantic-owned businesses included in 1999 operating results compared to 1998, financing costs increased $21.2 mil- lion in 1999. This increase was mainly due to additional interest expense on borrowings to finance repurchases of common stock and the operation of non- utility businesses. INCOME TAXES The effective income tax rate on "Income Before Income Taxes and Extraordi- nary Item" was higher in 1999 than in 2000 and 1998 primarily due to the write-off of goodwill (as discussed in Note 6 to the Consolidated Financial Statements), which was only partly deductible for income tax purposes, and higher state income tax expenses. See Note 3 to the Consolidated Financial Statements for a reconciliation of the amount computed by multiplying "income before income taxes and extraordinary item" by the federal statutory rate to income tax expense on operations. NEW ACCOUNTING STANDARD Conectiv implemented the provisions of SFAS No. 133, "Accounting for Deriva- tive Instruments and Hedging Activities" (SFAS No. 133), as amended, effective January 1, 2001. SFAS No. 133 establishes accounting II-22 and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recognized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, un- der SFAS No. 133, are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is ini- tially recorded in other comprehensive income (a separate component of common stockholders' equity) and is subsequently reclassified into earnings when the forecasted transaction occurs. Changes in the fair value of other hedging de- rivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately. The initial impact on Conectiv's financial statements of adopting SFAS No. 133 effective January 1, 2001 included the following: (a) recognition of $43.8 million of assets and $38.0 million of liabilities for the fair value of cer- tain contracts which are classified as derivatives under SFAS No. 133; (b) derecognition (or elimination) of $0.2 million of deferred credits and $3.1 million of current assets associated with deferred gains and losses from hedg- ing derivatives; and (c) a "cumulative effect" type of adjustment, which was recorded as a $5.8 million pre-tax ($3.3 million after-tax) credit to other comprehensive income. During 2001, approximately $7.6 million before-taxes ($4.4 million after-taxes) of the cumulative effect adjustment recorded in other comprehensive income is expected to be reclassified to earnings. Subse- quent to initial adoption, SFAS No. 133 may cause increased volatility in Conectiv's earnings, revenues and common stockholders' equity. LIQUIDITY AND CAPITAL RESOURCES General Conectiv's primary sources of capital are internally generated funds (net cash provided by operating activities less common dividends) and external financings. Additionally, restructuring the electric utility industry has cre- ated new opportunities for raising capital. As discussed under "Deregulated Generation and Power Plant Sales," Conectiv plans to sell electric generating units with 2,203.5 MW of capacity in 2001 for approximately $811 million, be- fore certain adjustments and selling expenses. As discussed under "Stranded Cost Recovery and Securitization," capital is also expected to be raised through the securitization of ACE's stranded costs, subsequent to ACE's appli- cation to the NJBPU for approval of such securitization. Capital requirements generally include construction expenditures for the electric and gas delivery businesses, construction expenditures for mid-merit and other electric gener- ating units, and repayment of debt and equity securities and capital lease ob- ligations. Conectiv's cash flows for 2000, 1999, and 1998 are summarized below.
Cash Provided/(Used) ------------------------- 2000 1999 1998 ------- ------- ------- (Dollars in Millions) Operating Activities.............................. $ 465.3 $ 310.2 $ 372.3 Investing Activities.............................. (278.5) (344.5) (259.4) Financing Activities.............................. (119.5) 24.7 (82.4) ------- ------- ------- Net change in cash and cash equivalents........... $ 67.3 $ (9.6) $ 30.5 ======= ======= =======
Cash Flows From Operating Activities In 2000, cash flows from operating activities increased by $155.1 million to $465.3 million, from $310.2 million for 1999. In 1999, net cash provided by operating activities included a net $146.3 million net cash outflow related to termination of the Pedricktown NUG purchased power contract, comprised of the $228.5 million payment by ACE to terminate the contract and $82.2 million of cash received by the Conectiv subsidiaries with an ownership interest in Pedricktown. Excluding the impact of the Pedricktown contract termination, op- erating activities provided a net cash flow of $456.5 million in 1999 compared to $465.3 million in 2000. This II-23 $8.8 million increase in cash flow for 2000 compared to 1999 reflects a $101.5 million increase due to lower income taxes paid (net of refunds), which was largely offset by higher interest expense payments, slower collection of ac- counts receivable caused by conversion to a new customer billing system in De- cember 1999, lower cash distributions from investments, and certain other items. Cash flows from operating activities for 1999, excluding the net impact of the Pedricktown contract termination, increased $84.2 million to $456.5 mil- lion, from $372.3 million in 1998. This increase was primarily due to $45 mil- lion of cash distributions received from the EnerTech funds in 1999 and two additional months of ACE's operations included in the consolidated 1999 finan- cial statements compared to the 1998 financial statements. Accounts receivable as of December 31, 2000 increased from the balance as of December 31, 1999 primarily due to higher natural gas and other energy trading activities, and slower collections of accounts receivable caused by conversion to a new customer billing system in December 1999. Increased energy trading activity was the primary reason for an increase in the balance of accounts payable as of December 31, 2000, compared to December 31, 1999. Cash Flows From Investing Activities The most significant items included in cash flows from investing activities during 2000, 1999, and 1998 are summarized below.
Cash Provided/(Used) ------------------------- 2000 1999 1998 ------- ------- ------- (Dollars in Millions) Capital expenditures............................. $(390.5) $(320.4) $(224.8) Investments in partnerships...................... (11.8) (23.6) (28.6) Proceeds from sale of assets..................... 114.6 -- 9.4 All other investing cash flows, net.............. 9.2 (0.5) (15.4) ------- ------- ------- Net cash used by investing activities............ $(278.5) $(344.5) $(259.4) ======= ======= =======
Capital expenditures increased $70.1 million for 2000 to $390.5 million, from $320.4 million for 1999. This increase was primarily due to the capital requirements of Conectiv's mid-merit electric generation strategy, including construction expenditures for combustion turbines that are expected to be con- figured into combined cycle units. Upgrades of the electric transmission and distribution systems, which increased system reliability, also contributed to the increase in capital expenditures. Capital expenditures increased $95.6 million in 1999 primarily due to con- struction of a new customer service center, higher expenditures for computer networks, customer service systems, and other shared infrastructure assets, and expansion of CCI's telecommunications system. Investments in partnerships of $11.8 million for 2000 included the EnerTech funds and an investment in an Internet start-up business. Investments in part- nerships of $23.6 million in 1999 and $28.6 million in 1998 were primarily for funding investments in the EnerTech funds and construction of two jointly owned CTS projects, which were sold in 2000. The $114.6 million of proceeds from sale of assets for 2000 includes $56 million for the sales of the HVAC business and two jointly owned CTS projects, $32 million for the sale of DPL's ownership interests in nuclear electric gen- erating plants and the related nuclear fuel, and $26.6 million for various other asset sales. DPL used approximately $26 million of the proceeds from the sale of its ownership interests in nuclear electric generating plants to repay the lease obligation related to the nuclear fuel. Primarily due to repayment of DPL's nuclear fuel lease obligation in 2000, the cash used for "Principal portion of capital lease payments" (classified within cash II-24 flows from financing activities) increased in 2000. The sale of DPL's owner- ship interests in nuclear electric generating plants also resulted in the transfer of nuclear decommissioning funds to the purchasers, which was the primary reason for the decrease in the balance of "Funds held by trustee" from $173.3 million as of December 31, 1999, to $122.4 million as of December 31, 2000. Cash Flows From Financing Activities Common dividend payments were $92.0 million in 2000, $135.1 million in 1999, and $154.1 million in 1998. The decrease in common dividends paid in 2000 and 1999 was due to lower common dividends declared per share of common stock ($0.88 in 2000, $1.045 in 1999, and $1.54 in 1998) and repurchases of common stock and Class A common stock. As a registered holding company under PUHCA, Conectiv is required to obtain SEC authorization for certain financing transactions. 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. In the first and second quarters of 2000, Conectiv had accumulated deficits and re- ceived SEC approval for the payment of quarterly dividends on shares of common stock and Class A common stock. PUHCA also prohibits Conectiv, the parent com- pany, from borrowing from its subsidiaries. Cash flows from financing activities that resulted from issuing, repurchas- ing, and redeeming and debt and equity securities of Conectiv and its subsidi- aries are summarized below for 2000, 1999, and 1998.
Net Cash Provided/(Used) --------------------------------- Total 2000 1999 1998 ------- ------ ------- ------- (Dollars in Millions) Common stock............................. $(458.0) $(54.5) $(390.3) $ (13.2) Long-term debt........................... 127.2 (51.0) 345.3 (167.1) Variable rate demand bonds............... 33.3 -- 33.3 -- Short-term debt.......................... 616.3 129.8 203.6 282.9 Preferred securities..................... (8.8) -- -- (8.8) ------- ------ ------- ------- $ 310.0 $ 24.3 $ 191.9 $ 93.8 ======= ====== ======= =======
As shown in the above table, during 2000-1998, cash was used for common stock and preferred stock financing activities in the amounts of $458.0 mil- lion and $8.8 million, respectively, and cash was provided by long-term debt, variable rate demand bonds, and short-term debt financing activities in the amounts of $127.2 million, $33.3 million, and $616.3 million, respectively. Most of the common stock financing activity during the three-year period re- sulted from a repurchase of stock in June of 1999, which reduced the number of shares of common stock and Class A common stock outstanding by 12.8 million and 0.8 million, respectively. Conectiv also repurchased shares of common stock under buyback programs during the three-year period. Repurchases of com- mon stock have generally been financed through the issuance of long- and short-term debt. As of December 31, 2000, 2,760,700 shares of common stock re- mained authorized for repurchase by the Board of Directors. Conectiv's capital structure including short-term debt and current maturi- ties of long-term debt, expressed as a percentage of total capitalization, is shown below as of December 31, 2000, and December 31, 1999.
December 31, December 31, 2000 1999 ------------ ------------ Common stockholders' equity...................... 26.2% 26.2% Preferred stock of subsidiaries.................. 6.4% 6.6% Long-term debt and variable rate demand bonds.... 49.2% 52.7% Short-term debt and current maturities of long- term debt....................................... 18.2% 14.5%
II-25 Most of Conectiv's short-term borrowing occurs under two credit agreements. As of December 31, 2000, Conectiv (the holding company) had a $300 million credit agreement with a five-year term that expires in February 2003 and a $730 million credit agreement with a one-year term that expires in April 2001. Conectiv expects to renew the $730 million credit agreement. As of December 31, 2000, Conectiv's credit agreements required a ratio of total indebtedness to total capitalization of 70% or less and the ratio was 64%, computed in ac- cordance with the terms of the credit agreements. DPL has a $150 million re- volving credit facility that expires January 31, 2003 and provides liquidity for DPL's $104.8 million of Variable Rate Demand Bonds and general corporate purposes. On a consolidated basis, $468 million was available for borrowing as of December 31, 2000 under the various credit agreements and credit lines. In December 2000, Conectiv filed a request with the SEC to increase the au- thorized short-term debt borrowing capacity for Conectiv (the holding company) from $1.3 billion (including the short-term debt of DPL) to $2.0 billion (ex- cluding the short-term debt of DPL). The SEC has "reserved jurisdiction," or withheld approval pending additional filings, over Conectiv's previous request for the authority to issue up to $750 million of additional long-term debt. Under existing SEC financing orders, Conectiv is permitted to issue securi- ties, other than long-term debt, if the ratio of consolidated common equity to total capitalization (common equity ratio) is 20% or higher. Based on a re- cently issued SEC order to another holding company under PUHCA, management be- lieves that the SEC will authorize the issuance of additional long-term debt by Conectiv when the common equity ratio is 30% or higher. Planned Capital Requirements Management expects future capital expenditures will be primarily for con- struction of mid-merit electric generating plants and improvements to the transmission and distribution systems of the Power Delivery business segment. For 2001, management expects $640 million in capital expenditures, including $450 million for mid-merit electric generating plants, $140 million for Power Delivery, and $50 million for various other purposes. After 2001, the level of capital expenditures will be dependent primarily upon the magnitude of the mid-merit electric generation construction program, which is discussed under "Mid-Merit Electric Generation," and the strategies of the new company that is expected to result from the planned business combination of Conectiv and Pepco. Construction scheduling, permitting, and other factors may also change the amount of planned capital expenditures. Scheduled maturities of long-term debt, including debt sinking fund require- ments, are $100.7 million in 2001, $370.5 million in 2002, $212.3 million in 2003; $154.5 million in 2004; and $82.8 million in 2005. These amounts include $57.1 million in 2001 and $171.4 million in 2002 for repayment of $228.5 mil- lion borrowed in December 1999 to finance ACE's payment to terminate the Pedricktown NUG contract. This $228.5 million borrowing is expected to be re- financed by issuing transition bonds. Capital requirements for redemption of securities also include $11.5 million in 2001, $11.5 million in 2002, and $1.0 million in 2003 for sinking fund requirements of ACE's preferred stock. Management expects to fund Conectiv's future capital requirements from in- ternally generated funds, leasing, external financings (including securitization of stranded costs), and proceeds from the sales of the electric generating units. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The following discussion contains "forward looking statements." These pro- jected results have been prepared based upon certain assumptions considered reasonable given the information currently available to Conectiv. Neverthe- less, because of the inherent unpredictability of interest rates, equity mar- ket prices, and energy commodity prices as well as other factors, actual re- sults could differ materially from those projected in such forward-looking in- formation. For a description of Conectiv's significant accounting policies as- sociated with these activities see Notes 1 and 12 to the Consolidated Finan- cial Statements. II-26 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 interest costs for short-term and variable rate debt was approximately $6.1 million as of December 31, 2000 and $4.3 mil- lion as of December 31, 1999. The increase in the effect of a 10% change in interest rates was due to higher amounts of short-term debt and higher inter- est rates. Equity Price Risk As discussed in Note 8 to the Consolidated Financial Statements, Conectiv holds investments in venture capital funds, which invest in securities of en- ergy related technology and Internet service companies, and in marketable se- curities. Conectiv is exposed to equity price risk through the securities in- vested in by the venture capital funds and the marketable securities held di- rectly by Conectiv. The potential change in the fair value of these invest- ments resulting from a hypothetical 10% change in quoted securities prices was approximately $4.0 million as of December 31, 2000 and $2.7 million as of De- cember 31, 1999. The increase in the potential change in fair value was due to increased investment in the EnerTech funds. Due to the nature of these invest- ments and market conditions, the fair value of these investments may change by substantially more than 10%. ACE maintains trust funds, as required by the Nuclear Regulatory Commission, to fund certain costs of nuclear decommissioning (See Note 16 to the Consoli- dated Financial Statements). These funds are invested primarily in domestic and international equity securities, fixed-rate, fixed income securities, and cash and cash equivalents. The equity securities included in ACE's portfolio are exposed to price fluctuations in equity markets, and the fixed-rate, fixed income securities are exposed to changes in interest rates. The accounting for nuclear decommissioning recognizes that the net costs are recovered through electric rates and the effects of fluctuations in equity prices and interest rates on the securities in the nuclear decommissioning trust funds do not af- fect Conectiv's earnings. 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 that Conectiv has net open positions, controls are in place that are intended to keep risk exposures within management-approved risk tolerance lev- els. Conectiv engages in commodity hedging activities to minimize the risk of market fluctuations associated with the purchase and sale of energy commodi- ties (natural gas, petroleum and electricity). Some hedging activities are conducted using derivative instruments. The remainder of Conectiv's hedging activity is conducted by backing physical transactions with offsetting physi- cal 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 uses a value-at-risk model to assess the market risk of its elec- tricity, 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 instru- ments or portfolios due to changes in market factors, for a specified time pe- riod 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 peri- od. Conectiv's calculated value at risk with respect to its commodity price exposure associated with contractual arrangements was approximately $16.9 mil- lion as of December 31, 2000 and $4.0 million as of December 31, 1999. The value at risk increased due to an increased level of energy trading activi- ties. The average, high, and low value at risk for the year ended December 31, 2000 was $16.6 million, $29.7 million and $9.3 million, respectively. II-27 CONECTIV ITEM 8. FINANCIAL STATEMENT AND SUPPLEMENTARY DATA REPORT OF MANAGEMENT Management is responsible for the information and representations contained in Conectiv's consolidated financial statements. Our consolidated financial statements have been prepared in conformity with accounting principles gener- ally accepted in the United States of America, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions. Conectiv and its subsidiary companies maintain a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified per- sonnel. PricewaterhouseCoopers LLP, independent accountants, are engaged to audit the financial statements and express their opinion thereon. Their audits are conducted in accordance with auditing standards generally accepted in the United States of America which include a review of selected internal controls to determine the nature, timing, and extent of audit tests to be applied. The Audit Committee of the Board of Directors, composed of outside directors only, meets with management, internal auditors, and independent accountants to review accounting, auditing, and financial reporting matters. The independent accountants are appointed by the Board of Directors on recommendation of the Audit Committee. /s/ Howard E. Cosgrove /s/ John C. van Roden _____________________________________ _____________________________________ Howard E. Cosgrove John C. van Roden Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer February 12, 2001 II-28 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors Conectiv Wilmington, Delaware In our opinion, the accompanying consolidated financial statements listed in the accompanying index appearing under Item 14(a)(1) on page IV-I present fairly, in all material respects, the financial position of Conectiv and sub- sidiary companies at December 31, 2000 and 1999, and the results of their op- erations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedules listed in the accompanying index appearing under Item 14(a)(2) on pages IV-I to IV-6 present fairly, in all material respects, the information set forth therein when read in conjunction with the related con- solidated financial statements. These financial statements and financial statement schedules are the responsibility of Conectiv's management; our re- sponsibility is to express an opinion on these financial statements and finan- cial statement schedules based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. /s/ PricewaterhouseCoopers LLP _____________________________________ PricewaterhouseCoopers LLP Philadelphia, Pennsylvania February 12, 2001 II-29 CONECTIV CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31, ---------------------------------- 2000 1999 1998 ---------- ---------- ---------- (Dollars in Thousands, Except Per Share Amounts) Operating Revenues Electric.................................. $2,906,342 $2,459,970 $2,203,748 Gas....................................... 1,529,785 816,245 535,082 Other services............................ 592,997 468,682 332,776 ---------- ---------- ---------- 5,029,124 3,744,897 3,071,606 ---------- ---------- ---------- Operating Expenses Electric fuel and purchased energy and capacity................................. 1,613,579 1,168,792 1,058,492 Gas purchased............................. 1,445,911 754,990 486,411 Other services' cost of sales............. 504,615 374,918 263,319 Special charges........................... 25,162 105,648 27,704 Gain on sale of interest in nuclear plants................................... (16,612) -- -- Operation and maintenance................. 627,667 634,966 532,419 Depreciation and amortization............. 260,082 271,348 241,420 Taxes other than income taxes............. 80,886 88,646 74,926 ---------- ---------- ---------- 4,541,290 3,399,308 2,684,691 ---------- ---------- ---------- Operating Income........................... 487,834 345,589 386,915 ---------- ---------- ---------- Other Income............................... 49,495 70,881 36,860 ---------- ---------- ---------- Interest Expense Interest charges.......................... 223,445 182,821 153,644 Capitalized interest and allowance for borrowed funds used during construction............................. (10,843) (5,639) (4,213) ---------- ---------- ---------- 212,602 177,182 149,431 ---------- ---------- ---------- Preferred Stock Dividend Requirements of Subsidiaries.............................. 20,383 19,894 15,326 ---------- ---------- ---------- Income Before Income Taxes and Extraordinary Item........................ 304,344 219,394 259,018 Income Taxes, Excluding Income Taxes Applicable to Extraordinary Item.......... 133,514 105,816 105,817 ---------- ---------- ---------- Income Before Extraordinary Item........... 170,830 113,578 153,201 Extraordinary Item (Net of $188,254 of income taxes)............................. -- (311,718) -- ---------- ---------- ---------- Net Income (Loss).......................... $ 170,830 $ (198,140) $ 153,201 ========== ========== ========== Earnings (Loss) Applicable To: Common stock Income before extraordinary item......... $ 164,719 $ 106,639 $ 141,292 Extraordinary item, net of income taxes.. -- (295,161) -- ---------- ---------- ---------- Total................................... $ 164,719 $ (188,522) $ 141,292 ========== ========== ========== Class A common stock Income before extraordinary item......... $ 6,111 $ 6,939 $ 11,909 Extraordinary item, net of income taxes.. -- (16,557) -- ---------- ---------- ---------- Total................................... $ 6,111 $ (9,618) $ 11,909 ========== ========== ========== Average Shares Outstanding (000) Common stock.............................. 83,686 93,320 94,338 Class A common stock...................... 5,742 6,110 6,561 Earnings (Loss) Per Average Share, Basic and Diluted Common stock Before extraordinary item................ $ 1.97 $ 1.14 $ 1.50 Extraordinary item....................... -- (3.16) -- ---------- ---------- ---------- Total................................... $ 1.97 $ (2.02) $ 1.50 ========== ========== ========== Class A common stock Before extraordinary item................ $ 1.06 $ 1.14 $ 1.82 Extraordinary item....................... -- (2.71) -- ---------- ---------- ---------- Total................................... $ 1.06 $ (1.57) $ 1.82 ========== ========== ========== Dividends Declared Per Share Common stock.............................. $ 0.88 $ 1.045 $ 1.54 Class A common stock...................... $ 3.20 $ 3.20 $ 3.20
See accompanying Notes to Consolidated Financial Statements. II-30 CONECTIV CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars in Thousands) Cash Flows From Operating Activities Net income (loss)........................... $ 170,830 $(198,140) $ 153,201 Adjustments to reconcile net income (loss) to net cash provided by operating activities Deferred recoverable purchased power contract termination payment.............. -- (228,500) -- Distribution from partnership in excess of recognized earnings....................... -- 70,849 -- Extraordinary item, net of income taxes.... -- 311,718 -- Special charges............................ 25,162 105,648 27,704 Depreciation and amortization.............. 283,057 294,902 261,457 Investment tax credit adjustments, net..... (10,115) (5,094) (4,002) Deferred income taxes, net................. 114,257 44,752 4,620 Net change in: Accounts receivable........................ (267,477) (92,952) (118,578) Inventories................................ 5,817 (14,753) (9,691) Accounts payable........................... 182,105 61,561 107,005 Accrued/prepaid taxes...................... 24,252 (34,757) 12,894 Other current assets & liabilities (1)..... (25,869) (393) (22,676) Other, net.................................. (36,733) (4,672) (39,625) --------- --------- --------- Net cash provided by operating activities... 465,286 310,169 372,309 --------- --------- --------- Cash Flows From Investing Activities Acquisition of businesses, net of cash acquired................................... (954) (17,138) (2,590) Capital expenditures........................ (390,540) (320,395) (224,831) Investments in partnerships................. (11,786) (23,570) (28,594) Proceeds from assets sold................... 114,639 -- 9,421 Deposits to nuclear decommissioning trust funds...................................... (738) (5,880) (10,676) Decrease in bond proceeds held in trust funds...................................... -- 12,449 -- Leveraged leases, net....................... 9,569 8,242 2,410 Other, net.................................. 1,319 1,826 (4,492) --------- --------- --------- Net cash used by investing activities....... (278,491) (344,466) (259,352) --------- --------- --------- Cash Flows From Financing Activities Common stock dividends paid................. (92,009) (135,134) (154,101) Common stock issued......................... 187 68 63 Common stock redeemed....................... (54,651) (390,397) (13,232) Preferred securities issued................. -- -- 25,000 Preferred securities redeemed............... -- -- (33,769) Long-term debt issued....................... 70,140 478,500 33,000 Long-term debt redeemed..................... (121,119) (133,218) (200,078) Variable rate demand bonds issued........... -- 33,330 -- Principal portion of capital lease payments................................... (48,547) (23,554) (20,037) Net change in short-term debt............... 129,842 203,627 282,889 Cost of issuances and refinancings.......... (3,315) (8,570) (2,147) --------- --------- --------- Net cash provided (used) by financing activities................................. (119,472) 24,652 (82,412) --------- --------- --------- Net change in cash and cash equivalents....... 67,323 (9,645) 30,545 Beginning of year cash and cash equivalents... 56,239 65,884 35,339 --------- --------- --------- End of year cash and cash equivalents......... $ 123,562 $ 56,239 $ 65,884 ========= ========= =========
- -------- (1) Other than debt and deferred income taxes classified as current. See accompanying Notes to Consolidated Financial Statements. II-31 CONECTIV CONSOLIDATED BALANCE SHEETS
As of December 31, --------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) ASSETS Current Assets Cash and cash equivalents.............................. $ 123,562 $ 56,239 Accounts receivable, net of allowances of $31,339 and $11,564, respectively................................. 792,843 544,463 Inventories, at average cost Fuel (coal, oil and gas)............................. 54,578 65,360 Materials and supplies............................... 62,675 58,177 Deferred energy supply costs........................... 22,094 8,612 Prepaid income taxes................................... -- 15,674 Other prepayments...................................... 23,354 20,295 Deferred income taxes, net............................. 13,155 25,175 ---------- ---------- 1,092,261 793,995 ---------- ---------- Investments Investment in leveraged leases......................... 53,706 72,161 Funds held by trustee.................................. 122,387 173,247 Other investments...................................... 70,780 100,764 ---------- ---------- 246,873 346,172 ---------- ---------- Property, Plant and Equipment Electric generation.................................... 1,576,550 1,571,556 Electric transmission and distribution................. 2,711,907 2,633,375 Gas transmission and distribution...................... 277,650 265,708 Other electric and gas facilities...................... 390,313 405,303 Telecommunications, thermal systems, and other property, plant, and equipment........................ 251,567 238,229 ---------- ---------- 5,207,987 5,114,171 Less: Accumulated depreciation......................... 2,179,951 2,097,529 ---------- ---------- Net plant in service................................... 3,028,036 3,016,642 Construction work-in-progress.......................... 406,884 199,390 Leased nuclear fuel, at amortized cost................. 28,352 55,983 Goodwill, net of accumulated amortization of $33,437 and $22,277, respectively............................. 344,514 369,468 ---------- ---------- 3,807,786 3,641,483 ---------- ---------- Deferred Charges and Other Assets Recoverable stranded costs, net........................ 988,153 1,030,049 Deferred recoverable income taxes...................... 84,730 93,853 Unrecovered purchased power costs...................... 14,487 28,923 Unrecovered New Jersey state excise tax................ 10,360 22,567 Deferred debt refinancing costs........................ 20,656 21,113 Deferred other postretirement benefit costs............ 29,981 32,479 Prepaid pension costs.................................. 69,963 35,005 Unamortized debt expense............................... 25,553 28,045 License fees........................................... 21,956 23,331 Other.................................................. 65,236 41,447 ---------- ---------- 1,331,075 1,356,812 ---------- ---------- Total Assets............................................. $6,477,995 $6,138,462 ========== ==========
See accompanying Notes to Consolidated Financial Statements. II-32 CONECTIV CONSOLIDATED BALANCE SHEETS
As of December 31, ---------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt.............................. $ 709,530 $ 579,688 Long-term debt due within one year........... 100,721 48,937 Variable rate demand bonds................... 158,430 158,430 Accounts payable............................. 490,887 307,764 Taxes accrued................................ 10,877 -- Interest accrued............................. 45,296 41,137 Dividends payable............................ 27,111 27,545 Deferred energy supply costs................. 34,650 46,375 Current capital lease obligation............. 15,591 28,715 Above-market purchased energy contracts and other electric restructuring liabilities.... 23,891 41,101 Other........................................ 107,025 91,353 ---------- ---------- 1,724,009 1,371,045 ---------- ---------- Deferred Credits and Other Liabilities Other postretirement benefits obligation..... 90,335 96,388 Deferred income taxes, net................... 823,094 730,987 Deferred investment tax credits.............. 64,316 74,431 Regulatory liability for New Jersey income tax benefit................................. 49,262 49,262 Above-market purchased energy contracts and other electric restructuring liabilities.... 103,575 119,704 Deferred gain on termination of purchased energy contract............................. 74,968 70,849 Long-term capital lease obligation........... 13,744 30,395 Other........................................ 67,751 47,447 ---------- ---------- 1,287,045 1,219,463 ---------- ---------- Capitalization Common stock: $0.01 per share par value; 150,000,000 shares authorized; shares outstanding--82,859,779 in 2000, and 86,173,169 in 1999.......................... 830 863 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..... 1,028,780 1,085,060 Additional paid-in capital--Class A common stock....................................... 93,738 93,738 Retained earnings/(Accumulated deficit)...... 42,768 (36,472) Treasury shares, at cost: 130,604 shares in 2000; 167,514 shares in 1999........................................ (2,688) (3,446) Unearned compensation........................ (1,172) (1,627) Accumulated other comprehensive income....... (2,044) -- ---------- ---------- Total common stockholders' equity........... 1,160,269 1,138,173 Preferred stock and securities of subsidiaries: Not subject to mandatory redemption......... 95,933 95,933 Subject to mandatory redemption............. 188,950 188,950 Long-term debt............................... 2,021,789 2,124,898 ---------- ---------- 3,466,941 3,547,954 ---------- ---------- Commitments and Contingencies (Notes 23, 24, and 26) ---------- ---------- Total Capitalization and Liabilities........... $6,477,995 $6,138,462 ========== ==========
See accompanying Notes to Consolidated Financial Statements. II-33 CONECTIV CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
Additional Par Value Paid-in Capital ----------------- ------------------ Class Retained Common Total Common A Class A Earnings Shares Stockholders' Common Common Common Common (Accumulated Treasury Unearned Outstanding Equity Stock (1) Stock Stock Stock Deficit) Stock Compensation ----------- ------------- --------- ------ --------- ------- ------------ --------- ------------ (Dollars in Thousands) Balance as of December 31, 1997............. 61,210,262 $ 954,496 $ 139,116 $ 526,812 $ 300,757 $ (11,687) $ (502) Net income....... 153,201 153,201 Comprehensive income........... Cash dividends declared Common stock ($1.54 per share).......... (155,302) (155,302) Class A common stock ($3.20 per share).......... (20,994) (20,994) Issuance of common stock Business acquisitions.... 488,473 9,090 9,090 CICP (2)........ 78,381 63 7 (427) 1,613 (1,130) 1998 Merger (3) (4)............. 45,924,284 915,854 (138,111) 66 946,804 107,095 Reacquired common stock............ (598,862) (13,232) (5) (10,947) (2,280) Redemption of preferred stock.. -- (587) 136 (723) Incentive compensation Expense recognition..... -- 572 309 263 Forfeited common shares.......... (25,158) -- (12) (533) 545 ----------- --------- --------- --- --------- ------- --------- --------- ------ Balance as of December 31, 1998 (4)......... 107,077,380 1,843,161 1,007 66 1,462,675 107,095 276,939 (3,797) (824) Net loss......... (198,140) (198,140) Comprehensive income........... Cash dividends declared Common stock ($1.045 per share).......... (96,241) (96,241) Class A common stock ($3.20 per share).......... (19,030) (19,030) Issuance of common stock CICP (2)........ 95,676 68 1 1,475 375 (1,783) Reacquired common stock Tender Offer (5)............. (13,586,512) (361,373) (128) (9) (347,879) (13,357) Common stock purchased....... (1,671,060) (31,397) (17) (31,356) (24) Incentive compensation expense.......... 1,125 145 980 ----------- --------- --------- --- --------- ------- --------- --------- ------ Balance as of December 31, 1999 (6)......... 91,915,484 1,138,173 863 57 1,085,060 93,738 (36,472) (3,446) (1,627) Accumulated Other Comprehensive Comprehensive Income/(Loss) Income/(Loss) ------------- ------------- Balance as of December 31, 1997............. Net income....... $ 153,201 ------------- Comprehensive income........... $ 153,201 ============= Cash dividends declared Common stock ($1.54 per share).......... Class A common stock ($3.20 per share).......... Issuance of common stock Business acquisitions.... CICP (2)........ 1998 Merger (3) (4)............. Reacquired common stock............ Redemption of preferred stock.. Incentive compensation Expense recognition..... Forfeited common shares.......... ------------- ------------- Balance as of December 31, 1998 (4)......... Net loss......... $(198,140) ------------- Comprehensive income........... $(198,140) ============= Cash dividends declared Common stock ($1.045 per share).......... Class A common stock ($3.20 per share).......... Issuance of common stock CICP (2)........ Reacquired common stock Tender Offer (5)............. Common stock purchased....... Incentive compensation expense.......... ------------- ------------- Balance as of December 31, 1999 (6).........
Continued on following page II-34
Additional Par Value Paid-in Capital ------------- ------------------- Class Retained Accumulated Common Total Common Common A Class A Earnings Other Shares Stockholders' Stock Common Common Common (Accumulated Treasury Unearned Comprehensive Outstanding Equity (1) Stock Stock Stock Deficit) Stock Compensation Income/(Loss) ----------- ------------- ------ ------ ---------- ------- ------------ -------- ------------ ------------- (Dollars in Thousands) Balance as of December 31, 1999 (6)......... 91,915,484 $1,138,173 $863 $57 $1,085,060 $93,738 $(36,472) $(3,446) $(1,627) Net Income....... 170,830 170,830 Unrealized net loss on marketable securities, net of $890 of income taxes............ (1,653) (1,653) Reclassification adjustment for realized gain on marketable securities net of $211 of income taxes............ (391) (391) Comprehensive income........... Cash dividends declared Common stock ($0.88 per share).......... (73,215) (73,215) Class A common stock ($3.20 per share).......... (18,375) (18,375) Issuance of common stock CICP (2)........ 146,975 187 1 520 1,059 (1,393) Reacquired common stock (7)........ (3,411,465) (54,650) (34) (54,610) (6) Incentive compensation Expense recognition..... (637) (1,437) 800 Forfeited common shares.......... (48,900) -- (753) (295) 1,048 ---------- ---------- ---- --- ---------- ------- -------- ------- ------- ------- Balance as of December 31, 2000 (8)......... 88,602,094 $1,160,269 $830 $57 $1,028,780 $93,738 $ 42,768 $(2,688) $(1,172) $(2,044) ========== ========== ==== === ========== ======= ======== ======= ======= ======= Comprehensive Income/(Loss) ------------- Balance as of December 31, 1999 (6)......... Net Income....... $170,830 Unrealized net loss on marketable securities, net of $890 of income taxes............ (1,653) Reclassification adjustment for realized gain on marketable securities net of $211 of income taxes............ (391) ------------- Comprehensive income........... $168,786 ============= Cash dividends declared Common stock ($0.88 per share).......... Class A common stock ($3.20 per share).......... Issuance of common stock CICP (2)........ Reacquired common stock (7)........ Incentive compensation Expense recognition..... Forfeited common shares.......... Balance as of December 31, 2000 (8).........
(1) There are 150,000,000 and 10,000,000 shares of Conectiv common stock and Conectiv Class A common stock, respectively, which are authorized. The common stock had a par value of $2.25 per share prior to the 1998 Merger and $0.01 per share after the 1998 Merger on March 1, 1998. (2) Includes restricted common shares granted and stock options exercised un- der the Conectiv Incentive Compensation Plan (CICP), and under the incen- tive plan of Delmarva Power & Light Company (DPL) in 1998. (3) Conectiv common stock and Conectiv Class A common stock were issued to former Atlantic common shareholders, and Conectiv common stock was issued to former DPL common stockholders, pursuant to the 1998 Merger discussed in Note 4 to the Consolidated Financial Statements. (4) Includes 6,560,612 shares of Conectiv Class A common stock; all other shares are Conectiv common stock. (5) Includes 12,768,215 shares of Conectiv common stock and 818,297 shares of Conectiv Class A common stock, and costs associated with the tender offer discussed in Note 18 to the Consolidated Financial Statements. (6) Includes 86,173,169 shares of Conectiv common stock and 5,742,315 shares of Conectiv Class A common stock. (7) As of December 31, 2000, 2,760,700 shares of common stock remained autho- rized for purchase under a stock purchase program. (8) Includes 82,859,779 shares of Conectiv common stock and 5,742,315 shares of Conectiv Class A common stock. See accompanying Notes to Consolidated Financial Statements. II-35 CONECTIV NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING POLICIES Nature of Business As discussed in Note 4 to the Consolidated Financial Statements, effective March 1, 1998, Delmarva Power & Light Company (DPL) and Atlantic Energy, Inc. (Atlantic) consummated a series of transactions (the 1998 Merger) by which DPL and Atlantic City Electric Company (ACE) became wholly owned subsidiaries of Conectiv. Conectiv is a registered holding company under the Public Utility Holding Company Act of 1935 (PUHCA). As used in this document, references to Conectiv may mean the activities of one or more subsidiary companies. On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will acquire Conectiv for a combination of cash and stock. The transaction is subject to various statu- tory and regulatory approvals and approval by the stockholders of Conectiv and Pepco. See Note 5 to the Consolidated Financial Statement for additional in- formation. DPL and ACE are public utilities that supply and deliver electricity to their customers under the trade name Conectiv Power Delivery. As discussed be- low, DPL also supplies and delivers natural gas to its customers. A transition to market pricing and terms of service for supplying electricity to customers in the regulated service areas of DPL and ACE began in 1999. DPL and ACE de- liver electricity within their service areas to approximately 973,600 custom- ers through their respective transmission and distribution systems. DPL and ACE also supply electricity to most of their electricity delivery customers who have the option of choosing an alternative supplier. DPL's regulated elec- tric service area is located on the Delmarva Peninsula (Delaware and portions of Maryland and Virginia) and ACE's regulated service area is located in the southern one-third of New Jersey. On a combined basis, DPL's and ACE's regu- lated electric service areas encompass about 8,700 square miles and have a population of approximately 2.0 million. DPL provides regulated gas service (supply and/or delivery) to approximately 110,800 customers located in a service territory that covers about 275 square miles with a population of approximately 0.5 million in northern Delaware. During 1998-2000, DPL also sold gas off-system and in markets that are not subject to price regulation. Strategic electric generating plants of DPL and ACE, with capacity of 1,501 megawatts (MW) and 502 MW, respectively, were transferred to other Conectiv subsidiaries on July 1, 2000. The Conectiv subsidiaries which received the transferred plants became subsidiaries of Conectiv Energy Holding Company (CEH). CEH and its subsidiaries are engaged in non-regulated electricity pro- duction and sales, energy trading and marketing. During 1999 and 2000, as discussed in Note 14 to the Consolidated Financial Statements, DPL and ACE entered into agreements for the sale of their nuclear and non-strategic baseload fossil fuel-fired electric generating plants. Pur- suant to the agreements, DPL sold its 7.51% (164 MW) interest in Peach Bottom Atomic Power Station (Peach Bottom) and 7.41% (167 MW) interest in Salem Nu- clear Generating Station (Salem) on December 29, 2000. After completion of the sales of the non-strategic baseload fossil electric generating plants of DPL and the nuclear and non-strategic baseload fossil fuel-fired electric generat- ing plants of ACE, the principal remaining businesses of DPL and ACE will be the transmission and distribution, or delivery, of electricity. DPL and ACE will purchase power to supply electricity to customers who do not choose al- ternative electricity suppliers. DPL will also continue to supply and deliver gas under regulated tariffs. II-36 "Other services," which are not subject to price regulation, are provided primarily by Conectiv's non-utility subsidiaries and, to a lesser extent, by DPL and ACE. The principal businesses included in revenues from "Other servic- es" are as follows: heating, ventilation, and air conditioning (HVAC) con- struction and services; telecommunications, including local and long-distance phone services; construction and operation of district heating and cooling systems; power plant operation services; leveraged leases; and sales of petro- leum products. As discussed in Note 6 to the Consolidated Financial State- ments, Conectiv sold its HVAC businesses and portions of its district heating and cooling systems business during 2000. (Revenues from non-regulated elec- tricity and gas sales are included in "Electric" revenues and "Gas" revenues, respectively.) Regulation of Utility Operations Certain aspects of Conectiv's utility businesses are subject to regulation by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, re- spectively), the New Jersey Board of Public Utilities (NJBPU), the Virginia State Corporation Commission (VSCC), and the Federal Energy Regulatory Commis- sion (FERC). As discussed below, the nature of regulation of retail electric- ity sales by these regulatory commissions changed during 1999. Excluding sales not subject to price regulation, the percentages of retail electric and gas utility operating revenues regulated by each regulatory commission for the year ended December 31, 2000, were as follows: NJBPU, 45.9%; DPSC, 34.0%; MPSC, 18.4%; and VSCC, 1.7%. Wholesale sales are subject to FERC regulation. Retail gas sales are subject to regulation by the DPSC. The electric delivery businesses of DPL and ACE and the retail gas business of DPL are subject to the requirements of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regu- lation" (SFAS No. 71). As discussed below, prior to the third quarter of 1999, the electricity supply businesses of DPL and ACE were subject to the require- ments of SFAS No. 71. Regulatory commissions occasionally provide for future recovery from customers of current period expenses. When this happens, the ex- penses are deferred as regulatory assets and subsequently recognized in the Consolidated Statements of Income during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of regulatory commission actions. In the latter half of 1999, as discussed in Note 10 to the Consolidated Fi- nancial Statements, the NJBPU issued a Summary Order to ACE, and the DPSC and MPSC issued orders to DPL, concerning restructuring the electricity supply businesses of ACE and DPL, respectively. These orders were issued pursuant to electric restructuring legislation enacted earlier in 1999. Based on these or- ders, ACE and DPL determined that the requirements of SFAS No. 71 no longer applied to their electricity supply businesses in the third quarter of 1999. As a result, ACE and DPL discontinued applying SFAS No. 71 to their electric- ity supply businesses and applied the requirements of SFAS No. 101, "Regulated Enterprises--Accounting for the Discontinuation of Application of FASB State- ment No. 71" (SFAS No. 101) and Emerging Issues Task Force (EITF) Issue No. 97-4, "Deregulation of the Pricing of Electricity--Issues Related to the Ap- plication of FASB Statements No. 71 and No. 101" (EITF 97-4). For information concerning the extraordinary charge to 1999 earnings that resulted from apply- ing the requirements of SFAS No. 101 and EITF 97-4, refer to Note 7 to the Consolidated Financial Statements. Refer to Note 17 to the Consolidated Financial Statements for information about regulatory assets and liabilities arising from the financial effects of rate regulation. Financial Statement Presentation The Consolidated Financial Statements include the accounts of Conectiv and its majority owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. Ownership interests of 20% or more in entities not controlled by Conectiv are accounted for on the equity method of accounting. Investments in entities accounted for on the equity method are included in "Other investments" on the Consolidated Balance Sheets. Earnings from equity method investees are in- cluded in "Other income" in the Consolidated Statements of Income. Ownership interests of less than 20% in other entities are accounted for on the cost method of accounting. II-37 Within the Consolidated Statements of Income, amounts previously reported for 1999 and 1998 as "Electric fuel and purchased power" and "Purchased elec- tric 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. Use of Estimates The preparation of financial statements in conformity with accounting prin- ciples generally accepted in the United States of America requires management to make certain estimates and assumptions. These assumptions affect the re- ported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and assumptions. Revenue Recognition DPL and ACE recognize revenues for the supply and delivery of electricity and gas upon delivery to the customer, including amounts for services ren- dered, but not yet billed. Similarly, revenues from "Other services" are rec- ognized when services are performed or products are delivered. Energy Supply Costs Prior to deregulation of electricity supply in 1999, regulated electric cus- tomer rates were subject to adjustment for differences between energy costs incurred in supplying regulated customers and amounts billed to customers for recovery of such costs. These customer rate adjustments occurred under "energy adjustment clauses." As a result of the energy adjustment clauses, the amount recognized in the Consolidated Statements of Income for energy costs incurred in supplying electricity to regulated customers was adjusted to match the amounts billed to the regulated customers. An asset was recorded for under- collections from customers and a liability was recorded for over-collections from customers. Effective August 1, 1999 for ACE, and October 1, 1999 for DPL, the accounting for energy costs associated with supplying electricity changed as discussed below. The DPSC and MPSC electric restructuring orders discussed in Note 10 to the Consolidated Financial Statements did not provide a rate adjustment mechanism for any under-recovery or over-recovery of energy costs after the start of customer choice (October 1, 1999 in Delaware and July 1, 2000 in Maryland). Thus, effective October 1, 1999 for DPL's Delaware electricity supply business and July 1, 2000 for DPL's Maryland electricity supply business, the practice of deferring the difference between the amount collected in revenues for en- ergy costs and the amount of actual energy costs incurred was ended. As a re- sult, differences between DPL's energy revenues and expenses have affected earnings subsequent to the elimination of the rate adjustment mechanism. As discussed under "Shopping Credits and Basic Generation Service" in Note 10 to the Consolidated Financial Statements, the electric restructuring Sum- mary Order issued by the NJBPU to ACE provides for recovery through customer rates of energy and other costs of supplying customers who do not choose an alternative electricity supplier. Effective August 1, 1999, in recognition of these cost-based, rate-recovery mechanisms, ACE adjusts revenues from customer billings to the amount of the related costs incurred, including an allowed re- turn on certain electric generating plants. The amount recognized in the Consolidated Statements of Income for the cost of gas purchased to supply DPL's regulated gas customers is adjusted to the amount included in customer billings for such costs since customer rates are periodically adjusted to reflect amounts actually paid by DPL for purchased gas. Nuclear Fuel As discussed in Note 14 to the Consolidated Financial Statements, DPL sold its ownership interests in Peach Bottom and Salem and the related nuclear fuel on December 29, 2000. Prior to the sales, the ownership interests II-38 of DPL in nuclear fuel at Peach Bottom and Salem were financed through nuclear fuel energy contracts, which were accounted for as capital leases. ACE has similar contracts in place, which are considered capital leases, that finance its ownership interest in the nuclear fuel at Peach Bottom, Salem, and Hope Creek Nuclear Generating Station (Hope Creek). Nuclear fuel costs, including estimated future disposal costs, are charged to fuel expense on a unit-of-pro- duction basis. Energy Trading and Risk Management Activities Conectiv uses futures, options, swap agreements, and forward contracts to hedge firm commitments or anticipated transactions of energy commodities and also creates net open energy commodity positions, or trading positions. On January 1, 1999, Conectiv adopted the EITF consensus EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities" (EITF 98-10) under which contracts (including derivative instruments) entered into in connection with energy trading activities are marked to market, with gains and losses (unrealized and realized) included in earnings. Energy trading ac- tivities are recorded on a gross basis, with sales reported as revenues and purchases included in operating expenses. The initial implementation of EITF 98-10 did not have a material impact on net income. In 1998, prior to imple- mentation of EITF 98-10, certain energy trading transactions were accounted for with "hedge accounting," as discussed below. Conectiv implemented the provisions of SFAS No. 133, "Accounting for Deriva- tive Instruments and Hedging Activities" (SFAS No. 133), as amended, effective January 1, 2001. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and for hedging activities. SFAS No. 133 requires all derivative instruments, within the scope of the statement, to be recog- nized as assets or liabilities on the balance sheet at fair value. Changes in the fair value of derivatives that are not hedges, under SFAS No. 133, are recognized in earnings. The gain or loss on a derivative that hedges exposure to variable cash flow of a forecasted transaction is initially recorded in other comprehensive income (a separate component of common stockholders' equi- ty) and is subsequently reclassified into earnings when the forecasted trans- action occurs. Changes in the fair value of other hedging derivatives result in a change in the value of the asset, liability, or firm commitment being hedged, to the extent the hedge is effective. Any ineffective portion of a hedge is recognized in earnings immediately. During 1998-2000, gains and losses related to derivative hedging instruments were deferred, as deferred credits or current assets, and then recognized in operating results when the underlying transaction occurred. If, subsequent to being hedged, the underlying transaction was no longer likely to occur or the hedge was no longer effective, the gain or loss on the related derivative was recognized currently in operating results. Premiums paid for options purchased during 1998-2000 were recorded as current assets and amortized to expense over the life of the options. Gains and losses on hedges of the cost of energy are reflected within the Consolidated Statements of Income as "Electric fuel and purchased energy and capacity" or "Gas purchased," as appropriate for the hedged transaction. Gains and losses on hedges of the selling price of generated electricity are recog- nized in revenues. Margin requirements for futures contracts are recorded as current assets. The initial impact on Conectiv's financial statements of adopting SFAS No. 133 effective January 1, 2001 included the following: (a) recognition of $43.8 million of assets and $38.0 million of liabilities for the fair value of cer- tain contracts which are classified as derivatives under SFAS No. 133; (b) derecognition (or elimination) of $0.2 million of deferred credits and $3.1 million of current assets associated with deferred gains and losses from hedg- ing derivatives; and (c) a "cumulative effect" type of adjustment, which was recorded as a $5.8 million pre-tax ($3.3 million after-tax) credit to other comprehensive income. During 2001, approximately $7.6 million before-taxes ($4.4 million after-taxes) of the cumulative effect adjustment recorded in other comprehensive income is expected to be reclassified to earnings. Subse- quent to initial adoption, SFAS No. 133 may cause increased volatility in Conectiv's earnings, revenues and common stockholders' equity. The cash flows from derivatives are included in the "Cash Flows From Operat- ing Activities" section of the Consolidated Statements of Cash Flows. II-39 For additional information concerning energy trading and risk management ac- tivities, refer to Note 12 to the Consolidated Financial Statements. Depreciation Expense The annual provision for depreciation on utility property is computed on the straight-line basis using composite rates by classes of depreciable property. Accumulated depreciation is charged with the cost of depreciable property re- tired, including removal costs less salvage and other recoveries. The rela- tionship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.4% for 2000, 3.5% for 1999, and 3.8% for 1998. Depreciation expense includes a provision for Conectiv's share of the estimated cost of decommissioning nuclear power plant reactors based on amounts billed to customers for such costs. Refer to Note 16 to the Consoli- dated Financial Statements for additional information on nuclear decommissioning. Non-utility property is generally depreciated on a straight-line basis over the useful lives of the assets. Income Taxes The Consolidated Financial Statements include two categories of income tax- es, which are current and deferred. Current income taxes represent the amounts of tax expected to be reported on Conectiv's federal and state income tax re- turns. Deferred income taxes are discussed below. Deferred income tax assets and liabilities represent the tax effects of tem- porary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of Conectiv's deferred tax liability applicable to the utility opera- tions of DPL and ACE that has not been recovered from utility customers repre- sents income taxes recoverable in the future and is shown on the Consolidated Balance Sheets as "Deferred recoverable income taxes." Deferred income tax expense generally represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes. Investment tax credits from utility plant purchased in prior years are re- ported on the Consolidated Balance Sheets as "Deferred investment tax cred- its." These investment tax credits are being amortized to income over the use- ful lives of the related utility plant. Investment tax credits associated with leveraged leases are being amortized over the lives of the related leases dur- ing the periods in which the net investment is positive. Deferred Debt Refinancing Costs Prior to the third quarter of 1999, the costs of refinancing debt of the utility businesses of DPL and ACE were deferred and amortized over the period during which the costs are recovered in rates, which is generally the life of the new debt. In the third quarter of 1999, the deferred costs associated with previously refinanced debt attributed to the electric generation businesses of DPL and ACE were written off and charged to earnings, net of anticipated rate recovery. The costs of future debt refinancing costs that are to be recovered through customer rates of the regulated utility businesses will be deferred and subsequently amortized to interest expense during the rate recovery peri- od. The costs of other debt refinancings will be accounted for in accordance with SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt," which requires such costs to be expensed. License Fees License fees represent the unamortized balance of amounts paid for the right to operate heating and cooling systems of certain hotel casinos in Atlantic City, New Jersey, over a 20-year period. These fees are classified as License Fees on the Consolidated Balance Sheets and are being amortized over 20 years. II-40 Interest Expense The amortization of debt discount, premium, and expense, including deferred refinancing expenses associated with the regulated electric and gas transmis- sion and distribution businesses, is included in interest expense. Utility Plant As discussed in Note 7 to the Consolidated Financial Statements, the book cost basis of electric generation plants that became impaired as a result of deregulation of the electric utility industry in 1999, is the estimated fair value of the plants at the time of deregulation. The estimated fair values were based on amounts included in agreements for the sale of certain electric generating plants of DPL and ACE, as discussed in Note 14 to the Consolidated Financial Statements. Utility plant that is not impaired is stated at original cost. Utility plant is generally subject to a first mortgage lien. Capitalized Interest and Allowance for Funds Used During Construction Effective in the third quarter of 1999, the cost of financing the construc- tion of electric generation plant is capitalized in accordance with SFAS No. 34, "Capitalization of Interest Cost" (SFAS No. 34). Other non-utility con- struction projects also include financing costs in accordance with SFAS No. 34. Interest costs were capitalized on these projects at the rates of 6.8% during 2000 and 5.3% during 1999. Allowance for Funds Used During Construction (AFUDC) is included in the cost of regulated transmission and distribution utility plant and represents the cost of borrowed and equity funds used to finance construction. In the Consol- idated Statements of Income, the borrowed funds component of AFUDC is reported as a reduction of interest expense and the equity funds component of AFUDC is reported as other income. AFUDC was capitalized on utility plant construction at the rates of 8.4% in 2000, 8.6% in 1999, and 8.8% in 1998. Stock-based Employee Compensation Refer to Note 18 to the Consolidated Financial Statements for Conectiv's ac- counting policy on stock-based employee compensation. Cash Equivalents In the Consolidated Financial Statements, Conectiv considers highly liquid marketable securities and debt instruments purchased with a maturity of three months or less to be cash equivalents. Goodwill Conectiv amortizes goodwill arising from business acquisitions over the shorter of the estimated useful life or 40 years. Substantially all of the goodwill as of December 31, 2000 had a 40 year life. The amount of goodwill amortized to expense was as follows: in 2000, $10.5 million, or $0.11 per share of common stock, in 1999, $11.0 million, or $0.10 per share of common stock, and in 1998, $9.7 million, or $0.09 per share of common stock. Leveraged Leases Conectiv's investment in leveraged leases includes the aggregate of rentals receivable (net of principal and interest on nonrecourse indebtedness) and es- timated residual values of the leased equipment less unearned and deferred in- come (including investment tax credits). Unearned and deferred income is rec- ognized at a level rate of return during the periods in which the net invest- ment is positive. Refer to Note 24 to the Consolidated Financial Statements for additional information on leveraged leases. II-41 Funds Held By Trustee Funds held by trustee are stated at fair value and primarily include depos- its in external nuclear decommissioning trusts and unexpended, restricted, tax-exempt bond proceeds. Changes in the fair value of the trust funds are also reflected in the accrued liability for nuclear decommissioning, which is included in accumulated depreciation. Earnings Per Share Earnings per share have been computed in accordance with SFAS No. 128, "Earnings Per Share" (SFAS No. 128). Under SFAS No. 128, basic earnings per share are computed based on earnings applicable to common stock divided by the weighted average number of common shares outstanding for the period, excluding non-vested shares of performance accelerated restricted stock. Diluted earn- ings per share are computed based on earnings applicable to common stock di- vided by the weighted average number of shares of common stock outstanding during the period after giving effect to securities considered to be dilutive common stock equivalents, such as non-vested shares of performance accelerated restricted stock. The effect of dilutive common stock equivalents was not sig- nificant, and thus, for 2000, 1999, and 1998, Conectiv's basic and diluted earnings per share were the same amounts. NOTE 2. SUPPLEMENTAL CASH FLOW INFORMATION See the Consolidated Statement of Changes in Common Stockholders' Equity and Note 4 to the Consolidated Financial Statements for information concerning the issuance of Conectiv common stock and Conectiv Class A common stock in ex- change for DPL and Atlantic common stock pursuant to the 1998 Merger. The Consolidated Statement of Cash Flows for 2000 excludes the assumption of DPL's former nuclear decommissioning liability by the purchasers of the owner- ship interests of DPL in nuclear electric generating plants and also excludes the transfer of nuclear decommissioning trust funds to the purchasers. The nu- clear decommissioning trust funds which were transferred had a fair value of approximately $68.0 million. For information about the sale of the ownership interests of DPL in nuclear electric generating plants, refer to Note 14 to the Consolidated Financial Statements. Cash Paid During the Year
2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Interest, net of capitalized amounts................ $200,737 $164,370 $142,503 Income taxes, net of refunds........................ $ 10,150 $111,667 $107,755
During 2000, Conectiv received $118 million of income tax refunds. Approxi- mately $91 million of the income tax refunds received in 2000 were 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 Pedricktown contract termination, see Note 11 to the Consolidated Financial Statements. II-42 NOTE 3. INCOME TAXES Conectiv files a consolidated federal income tax return which includes its wholly-owned subsidiaries. Income taxes are allocated to Conectiv's subsidiar- ies based upon the taxable income or loss of each subsidiary. Components of Consolidated Income Tax Expense
2000 1999 1998 -------- -------- -------- (Dollars in Thousands) Operations Federal: Current............................. $ 8,410 $ 44,468 $ 80,408 Deferred............................ 108,145 36,088 7,387 State: Current............................. 20,962 21,690 24,791 Deferred............................ 6,112 8,664 (2,767) Investment tax credit adjustments, net (1).... (10,115) (5,094) (4,002) -------- -------- -------- $133,514 $105,816 $105,817 -------- -------- -------- Extraordinary Item Federal: Deferred............................ -- (155,702) -- State: Deferred............................ -- (32,552) -- -------- -------- -------- -- (188,254) -- -------- -------- -------- Total Income Tax Expense........................ $133,514 $(82,438) $105,817 ======== ======== ======== Deferred federal income taxes included in other comprehensive income........................... $ (1,101) -- -- ======== ======== ========
- -------- (1) Includes a $4.4 million credit in 2000 which resulted from reversal of the deferred investment tax credits in connection with sale of the ownership interests of DPL in Peach Bottom and Salem on December 29, 2000, as dis- cussed in Note 14 to the Consolidated Financial Statements. Reconciliation of Effective Income Tax Rate The amount computed by multiplying "Income before income taxes and extraor- dinary item" by the federal statutory rate is reconciled below to income tax expense on operations (which excludes amounts applicable to the extraordinary item).
2000 1999 1998 -------------- -------------- -------------- Amount Rate Amount Rate Amount Rate -------- ---- -------- ---- -------- ---- (Dollars in Thousands) Statutory federal income tax expense.......................... $106,520 35% $ 76,788 35% $ 90,656 35% Increase (decrease) due to: State income taxes, net of federal tax benefit............ 17,598 6 19,730 9 14,316 6 Depreciation.................... 4,717 2 5,915 3 5,047 2 Non-deductible goodwill......... 7,320 2 9,536 4 2,188 1 Investment tax credit amortization................... (10,115) (3) (5,094) (2) (4,002) (2) Other, net...................... 7,474 2 (1,059) (1) (2,388) (1) -------- --- -------- --- -------- --- Total income tax expense for operations....................... $133,514 44% $105,816 48% $105,817 41% ======== === ======== === ======== ===
II-43 Components of Deferred Income Taxes The tax effects of temporary differences that give rise to Conectiv's net deferred tax liability are shown below.
As of December 31, ------------------- 2000 1999 ---------- -------- (Dollars in Thousands) Deferred Tax Liabilities Plant basis differences............................... $ 691,952 $636,762 Leveraged leases...................................... 69,354 87,669 Deferred recoverable income taxes..................... 42,208 46,215 Termination of purchased energy contract.............. 64,358 65,487 Prepaid pension costs................................. 33,293 23,342 Other................................................. 141,406 85,593 ---------- -------- Total deferred tax liabilities........................ $1,042,571 $945,068 ---------- -------- Deferred Tax Assets Deferred investment tax credits....................... 29,080 32,895 Electric restructuring liabilities.................... 42,824 52,340 Other postretirement benefits obligation.............. 19,002 20,269 Other................................................. 141,726 133,752 ---------- -------- Total deferred tax assets............................. 232,632 239,256 ---------- -------- Total deferred taxes, net............................... $ 809,939 $705,812 ========== ========
There were no valuation allowances for deferred tax assets as of December 31, 2000 and $0.8 million as of December 31, 1999. NOTE 4. 1998 MERGER On March 1, 1998, DPL and ACE became wholly owned subsidiaries of Conectiv (1998 Merger). Before the 1998 Merger, Atlantic owned ACE, an electric utility serving the southern one-third of New Jersey, and non-utility subsidiaries. As a result of the 1998 Merger, Atlantic's existence ended, and Conectiv became the owner (directly or indirectly) of ACE, DPL, and the non-utility subsidiar- ies formerly held separately by Atlantic and DPL. Conectiv is a registered holding company under PUHCA. Effective March 1, 1998, DPL common stockholders received one share of Conectiv common stock in exchange for each share of DPL common stock, and At- lantic common stockholders received 0.75 of one share of Conectiv common stock and 0.125 of one share of Conectiv Class A common stock in exchange for each share of Atlantic common stock. Atlantic stockholders and DPL stockholders re- ceived 39,363,672 and 61,832,699 shares of Conectiv common stock, respective- ly. Atlantic stockholders received 6,560,612 shares of Conectiv Class A common stock. See Note 19 to the Consolidated Financial Statements for information concerning Conectiv Class A common stock and the apportionment of earnings be- tween Conectiv Class A common stock and Conectiv common stock. The 1998 Merger was accounted for under the purchase method of accounting, with DPL as the acquirer. In connection with the 1998 Merger, $289.0 million of goodwill was recorded, which is being amortized over 40 years. Subsequent to March 1, 1998, the results of operations for ACE and other formerly Atlan- tic-owned businesses are included in the Consolidated Statements of Income. NOTE 5. SUBSEQUENT EVENT--AGREEMENT FOR THE ACQUISITION OF CONECTIV On February 9, 2001, the Boards of Directors of Conectiv and Potomac Elec- tric Power Company (Pepco) approved an Agreement and Plan of Merger (Conectiv/Pepco Merger Agreement) under which Pepco will II-44 acquire Conectiv for a combination of cash and stock. The transaction is sub- ject to various statutory and regulatory approvals and approval by the stock- holders of Conectiv and Pepco. Upon completion of the transaction, Conectiv and Pepco will become subsidiaries of a new holding company (HoldCo), to be named at a later date. HoldCo is expected to be a registered holding company under PUHCA. Approximately 67% of the shares of HoldCo are expected to be owned by Pepco stockholders and 33% of the shares of HoldCo are expected to be owned by Conectiv stockholders Under the terms of the Conectiv/Pepco Merger Agreement, holders of Pepco's common stock will receive one share of HoldCo common stock for each share of Pepco common stock owned. Under the Conectiv/Pepco Merger Agreement, holders of Conectiv common stock and Conectiv Class A common stock may elect to exchange their shares for cash, HoldCo common stock, or a combination of cash and HoldCo common stock. Howev- er, such elections will be subject to a proration procedure that will cause the aggregate consideration paid to holders of Conectiv common stock and Conectiv Class A common stock to be 50% cash and 50% HoldCo common stock. Sub- ject to certain restrictions described below, (i) Conectiv stockholders elect- ing to receive cash would receive $25 per share of Conectiv common stock ex- changed and $21.69 per share of Conectiv Class A common stock exchanged, and (ii) Conectiv stockholders electing to receive HoldCo common stock would re- ceive a number of shares of HoldCo common stock determined by the exchange ra- tio described below. Subject to certain limitations, the exchange ratio is de- signed to provide holders of Conectiv common stock with a number of shares of HoldCo common stock having a market value of $25.00 and holders of Conectiv Class A common stock with a number of shares of HoldCo common stock having a market value of $21.69. The exchange ratio will be $25.00 divided by the volume-weighted average of the closing trading prices of Pepco common stock for 20 trading days randomly selected by lot out of 30 consecutive trading days ending on the fifth busi- ness day immediately preceding the closing date of the transaction (Average Final Price). If the Average Final Price is below $19.50, then Conectiv common stockhold- ers will have the right to receive 1.28205 shares of HoldCo common stock for each share of stock exchanged and Conectiv Class A common stockholders will have the right to receive 1.11227 shares of HoldCo common stock for each share of stock exchanged. In this instance, the fair value of HoldCo common stock received for each share of Conectiv common stock exchanged and each share of Conectiv Class A common stock exchanged will be less than $25.00 and $21.69, respectively. If the Average Final Price is above $24.50, then Conectiv common stockhold- ers will have the right to receive 1.02041 shares of HoldCo common stock for each share of stock exchanged and Conectiv Class A common stockholders will have the right to receive 0.88528 shares of HoldCo common stock for each share of stock exchanged. In this instance, the fair value of HoldCo common stock received for each share of Conectiv common stock exchanged and each share of Conectiv Class A common stock exchanged will be more than $25.00 and $21.69, respectively. Conectiv may terminate the Conectiv/Pepco Merger Agreement if the Average Final Price is less than $16.50, unless Pepco, at its option, chooses to in- crease the consideration that will be paid to Conectiv's stockholders for their shares of Conectiv stock. If the Average Final Price is less than $16.50, Pepco has the option of (i) adjusting the exchange ratio so as to pro- vide Conectiv's stockholders with HoldCo common stock having a value of $21.25 for each share of Conectiv common stock and $18.35 for each share of Conectiv Class A common stock, (ii) paying additional cash to the stockholders so that they receive a total consideration of $21.25 for each share of Conectiv common stock and $18.35 for each share of Conectiv Class A common stock, or (iii) un- dertaking a combination of (i) and (ii), provided that any such combination must be in the same proportion with respect to the Conectiv common stock and the Conectiv Class A common stock. The Conectiv/Pepco Merger Agreement may be terminated by either Conectiv or Pepco if the transaction has not occurred by August 9, 2002 (18 months after the date of the Conectiv/Pepco Merger Agreement). If II-45 however, on August 9, 2002, the conditions required to complete the merger have been satisfied, except that additional time is needed to obtain the nec- essary statutory and regulatory approvals, then the Conectiv/Pepco Merger Agreement is extended for six additional months. If Conectiv terminates the Conectiv/Pepco Merger Agreement under certain circumstances, Conectiv is re- quired to pay a $60 million termination fee to Pepco. For example, if Conectiv's Board of Directors concludes that a business combination with an- other party is more favorable to Conectiv's stockholders and Conectiv termi- nates the Conectiv/Pepco Merger Agreement, then Conectiv is obligated to pay a $60 million termination fee to Pepco. During the period the Conectiv/Pepco Merger Agreement is in effect, Conectiv's dividend payments cannot exceed $0.22 per share of Conectiv common stock per quarter and $0.80 per share of Conectiv Class A common stock per quarter through March 31, 2001; after March 31, 2001, dividends on Conectiv Class A common stock may be paid at an annual rate up to 90% of annualized earnings of Class A common stock. NOTE 6. SPECIAL CHARGES
2000 1999 1998 ------- -------- ------- (Dollars in Thousands, Except Per Share Amounts) Special Charges Before Income Taxes.......................... $25,162 $105,648 $27,704 After Income Taxes........................... $23,412 $ 71,562 $16,764 Effect of Special Charges on Basic and Diluted Earnings Per Average Share Common Stock................................. $ (0.28) $ (0.75) $ (0.18) Class A Common Stock......................... -- $ (0.30) --
"Special charges" recorded in the second quarter of 2000 of $25.2 million before income taxes, or $23.4 million after income taxes ($0.28 per share of common stock), resulted from losses on the sales of Conectiv Services, Inc. (CSI) and portions of Conectiv Thermal Systems, Inc. (CTS). CSI provided heat- ing, ventilation, and air conditioning (HVAC) services and its results of op- erations are presented as the "HVAC" business segment in Note 27 to the Con- solidated Financial Statements. CTS constructs and operates district heating and cooling systems and its results of operations are included in the Energy business segment in Note 27 to the Consolidated Financial Statements included herein. Proceeds of $56 million were received from the sale of these business- es, which had total assets of $79 million at the time of sale. Conectiv's operating results for 1999 included "Special charges" of $105.6 million before taxes, or $71.6 million after taxes, which were recorded in the third quarter. The special charges decreased 1999 earnings per share of common stock by $0.75 and earnings per share of Class A common stock by $0.30. The items included in the 1999 special charges are discussed below. (a) Declines in the estimated residual values of the airplanes and cargo containerships leased by certain Conectiv subsidiaries to third parties resulted in a write-down of the investments in leveraged leases by $43.7 million before taxes ($26.7 million after taxes). (b) Approximately $10.9 million before taxes ($6.5 million after taxes) was accrued for employee separations. (c) Lower actual operating cash flows than initially expected when certain HVAC businesses were acquired caused the net book value of the HVAC busi- nesses to be impaired, which resulted in a write-down of goodwill by $35.6 million before taxes ($29.1 million after taxes). (d) Charges for additional costs related to the 1998 Merger, impairments of certain other assets, and other items were $15.4 million before taxes ($9.3 million after taxes). Conectiv's operating results for 1998 include "Special charges" of $27.7 million before taxes, or $16.8 million after taxes ($0.18 per share of common stock) for the cost of DPL employee separations associated with II-46 the 1998 Merger-related workforce reduction and other 1998 Merger-related costs. The $27.7 million pre-tax charge includes a net $45.5 million gain from curtailments and settlements of pension and other postretirement benefits. The 1998 employee separation, relocation, and other 1998 Merger-related costs for Atlantic and its former subsidiaries of $80.8 million before taxes, or $48.3 million after taxes, were capitalized as costs of the 1998 Merger. NOTE 7. EXTRAORDINARY ITEM As discussed in Note 1 to the Consolidated Financial Statements, as a result of electric utility restructuring orders, DPL and ACE discontinued applying SFAS No. 71 to their electricity supply businesses in the third quarter of 1999 and applied the requirements of SFAS No. 101 and EITF 97-4. Pursuant to the requirements of SFAS No. 101 and EITF 97-4, DPL and ACE recorded extraor- dinary charges in 1999 which, on a consolidated basis, reduced earnings by $311.7 million, after $188.3 million of income taxes. The extraordinary charge was apportioned between Conectiv common stock ($295.161 million or $3.16 per share) and Conectiv Class A common stock ($16.557 million or $2.71 per share). The portion of the 1999 extraordinary charge related to impaired assets was determined in accordance with SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets To Be Disposed Of" (SFAS No. 121). The 1999 extraordinary charge primarily resulted from impaired electric gener- ating plants and certain other assets, uneconomic energy contracts, and other effects of deregulation requiring loss recognition. The impairment amount for electric generating plants was determined based on expected proceeds under agreements for the sale of certain electric generating plants, which are dis- cussed in Note 14 to the Consolidated Financial Statements. The extraordinary charge was decreased by the regulatory asset established for the amount of stranded costs expected to be recovered through regulated electricity delivery rates. As discussed in Note 10 to the Consolidated Financial Statements, ACE's por- tion of the 1999 extraordinary charge was based on the NJBPU's Summary Order and the NJBPU is to issue a more detailed order at a later date. If the NJBPU's final detailed order were to differ materially from the Summary Order, then another extraordinary item may result due to adjustment of the 1999 ex- traordinary charge. The details of the 1999 extraordinary charge are shown in the following ta- ble:
Items Included in the 1999 Extraordinary Consolidated Charge Conectiv DPL ACE ---------------------------------------- ------------ ------- ------- (Dollars in millions) (a) The net book value of nuclear and certain fossil fuel-fired electric generating plants and other electric plant-related assets, including inventories, were written down due to impairment.............................. $(915.4) $(253.3) $(662.1) (b) The net present value of water-supply capacity from the Merrill Creek Reservoir in excess of the electric generating plants' requirements was expensed................................ (45.3) (41.9) (3.4) (c) The net present value of expected losses under uneconomic energy contracts, primarily for the purchase of electricity and gas at above-market prices, was expensed.................... (100.3) (99.0) (1.3) (d) Generation-related regulatory assets and certain other utility assets impaired from deregulation were written off. Also, various liabilities resulting from deregulation were recorded.............. (252.5) (51.5) (201.0) (e) Regulatory assets were established for the amount of stranded costs expected to be recovered through regulated electricity delivery rates.............. 813.5 44.3 769.2 ------- ------- ------- Total pre-tax extraordinary charge.......... (500.0) (401.4) (98.6) Income tax benefit.......................... 188.3 147.8 40.5 ------- ------- ------- Total extraordinary charge, net of income taxes...................................... $(311.7) $(253.6) $ (58.1) ======= ======= =======
II-47 NOTE 8. INVESTMENT INCOME Investments in the EnerTech Funds 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 energy re- lated technology and Internet service companies. Due to the nature of the in- vestments of the EnerTech funds, the earnings of the funds may be volatile from period to period. The EnerTech funds record their investments at fair value and include gains and losses on changes in the fair value of their in- vestments in income in accordance with industry practice. Conectiv's subsidi- ary accounts for its investment in the EnerTech funds on the equity method of accounting. The pre-tax equity in earnings of the EnerTech funds are reported as "Other income" in the Consolidated Statements of Income. Conectiv's equity in earnings of the EnerTech funds was $20.3 million ($13.2 million after-income taxes or $0.16 per share of common stock) in 2000 and $42.1 million ($24.9 million after-income taxes or $0.27 per share of common stock) in 1999. Conectiv's equity in earnings of the EnerTech funds was not significant in 1998. The earnings of the EnerTech funds during 2000 resulted primarily from an unrealized gain on the initial public offering of common shares of Capstone Turbine Corporation (Capstone). Capstone develops, designs, assembles, and sells micro-turbines worldwide in the distributed power genera- tion market and hybrid electric vehicle market. The earnings of the EnerTech funds during 1999 resulted primarily from the initial public offering of a business-to-business Internet company. The carrying amount of Conectiv's subsidiary's investment in the EnerTech funds was $38.6 million as of December 31, 2000 and $26.6 million as of Decem- ber 31, 1999. Conectiv's subsidiary received from the EnerTech Funds cash and marketable securities distributions in 2000 valued at $15 million and cash distributions in 1999 of $45 million. In 1998, no distributions of cash or marketable securities were received. Summarized financial information for the EnerTech funds (in their entirety) is presented below. Conectiv's subsidiary owns a partial interest in the EnerTech funds.
Year Ended December 31, ----------------------- Income Statement Information 2000 1999 1998 ---------------------------- ------- ------- ------- (Dollars in Thousands) Operating Revenues *............................... $69,513 $60,272 $(2,161) Income (Loss) Before Taxes......................... 61,319 58,500 (3,743)
-------- * Includes the net change in investment valuation.
As of December 31, ---------------- Balance Sheet Information 2000 1999 ------------------------- -------- ------- (Dollars in Thousands) Current assets............................................. $ 2,570 $11,387 Noncurrent assets.......................................... 105,740 42,761 -------- ------- Total assets............................................... $108,310 $54,148 ======== ======= Current liabilities........................................ $ 3,000 $ 7,052 Partners' capital.......................................... 105,310 47,096 -------- ------- Total capitalization and liabilities....................... $108,310 $54,148 ======== =======
Other Investments Conectiv's other investments that affect its results of operations include marketable securities (other than those held in nuclear decommissioning trust funds) and minority interests in a venture capital fund and an Internet start- up project. For 2000, these investments resulted in a net loss, including $3.0 million before taxes II-48 ($2.0 million after taxes, or $0.02 per share of common stock) which was rec- ognized in earnings and $3.1 million before taxes ($2.0 million after taxes) which was recognized in other comprehensive income. The earnings from these investments in 1999 and 1998 was insignificant. The carrying value of these investments was $4.6 million as of December 31, 2000. See Note 9 to the Consolidated Financial Statements for additional informa- tion concerning investment income. NOTE 9. SUMMARIZED FINANCIAL INFORMATION OF ENTITIES NOT CONSOLIDATED Summarized financial information for unconsolidated entities accounted for on the equity method (excluding the EnerTech funds, which are shown in Note 8 to the Consolidated Financial Statements) is presented below for the periods the unconsolidated entities are included in Conectiv's Consolidated Financial Statements. The amounts presented below are primarily attributed to unconsoli- dated electric co-generation projects and are for the unconsolidated entities in their entirety.
Year Ended December 31, ----------------------- Income Statement Information 2000 1999 1998 ---------------------------- ------- ------- ------- (Dollars in Thousands) Operating Revenues.................................. $90,144 $98,507 $99,208 Income Before Taxes................................. $24,848 $15,932 $50,077
As of December 31, ----------------- Balance Sheet Information 2000 1999 ------------------------- -------- -------- (Dollars in Thousands) Current assets............................................ $ 60,135 $ 77,404 Noncurrent assets......................................... 137,694 225,860 -------- -------- Total assets.............................................. $197,829 $303,264 ======== ======== Current liabilities....................................... $ 27,786 $ 17,125 Noncurrent liabilities.................................... 123,074 147,443 Partners' capital......................................... 46,969 138,696 -------- -------- Total capitalization and liabilities...................... $197,829 $303,264 ======== ========
The carrying amount of Conectiv's subsidiaries' investments in these enti- ties was $20.8 million as of December 31, 2000 and $60.4 million as of Decem- ber 31, 1999. The decrease in the carrying amount of the investment as of De- cember 31, 2000 compared to December 31, 1999 was primarily due to the sale of two projects that CTS had investments in, as discussed in Note 6 to the Con- solidated Financial Statements. Conectiv's subsidiaries' equity in earnings of these entities was $13.0 million in 2000, $6.4 million in 1999, and $22.2 mil- lion in 1998. These amounts are included in "Other Income" in the Consolidated Statements of Income. Conectiv's subsidiaries received cash distributions from these entities of $13.4 million in 2000, $86.4 million in 1999, which includes the $82.2 million distribution related to the purchased power contract termi- nation discussed in Note 11 to the Consolidated Financial Statements, and $22.2 million in 1998. NOTE 10. REGULATORY MATTERS Electric Utility Industry Restructuring New Jersey Electric Utility Industry Restructuring On February 9, 1999, New Jersey enacted the Electric Discount and Energy Competition Act (the New Jersey Act) which, among other things, provided cus- tomers of New Jersey electric utilities with a choice of electricity suppliers beginning August 1, 1999. Pursuant to the New Jersey Act, on July 15, 1999, the NJBPU II-49 issued a Summary Order to ACE concerning stranded costs, unbundled rates, and other matters related to restructuring. The NJBPU indicated that a more de- tailed order would be issued at a later time. Issuance of the NJBPU's final order for ACE has been delayed due to appeals of the NJBPU's final order con- cerning restructuring the electricity supply business of Public Service Elec- tric and Gas Company (PSE&G) and recent electricity shortages and price in- creases in California. On December 6, 2000, the New Jersey Supreme Court af- firmed the judgment of the New Jersey Superior Court Appellate Division which had previously affirmed the NJBPU's final order concerning the PSE&G restruc- turing. However, management cannot predict the timing or outcome of this or related matters, such as securitization by ACE of its stranded costs and the sale of electric generating plants, as discussed in Note 14 to the Consoli- dated Financial Statements. The key provisions of the Summary Order issued by the NJBPU to ACE are dis- cussed below. Rate Decreases In its Summary Order, the NJBPU directed ACE to implement a 5% aggregate rate reduction effective August 1, 1999 and an additional 2% rate reduction by January 1, 2001. By August 1, 2002, rates must be reduced by 10% from the rates that were in effect as of April 30, 1997. The initial 5% rate reduction effective August 1, 1999 reduced annual reve- nues by approximately $50 million. The additional 2% rate reduction required by January 1, 2001 was implemented through two separate 1% rate reductions ef- fective January 1, 2000 and 2001, respectively. Each of the 1% rate reductions reduced annual revenues by approximately $10 million, or $20 million in total. The final rate reduction, which is required by August 1, 2002, is expected to reduce revenues by an additional $30 million, which would result in a cumula- tive rate reduction of $100 million since August 1, 1999. Stranded Cost Recovery and Securitization Stranded costs are the uneconomic portion of assets and long-term contracts that resulted from electric utility industry restructuring. The Summary Order provides that ACE may divest its nuclear and fossil fuel-fired baseload units and transfer combustion turbine electric generating units to a non-utility af- filiated company at net book value. Additional NJBPU approvals are required prior to the sale of the nuclear and fossil fuel-fired baseload units of ACE. The NJBPU determined that ACE will have the opportunity to recover 100% of the net stranded costs related to certain generation units to be divested and the stranded costs associated with power purchased from non-utility generators (NUGs), subject to further NJBPU proceedings. The Summary Order, in conjunc- tion with the New Jersey Act, also permits securitization of stranded costs through the issuance of transition bonds in the amount of the after-tax stranded cost recovery approved by the NJBPU. Management expects the transi- tion bonds will be issued after ACE completes the sale of certain electric generating units, as discussed in Note 14 to the Consolidated Financial State- ments. The ability to issue transition bonds would depend not only upon ap- proval of the NJBPU, but also on the conditions in the relevant capital mar- kets at the times of the offerings. Proceeds from the transition bonds may be used to refinance ACE's debt and preferred securities, finance the restructur- ing of purchased power contracts, or otherwise reduce costs in order to de- crease regulated electricity rates. The Summary Order allows securitization of (a) 100% of the net stranded costs of certain generation units to be divested, over a period not to exceed 15 years, and (b) 100% of the costs to effect po- tential NUG contract buyouts or buydowns, over a period not to exceed the re- maining term of the restructured contracts. The Summary Order provides for the principal of and interest on transition bonds to be collected from customers through a transition bond charge over the securitization term. The Summary Or- der also provides for customer rates to include a separate market transition charge for recovery of the income tax expense associated with the revenues from transition bond charges. The balance for ACE's pre-tax recoverable stranded costs, net of amortized amounts, was approximately $959 million as of December 31, 2000 and $988 mil- lion as of December 31, 1999. The balances of recoverable stranded costs in- clude the stranded costs estimated and recorded as a result of discontinuing the application of SFAS No. 71 (as discussed in Note 7 to the Consolidated Fi- nancial Statements) and the $228.5 million payment to terminate a NUG contract (as discussed in Note 11 to the Consolidated Financial Statements). ACE's amount II-50 of recoverable stranded costs remains subject to adjustment based on the ac- tual gains and losses realized on the sale of certain electric generating plants, additional buyouts or buydowns of NUG contracts, the NJBPU's final re- structuring order, and the final amount determined to be recoverable through customer rates under the New Jersey Act. Shopping Credits and Basic Generation Service The Summary Order established minimum initial shopping credits for customers who choose an alternative electricity supplier, from a system average 5.27 cents per kilowatt-hour (kWh), effective August 1, 1999, to a system average of 5.48 cents per kWh in 2003. These shopping credits include transmission costs and charges by ACE for its Basic Generation Service (BGS) provided to retail customers who do not choose an alternative electricity supplier. ACE is obligated to provide BGS through July 31, 2002; thereafter, the BGS supplier is expected be determined each year based on a competitive bidding process. In accordance with the Summary Order, the rates charged to ACE's customers for BGS include a component for the market-value of power purchased from NUGs. The above-market portion of the cost of NUG power is being collected through a non-bypassable "Net NUG Charge" included in regulated electricity delivery rates, over the remaining term of the NUG contracts. The above-market portion of the costs of certain of ACE's power plants is being recovered through a "Market Transition Charge," included in regulated electricity delivery rates. The NJBPU's Summary Order also provided that ACE's regulatory liability for over-recovered energy supply costs as of July 31, 1999 would be offset by any subsequent under-recoveries of the costs associated with BGS. Due to under-re- coveries of such costs, ACE reduced its liability for over-recovered energy supply costs and recognized like amounts of revenues in the amounts of $17.5 million for 2000 and $17.2 million for 1999. Customer rates are to be adjusted for any deferred balance remaining after the initial four-year transition pe- riod, which ends July 31, 2003. ACE's recovery of BGS supply costs is subject to review by the NJBPU. Customer Account Services During the fourth quarter of 1999, the NJBPU began a proceeding concerning customer metering, billing, and other account administration functions (Cus- tomer Account Services). On December 22, 2000, the NJBPU approved a stipula- tion, to which ACE and certain other New Jersey utilities were parties, in the Customer Account Services proceeding. One of the terms of the stipulation re- quires ACE to begin purchasing the receivables of third parties supplying electricity to ACE's delivery customers in the second quarter of 2001. The stipulation remains effective through August 1, 2003. Delaware Electric Utility Industry Restructuring On March 31, 1999, Delaware enacted the Electric Utility Restructuring Act of 1999 (the Delaware Act), which provided for a phase-in of retail customer choice of electricity suppliers from October 1999 to October 2000, customer rate decreases, and other matters concerning restructuring the electric util- ity industry in Delaware. On April 15, 1999, DPL submitted a compliance plan to the DPSC for implementing the provisions of the Delaware Act in DPL's Dela- ware service area. On August 31, 1999, the DPSC issued an order on DPL's com- pliance plan. The DPSC's order is discussed below. Implementation Dates The DPSC approved implementation dates for retail customer choice of elec- tric suppliers of October 1, 1999 for customers with a peak monthly load of 1,000 kilowatts (kW) or more; January 15, 2000 for customers with a peak monthly load of 300 kW or more; and October 1, 2000 for other customers. Rate Decrease The DPSC approved DPL's proposed rate structure, which provides for a 7.5% decrease in DPL's Delaware residential electric rates, effective October 1, 1999, with those rates held constant from October 1, 1999 to II-51 September 30, 2003. Also, non-residential rates are to be held constant from October 1, 1999 to September 30, 2002. The initial 7.5% residential rate re- duction reduced revenues by approximately $17.5 million on an annualized ba- sis. Sale of Electric Generating Plants The Delaware Act permits DPL to sell, transfer, or otherwise divest its electric generating plants without DPSC approval after October 1, 1999. The DPSC's order effectively provides that electric rates will remain unchanged as a result of such divestiture. See Note 14 to the Consolidated Financial State- ments for related information concerning the expected sales of electric gener- ating plants. Stranded Cost Recovery The rates approved by the DPSC also provide for DPL's recovery of stranded costs, $16 million net of taxes, or $31 million before taxes, through a "Com- petitive Transition Charge" billed to non-residential customers from October 1, 1999 to September 30, 2002. Shopping Credits The system-average customer shopping credits, which include the costs of electricity supply, transmission, and ancillary services, are 4.736 cents per kWh for the year beginning October 1, 1999, 4.719 cents per kWh for the year beginning October 1, 2000, and 4.721 cents per kWh for the year beginning Oc- tober 1, 2001. Default Service for Electricity Supply The Delaware Act makes DPL the provider of default service to customers who do not choose an alternative electricity supplier for 3 years ending September 30, 2002 for non-residential customers and the 4 years ending September 30, 2003 for residential customers (transition periods). Thereafter, the DPSC may conduct a bidding process to select the default supplier for such customers. The DPSC order permits customers with demand below 300 kW to choose an alter- native electric supplier and to switch back to DPL's default service without any time restrictions or price differential. Customers with demand above 300 kW who choose an alternative electricity supplier and switch back to DPL's de- fault service must either, at the customer's option, return to DPL's default service for a minimum of 12 months or pay market prices. Maryland Electric Utility Industry Restructuring On April 8, 1999, Maryland enacted the Electric Customer Choice and Competi- tion Act of 1999 (the Maryland Act), which provided for customer choice of electricity suppliers, customer rate decreases, and other matters concerning restructuring the electric utility industry in Maryland. On October 8, 1999, the MPSC issued an order to DPL that approved a settlement agreement for im- plementing the provisions of the Maryland Act in DPL's Maryland service area. The key elements of the approved settlement agreement are discussed below. Implementation Date Effective July 1, 2000, all of DPL's Maryland retail customers were eligible to select an alternative electricity supplier. Rate Decrease The MPSC approved a 7.5% decrease in DPL's Maryland residential electric rates, effective July 1, 2000, with those rates held constant from July 1, 2000 to June 30, 2004. Also, non-residential rates are to be held constant from July 1, 2000 to June 30, 2003. The initial 7.5% residential rate reduc- tion reduced revenues by approximately $12.5 million on an annualized basis. II-52 Sale of Electric Generating Plants The Maryland Act in conjunction with the approved settlement effectively provides that electric rates will not be changed in the event DPL sells or transfers electric generating assets. See Note 14 to the Consolidated Finan- cial Statements for related information concerning the expected sales of elec- tric generating plants. Stranded Cost Recovery The MPSC approved DPL's recovery of stranded costs, $8 million net of taxes, or $14 million before taxes, through a "Competitive Transition Charge" billed to non-residential customers from July 1, 2000 to June 30, 2003. Shopping Credits The system-average customer shopping credits, which include the costs of electricity supply, transmission, and ancillary services, are 5.385 cents per kWh for the year beginning July 1, 2000, 5.388 cents per kWh for the year be- ginning July 1, 2001, and 5.390 cents per kWh for the year beginning July 1, 2002. Default Service for Electricity Supply DPL is to provide default service to customers who do not choose an alterna- tive electricity supplier during July 1, 2000 to July 1, 2004 for residential customers and during July 1, 2000 to July 1, 2003 for non-residential custom- ers. Subsequent to these default service periods, the MPSC is to determine the default service supplier. Virginia Electric Utility Industry Restructuring On March 29, 1999, the Governor of Virginia signed the Virginia Electric Utility Restructuring Act (the Virginia Act). In connection with the Virginia Act, the VSCC issued an order on June 29, 2000 that, among other things, ap- proved DPL's plan for the functional separation of electric generation opera- tions from transmission and distribution operations and authorized the trans- fer of certain electric generating plants and related assets to other Conectiv subsidiaries. DPL has proposed to the VSCC to offer choice of electricity sup- pliers to all of its retail Virginia customers as of January 1, 2002. Revenues from regulated retail electricity sales in Virginia represented approximately 1.7% of Conectiv's regulated retail electric and gas revenues for 2000. NOTE 11. TERMINATION AND RESTRUCTURING OF PURCHASED POWER CONTRACTS On November 10, 1999, the NJBPU issued an order approving termination of a contract under which ACE had purchased energy and 116 MW of capacity from Pedricktown, a NUG partnership which was owned 50% by other Conectiv subsidi- aries. The NJBPU order provided that ACE is entitled to recover from customers the contract termination payment of $228.5 million, transaction costs, and in- terim financing costs. The NJBPU order also found that the contract termina- tion payment and related transaction costs are eligible for long-term financ- ing through the issuance of securitized bonds. On December 28, 1999, ACE paid $228.5 million to terminate the contract and borrowed funds to finance the contract termination payment (as discussed in Note 21 to the Consolidated Fi- nancial Statements). The contract termination payment and related costs are included in "Recoverable Stranded Costs" on the Consolidated Balance Sheets. ACE's customer rates were reduced by about 1% (approximately $10 million of revenues on an annualized basis) effective January 1, 2000 as a result of the net savings from the contract termination. On December 6, 2000, the NJBPU approved ACE's payment on January 22, 2001 of $3.45 million in connection with restructuring ACE's purchased power contract with a NUG, American Ref-Fuel Company of Delaware Valley, L.P. II-53 Management anticipates that transition bonds will ultimately be used to fi- nance the stranded costs associated with the buyout or buydown of ACE's NUG contracts. On December 28, 1999, the Conectiv subsidiaries that own 50% of the Pedricktown NUG partnership with which ACE terminated its contract received an $82.2 million distribution from Pedricktown. The distribution was primarily the result of a gain realized by Pedricktown from the contract termination; the Conectiv subsidiaries' share of the gain was estimated at $75.0 million as of December 31, 2000 and $70.8 million as of December 31, 1999. Conectiv's subsidiaries share of the gain is deferred in Conectiv's Consolidated Balance Sheets and classified under "Deferred Credits and Other Liabilities." The de- ferred gain is expected to be either (a) amortized to income over the period revenues are collected from ACE's customers to repay the transition bonds ex- pected to be issued to recover the contract termination payment, or (b) recog- nized in income if the Conectiv subsidiaries no longer hold an ownership in- terest in Pedricktown. NOTE 12. ENERGY TRADING AND RISK MANAGEMENT ACTIVITIES Conectiv actively participates in the wholesale energy markets and engages in commodity hedging activities to minimize the risk of market fluctuations associated with the purchase and sale of energy commodities (natural gas, pe- troleum and electricity). Some hedging activities are conducted using deriva- tive instruments. 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's participation in wholesale energy markets includes trading and ar- bitrage activities, which expose Conectiv to commodity market risk. To the ex- tent that Conectiv has net open positions, controls are in place that are in- tended to keep risk exposures within management-approved risk tolerance lev- els. Conectiv utilizes futures, options and swap agreements to manage risk. Futures help manage commodity price risk by fixing purchase or sales prices. Options provide a floor or ceiling on future purchases or sales prices while allowing Conectiv to benefit from favorable price movements. Swaps are struc- tured to provide the same risk protection as futures and options. Basis swaps are used to manage risk by fixing the basis differential that exists between a delivery location index and the commodity futures price. Open commodity positions may be "long" or "short." A long position indicates that Conectiv has an excess of the commodity available for sale. A short posi- tion means Conectiv will have to obtain additional commodity to fulfill its sales requirements. A "delta" position is the conversion of an option into futures contract equivalents. The option delta is dependent upon the strike price, volatility, current market price and time-value of the option. Counterparties to its various hedging and trading contracts expose Conectiv to credit losses in the event of nonperformance. Management has evaluated such risk, implemented credit checks and established reserves for credit losses. Non-regulated Natural Gas Activities At December 31, 2000, Conectiv's open futures contracts represented a net long position with a notional quantity of 13.7 billion cubic feet (Bcf), through April 2002. Conectiv also had a net short commodity swap position at December 31, 2000 equivalent to 8.9 Bcf through May 2002, and a net short ba- sis swaps position equivalent to 2.7 Bcf through November 2002. At December 31, 1999, Conectiv's open futures contracts represented a net long position with a notional quantity of 8.5 billion cubic feet (Bcf), through March 2002. Conectiv also had a net long commodity swap position at December 31, 1999 equivalent to 1.2 Bcf and a net short basis swaps position equivalent to 0.2 Bcf. Gains recognized for gas trading positions (physical and financial combined) were as follows: 2000--$19.7 million, including a $35.3 million unrealized gain; and 1999--$5.0 million, including a $3.0 million unrealized II-54 gain. The annual average unrealized gain on gas trading activities was $7.8 million in 2000 and $2.1 million in 1999. During 1998, recognized and unrealized gains from gas trading positions were not material to Conectiv's results of operations or financial position. An unrealized hedging gain of $5.6 million as of December 31, 2000 and an unrealized hedging loss of $7.6 million as of December 31, 1999 from natural gas futures, swaps and options contracts used to hedge gas marketing activi- ties were deferred in the Consolidated Balance Sheets. A loss for 2000 and gain for 1999 on the physical commodity transactions being hedged offset the related hedging gain and loss, respectively. Regulated Natural Gas Activities Gains and losses on regulated gas hedging are included in the gas cost re- covery provisions of the regulated energy adjustment clause. At December 31, 2000, Conectiv's open futures contracts represented a net long position with a notional quantity of 0.2 Bcf, through October 2001. Conectiv also had a net long commodity swap position at December 31, 2000 equivalent to 14.1 Bcf through December 2002. At December 31, 1999, Conectiv had a long commodity swap position of 4.0 Bcf for the regulated gas business. Unrealized hedging gains of $14.4 million as of December 31, 2000 and an unrealized loss of $1.4 million as of December 31, 1999 from natural gas futures, swaps and options contracts used to hedge regulated gas activities were deferred in the Consolidated Balance Sheets. During 1998, derivatives were not used for regulated hedging. Electricity Marketing and Trading Activities Primarily resulting from forward contracts, at December 31, 2000, Conectiv had a net long exposure of 1,195,000 megawatt-hours (MWH) through December 2003; and at December 31, 1999, Conectiv had a net long exposure of 219,900 MWH through December 2000. The amounts of deferred gains and losses from hedges of electricity market- ing activities were as follows: as of December 31, 2000, a loss of $0.2 mil- lion was deferred and as of December 31, 1999, a gain of $0.1 million was de- ferred in the Consolidated Balance Sheets. During 1998 to 2000, the gains recognized for electricity trading activities (physical and financial combined) were as follows: $12.5 million in 2000, in- cluding a $3.6 million unrealized gain; $6.0 million in 1999, including a $1.3 million unrealized gain; and $11.4 million in 1998, including a $1.2 million unrealized gain. The annual average unrealized gain on electricity trading ac- tivities was $1.3 million in 2000, $0.1 million in 1999, and $1.3 million in 1998. Electricity Generation Activities As a result of electric utility industry restructuring orders issued in 1999, deregulated operation of the electric generating plants owned by Conectiv subsidiaries was phased-in from August 1, 1999 to July 1, 2000. As of July 1, 2000, approximately 79% of Conectiv's electric generating capacity was being operated on a deregulated basis and the remaining 21% was dedicated to supplying BGS customers, in accordance with the terms of the Summary Order is- sued by the NJBPU. Conectiv hedges portions of the fuel purchased and the electricity output of the generating plants using derivative instruments and forward contracts to stabilize fuel costs and to lock-in prices for electricity generated. As of December 31, 2000, Conectiv hedged 680,800 MWH of forward generation output, through the sale of forward contracts, which resulted in a $13.5 million unrealized and unrecognized loss as of December 31, 2000. As of December 31, 1999, Conectiv hedged 3,865,800 MWH of forward generation output, through the sale of forward contracts, which resulted in an $11.0 million unrealized and unrecognized gain as of December 31, 1999. II-55 A net unrealized gain of $0.2 million that resulted from hedging the cost of gas and oil burned by electric generating units was deferred in the Consoli- dated Balance Sheet as of December 31, 2000. At December 31, 2000, forward natural gas hedges consisted of a long position of futures, forwards and swaps with a combined notional amount of 25.3 Bcf. At December 31, 2000, forward pe- troleum hedges consisted of a long position in futures and swaps of 2.4 mil- lion barrels. A net unrealized loss of $4.1 million which resulted from hedg- ing the cost of gas burned by electric generating units was deferred in the Consolidated Balance Sheet as of December 31, 1999. This hedge consisted of a long position of natural gas futures, forwards and swaps with a combined notional amount of 12.9 Bcf. Petroleum Activities To hedge a portion of its petroleum sales commitments, Conectiv had a net long position in futures as of December 31, 2000 and 1999 with notional equiv- alents of 254,000 barrels and 376,000 barrels, respectively. An unrealized hedging gain of $0.4 million was deferred as of December 31, 2000 and an unrealized hedging gain of $3.0 million was deferred as of December 31, 1999. In 2000, petroleum trading activities recognized a $6.6 million gain, in- cluding a $0.9 million unrealized gain. In 1999 a $1.3 million trading gain was recognized, including a $0.7 million unrealized gain. The average annual unrealized gain on petroleum trading activities was $0.8 million for 2000, and $0.5 million for 1999. NOTE 13. JOINTLY OWNED PLANT Conectiv's Consolidated Balance Sheets include its proportionate share of assets and liabilities related to jointly owned plant. Conectiv's subsidiaries have ownership interests in electric generating plants, transmission facili- ties, and other facilities in which other parties have ownership interests. Conectiv's proportionate shares of operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in Conectiv's Consolidated Statements of Income. Conectiv is responsible for providing its share of financing for the jointly owned facilities. Information with respect to Conectiv's shares of jointly owned plant as of December 31, 2000 is shown below. As discussed in Note 14 to the Consolidated Financial Statements, the ownership interests of DPL in nuclear electric gen- erating plants were sold on December 29, 2000 and there are agreements to sell to third parties the remaining jointly owned nuclear and coal-fired plants, which are listed below.
Megawatt Construction Ownership Capability Plant in Accumulated Work in Share Owned Service Depreciation Progress --------- ---------- -------- ------------ ------------ (Dollars in Thousands) Nuclear Peach Bottom.......... 7.51% 164 $ 4,847 $ 944* $ 4,760 Salem................. 7.41% 167 3,892 2,236* 2,517 Hope Creek............ 5.00% 52 1,930 923* 619 Coal-Fired Keystone.............. 6.17% 106 34,733 15,285 1,193 Conemaugh............. 7.55% 129 68,796 24,318 1,698 Transmission Facilities............. Various 29,448 13,878 -- Other Facilities........ Various 3,269 887 -- -------- ------- ------- Total................... $146,915 $58,471 $10,787 ======== ======= =======
- -------- * Excludes nuclear decommissioning reserve. II-56 NOTE 14. AGREEMENTS FOR THE SALES OF ELECTRIC GENERATING PLANTS DPL and ACE have entered into agreements for the sale of their respective ownership interests in non-strategic baseload fossil fuel-fired electric gen- erating plants and ACE has executed agreements for the sale of its ownership interests in nuclear electric plants. A summary of the electric generating plants that were subject to agreements for sale as of December 31, 2000 is shown in the table below. The ownership interests of DPL in nuclear electric generating plants that were sold on December 29, 2000 are excluded from the table. Management intends to retain certain fossil fuel-fired electric gener- ating plants which are strategic to Conectiv's energy business, pursuant to Conectiv's "mid-merit" strategy as discussed in the "Mid-Merit Electric Gener- ation" section of Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A). The operating results of the electric gener- ating plants to be sold are included in the Energy business segment shown in Note 27 to the Consolidated Financial Statements. Electric Generating Plants Subject to Agreements for Sale
As of December 31, 2000 ------------------------- MW of Net Book Capacity Value ------------ ----------- ($ in millions) Fossil Units: Wholly owned................................... 1,586.0 $ 341.9 Jointly owned.................................. 234.5 66.8 Jointly owned nuclear units...................... 383.0 14.5 ------------ ----------- 2,203.5 $ 423.2 ============ ===========
On September 30, 1999, Conectiv announced that DPL and ACE reached agree- ments to sell their ownership interests in nuclear plants to PSEG Power LLC (a subsidiary of Public Service Enterprise Group Incorporated) and PECO Energy Company (PECO). Pursuant to the agreements, DPL sold its 7.51% (164 MW) inter- est in Peach Bottom and 7.41% (167 MW) interest in Salem and the related nu- clear fuel on December 29, 2000 for approximately $32 million. DPL used ap- proximately $26 million of the proceeds to repay the lease obligation related to the nuclear fuel. In accordance with the sales agreements, DPL transferred its decommissioning trust funds and related obligation for decommissioning the plants to the purchasers. Completion of these sales resulted in a gain of $16.6 million before income taxes ($12.8 million after income taxes, or $0.15 per share of Conectiv common stock). The pre-tax gain primarily resulted from the reversal of previously accrued liabilities associated with the nuclear plants and is classified as a reduction of operating expenses in the 2000 Con- solidated Statement of Income. ACE's interests in the nuclear units that are subject to the sales agreements include 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. The agreements for the sale of ACE's interests in the nuclear plants provide for (a) a sales price of approximately $11 million plus the net book value of the interests of ACE in nuclear fuel on-hand as of the closing date and (b) the transfer of ACE's nuclear decommissioning funds and related obli- gation for decommissioning the plants to the purchasers upon completion of the sales. On January 19, 2000, Conectiv announced that DPL and ACE reached agreements to sell certain wholly and jointly owned fossil units to NRG Energy, Inc. (NRG), a subsidiary of Northern States Power Company, for $800 million. The units to be sold under the agreements have a total capacity of 1,820.5 MW, and had a net book value of $408.7 million as of December 31, 2000. Management ex- pects the proceeds from the planned sales of the electric generating plants will be used to repay debt and to fund expansion of the mid-merit generation business. The terms of DPL's agreement with NRG provide for DPL to purchase from NRG 500 megawatt-hours of firm electricity per hour from completion of the sale through December 31, 2005. Upon completion of the sales of the non- strategic baseload electric generating plants, DPL and ACE will purchase power to supply electricity to customers who do not choose alternative electricity suppliers. For information concerning long-term purchased power contracts, see Note 23 to the Consolidated Financial Statements. II-57 Consummation of the sales of the electric generating plants is subject to the receipt of required regulatory approvals. In addition, the agreements for the sales of the electric generating plants contemplated that the sales of the plants of ACE and DPL would occur simultaneously. Appeals related to the NJBPU's final order concerning restructuring the electricity supply business of PSE&G and recent electricity shortages and price increases in California have resulted in delays in the issuance of required regulatory approvals, the NJBPU's final order concerning restructuring the electricity supply business of ACE, and the closings of the sales of the electric generating units. Effec- tive October 3, 2000, the agreements relating to the sale of the nuclear plants were amended to, among other things, permit separate closings of the sales of the ACE and DPL interests in the nuclear plants. DPL's ownership in- terests in the nuclear electric generating plants were sold on December 29, 2000, as discussed above. On December 6, 2000, the New Jersey Supreme Court affirmed the judgment of the New Jersey Superior Court Appellate Division, which had previously upheld the NJBPU's final order concerning the PSE&G re- structuring. Management currently expects the sales of ACE's nuclear and fos- sil, and DPL's fossil, electric generating plants to take place during 2001. However, management cannot predict the timing of the issuance of required NJBPU approvals, the timing or outcome of appeals, if any, of such approvals, the effect of any of the foregoing on the ability of ACE or DPL to consummate the sales of various electric generating plants or the impact of any of the foregoing on ACE's ability to recover or securitize any related stranded costs. Based on the terms of the restructuring orders and sales agreement with NRG, management expects to recognize a net gain in earnings when the sale of the electric generating plants is completed. There can be no assurances, however, that the sales of the electric generating plants will be completed pursuant to the agreements, or that any gain will be realized from such sales of electric generating plants. As of December 31, 2000, approximately $20 million of costs associated with selling the electric generating plants had been deferred as an adjustment to the expected future gain or loss on the sales. In the event the sales are not completed, these costs would be expensed. NOTE 15. WHOLESALE TRANSACTION CONFIRMATION LETTER AGREEMENTS On October 3, 2000, ACE entered into Wholesale Transaction Confirmation let- ter agreements (Letter Agreements). The Letter Agreements provide for the sale of the electricity output and capacity associated with the ownership interests of ACE in Peach Bottom, Salem, and Hope Creek. PECO and PSEG Energy Resources & Trade LLC (PSER&T), an indirect subsidiary of Public Service Enterprise Group, purchase the electricity output and capacity from ACE under the Letter Agreements. The Letter Agreements became effective October 7, 2000, and termi- nate for each plant upon the earlier of (1) the closing of the sale of the plant, (2) the termination of the agreement relating to the sale of the plant or (3) September 30, 2001. In exchange for the electricity output and capacity purchased from a given plant, PECO and PSER&T reimburse ACE for the nuclear fuel amortized during the term of the Letter Agreements at each plant, and are responsible for the pay- ment of operation and maintenance costs, inventories, capital expenditures (subject, in certain circumstances, to reimbursement by ACE) and certain other liabilities associated with the ownership interests of ACE in each plant. DPL had also entered into Letter Agreements, similar to the agreements en- tered into by ACE, for the sale of the electricity output and capacity associ- ated with the ownership interests of DPL in Peach Bottom and Salem, effective October 7, 2000. DPL's Letter Agreements terminated effective with the sale of DPL's interests in such nuclear plants on December 29, 2000. NOTE 16. NUCLEAR DECOMMISSIONING As discussed in Note 14 to the Consolidated Financial Statements, DPL sold its ownership interests in Peach Bottom and Salem on December 29, 2000. As part of the sales, DPL transferred its decommissioning trust funds and related obligations for decommissioning the plants to the purchasers. As a result, Conectiv's Consolidated Balance Sheet as of December 31, 2000 excludes any amounts for the former decommissioning trust funds and II-58 related decommissioning obligations of DPL. During 2001, ACE is expected to sell its ownership interests in nuclear electric generating plants and trans- fer its decommissioning trust funds and related obligation for decommissioning the plants to the purchasers upon completion of the sales. The portion of the estimated cost of decommissioning nuclear reactors re- lated to ACE's ownership interests and DPL's former ownership interests in nu- clear electric generating plants has been recorded over the estimated lives of the plants based on amounts collected in rates charged to electric customers. ACE estimates its share of future nuclear decommissioning costs ($157 million) based on site-specific studies filed with and approved by the NJBPU. The ulti- mate cost of nuclear decommissioning for ACE's ownership interests in the nu- clear electric generating plants may exceed the estimate. Prior to the sale of its ownership interests in nuclear electric generating plants, DPL had esti- mated its share of nuclear decommissioning costs based on Nuclear Regulatory Commission (NRC) regulations concerning the minimum financial assurance amount for nuclear decommissioning. Conectiv's consolidated balances for nuclear decommissioning liability and related external trust funds decreased from December 31, 1999 to December 31, 2000 due to the sales of DPL's ownership interests in nuclear electric gener- ating plants. Conectiv's consolidated accrued nuclear decommissioning liabili- ty, which is reflected in the accumulated reserve for depreciation, was $109.0 million as of December 31, 2000 and $179.5 million as of December 31, 1999. The provision reflected in depreciation expense for nuclear decommissioning was $0.4 million in 2000, $6.7 million in 1999, and $10.6 million in 1998. Ex- ternal trust funds established for the purpose of funding nuclear decommissioning costs had an aggregate book balance (stated at fair market value) of $109.0 million as of December 31, 2000 and $166.9 million as of De- cember 31, 1999. Earnings on the trust funds are recorded as an increase to the accrued nuclear decommissioning liability, which, in effect, reduces the expense recorded for nuclear decommissioning. The staff of the Securities and Exchange Commission (SEC) has questioned certain of the current accounting practices of the electric utility industry, including Conectiv, regarding the recognition, measurement and classification of decommissioning costs for nuclear generating stations in the financial statements of electric utilities. In February 2000, the FASB issued an expo- sure draft of a new accounting standard that addresses the accounting for ob- ligations associated with the retirement of long-lived assets, such as decommissioning costs of nuclear generating stations. Under this proposed ac- counting standard, the fair value of the decommissioning obligation would be capitalized as part of the cost of the nuclear generating station and recorded as a liability. The cost capitalized would be depreciated over the life of the nuclear generating station. Changes in the liability due to the passage of time would be recorded as interest expense. Changes in the liability resulting from revisions in the timing or amount of cash flows would increase or de- crease the liability and the carrying amount of the nuclear generating sta- tion. Trust fund income from the external decommissioning trusts would be re- ported as investment income under the proposed accounting standard rather than as a reduction of decommissioning expense. NOTE 17. REGULATORY ASSETS AND LIABILITIES In conformity with SFAS No. 71, Conectiv's accounting policies reflect the financial effects of rate regulation and decisions by regulatory commissions having jurisdiction over the regulated utility businesses of DPL and ACE. Reg- ulatory commissions occasionally provide for future recovery from customers of current period expenses. When this happens, the expenses are deferred as regu- latory assets and subsequently recognized in the Consolidated Statement of In- come during the period the expenses are recovered from customers. Similarly, regulatory liabilities may also be created due to the economic impact of an action taken by a regulatory commission. As discussed in Notes 1, 7, and 10 to the Consolidated Financial Statements, in the third quarter of 1999, the electricity supply businesses of ACE and DPL no longer met the requirements of SFAS No. 71. Accordingly, regulatory assets and liabilities related to the electricity supply business were written off, except to the extent that future cost recovery was provided for through the regulated electricity delivery business. A regulatory asset, II-59 "Recoverable stranded costs," was established to recognize amounts to be col- lected from regulated delivery customers for stranded costs that resulted from deregulation of the electricity supply business. The table below displays the regulatory assets and liabilities as of Decem- ber 31, 2000 and December 31, 1999.
December 31, December 31, Regulatory Assets (Liabilities) 2000 1999 - ------------------------------- ------------ ------------ (Millions of Dollars) Recoverable stranded costs.......................... $ 988.2 $1,030.0 Deferred recoverable income taxes................... 84.7 93.9 Deferred debt refinancing costs..................... 20.7 21.1 Unrecovered New Jersey state excise taxes........... 10.4 22.6 Deferred other postretirement benefit costs......... 30.0 32.5 Unrecovered purchased power costs................... 14.5 28.9 Deferred energy supply costs--DPL................... 22.1 8.6 Deferred energy supply costs--ACE................... (34.7) (46.4) Deferred costs for nuclear decommissioning/decontamination.................... 5.1 5.6 Regulatory liability for New Jersey income tax benefit............................................ (49.3) (49.3) Asbestos removal costs.............................. 8.0 8.3 Deferred demand-side management costs............... 2.4 4.1 Other............................................... 2.9 2.7 -------- -------- Total............................................... $1,105.0 $1,162.6 ======== ========
Recoverable Stranded Costs: Represents amounts to be collected from regu- lated delivery customers (net of amounts that have been amortized to expense) for stranded costs which resulted from deregulation of the electricity supply business. Any gain realized on the sale of certain of ACE's electric generat- ing plants will reduce the amount of recoverable stranded costs. The pre-tax balances of $988.2 million as of December 31, 2000 and $1.0 billion as of De- cember 31, 1999 arose from the $228.5 million NUG contract termination payment in 1999, as discussed in Note 11 to the Consolidated Financial Statements, and discontinuing the application of SFAS No. 71 to the electricity supply busi- ness in 1999, as discussed in Note 7 to the Consolidated Financial Statements. Deferred Recoverable Income Taxes: Represents the portion of deferred income tax liabilities applicable to utility operations of DPL and ACE that has not been reflected in current customer rates for which future recovery is proba- ble. As temporary differences between the financial statement and tax bases of assets reverse, deferred recoverable income taxes are amortized. Deferred Debt Refinancing Costs: See "Deferred Debt Refinancing Costs" in Note 1 to the Consolidated Financial Statements. Unrecovered New Jersey State Excise Taxes: Represents additional amounts paid, by ACE, as a result of prior legislative changes in the computation of New Jersey state excise taxes. These costs are included in current customer rates, with the remaining balance scheduled for full recovery over the next 2 years. Deferred Other Postretirement Benefit Costs: Represents the non-cash portion of other postretirement benefit costs deferred by ACE during 1993 through 1997. This cost is being recovered over a 15-year period that began on January 1, 1998. Unrecovered Purchased Power Costs: Includes costs incurred by ACE for rene- gotiation of a long-term capacity and energy contract. These costs are in- cluded in current customer rates with the balance scheduled for full recovery over the next 14 years. The balance as of December 31, 1999 also included $12 million of prior deferrals by ACE of capacity costs; the amortization of these costs to expense expired in 2000. II-60 Deferred Energy Supply Costs: See "Energy Supply Costs" in Note 1 to the Consolidated Financial Statements. Deferred Costs for Nuclear Decommissioning/Decontamination: Represents amounts recoverable from ACE's customers for amounts owed by ACE to the U.S. government for clean-up of gaseous diffusion enrichment facilities pursuant to the Energy Policy Act of 1992. Regulatory Liability for New Jersey Income Tax Benefit: In 1999, a deferred tax asset arising from the write down of ACE's electric generating plants was established. The deferred tax asset represents the future tax benefit expected to be realized when the higher tax basis of the generating plants is deducted for New Jersey state income tax purposes. ACE has requested the New Jersey Di- vision of Taxation to rule on whether or not this tax benefit may be used to reduce the rates charged to ACE's regulated electricity delivery customers for stranded cost recovery. To recognize that this tax benefit probably will be given to ACE's regulated electricity delivery customers through lower electric rates, ACE established a regulatory liability. Asbestos Removal Costs: Represents costs incurred by ACE to remove asbestos insulation from a wholly owned generating station. These costs are included in current customer rates with the balance scheduled for full recovery over the next 29 years. Deferred Demand-Side Management Costs: Represents deferred costs of programs that allow DPL to reduce the peak demand for power. The remaining recovery pe- riod for these costs is 3 years. NOTE 18. CONECTIV COMMON STOCK Significant Transactions Tender Offer Pursuant to a tender offer to purchase shares of Conectiv common stock (the Offer), in June 1999, Conectiv paid $361.4 million (including expenses) to purchase 14,077,466 shares of Conectiv common stock through the Offer at a price of $25.50 per share, which was determined based on procedures described in the Offer. Holders of shares of Class A common stock could participate in the Offer by electing to convert shares of Class A common stock into shares of Conectiv common stock and tendering such shares of Conectiv common stock pur- suant to the Offer. The 14,077,466 shares of Conectiv common stock purchased through the Offer included 1,309,251 shares of Conectiv common stock (1.59997 shares of Conectiv common stock for each share of Class A common stock con- verted) that were issued to and then tendered by holders of 818,297 shares of Class A common stock who elected to convert shares of Class A common stock through the Offer. Buyback programs Conectiv repurchased shares of Conectiv common stock under two buyback pro- grams as follows: 3,411,100 shares for $54.7 million in 2000; 1,670,000 shares for $31.4 million in 1999; and 503,700 shares for $11.3 million in 1998. As of December 31, 2000, 2,760,700 shares of common stock remained authorized for repurchase by the Board of Directors. 1998 Merger See Note 4 to the Consolidated Financial Statements and the Statement of Changes in Common Stockholders' Equity for information concerning changes in common stock due to the 1998 Merger. Other Common Stock Transactions For additional information concerning issuances and redemptions of common stock during 1998 through 2000, see the Consolidated Statements of Changes in Common Stockholders' Equity. II-61 Dividend Payments As discussed in Note 5 to the Consolidated Financial Statements, during the period the Conectiv/Pepco Merger Agreement is in effect, Conectiv's dividend payments cannot exceed $0.22 per share of Conectiv common stock per quarter. In 2000, Conectiv's Board of Directors declared quarterly dividends per share of common stock of $0.22, or $0.88 for the year, which represented ap- proximately 45% of earnings per share of common stock of $1.97. In the second quarter of 1999, Conectiv established the objective of having a dividend pay- out ratio on common stock of 40% to 60% of earnings per share of common stock and also reduced the quarterly dividend from $0.385 per share to $0.22 per share. Restrictions Under PUHCA, Conectiv may not pay dividends on the shares of common stock and Class A common stock from an accumulated deficit or paid-in-capital with- out SEC approval. In the first and second quarters of 2000, Conectiv had accu- mulated deficits and received SEC approval for the payment of quarterly divi- dends on shares of common stock and Class A common stock. Conectiv's common dividends paid to public stockholders are currently funded from the common dividends DPL and ACE pay to Conectiv. Under PUHCA, DPL and ACE are prohibited from paying a dividend from an accumulated deficit or paid- in-capital, unless SEC approval is obtained. Also, certificates of incorpora- tion of DPL and ACE require payment of all preferred dividends in arrears (if any) prior to payment of common dividends to Conectiv, and have certain other limitations on the payment of common dividends to Conectiv. Stock-Based Compensation The Conectiv Incentive Compensation Plan (CICP) provides long-term awards to key employees through awards of stock-based compensation. Up to 5,000,000 shares of common stock may be issued under the CICP during the ten-year period from March 1, 1998, through February 28, 2008. Awards granted under the CICP that can be settled in common stock have included performance accelerated re- stricted stock (PARS), stock options, and performance accelerated stock op- tions (PASO). The number of shares of Conectiv common stock granted as PARS during 1998, 1999, and 2000 were 52,700, 71,500 and 84,100, respectively. The PARS are earned by the participants over a seven-year vesting period unless accelerated vesting occurs, in whole or in part, due to satisfaction of certain conditions required for accelerated vesting. For the PARS shares granted in 1998, 1999, and 2000, there are 22,000, 22,000, and 39,800 respective shares which have an additional condition required for vesting; a total stockholder return of 8% must be earned over the seven years for those shares to vest, unless vesting is accelerated. The fair value per share on grant date of the PARS was $22.84 for the 1998 grant, $24.25 for the 1999 grant, and $16.56 for the 2000 grant. II-62 Changes in stock options and PASO are summarized below.
2000 1999 1998 ------------------ ------------------ ------------------ Weighted Weighted Weighted Number of Average Number of Average Number of Average Shares Price Shares Price Shares Price --------- -------- --------- -------- --------- -------- Beginning-of-year balance................ 1,541,950 $23.28 1,072,150 $22.77 38,500 $20.55 Options exercised....... 11,300 16.56 5,600 20.23 3,200 19.89 Options forfeited....... 159,700 20.07 42,400 22.70 2,150 19.73 Options issued.......... 1,156,900 16.65 367,800 24.29 289,000 22.84 PASO issued............. -- -- 150,000 24.25 750,000 22.84 PASO forfeited.......... 150,000 22.84 -- -- -- -- End-of-year balance..... 2,377,850 20.33 1,541,950 23.28 1,072,150 22.77 Exercisable............. 141,600 22.46 11,950 20.11 33,150 20.67
The stock options shown in the table above have a ten-year life, with 50% of the options vesting after two years and the remaining 50% vesting after three years. The PASO shown in the table above have a ten-year life and vest after nine and a half years. One third of the PASO will vest if Conectiv's common stock price closes at or above $26 per share for ten consecutive days, two thirds will vest if the stock price closes at or above $28 per share for ten consecutive days, and all of the PASO will vest if the stock price closes at or above $30 per share for ten consecutive days. For options and PASO out- standing as of December 31, 2000, the range of exercise prices was $16.56 to $24.75, and the weighted average remaining contractual life was 8.0 years. Conectiv recognizes compensation costs for its stock-based employee compen- sation plans based on the accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25). Stock-based employee compensation costs charged to expense were $(0.2) million in 2000, $1.8 million in 1999, and $0.9 million in 1998. The $0.2 million ex- pense credit for 2000 includes the reversal of stock compensation expense pre- viously accrued under APB 25 for PARS granted in 1997, which will not be awarded to employees because the performance criteria were not met. Pro forma net income (loss), based on the application of SFAS No. 123, "Accounting for Stock-Based Compensation," was $169.760 million for 2000, $(199.306) million for 1999, and $152.676 million for 1998. Pro forma earnings (loss) per share of Conectiv common stock was $1.96 for 2000, $(2.03) for 1999, and $1.49 for 1998. The fair values of each option and PASO granted in 2000, 1999 and 1998, es- timated on the date of grant using the Black Scholes option pricing model, and related valuation assumptions are as follows:
2000 1999 1998 ----- ----- ----- Weighted Average Fair Value Per Option.................. $2.33 $3.38 $2.64 Weighted Average Fair Value Per PASO.................... -- $3.93 $2.87 Expected Option Term (years)............................ 3.5 3.5 3.5 Expected PASO Term (years).............................. -- 5.5 5.3 Expected Volatility..................................... 20.0% 20.0% 20.0% Expected Dividend Yield................................. 5.0% 4.0% 6.0% Risk-free Interest Rate................................. 6.2% 4.7% 5.6%
Stockholders Rights Plan Under Conectiv's Stockholders Rights Plan (Plan), holders of Conectiv common stock and holders of Conectiv Class A common stock were granted preferred stock purchase rights on May 11, 1998, by means of a dividend at the rate of one Right for each share of common stock and one Right for each share of Class A common stock held. The Rights expire in 10 years. The purpose of the Plan is to guard against partial tender offers or abusive or unfair tactics that might be used in an attempt to gain control of Conectiv without paying all stockholders a fair price for their shares. The II-63 Plan will not prevent takeovers, but is designed to deter coercive, abusive, or unfair takeover tactics and to encourage individuals or entities attempting to acquire Conectiv to negotiate first with the Board of Directors. Each Right would, after the Rights become exercisable, entitle the holder to purchase from Conectiv one one-hundredth of one share of Series One Junior Preferred Stock or one one-hundredth of one share of Series Two Junior Pre- ferred Stock at an initial price of $65. The Rights will be exercisable only if a person or group acquires beneficial ownership of 15% or more of the ag- gregate voting power represented by Conectiv's outstanding securities (i.e., becomes an "Acquiring Person" as defined in the Plan) or commences a tender or exchange offer to acquire beneficial ownership of 15% or more of the aggregate voting power represented by Conectiv's outstanding securities. Conectiv gener- ally will be entitled to redeem the Rights at $.01 per Right at any time be- fore a person or group becomes an Acquiring Person. NOTE 19. CONECTIV CLASS A COMMON STOCK General Conectiv Class A common stock provides its holders a proportionately greater opportunity to share in the growth prospects of, and a proportionately greater exposure to the uncertainties associated with, the electric utility business of ACE. Earnings applicable to Class A common stock are equal to a percentage of "Company Net Income Attributable to the Atlantic Utility Group," which is earnings of the Atlantic Utility Group (AUG) less $40 million per year. The AUG includes the assets and liabilities of the electric generation, transmis- sion, and distribution businesses of ACE that existed on August 9, 1996 and were regulated by the NJBPU. Effective July 1, 2000, ACE contributed electric generation assets to a newly formed subsidiary, Conectiv Atlantic Generation LLC (CAG), which is part of the AUG. The percentage of "Company Net Income At- tributable to the Atlantic Utility Group" that is applicable to Class A common stock is the "Outstanding Atlantic Utility Fraction" (as defined in Conectiv's Restated Certificate of Incorporation). The Outstanding Atlantic Utility Frac- tion was 27.3% as of December 31, 2000 and 1999, and 30.0% as of December 31, 1998. Certain circumstances, as specified in the Restated Certificate of Incorpo- ration of Conectiv, result in an adjustment to the Outstanding Atlantic Util- ity Fraction. As discussed in Note 18 to the Consolidated Financial State- ments, the number of shares of Class A common stock outstanding decreased by 818,297 as a result of the Offer. Due to this reduction in the number of shares of Class A common stock outstanding and in accordance with the Restated Certificate of Incorporation of Conectiv, the Outstanding Atlantic Utility Fraction decreased to 27.3% in June 1999, when the Offer was completed. The earnings of the AUG have been affected by the implementation of the Sum- mary Order in New Jersey, including the rate decreases required by the Summary Order. (See Note 10 to the Consolidated Financial Statements for information concerning the Summary Order.) The planned sales of most of ACE's electric generating plants are expected to decrease the earnings capacity of the AUG. The extent of the decrease in earnings capacity will be affected by how the proceeds from the sales of the generating plants are utilized. (See Note 14 to the Consolidated Financial Statements for information concerning agreements for the sale of the electric generating plants of ACE and DPL.) Management ex- pects the proceeds from the planned sales of the electric generating plants of ACE and DPL will be used to repay debt and to fund expansion of the mid-merit generation business. Under certain circumstances, the percentage of "Company Net Income Attributable to the Atlantic Utility Group" applicable to Class A common stock may be adjusted. Dividend Payments Conectiv's Board of Directors intends that the quarterly dividend on shares of Class A common stock will remain $0.80 per share ($3.20 annualized rate) until March 31, 2001 (the "Initial Period"), subject to declaration by Conectiv's Board of Directors and the obligations of Conectiv's Board of Di- rectors to consider the financial condition and regulatory environment of Conectiv and the results of its operations; and also subject to the limita- tions under applicable law and the provisions of Conectiv's Restated Certifi- cate of Incorporation. II-64 As disclosed at the time of the 1998 Merger, Conectiv intends, following the Initial Period, subject to declaration by Conectiv's Board of Directors and the obligation of the Board of Directors to consider the financial condition and regulatory environment of Conectiv and the results of its operations, to pay annual dividends on the Class A common stock at a rate equal to 90% of annualized earnings of the Class A common stock (taking into account the notional fixed charge of $40 million per year in accordance with Conectiv's Restated Certificate of Incorporation). Notwithstanding Conectiv's intention with respect to dividends on the Class A common stock following the Initial Period, if and to the extent that the annual dividends paid on the Class A common stock during the Initial Period exceed the earnings that were applica- ble to the Class A common stock during the Initial Period, Conectiv's Board of Directors may consider such fact in determining the appropriate annual divi- dend rate on the Class A common stock following the Initial Period. Management expects that during the Initial Period the earnings applicable to Class A com- mon stock will be less than the dividends on the Class A common stock. Divi- dends declared per share of Class A common stock were $3.20 for 2000, $3.20 for 1999 and $3.20 for 1998. In comparison, earnings excluding special charges and the extraordinary item which were applicable to Class A common stock were $1.06 for 2000, $1.44 for 1999 and $1.82 for 1998. As discussed in Note 5 to the Consolidated Financial Statements, after March 31, 2001 and during the period the Conectiv/Pepco Merger Agreement is in ef- fect, dividends on Conectiv Class A common stock may be paid at an annual rate up to 90% of annualized earnings of Class A common stock. Computation of Earnings Applicable to Conectiv Class A Common Stock
Twelve Months Ended Ten Months December 31, Ended ------------------ December 31, 2000 1999 1998 -------- -------- ------------ (Dollars in Thousands) Net earnings of ACE [1]...................... $ 52,302 $ 3,703 $ 23,742 Exclude non-utility activities of ACE........ 189 1,712 1,402 Exclude 1998 Merger-related costs............ -- 837 47,886 Net earnings of CAG.......................... 9,895 -- -- -------- -------- -------- Net income of the AUG........................ 62,386 6,252 73,030 Pro-rata portion of fixed amount of $40 million per year............................ (40,000) (40,000) (33,333) -------- -------- -------- Company Net Income (Loss) Attributable to the AUG......................................... 22,386 (33,748) 39,697 Percentage applicable to Class A Common Stock [2]......................................... 27.3% 28.5% 30.0% -------- -------- -------- Earnings (loss) applicable to Class A Common Stock....................................... $ 6,111 $ (9,618) $ 11,909 ======== ======== ======== Earnings (loss) applicable to Class A Common Stock Before extraordinary item [3].............. $ 6,111 $ 6,939 $ 11,909 Extraordinary item [4]..................... -- (16,557) -- -------- -------- -------- $ 6,111 $ (9,618) $ 11,909 ======== ======== ========
- -------- [1] Under the purchase method of accounting, the 1998 Conectiv Consolidated Statement of Income includes ten months of ACE's operating results from March 1, 1998 to December 31, 1998. [2] The percentage applicable to Class A common stock (the Outstanding Atlan- tic Utility Fraction) in a reporting period is a weighted average based on the number of days the percentage was in effect during the reporting peri- od. [3] After "Special charges" of $1.9 million for 1999, as discussed in Note 6 to the Consolidated Financial Statements. [4] Represents the portion of the extraordinary item recorded by ACE, as dis- cussed in Note 7 to the Consolidated Financial Statements, applicable to Class A common stock based on the Outstanding Atlantic Utility Fraction in 1999. II-65 Summarized Combined Financial Information of ACE and CAG
Twelve Months Ended Ten Months December 31, Ended --------------------- December 31, Income Statement Information [1] 2000 1999 1998 - -------------------------------- ---------- ---------- ------------ (Dollars in Thousands) Operating Revenues........................ $1,003,552 $1,076,585 $875,741 Operating Income [2]...................... 183,011 171,931 105,099 Income before extraordinary item [2]...... 64,329 63,930 23,940 Extraordinary item, net of income taxes [3]...................................... -- (58,095) -- Earnings applicable to common stock....... 62,197 3,703 23,742
- -------- [1] Under the purchase method of accounting, the 1998 Conectiv Consolidated Statement of Income includes ten months of ACE's operating results from March 1, 1998 to December 31, 1998. [2] In 1999, special charges for employee separations, additional 1998 Merger costs, and certain other items reduced ACE's operating income by $12.3 million and income before extraordinary item by $7.3 million. For the ten months ended December 31, 1998, employee separation and other 1998 Merger- related costs reduced ACE's operating income by $80.1 million and income before extraordinary item by $47.9 million. In the Conectiv Consolidated Financial Statements, ACE's employee separation and other 1998 Merger- related costs were capitalized as costs of the 1998 Merger. [3] For information concerning the extraordinary item, refer to Note 7 to the Consolidated Financial Statements.
Balance Sheet Information - ------------------------- As of December 31, --------------------- --- 2000 1999 ---------- ---------- (Dollars in Thousands) Current assets........................................ $ 348,958 $ 340,774 Noncurrent assets..................................... 2,239,297 2,313,885 ---------- ---------- Total assets.......................................... $2,588,255 $2,654,659 ========== ========== Current liabilities................................... $ 308,801 $ 300,837 Noncurrent liabilities................................ 1,481,548 1,550,690 Preferred Stock....................................... 125,181 125,181 Common stockholders' equity........................... 672,725 677,951 ---------- ---------- Total capitalization and liabilities.................. $2,588,255 $2,654,659 ========== ==========
Conversion and Redemption Provisions Relating to Class A Common Stock Conectiv may at any time convert each share of Conectiv Class A common stock into the number of shares of Conectiv common stock equal to a specified per- centage set forth in Conectiv's Restated Certificate of Incorporation of the Market Value Ratio of Conectiv Class A common stock to Conectiv common stock (as defined in the Conectiv Restated Certificate of Incorporation). If the holders of more than 50% of the Conectiv Class A common stock accept a tender offer by Conectiv for all of the Conectiv Class A common stock for either (a) a cash price of at least 110% of the market price of Conectiv Class A common stock, or (b) a number of shares of Conectiv common stock equal to at least 110% of the Market Value Ratio of Conectiv Class A common stock to Conectiv common stock, then, based on terms specified in the Conectiv Restated Certificate of Incorporation, Conectiv may either redeem each share of Conectiv Class A common stock remaining outstanding for cash or convert each share of Conectiv Class A common stock remaining outstanding into shares of Conectiv common stock. If any person (including Conectiv) consummates a tender offer for all of the outstanding shares of Conectiv common stock at an all cash price that is ac- cepted by the holders of more than 50% of Conectiv common stock, Conectiv may, based on terms specified in the Conectiv Restated Certificate of Incorpora- tion, either redeem each share of Conectiv Class A common stock for cash or convert each share of Conectiv Class A common stock into shares of Conectiv common stock. II-66 If any person (including Conectiv) makes a tender offer to purchase shares of Conectiv common stock for cash, property, or other securities, any holder of Conectiv Class A common stock may elect to convert shares of Conectiv Class A common stock into shares of Conectiv common stock based on terms specified in the Conectiv Restated Certificate of Incorporation. Upon the disposition of all or substantially all (as defined in the Conectiv Restated Certificate of Incorporation) of the assets attributed to the AUG to an entity that is not controlled by Conectiv, the Conectiv Restated Certifi- cate of Incorporation provides for the payment of a dividend to holders of Conectiv Class A common stock or redemption of some or all of the shares of Conectiv Class A common stock or conversion of shares of Conectiv Class A com- mon stock into shares of Conectiv common stock, in each case subject to the terms specified in the Conectiv Restated Certificate of Incorporation. Allocation of Consideration in a Subsequent Merger If there is a merger subsequent to the 1998 Merger described in Note 4 to the Consolidated Financial Statements (subsequent merger), Conectiv's Restated Certificate of Incorporation provides for an allocation of the consideration between Conectiv common stock and Conectiv Class A common stock. In the event of such a subsequent merger, the holders of shares of Conectiv Class A common stock are entitled to receive, in exchange for each share held, consideration equal to a "Market Value Ratio" of the consideration for one share of Conectiv common stock. The Market Value Ratio is determined in accordance with the pro- visions of Conectiv's Restated Certificate of Incorporation and is based on a ratio of the trading prices of Conectiv Class A common stock to Conectiv com- mon stock during a 20 day period immediately preceding announcement of the subsequent merger. NOTE 20. PREFERRED STOCK AND SECURITIES Conectiv (the parent holding company), ACE, and DPL are each authorized to separately issue preferred stock. Conectiv is authorized to issue 20,000,000 shares of $0.01 per share par value preferred stock, none of which has been issued. ACE is authorized to issue 799,979 shares of $100 par value Cumulative Preferred Stock, 2,000,000 shares of No Par Preferred Stock, and 3,000,000 shares of Preference Stock. DPL has $1, $25, and $100 par value per share pre- ferred stock for which 10,000,000, 3,000,000, and 1,800,000 shares are autho- rized, respectively. Dividends on ACE and DPL preferred stock are cumulative. Information concerning shares of preferred stock outstanding is shown below. Preferred Stock of Subsidiaries Not Subject to Mandatory Redemption The amounts outstanding as of December 31, 2000, and 1999 of DPL's and ACE's preferred stock not subject to mandatory redemption are presented below.
Shares Current Outstanding Amount Redemption --------------- --------------- Series Issuer Price 2000 1999 2000 1999 - ------ ------------------------ --------------- ------- ------- ------- ------- (Dollars in Thousands) ACE $100 per share par value 4.00%-5.00% $100.00-$105.50 62,305 62,305 $ 6,230 $ 6,230 DPL $25 per share par value 7 3/4% (1) 316,500 316,500 7,913 7,913 DPL $100 per share par value 3.70%-5.00% $103.00-$105.00 181,698 181,698 18,170 18,170 6 3/4% (2) 35,000 35,000 3,500 3,500 Adjustable rate (3) $100 151,200 151,200 15,120 15,120 Auction rate (4) $100 450,000 450,000 45,000 45,000 ------- ------- $95,933 $95,933 ======= =======
- -------- (1) Redeemable beginning September 30, 2002, at $25 per share. (2) Redeemable beginning November 1, 2003, at $100 per share. (3) Average rates were 5.5% during 2000 and 5.5% during 1999. (4) Average rates were 5.1% during 2000 and 4.3% during 1999. II-67 In the fourth quarter of 1998, ACE purchased and retired 237,695 shares, or $23.8 million, of various series of $100 per share par value preferred stock, which had an average dividend rate of 4.4%. A $2.5 million gain on the redemp- tion is presented in the 1998 Consolidated Statement of Income as a reduction of Preferred Stock Dividend Requirements of Subsidiaries. Preferred Stock and Securities of Subsidiaries Subject to Mandatory Redemption The amounts outstanding as of December 31, 2000, and 1999 of Conectiv's sub- sidiaries preferred stock and securities subject to mandatory redemption are presented below.
Shares Outstanding Amount ------------------- ----------------- Issuer Series 2000 1999 2000 1999 ------ --------------------- --------- --------- -------- -------- (Dollars in Thousands) DPL financing trust (1).................... $25 per share, 8.125% 2,800,000 2,800,000 $ 70,000 $ 70,000 ACE (2)................. $100 per share, $7.80 239,500 239,500 23,950 23,950 ACE financing trust (1).................... $25 per share, 8.25% 2,800,000 2,800,000 70,000 70,000 ACE financing trust (1).................... $25 per share, 7.375% 1,000,000 1,000,000 25,000 25,000 -------- -------- $188,950 $188,950 ======== ========
- -------- (1) Per share value is stated liquidation value. See additional information below. (2) No par value; stated value is $100 per share. Beginning May 1, 2001, 115,000 shares are subject to mandatory redemption annually. On August 3, 1998, ACE redeemed the remaining 100,000 shares of its $8.20 No Par Preferred Stock at $100 per share, or $10.0 million total book value. In November 1998, a financing subsidiary trust owned by ACE issued $25 mil- lion (1,000,000 shares) of 7.375% preferred stock. DPL and ACE have established wholly owned financing subsidiary trusts for the purposes of issuing common and preferred trust securities and holding Junior Subordinated Debentures (the Debentures) issued by DPL and ACE, respectively. The Debentures held by the trusts are their only assets. The trusts use inter- est payments received on the Debentures they hold to make cash distributions on the trust securities. The obligations of DPL and ACE pursuant to the Debentures and guarantees of distributions with respect to the trusts' securities, to the extent the trusts have funds available therefor, constitute full and unconditional guarantees of the obligations of the trusts under the trust securities the trusts have is- sued. DPL and ACE own all of the common securities of the trusts, which consti- tute approximately 3% of the liquidation amount of all of the trust securities issued by the trusts. For consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's investment in the Debentures. The pre- ferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures mature in 2026 to 2036. The Debentures are subject to redemption, in whole or in part, at the op- tion of DPL and/or ACE, at 100% of their principal amount plus accrued inter- est, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events. NOTE 21. DEBT Substantially all utility plant of DPL and ACE are subject to the liens of the Mortgages collateralizing First Mortgage Bonds issued by DPL and ACE. The mortgage indentures of DPL and ACE require that the electric generating plants being sold (as discussed in Note 14 to the Consolidated Financial Statements) be released from the liens of the respective mortgages. These assets may be re- leased with a combination of cash, bondable property additions and credits rep- resenting previously issued and retired first mortgage bonds. Both ACE and DPL have sufficient bondable property additions and retired first mortgage bonds to release such assets at fair values. Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 2001--$100.7 million; 2002--$370.5 million; 2003-- $212.3 million; 2004--$154.5 million; and 2005--$82.8 million. II-68 As of December 31, 2000, Conectiv (the holding company) had a $300 million credit agreement with a five-year term that expires in February 2003 and a $730 million credit agreement with a one-year term that expires in April 2001. Conectiv expects to renew the $730 million credit agreement. As of December 31, 2000, Conectiv's credit agreements required a ratio of total indebtedness to total capitalization of 70% or less and the ratio was 64%, computed in ac- cordance with the terms of the credit agreements. DPL has a $150 million re- volving credit facility that expires January 31, 2003 and provides liquidity for DPL's $104.8 million of Variable Rate Demand Bonds and general corporate purposes. On a consolidated basis, $468 million was available for borrowing as of December 31, 2000 under the various credit agreements and credit lines. Conectiv had a $709.5 million consolidated short-term debt balance (average interest rate of 7.4%) as of December 31, 2000, compared to a $579.7 million consolidated short-term debt balance (average interest rate of 6.4%) as of De- cember 31, 1999. The $129.8 million increase was primarily due to financing capital expenditures and purchases of Conectiv common stock. ACE borrowed $228.5 million under a revolving credit facility on December 28, 1999 to provide interim financing for a payment made to terminate a NUG purchased power contract with Pedricktown, as discussed in Note 11 to the Con- solidated Financial Statements. In December 2000, ACE exercised its option to convert the revolving loan balance to a term loan, which is due in two in- stallments; (1) 25% of the principal balance is due December 20, 2001, and (2) the remaining term loan principal is due December 20, 2002. ACE intends to re- pay this debt with proceeds from the expected issuance of transition bonds, which are discussed Note 10 to the Consolidated Financial Statements. ACE redeemed $46.0 million of 6.83% Medium Term Notes at maturity on January 26, 2000. DPL redeemed $2.1 million of 7 1/8% Pollution Control Bonds on Feb- ruary 1, 2000 and $1.4 million of 6.95% Amortizing First Mortgage Bonds on June 1, 2000. On behalf of DPL, the Delaware Economic Development Authority issued the bonds listed below on July 7, 2000, and loaned the proceeds to DPL. The bonds are not secured by a mortgage or security interest in property of DPL.
Interest Principal Series Maturity Date Rate --------- ----------------------------------- ------------- -------- ($000) Exempt Facilities Refunding Revenue $11,150 Bonds, Series 2000A July 1, 2030 Variable (1) Exempt Facilities Refunding Revenue 27,750 Bonds, Series 2000B July 1, 2030 Variable (1) Pollution Control Refunding Revenue 15,000 Bonds, Series 2000C July 1, 2025 (2) 5.5% Pollution Control Refunding Revenue 16,240 Bonds, Series 2000D July 1, 2028 (2) 5.65% ------- $70,140 =======
- -------- (1) The interest rates on these bonds are set by either auction or remarketing procedures for periods specified by DPL, which may be daily, weekly or other periods, including long-term periods extending up to the bonds' ma- turity date. The bonds may be subject to optional redemption prior to ma- turity as provided for in the indenture for the bonds. (2) The bonds are subject to mandatory tender on July 1, 2010. All or a por- tion of the tendered bonds may be redeemed and/or remarketed. After July 1, 2010, the bonds may bear interest at a variable rate or fixed rate and may be subject to optional redemption prior to maturity, as provided for in the indenture for the bonds. II-69 The proceeds from the issuance of the bonds listed above and additional cash were used to redeem $70.17 million of bonds, which are listed below. The bonds were called at 101.5% to 102% of their principal amount.
Principal Series Redemption Date Interest Rate --------- -------------------------------- --------------- ------------- ($000) Exempt Facilities Revenue Bonds, $11,170 Series 1985 September 1, 2000 7.3% Exempt Facilities Revenue Bonds, 35,000 Series 1990A September 1, 2000 7.6% Pollution Control Refunding 15,000 Revenue Bonds, Series 1990B September 1, 2000 7.3% Exempt Facilities Revenue Bonds, 9,000 Series 1989 October 1, 2000 7.5% ------- $70,170 =======
As a registered holding company under PUHCA, Conectiv is required to obtain SEC authorization for certain financing transactions. In December 2000, Conectiv filed a request with the SEC to increase the authorized short-term debt borrowing capacity for Conectiv (the holding company) from $1.3 billion (including the short-term debt of DPL) to $2.0 billion (excluding the short- term debt of DPL). The SEC has "reserved jurisdiction," or withheld approval pending additional filings, over Conectiv's previous request for the authority to issue up to $750 million of additional long-term debt. Under existing SEC financing orders, Conectiv is permitted to issue securities, other than long- term debt, if the ratio of consolidated common equity to total capitalization (common equity ratio) is 20% or higher. Based on a recently issued SEC order to another holding company under PUHCA, management believes that the SEC will au- thorize the issuance of additional long-term debt by Conectiv when the common equity ratio is 30% or higher. PUHCA regulations prohibit the parent holding-company (Conectiv), from bor- rowing from its subsidiaries. II-70 Long-term debt outstanding as of December 31, 2000, and 1999 is presented below:
Type of Debt Interest Rates Due 2000 1999 - ------------ -------------- --------- ---------- ---------- (Dollars in Thousands) First Mortgage Bonds: 6.95% 2002 $ 30,000 $ 30,000 6.40% 2003 90,000 90,000 6.63%-8.15% 2011-2015 135,600 161,770 5.90%-7.30% 2017-2021 108,200 152,200 6.85%-8.50% 2022-2025 227,500 227,500 6.05%-7.00% 2028-2032 90,000 90,000 Amortizing First Mortgage Bonds 6.95% 2001-2008 21,517 22,962 ---------- ---------- 702,817 774,432 ---------- ---------- Pollution Control Bonds and Notes 7.25% 2001 550 2,700 6.38% 2001-2006 2,200 2,275 6.80% 2021 38,865 38,865 5.50%-7.20% 2025-2029 (1) 89,890 58,650 ---------- ---------- 131,505 102,490 ---------- ---------- Medium-Term Notes (secured): 6.83% 2000 -- 46,000 6.86% 2001 40,000 40,000 7.02% 2002 30,000 30,000 6.00%-7.20% 2003 40,000 40,000 6.18%-7.98% 2004-2008 223,000 223,000 7.25%-7.63% 2010-2014 8,000 8,000 7.68% 2015-2016 17,000 17,000 ---------- ---------- 358,000 404,000 ---------- ---------- Medium-Term Notes (unsecured): 6.46%-9.29% 2002 136,000 136,000 6.63%-6.73% 2003 80,000 80,000 6.73%-8.30% 2004 85,000 85,000 6.73%-6.84% 2005 40,000 40,000 6.73%-6.75% 2006 40,000 40,000 7.06%-8.13% 2007 106,500 106,500 7.54%-7.62% 2017 40,700 40,700 6.81% 2018 33,000 33,000 7.61%-9.95% 2019-2021 73,000 73,000 7.72% 2027 30,000 30,000 ---------- ---------- 664,200 664,200 ---------- ---------- Other Obligations: 7.32% 2001 57,125 57,125 7.32% 2002 171,375 171,375 9.65% 2001-2002 2,380 4,256 Variable 2030 38,900 -- Unamortized premium and discount, net (3,792) (4,043) Current maturities of long-term debt (100,721) (48,937) ---------- ---------- Total long-term debt 2,021,789 2,124,898 Variable Rate Demand Bonds (2) 158,430 158,430 ---------- ---------- Total long-term debt and Variable Rate Demand Bonds $2,180,219 $2,283,328 ========== ==========
- -------- (1) $31.24 million of the $89.89 million of the bonds listed above are subject to mandatory tender on July 1, 2010. All or a portion of such tendered bonds may be redeemed and/or remarketed. (2) The debt obligations of Conectiv's subsidiaries included $158.4 million of Variable Rate Demand Bonds (VRDB) as of December 31, 2000 and 1999. The VRDB are classified as current liabilities because the VRDB are due on de- mand by the bondholder. However, bonds submitted to Conectiv's subsidiar- ies for purchase are remarketed by a remarketing agent on a best efforts basis. Management expects that bonds submitted for purchase will continue to be remarketed successfully due to the credit worthiness of Conectiv's subsidiaries and the bonds' interest rates being set at market. Conectiv's subsidiaries also may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, management considers the VRDB to be a source of long-term financing. The $158.4 million balance of VRDB outstanding as of December 31, 2000, matures in 2009 ($12.5 million), 2014 ($18.2 mil- lion), 2017 ($30.4 million), 2024 ($33.33 million); 2028 ($15.5 million), 2029 ($30.0 million) and 2031 ($18.5 million). Average annual interest rates on the VRDB were 4.1% in 2000 and 3.3% in 1999. II-71 NOTE 22. FAIR VALUE OF FINANCIAL INSTRUMENTS The year-end fair values of certain financial instruments are listed below. The fair values were based on quoted market prices of Conectiv's securities or securities with similar characteristics.
2000 1999 --------------------- --------------------- Carrying Fair Carrying Fair Amount Value Amount Value ---------- ---------- ---------- ---------- (Dollars in Thousands) Funds held by trustee........... $ 122,387 $ 122,387 $ 173,247 $ 173,247 Preferred stock and securities of subsidiaries subject to mandatory redemption........... $ 188,950 $ 187,283 $ 188,950 $ 163,900 Long-term debt.................. $2,021,789 $2,018,853 $2,124,898 $2,075,510
NOTE 23. LONG-TERM PURCHASED POWER CONTRACTS As of December 31, 2000, the commitments of Conectiv's subsidiaries under long-term purchased power contracts included 1,421 MW of capacity and varying amounts of firm electricity per hour during each month of a given year. As discussed in Note 7 to the Consolidated Financial Statements, the net present value of expected losses under uneconomic purchased power contracts that ex- isted when electric utility deregulation occurred in the third quarter of 1999 was included in the extraordinary item recorded in 1999. Based on existing contracts as of December 31, 2000, the commitments of Conectiv's subsidiaries during the next five years for capacity and energy under long-term purchased power contracts are estimated to be as follows: $445 million in 2001, $413 million in 2002; $312 million in 2003; $297 million in 2004; and $328 million in 2005. The terms of DPL's wholly owned electric generating plant sale agreement discussed in Note 14 to the Consolidated Financial Statements provide for DPL to purchase from NRG 500 MWH of firm electricity per hour from completion of the sale through December 31, 2005. This planned power purchase is excluded from the commitments discussed above, since it is contingent upon completion of the sale of the electric generating plants. NOTE 24. LEASES Nuclear Fuel As discussed in Note 14 to the Consolidated Financial Statements, DPL sold its ownership interests in Peach Bottom and Salem and the related nuclear fuel on December 29, 2000. Prior to the sales, the ownership interests of DPL in nuclear fuel at Peach Bottom and Salem were financed through nuclear fuel en- ergy contracts, which were accounted for as capital leases. DPL's obligations under the contracts were repaid on December 29, 2000 with proceeds from the sale. ACE has similar contracts in place, which are considered capital leases, to finance its ownership interest in the nuclear fuel at Peach Bottom, Salem, and Hope Creek. Payments under these contracts are based on the quantity of nuclear fuel burned by the plants. ACE's obligations under the contracts are generally the net book values of the nuclear fuel financed, which was $28.4 million, in total, as of December 31, 2000. As discussed in Note 14 to the Consolidated Financial Statements, there are agreements for the sale of the ownership interests of ACE in the nuclear power plants, under which ACE's in- terest in the nuclear fuel is to be sold at its net book value. Lease Commitments DPL leases an 11.9% interest in the Merrill Creek Reservoir. The lease is an operating lease and payments over the remaining lease term, which ends in 2032, are $139.1 million in aggregate. As discussed in Note 7 to the Consoli- dated Financial Statements, the net present value of water-supply capacity from the Merrill Creek Reservoir in excess of the electric generating plants' requirements that existed when electric utility deregulation occurred was in- cluded in the extraordinary item in the third quarter of 1999. DPL, ACE and other Conectiv II-72 subsidiaries also have long-term leases for certain other facilities and equipment. Minimum commitments as of December 31, 2000, under the Merrill Creek Reservoir lease and other lease agreements (excluding payments under the nuclear fuel energy contracts, which cannot be reasonably estimated) are as follows: 2001--$19.7 million; 2002--$20.7 million; 2003--$23.0 million; 2004-- $20.4 million; 2005--$19.2 million; after 2005--$134.0 million; total--$237.0 million. Rentals Charged To Operating Expenses The following amounts were charged to operating expenses for rental payments under both capital and operating leases.
2000 1999 1998 ------- ------- ------- (Dollars in Thousands) Interest on capital leases............................. $ 3,297 $ 2,466 $ 2,468 Amortization of capital leases......................... 23,029 24,237 19,554 Operating leases....................................... 31,230 22,344 17,443 ------- ------- ------- $57,556 $49,047 $39,465 ======= ======= =======
Leveraged Leases The leveraged leases of Conectiv's subsidiaries included four airplane leases and two container-ship leases as of December 31, 2000. During 2000, the leveraged lease of one airplane was sold. During 1999, declines in the esti- mated residual values of the airplanes and cargo container-ships leased by Conectiv's subsidiaries to third parties under leveraged leases resulted in a write-down of the investments in leveraged leases by $43.7 million before taxes ($26.7 million after taxes). The net investment in leveraged leases as of December 31, 2000, and 1999 was as follows:
2000 1999 -------- -------- (Dollars in Thousands) Rentals receivable (net of principal and interest on nonrecourse debt)........................................ $ 48,243 $ 66,771 Estimated residual value.................................. 6,752 9,234 Unearned and deferred income.............................. (1,289) (3,844) -------- -------- Investment in leveraged leases............................ 53,706 72,161 Deferred income tax liability............................. 69,354 87,669 -------- -------- Net investment in leveraged leases........................ $(15,648) $(15,508) ======== ========
NOTE 25. PENSION AND OTHER POSTRETIREMENT BENEFITS Assumptions
2000 1999 1998 ----- ----- ----- Discount rates used to determine projected benefit obligation as of December 31............................... 7.50% 7.75% 6.75% Expected long-term rates of return on assets................ 9.50% 9.00% 9.00% Rates of increase in compensation levels.................... 4.50% 4.50% 4.50% Health-care cost trend rate on covered charges.............. 8.00% 6.50% 7.00%
The health-care cost trend rate, or the expected rate of increase in health- care costs, is assumed to gradually decrease to 5.0% by 2004. Increasing the health-care cost trend rates of future years by one percentage point would in- crease the accumulated postretirement benefit obligation by $10.1 million and would increase annual aggregate service and interest costs by $0.9 million. Decreasing the health-care cost trend rates of future years by one percentage point would decrease the accumulated postretirement benefit obligation by $10.5 million and would decrease annual aggregate service and interest costs by $1.0 million. II-73 The following schedules reconcile the beginning and ending balances of the pension and other postretirement benefit obligations and related plan assets for Conectiv. Other postretirement benefits include medical benefits for re- tirees and their spouses and retiree life insurance. Change in Benefit Obligation
Other Postretirement Pension Benefits Benefits ---------------------- ------------------ 2000 1999 2000 1999 ---------- ---------- -------- -------- (Dollars in Thousands) Benefit obligation at beginning of year............................. $ 673,095 $ 748,689 $194,031 $232,374 Service cost...................... 18,388 20,288 3,908 5,282 Interest cost..................... 51,856 51,442 14,513 13,839 Plan participants' contributions.. -- -- 511 500 Plan amendment.................... 4,359 -- -- -- Actuarial (gain) loss............. 12,689 (75,244) 5,500 (43,861) Benefits paid..................... (66,438) (64,671) (16,970) (9,436) Other............................. 672 (7,409) -- (4,667) ---------- ---------- -------- -------- Benefit obligation at end of year............................. $ 694,621 $ 673,095 $201,493 $194,031 ========== ========== ======== ======== Change in Plan Assets Other Postretirement Pension Benefits Benefits ---------------------- ------------------ 2000 1999 2000 1999 ---------- ---------- -------- -------- (Dollars in Thousands) Fair value of assets at beginning of year.......................... $1,017,844 $ 951,474 $120,072 $ 95,164 Actual return on plan assets...... (3,363) 138,450 166 13,494 Employer contributions............ -- -- 15,945 25,017 Plan participants' contributions.. -- -- 511 500 Benefits paid..................... (66,438) (64,671) (16,970) (9,436) Other............................. -- (7,409) -- (4,667) ---------- ---------- -------- -------- Fair value of assets at end of year............................. $ 948,043 $1,017,844 $119,724 $120,072 ========== ========== ======== ======== Reconciliation of Funded Status of the Plans Other Postretirement Pension Benefits Benefits ---------------------- ------------------ 2000 1999 2000 1999 ---------- ---------- -------- -------- (Dollars in Thousands) Funded status at end of year...... $ 253,422 $ 344,749 $(81,769) $(73,959) Unrecognized net actuarial (gain)........................... (181,008) (300,864) (46,246) (63,286) Unrecognized prior service cost... 7,794 4,129 149 198 Unrecognized net transition (asset) obligation............... (10,245) (13,009) 37,531 40,659 ---------- ---------- -------- -------- Net amount recognized at end of year............................. $ 69,963 $ 35,005 $(90,335) $(96,388) ========== ========== ======== ========
Based on fair values as of December 31, 2000, the pension plan assets were comprised of publicly traded equity securities ($606.7 million or 64%) and fixed income obligations ($341.3 million or 36%). Based on fair values as of December 31, 2000, the other postretirement benefit plan assets included eq- uity securities ($77.8 million or 65%) and fixed income obligations ($41.9 million or 35%). II-74 Components of Net Periodic Benefit Cost
Other Postretirement Pension Benefits Benefits ---------------------------- ------------------------- 2000 1999 1998 2000 1999 1998 -------- -------- -------- ------- ------- ------- (Dollars in Thousands) Service cost............ $ 18,388 $ 20,288 $ 18,933 $ 3,908 $ 5,282 $ 5,221 Interest cost........... 51,856 51,442 48,291 14,513 13,839 13,636 Expected return on assets................. (90,037) (83,999) (81,259) (8,645) (6,769) (4,845) Amortization of: Transition obligation (asset).............. (2,764) (2,764) (2,764) 3,128 3,128 3,244 Prior service cost.... 694 406 1,911 49 49 50 Actuarial (gain)...... (13,767) (4,248) (9,165) (3,060) (1,059) (567) -------- -------- -------- ------- ------- ------- Benefit cost before items below............ (35,630) (18,875) (24,053) 9,893 14,470 16,739 Special termination benefits............... -- -- 59,610 -- -- 2,682 Curtailment (gain) loss................... -- -- (10,256) -- -- 6,614 Settlement (gain) loss.. -- -- (45,291) -- -- 6,457 -------- -------- -------- ------- ------- ------- Total net periodic benefit cost....... $(35,630) $(18,875) $(19,990) $ 9,893 $14,470 $32,492 ======== ======== ======== ======= ======= ======= Portion of net periodic benefit cost included in results of operations............. $(35,630) $(18,875) $(22,258) $ 9,893 $14,470 $20,440 ======== ======== ======== ======= ======= =======
The special termination benefits and curtailment and settlement gains and losses shown above for 1998 resulted from 1998 Merger-related employee separa- tion programs discussed in Note 6 to the Consolidated Financial Statements. Conectiv also maintains 401(k) savings plans for covered employees. Conectiv contributes to the plan, in the form of Conectiv stock, at varying levels up to $0.50 for each dollar contributed by employees, up to 6% of employee base pay. The amount expensed for Conectiv's matching contributions was $4.9 mil- lion in 2000, $5.6 million in 1999, and $4.9 million in 1998. NOTE 26. COMMITMENTS AND CONTINGENCIES Commitments In 2001, Conectiv's expected total capital expenditures, are estimated to be approximately $640 million, including $450 million for mid-merit electric gen- erating facilities, $140 million for the electric and gas delivery businesses, and $50 million for various other projects. See Note 23 to the Consolidated Financial Statements for commitments related to long-term purchased power contracts and Note 24 to the Consolidated Finan- cial Statements for commitments related to leases. Environmental Matters Conectiv's subsidiaries are subject to regulation with respect to the envi- ronmental effects of their operations, including air and water quality con- trol, solid and hazardous waste disposal, and limitations on land use by vari- ous federal, regional, state, and local authorities. Federal and state stat- utes 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 practic- es. Conectiv's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past dis- posal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities in- volved in resolving clean up-related issues (including whether a Conectiv sub- sidiary or a corporate predecessor is responsible for conditions on a particu- lar parcel). Conectiv's current liabilities included $9.8 million as of Decem- ber 31, 2000 and $3.0 million as of December 31, 1999 for potential clean-up and other costs related to sites at which a Conectiv subsidiary is a poten- tially responsible party or alleged to be a third party contributor, including the Indian River power plant discussed below. Conectiv does not expect such future costs to have a material effect on its financial position or results of operations. II-75 In December 1999, DPL discovered an oil leak at the Indian River power plant. DPL took action to determine the source of the leak and cap it, contain the oil to minimize impact to a nearby waterway and recover oil from the soil. Remediation costs are expected to be approximately $10 million, including ap- proximately $3 million of cumulative expenditures which had been incurred as of December 31, 2000. In addition, DPL paid $350,000 in penalties and $100,000 for an environmental improvement project to the Delaware Department of Natural Resources and Environmental Control (DNREC) in connection with the oil leak and another matter related to the Indian River power plant. Nuclear Insurance As discussed in Note 14 to the Consolidated Financial Statements, DPL sold its ownership interests in nuclear electric generating plants on December 29, 2000. In conjunction with the ownership interests of ACE in Peach Bottom, Salem, and 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. 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. 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 in- surance coverage of approximately $1.8 billion for each unit for loss or dam- age to the units, including coverage for decontamination expense and premature decommissioning. An industry mutual insurance company (NEIL) provides replace- ment 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 aggre- gate basis. Under changes in NEIL's by-laws effective December 31, 2000, member account balances no longer exist. NEIL members who sell their interests in nuclear electric generating plants after December 31, 2000, may choose either (1) to continue to receive certain policyholders' distributions from NEIL (if, as, and when declared) over a 5-year period or (2) to remain a NEIL member by pur- chasing other insurance products from NEIL and thus remain eligible for poli- cyholders' distributions (if, as, and when declared) for a longer period. NEIL members that sold their interests in nuclear generating plants on or before December 31, 2000 have available the two options discussed above or could also elect prior to February 28, 2001 a third option, to be paid their member ac- count balances by NEIL as a result of terminating their NEIL insurance cover- ages. DPL expects to terminate its NEIL membership and elect to receive cash of approximately $16 million for its member account balance. If the sale of ACE's ownership interests in nuclear electric generating plants is completed, then ACE will be able to choose one of the two options available to it. Other On October 24, 2000, the City of Vineland, New Jersey, filed an action in a New Jersey Superior Court to acquire by eminent domain ACE electric distribu- tion facilities located within the City limits. The City has offered approxi- mately $11 million for these assets, including the right to provide electric service in this area. ACE believes that, properly evaluated, the assets sought by the City are worth approximately $40 million. NOTE 27. BUSINESS SEGMENTS The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" (SFAS No. 131). In accordance with SFAS No. 131, Conectiv's business segments were determined from Conectiv's internal organization and management reporting, which are based primarily on differences in products and services. Conectiv's business segments under SFAS No. 131 are as II-76 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 servic- es, and (d) district heating and cooling systems operation and construction services provided by CTS; "Power Delivery" includes activities related to de- livery of electricity and gas to customers at regulated prices over transmis- sion and distribution systems; "Telecommunications" represents services pro- vided by Conectiv Communications Inc. (CCI), including local and long-distance telephone service and Internet services; "HVAC" represents heating, ventila- tion, and air conditioning services which were provided by CSI prior to the sale of this business in the latter-half of 2000. All revenues of Conectiv's business segments are from customers located in the United States. Also, all assets of Conectiv's business segments are lo- cated in the United States. As discussed in Note 10 to the Consolidated Financial Statements, 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 services were not separately identified; dur- ing this period revenues were allocated directly to the Energy and Power De- livery business segments based on the cost of services provided. Common services shared by the business units (shared services) are assigned directly or allocated based on various cost causative factors, depending on the nature of the service provided. The depreciation associated with shared services' assets is allocated to the business segments; however, the assets and related capital expenditures are not allocated. The operating results for business segments are evaluated based on "earnings before interest and income taxes," which is generally equivalent to Operating Income, excluding Special Charges (see Note 6 to the Consolidated Financial Statements) and the gain on the sale of DPL's ownership interests in nuclear generating plants, plus Other Income, less certain interest charges allocated to the business segments. "Earnings before interest and income taxes" for the Energy business segment include the operating results of certain electric gen- erating plants that are expected to be sold subsequent to receipt of required regulatory approvals, as discussed in Note 14 to the Consolidated Financial Statements. The "earnings before interest and income taxes" of "All Other" business segments include the equity in earnings of the EnerTech funds, dis- cussed in Note 8 to the Consolidated Financial Statements. "Earnings before interest and income taxes" for 1998 includes the January and February 1998 op- erating results of the former Atlantic-owned companies which are excluded from the 1998 Consolidated Statement of Income under purchase accounting for the 1998 Merger. For internal management reporting purposes, Investments and Property, Plant and Equipment are assigned to business segments, but Current Assets and De- ferred Charges and Other Assets are not. However, the deferred asset for "Re- coverable stranded costs" of $988.2 million and $1,030.0 million as of Decem- ber 31, 2000 and 1999, respectively, and other regulatory assets (and liabili- ties) are associated with the Power Delivery Business. See Note 17 to the Con- solidated Financial Statements for additional information about regulatory as- sets, including "Recoverable stranded costs." II-77
As of Year Ended December 31, 2000 December 31, 2000 -------------------------------------------------------- ----------------- Earnings Investments and Before Interest Capital Property, Plant & Business Segments Revenues Depreciation and Taxes Expenditures Equipment - ----------------- ---------- ------------ --------------- ------------ ----------------- (Dollars in Thousands) Energy.................. $4,905,535 $116,386 $337,499 $184,121 $1,299,061 Power Delivery.......... 772,240 97,234 255,004 142,140 2,230,012 Telecommunications...... 56,071 7,249 (50,189) 52,314 160,119 HVAC.................... 89,594 1,724 (8,864) -- 1,008 All Other............... 7,131 1,433 (2,298) 4,514 97,186 ---------- -------- -------- -------- ---------- $5,830,571(1) $224,026(2) $531,152(3) $383,089(4) $3,787,386(5) ========== ======== ======== ======== ==========
- -------- (1) Includes intercompany revenues that are eliminated in consolidation as follows: Energy business segment--$795,470; Power Delivery Business Seg- ment--$444; Telecommunications business segment--$5,533. (2) Excludes $7,226 of goodwill amortization pursuant to the 1998 Merger and $28,830 of depreciation classified in business segment operating expenses which are included in consolidated depreciation and amortization expense. (3) "Earnings before interest and income taxes" less $216,242 of interest ex- pense and preferred stock dividends, $2,016 of consolidation adjustments, and $25,162 of special charges plus the $16,612 pre-tax gain on the sale of DPL's ownership interests in nuclear electric generating plants equals consolidated income before income taxes and extraordinary item. (4) Consolidated capital expenditures of $390,540 include $7,451 of shared services' capital expenditures which are excluded above. (5) Excludes $267,273 of shared services' property, plant & equipment and cer- tain investments, all Current Assets ($1,092,261), and all Deferred Charges and Other Assets ($1,331,075) which are included in total consoli- dated assets of $6,477,995. Amounts invested in equity method investees as of December 31, 2000 were $20,750 by Energy and $40,556 by All Other busi- ness segments.
As of Year Ended December 31, 1999 December 31, 1999 -------------------------------------------------------- ----------------- Earnings Investments and Before Interest Capital Property, Plant & Business Segments Revenues Depreciation and Taxes Expenditures Equipment - ----------------- ---------- ------------ --------------- ------------ ----------------- (Dollars in Thousands) Energy.................. $3,002,736 $132,538 $271,181 $105,993 $1,242,211 Power Delivery.......... 765,551 91,519 260,835 115,273 2,223,571 Telecommunications...... 36,253 5,229 (43,344) 54,798 116,101 HVAC.................... 134,942 3,316 (13,655) 1,172 22,810 All Other............... 6,470 2,981 34,339 -- 100,227 ---------- -------- -------- -------- ---------- $3,945,952(1) $235,583(2) $509,356(3) $277,236(4) $3,704,920(5) ========== ======== ======== ======== ==========
- -------- (1) Includes intercompany revenues that are eliminated in consolidation as follows: Energy business segment--$195,498; Telecommunications business segment--$4,482; All Other business segments--$1,075. (2) Excludes $7,073 of goodwill amortization pursuant to the 1998 Merger and $28,692 of depreciation classified in business segment operating expenses which are included in consolidated depreciation and amortization expense. (3) "Earnings before interest and income taxes" less $182,451 of interest ex- pense and preferred stock dividends, $105,648 of special charges, and $1,863 of consolidation adjustments equals consolidated income before in- come taxes and extraordinary item. (4) Consolidated capital expenditures of $320,395 include $43,159 of shared services' capital expenditures which are excluded above. (5) Excludes $282,735 of shared services' property, plant & equipment and cer- tain investments, all Current Assets ($793,995), and all Deferred Charges and Other Assets ($1,356,812) which are included in total consolidated as- sets of $6,138,462. Amounts invested in equity method investees as of De- cember 31, 1999 were $60,371 by Energy and $26,601 by All Other business segments. II-78
As of December 31, Year Ended December 31, 1998 1998 -------------------------------------------------------- --------------- Earnings Investments and Before Interest Capital Property, Plant Business Segments Revenues Depreciation and Taxes Expenditures & Equipment - ----------------- ---------- ------------ --------------- ------------ --------------- (Dollars in Thousands) Energy.................. $2,450,274 $130,863 $267,463 $ 50,083 $2,123,982 Power Delivery.......... 666,894 88,612 256,886 102,651 2,139,111 Telecommunications...... 10,620 2,992 (29,591) 25,814 66,751 HVAC.................... 94,907 1,984 (21,676) 955 45,622 All Other............... 14,096 3,781 (9,570) 5,090 178,238 ---------- -------- -------- -------- ---------- $3,236,791(1) $228,232(2) $463,512(3) $184,593(4) $4,553,704(5) ========== ======== ======== ======== ==========
- -------- (1) Includes $165,185 of revenues for January to February 1998 of the formerly Atlantic-owned companies which are excluded from consolidated revenues of $3,071,606. (2) Includes $14,629 of depreciation for January to February 1998 of the for- merly Atlantic-owned companies which is excluded from consolidated depre- ciation expense of $241,420. Excludes $6,174 of goodwill amortization pur- suant to the 1998 Merger and $21,643 of depreciation classified in busi- ness segment operating expenses which are included in consolidated depre- ciation and amortization expense. (3) "Earnings before interest and taxes" less $20,914 for the January to Feb- ruary 1998 "earnings before interest and taxes" of the formerly Atlantic- owned companies, $27,704 of special charges, $154,044 of interest expense and preferred stock dividends, and $1,832 of consolidation adjustments equals consolidated income before income taxes and extraordinary item. (4) Consolidated capital expenditures of $224,831 include $53,862 of shared services' capital expenditures which are excluded above and exclude $13,624 of January to February 1998 capital expenditures of the formerly Atlantic-owned companies which are included above. (5) Excludes $314,361 of shared services' property, plant & equipment and cer- tain investments, all Current Assets ($723,872), and all Deferred Charges and Other Assets ($495,737) which are included in total consolidated as- sets of $6,087,674. Amounts invested in equity method investees as of De- cember 31, 1998 were $62,420 by Energy and $15,854 by All Other business segments. NOTE 28. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The quarterly data presented below reflect all adjustments necessary in the opinion of Conectiv management for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differences between summer and winter rates, and the scheduled downtime and maintenance of electric generating units.
2000 ------------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands, Except Per Share Amounts) Operating Revenues...... $1,045,345 $1,152,384 $1,551,548 $1,279,847 $5,029,124 Operating Income........ 101,946 63,200 204,357 118,331 487,834 Net Income ............. 32,537 18,361 89,616 30,316 170,830 Earnings Per Common Share.................. 0.41 0.21 1.01 0.35 1.97 Earnings (Loss) Per Class A Common Share... (0.43) 0.17 1.08 0.24 1.06
As discussed in Note 8 to the Consolidated Financial Statements, Conectiv recorded investment income in 2000 for equity in the earnings of the EnerTech funds. This investment income increased (a) net income and earnings per share of common stock in the second quarter of 2000 by $16.0 million and $0.19, re- spectively, and (b) net income and earnings per share of common stock in the third quarter of 2000 by $6.2 million and $0.07, II-79 respectively. In the fourth quarter of 2000, an investment loss from the EnerTech funds reduced net income and earnings per share of common stock by $9.0 million and $0.11, respectively. As discussed in Note 6 to the Consolidated Financial Statements, Conectiv recorded special charges in the second quarter of 2000 related to the sale of businesses which decreased income before extraordinary item and earnings per share of common stock by $23.4 million and $0.28, respectively. In the third quarter of 2000, management received a new actuarial estimate of Conectiv's pension and other postretirement benefit costs for 2000. As a result of lower than previously estimated annual costs, pre-tax income, net income, and earnings per common share increased by $3.9 million, $2.3 million, and $0.03, respectively, for the third quarter of 2000. As discussed in Note 14 to the Consolidated Financial Statements, in the fourth quarter of 2000, a gain on the sale of the ownership interests of DPL in nuclear electric generating plants increased net income by $12.8 million and earnings per share of Conectiv common stock by $0.15.
1999 -------------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter Total -------- -------- ---------- -------- ---------- (Dollars in Thousands, Except Per Share Amounts) Operating Revenues........ $946,585 $802,480 $1,080,412 $915,420 $3,744,897 Operating Income.......... 102,538 85,858 107,333 49,860 345,589 Income Before Extraordinary Item....... 48,695 31,359 20,239 13,285 113,578 Extraordinary Item (1).... -- -- (271,106) (40,612) (311,718) Net Income (Loss)......... 48,695 31,359 (250,867) (27,327) (198,140) Earnings (Loss) Per Common Share Before Extraordinary Item................... 0.47 0.31 0.15 0.19 1.14 Extraordinary Item (1).. -- -- (3.04) (0.34) (3.16) Earnings (Loss) Per Class A Common Share Before Extraordinary Item................... 0.20 0.20 1.25 (0.51) 1.14 Extraordinary Item (1).. -- -- (0.83) (1.93) (2.71)
- -------- (1) For information concerning the extraordinary item recorded in the third and fourth quarters of 1999, see Note 7 to the Consolidated Financial Statements. As discussed in Note 6 to the Consolidated Financial Statements, special charges were recorded in the third quarter of 1999 primarily for write-downs of investments in non-utility businesses and accrued employee separation costs. These special charges decreased operating income by $105.6 million, in- come before extraordinary item by $71.6 million, third quarter 1999 earnings per share of common stock by $0.80, and third quarter 1999 earnings per share of Class A common stock by $0.30. Investment income from the EnerTech funds increased (a) income before ex- traordinary item and earnings per share of common stock in the first quarter of 1999 by $9.4 million and $0.09, respectively, and (b) income before ex- traordinary item and earnings per share of common stock in the fourth quarter of 1999 by $14.2 million and $0.16, respectively, II-80 The total of 2000 and 1999 quarterly earnings per share does not equal an- nual earnings per share for 2000 and 1999, respectively, due to different amounts for average quarterly common shares outstanding. The quarterly average number of common shares and Class A common shares outstanding during 2000 and 1999 are presented below.
Average Number of Shares Outstanding ------------------------------------ Common Stock Class A Common Stock -------------- --------------------- 2000 1999 2000 1999 ------ ------- ---------- ---------- (Thousands of Shares) First Quarter.............................. 85,568 100,532 5,742 6,561 Second Quarter............................. 83,777 98,120 5,742 6,408 Third Quarter.............................. 82,701 87,711 5,742 5,743 Fourth Quarter............................. 82,699 86,916 5,742 5,742
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. II-81 PART III Item 10. Directors and Executive Officers of the Registrant Proposal No. 1--"Election of Directors" is incorporated by reference herein from the Preliminary Joint Proxy Statement/Prospectus which was initially filed for New RC, Inc. on Form S-4 with the SEC on March 14, 2001 (Preliminary Joint Proxy Statement/Prospectus). Information about Conectiv's executive officers is included under Item 1. Information about reporting on Form 4, Statement of Changes in Beneficial Own- ership of Securities, and on Form 5, Annual Statement of Beneficial Ownership of Securities, is incorporated by reference herein from the "Section 16(a) Beneficial Ownership Compliance" section of the Preliminary Joint Proxy Statement/Prospectus. Item 11. Executive Compensation The information required by Item 11 of Form 10-K is incorporated herein by reference from the Preliminary Joint Proxy Statement/Prospectus except that the Report of the Personnel & Compensation Committee and the Stock Performance Chart are specifically excluded. Item 12. Security Ownership of Certain Beneficial Owners and Management The information required by Item 12 of Form 10-K is set forth under the head- ing "Security Ownership of Directors, Executive Officers and Certain Benefi- cial Owners" in the Preliminary Joint Proxy Statement/Prospectus and is incor- porated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by Item 13 of Form 10-K is set forth under the head- ing "Personnel & Compensation Committee Interlocks and Insider Participation" in the Preliminary Joint Proxy Statement/Prospectus and is incorporated herein by reference. III-1 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Documents Filed As Part Of This Report 1. Financial Statements The following financial statements are contained in Item 8 of Part II.
Page No. -------- Report of Independent Accountants..................................... II-29 Consolidated Statements of Income for the years ended December 31, 2000, 1999, and 1998................................................. II-30 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998................................................. II-31 Consolidated Balance Sheets as of December 31, 2000 and 1999.......... II-32 Consolidated Statements of Changes in Common Stockholders' Equity for the years ended December 31, 2000, 1999, and 1998.................... II-34 Notes to Consolidated Financial Statements............................ II-36
2. Financial Statement Schedules Schedule I, Condensed Financial Information of Registrant, and Schedule II, Valuation and Qualifying Accounts, are presented below. No other financial statement schedules have been filed since the required information is not present in amounts sufficient to require submission of the schedule or because the information required is included in the respective financial statements or the notes thereto. Schedule 1 Condensed Financial Information of Registrant Condensed financial statements of Conectiv, the holding company, are pre- sented below. Conectiv accounts for its subsidiaries on the equity method of accounting. Since Conectiv was established through a series of merger transac- tions on March 1, 1998, the 1998 Statement of Income and the 1998 Statement of Cash Flows do not include January to February of 1998. Conectiv's $250 million balance of long-term debt matures as follows: $100 million in 2002; $50 million in 2003; $50 million in 2004; $30 million in 2005; and $20 million in 2006. For additional information see Note 21 to the Consolidated Financial Statements included in Item 8 of Part II. For information concerning Conectiv's common stock and Class A common stock, see Notes 18 and 19, respectively, to the Consolidated Financial Statements included in Item 8 of Part II. Cash dividends received by Conectiv from consolidated subsidiaries were $122.5 million in 2000, $135.7 million in 1999 and $132.4 million in 1998. As of December 31, Conectiv had guarantees of approximately $249 million, which included $128 million for debt of Conectiv subsidiaries, $73 million for energy trading obligations of Conectiv subsidiaries, and $48 million for other items including construction commitments and the debt of an unconsolidated eq- uity method investee. IV-1 CONECTIV STATEMENTS OF INCOME
Year Ended December 31, ----------------------------- 2000 1999 1998 -------- --------- -------- (Dollars in Thousands) Operating Expenses.............................. $ 13,465 $ 2,003 $ 1,639 -------- --------- -------- Operating Income................................ (13,465) (2,003) (1,639) -------- --------- -------- Other Income Equity in earnings of consolidated subsidiaries excluding extraordinary item.... 204,110 129,209 156,511 Other income.................................. 2,839 513 624 -------- --------- -------- 206,949 129,722 157,135 -------- --------- -------- Interest Expense................................ 40,349 22,557 3,914 -------- --------- -------- Income Before Income Taxes And Extraordinary Item........................................... 153,135 105,162 151,582 -------- --------- -------- Income Tax Benefit, Excluding Income Taxes Applicable to Extraordinary Item............... (17,695) (8,416) (1,619) -------- --------- -------- Income Before Extraordinary Item................ 170,830 113,578 153,201 -------- --------- -------- Equity In Extraordinary Item of Consolidated Subsidiaries................................... -- (311,718) -- -------- --------- -------- Net Income (Loss)............................... $170,830 $(198,140) $153,201 ======== ========= ========
As discussed on IV-1, the above amounts are for Conectiv, the holding company; not Conectiv on a consolidated basis. IV-2 CONECTIV STATEMENTS OF CASH FLOWS
Year Ended December 31, ------------------------------- 2000 1999 1998 --------- --------- --------- (Dollars in Thousands) Cash Flows From Operating Activities Net income (loss)........................... $ 170,830 $(198,140) $ 153,201 Adjustments to reconcile net income to net cash provided by operating activities Equity in loss (earnings) of subsidiaries............................. (204,110) 182,509 (156,511) Net change in: Accounts receivable..................... 739 9,742 (16,124) Taxes accrued........................... (22,604) (4,476) 5,903 Other current assets and liabilities.... 28 (2,992) (4,501) Dividends received from subsidiaries........ 122,478 135,691 132,357 Other, net.................................. 13,807 2,380 (170) --------- --------- --------- Net cash provided by operating activities............................... 81,168 124,714 114,155 --------- --------- --------- Cash Flows From Investing Activities Decrease (increase) in investment in money pool (1)................................... 127,150 (48,130) (45,456) Decrease (increase) in notes receivable from subsidiaries............................... (116,268) 16,452 (168,003) Capital contributions to subsidiaries....... (55,399) (39,018) (27,496) Return of invested capital from subsidiaries............................... 48,570 -- -- Other, net.................................. (173) 143 239 --------- --------- --------- Net cash provided (used) by investing activities............................... 3,880 (70,553) (240,716) --------- --------- --------- Cash Flows From Financing Activities Common dividends paid....................... (92,009) (135,134) (130,451) Common stock issued......................... 187 68 -- Common stock redeemed....................... (54,651) (390,397) (11,135) Long-term debt issued....................... -- 250,000 -- Long-term debt redeemed..................... -- -- (53,500) Net change in short-term debt............... 59,315 210,685 339,000 Costs of issuances and refinancings......... (1,373) (4,114) 365 --------- --------- --------- Net cash provided (used) by financing activities............................... (88,531) (68,892) 144,279 --------- --------- --------- Net change in cash and cash equivalents....... (3,483) (14,731) 17,718 Beginning of year cash and cash equivalents... 3,960 18,691 973 --------- --------- --------- End of year cash and cash equivalents......... $ 477 $ 3,960 $ 18,691 ========= ========= =========
- -------- (1) The money pool is a pool of funds that Conectiv subsidiaries invest in or borrow from, depending on their cash position. As discussed on IV-1, the above amounts are for Conectiv, the holding company; not Conectiv on a consolidated basis. IV-3 CONECTIV BALANCE SHEETS
As of December 31, --------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) ASSETS Current Assets Cash and cash equivalents.............................. $ 477 $ 3,960 Dividends receivable from subsidiaries................. 22,788 23,536 Accounts receivable.................................... 1,618 600 Taxes receivable....................................... 14,373 -- Investment in money pool (1)........................... 422 136,456 Other.................................................. 19 1,838 ---------- ---------- 39,697 166,390 ---------- ---------- Investments Investment in subsidiary companies..................... 1,736,901 1,647,529 Notes receivable from subsidiary companies............. 267,446 151,178 Other investments...................................... 1,619 5,675 ---------- ---------- 2,005,966 1,804,382 ---------- ---------- Deferred Charges and Other Assets Unamortized debt expense............................... 1,149 1,477 Deferred charges....................................... -- 297 ---------- ---------- 1,149 1,774 ---------- ---------- Total Assets............................................. $2,046,812 $1,972,546 ========== ==========
- -------- (1) The money pool is a pool of funds that Conectiv subsidiaries invest in or borrow from, depending on their cash position. As discussed on IV-1, the above amounts are for Conectiv, the holding company; not Conectiv on a consolidated basis. IV-4 CONECTIV BALANCE SHEETS
As of December 31, ---------------------- 2000 1999 ---------- ---------- (Dollars in Thousands) CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt...................................... $ 605,030 $ 549,685 Taxes accrued........................................ -- 8,231 Dividends payable.................................... 25,565 25,983 Interest accrued..................................... 2,306 -- Other................................................ 2,086 474 ---------- ---------- 634,987 584,373 ---------- ---------- Deferred income taxes.................................. 1,556 -- ---------- ---------- Capitalization Common stock: $0.01 per share par value 150,000,000 shares authorized; shares outstanding--82,859,779 in 2000, and 86,173,169 in 1999........................ 830 863 Class A common stock, $0.01 par value; 10,000,000 shares authorized; shares outstanding--5,742,315 in 2000 and 1999....................................... 57 57 Additional paid-in-capital--common stock............. 1,028,780 1,085,060 Additional paid-in-capital--Class A common stock..... 93,738 93,738 Retained earnings/(Accumulated deficit).............. 42,768 (36,472) Treasury shares, cost: 130,604 shares in 2000; 167,514 shares in 1999.............................. (2,688) (3,446) Unearned compensation................................ (1,172) (1,627) Accumulated other comprehensive income............... (2,044) -- ---------- ---------- Total common stockholders' equity.................... 1,160,269 1,138,173 Long-term debt....................................... 250,000 250,000 ---------- ---------- 1,410,269 1,388,173 ---------- ---------- Total Capitalization and Liabilities................... $2,046,812 $1,972,546 ========== ==========
As discussed on IV-1, the above amounts are for Conectiv, the holding company; not Conectiv on a consolidated basis. IV-5 Schedule II--Valuation and Qualifying Accounts Years Ended December 31, 2000, 1999, 1998 (Dollars in thousands)
Column B Column C Column D Column E ---------- ------------------------- ---------- ---------- Additions ------------------------- Balance at Charged to Balance at beginning cost and Charged to end of Description of period expenses other accounts Deductions period ----------- ---------- ---------- -------------- ---------- ---------- 2000 Allowance for doubtful accounts............... $11,564 $30,508 -- $10,733(b) $31,339 1999 Allowance for doubtful accounts............... 4,743 23,917 1,000 18,096(b) 11,564 1998 Allowance for doubtful accounts............... 196 8,697 3,500(a) 7,650(b) 4,743
- -------- (a) Consolidation of ACE's balance due to the 1998 Merger discussed in Note 4 to the Consolidated Financial Statements included in Item 8 of Part II. (b) Accounts receivable written off. IV-6 (b) Reports on Form 8-K The following Reports on Form 8-K were filed in the fourth quarter of 2000. On October 20, 2000, Conectiv filed a Current Report on Form 8-K dated Octo- ber 3, 2000, reporting on Item 5, Other Events. 3. Exhibits
Exhibit Number ------- 2-A Amended and Restated Agreement and Plan of Merger, dated as of December 26, 1996, between DPL, Atlantic Energy, Inc., Conectiv and DS Sub, Inc. (filed with Registration Statement No. 333-18843) 2-B Agreement and Plan of Merger, dated as of February 9, 2001, between Potomac Electric Power Company, New RC, Inc. and Conectiv (filed with Conectiv's Current Report on Form 8-K dated February 13, 2001) 3-A Restated Certificate of Incorporation of Conectiv, filed with Delaware Secretary of State, effective as of March 2, 1998 (filed with Conectiv's Current Report on Form 8-K dated March 6, 1998) 3-B Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv, Inc., filed with the Delaware Secretary of State, effective as of March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated March 6, 1998) 3-C Certificate of Merger of Atlantic Energy, Inc. with and into Conectiv, Inc. filed with the New Jersey Secretary of State, effective as of March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated March 6, 1998) 3-D Certificate to change name from Conectiv, Inc. to Conectiv filed with the Delaware Secretary of State pursuant to Section 102(a) of the Delaware General Corporation Law (filed with Conectiv's Current Report on Form 8-K dated March 6, 1998) 3-E Certificate of Merger of DS Sub, Inc., a Delaware Corporation with and into Delmarva Power & Light Company, filed with the Delaware Secretary of State, effective as of March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated March 6, 1998) 3-F Certificate of Merger of DS Sub, Inc., a Delaware Corporation with and into Delmarva Power & Light Company, effective as of March 1, 1998, filed with the Virginia State Corporation Commission, effective as of March 1, 1998 (filed with Conectiv's Current Report on Form 8-K dated March 6, 1998) 3-G Conectiv's By-Laws as amended October 26, 1999 (filed herewith) 10-A Conectiv Incentive Compensation Plan (filed with Conectiv, Inc. Registration Statement No. 333-18843) 10-B Conectiv Deferred Compensation Plan, effective January 1, 1999 (filed with Conectiv's 1999 Report on Form 10-K) 10-C Conectiv Change-in-Control Severance Plan For Certain Executive Officers (filed herewith) 10-D Conectiv Change-in-Control Severance Plan For Certain Select Employees (filed herewith) 10-E Form of Change-in-Control Severance Agreement between Conectiv and certain executives (filed herewith)
IV-7
Exhibit Number ------- 12 Computation of ratio of earnings to fixed charges (filed herewith) 21 Subsidiaries of the registrant (filed herewith) 23 Consent of Independent Public Accountants (filed herewith) 27 Financial Data Schedule (filed herewith) 99 2000 Conectiv Pro Forma Financial Statements--Generation Asset Sale and Transfer (filed herewith)
IV-8 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Ex- change Act of 1934 the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 15, 2001. Conectiv (Registrant) /s/ John C. van Roden By: _________________________________ John C. van Roden Senior Vice President and Chief Financial Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Regis- trant and in the capacities indicated, on March 15, 2001.
Signature Title --------- ----- /s/ Howard E. Cosgrove Chairman of the Board and ______________________________________ Chief Executive Officer (Howard E. Cosgrove) /s/ John C. van Roden Senior Vice President and ______________________________________ Chief Financial Officer (John C. van Roden) /s/ James P. Lavin Controller and Chief ______________________________________ Accounting Officer (James P. Lavin) /s/ R. Franklin Balotti Director ______________________________________ (R. Franklin Balotti) /s/ Robert D. Burris Director ______________________________________ (Robert D. Burris) /s/ George F. MacCormack Director ______________________________________ (George F. MacCormack) /s/ Bernard J. Morgan Director ______________________________________ (Bernard J. Morgan)
IV-9 Exhibit Index
Exhibit Number Description - ----------- ---------------------------------------------------------- 3-G Conectiv's By-Laws as amended October 26, 1999 10-C Conectiv Change-in-Control Severance Plan For Certain Executive Officers 10-D Conectiv Change-in-Control Severance Plan For Certain Select Employees 10-E Form of Change-in-Control Severance Agreement between Conectiv and certain executives 12 Ratio of Earnings to Fixed Charges 21 Subsidiaries of the registrant 23 Consent of Public Accountants 27 Financial Data Schedule 99 2000 Conectiv Pro Forma Financial Statements-Generation Asset Sale and Transfer
EX-3.G 2 0002.txt CONECTIV'S BY-LAWS AS AMENDED 10/26/1999 EXHIBIT 3-G CONECTIV'S BY LAWS AS AMENDED OCTOBER 26, 1999 AMENDED AND RESTATED BY LAWS OF CONECTIV 1. OFFICES. ------- 1.1 Offices. In addition to its registered office in the State of ------- Delaware, the Corporation shall have a corporate office in Wilmington, Delaware and a significant presence in New Jersey, and such other offices, either within or without the State of Delaware, at such locations as the Board of Directors may from time to time determine or the business of the Corporation may require. 2. SEAL. ---- 2.1 Seal. The Corporation shall have a seal, which shall have ---- inscribed thereon its name and year of incorporation and the words, "Corporate Seal Delaware." 3. MEETINGS OF STOCKHOLDERS. ------------------------ 3.1 Annual Meetings. The annual meeting of stockholders of the --------------- Corporation shall be held on such date, at such time and at such place within or without the State of Delaware as shall be determined by the Board of Directors from time to time. 3.2 Special Meetings. Special meetings of the stockholders of the ---------------- Corporation shall be held on such date, at such time and at such place within or without the State of Delaware as may be designated by the Chairman of the Board or by the Board of Directors pursuant to a resolution approved by a majority of the entire Board of Directors. 3.3 Notice of Meetings. (a) Notices of meetings of stockholders ------------------ shall be in writing and shall state the place, date and hour of the meeting, and, in the case of a special meeting, the purpose or purposes for which a meeting is called. No business other than that specified in the notice thereof shall be transacted at any special meeting. 2 (b) Such notice shall either be delivered personally, mailed, postage prepaid, or delivered by any other lawful means, to each stockholder entitled to vote at such meeting not less than 10 nor more than 60 days before the date of the meeting. If mailed, the notice shall be directed to the stockholder at his or her address as it appears on the records of the Corporation. Delivery of any such notice to any officer of a corporation or association or to any member of a partnership shall constitute delivery of such notice to such corporation, association or partnership. (c) Notice of any meeting of stockholders need not be given to any stockholder if waived by such stockholder in writing, whether before or after such meeting is held, or if such stockholder shall sign the minutes or attend the meeting, except that if such stockholder attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, such stockholder shall not be deemed to have waived notice of such meeting. 3.4 Adjourned Meetings. When a meeting is adjourned to another time ------------------ or place, unless otherwise provided by these Bylaws, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken. At the adjourned meeting the stockholders may transact any business which might have been transacted at the original meeting. If an adjournment is for more than 30 days, or if after an adjournment, a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each stockholder entitled to vote at the meeting. 3.5 Quorum and Adjournment. Except as otherwise provided by law, by ---------------------- the Certificate of Incorporation of the Corporation or by these Bylaws, the presence, in person or by proxy, of the holders of a majority of the aggregate voting power of the stock issued and outstanding, entitled to vote thereat, shall constitute a quorum for the transaction of business at all meetings of stockholders. If such majority shall not be present or represented at any meeting of stockholders, the stockholders present, although less than a quorum, shall have the power to adjourn the meeting. 3.6 Vote Required. Except as otherwise provided by law or by the ------------- Certificate of Incorporation: (a) Directors shall be elected by a plurality of the votes present in person or represented by proxy at a meeting of stockholders and entitled to vote in the election of directors, and (b) whenever any corporate action other than the election of 3 Directors is to be taken, it shall be authorized by a majority in voting power of the shares present in person or by proxy at a meeting of stockholders and entitled to vote on the subject matter. 3.7 Manner of Voting. At each meeting of stockholders, each ---------------- stockholder having the right to vote shall be entitled to vote in person or by proxy. Proxies need not be filed with the Secretary of the Corporation until the meeting is called to order, but shall be filed before being voted. Each stockholder shall be entitled to vote each share of stock having voting power registered in his name on the books of the Corporation on the record date fixed for determination of stockholders entitled to vote at such meeting. All elections of Directors by stockholders shall be by written ballot. 3.8 Proxies. (a) At any meeting of stockholders, any stockholder ------- may be represented and vote by proxy or proxies. In the event that any form of proxy shall designate two or more persons to act as proxies, a majority of such persons present at the meeting or, if only one shall be present, then that one shall have and may exercise all of the powers conferred by the form of proxy upon all of the persons so designated unless the form of proxy shall otherwise provide. (b) The Board of Directors may, in advance of any annual or special meeting of the stockholders, prescribe additional regulations concerning proxies and the validation of the same, which are intended to be voted at any such meeting. 3.9 Presiding Officer and Secretary. The Chairman of the Board ------------------------------- shall act as chairman of all meetings of the stockholders. In the absence of the Chairman of the Board, the Vice Chairman of the Board or, in his or her absence, any Director designated by the Chairman of the Board or the Board of Directors shall act as chairman of the meeting. The Secretary of the Corporation shall act as secretary of all meetings of the stockholders, but, in the absence of the Secretary, the Assistant Secretary designated in accordance with Section 5.11(b) of these Bylaws shall act as secretary of all meetings of the stockholders, but in the absence of a designated Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. 3.10 Procedure. At each meeting of stockholders, the chairman of the --------- meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the Board of Directors, the chairman of the meeting may establish 4 rules, which need not be in writing, to maintain order and safety and for the conduct of the meeting. Without limiting the foregoing, he or she may: (a) restrict attendance at any time to bona fide stockholders of record and their proxies and other persons in attendance at the invitation of the chairman; (b) restrict dissemination of solicitation materials and use of audio or visual recording devices at the meeting; (c) adjourn the meeting without a vote of the stockholders, whether or not there is a quorum present; and (d) make rules governing speeches and debate, including time limits and access to microphones. The chairman of the meeting acts in his or her absolute discretion and his or her rulings are not subject to appeal. 4. DIRECTORS. --------- 4.1 Powers. The Board of Directors shall exercise all of the powers ------ of the Corporation except such as are by law, or by the Certificate of Incorporation of this Corporation or by these Bylaws conferred upon or reserved to the stockholders of any class or classes. 4.2 Resignations. Any Director may resign at any time by giving ------------ written notice to the Board of Directors or the Secretary. Such resignation shall take effect at the date of receipt of such notice or at any later time specified therein. Acceptance of such resignation shall not be necessary to make it effective. 4.3 Presiding Officer and Secretary. The Chairman of the Board ------------------------------- shall act as chairman of all meetings of the Board of Directors. In the absence of the Chairman of the Board, the Vice Chairman of the Board, or in his absence, the Chief Executive Officer or other person designated by the Board of Directors shall act as chairman of the meeting. The Secretary of the Corporation shall act as secretary of all meetings of the Board of Directors, but, in the absence of the Secretary, the Assistant Secretary designated in accordance with Section 5.11(b) of these Bylaws shall act as secretary of all meetings of the Board of Directors, but in the absence of a designated Assistant Secretary, the chairman of the meeting may appoint any person to act as secretary of the meeting. 5 4.4 Annual Meetings. The Board of Directors shall meet each year --------------- immediately following the annual meeting of stockholders, at the place where such meeting of stockholders has been held, or at such other place as shall be fixed by the person presiding over the meeting of the stockholders, for the purpose of election of officers and consideration of such other business as the Board of Directors considers relevant to the management of the Corporation. 4.5 Regular Meetings. Regular meetings of the Board of Directors ---------------- shall be held on such dates and at such times and places, within or without the state of Delaware, as shall from time to time be determined by the Board of Directors. In the absence of any such determination, such meetings shall be held at such times and places, within or without the State of Delaware, as shall be designated by the Chairman of the Board on not less than twelve hours notice to each Director, given verbally, in writing or electronically, either personally, by telephone (including by message or recording device), by facsimile transmission, by telegram, by telex, by electronic mail or by other electronic means or on not less than three (3) calendar days' notice to each Director given by mail. Notice given by any of the foregoing means shall be sufficient to constitute notice of a meeting without the necessity of further notice. 4.6 Special Meetings. Special meetings of the Board of Directors ---------------- shall be held at the call of the Chairman of the Board at such times and places, within or without the State of Delaware, as he or she shall designate, on not less than twelve hours notice to each Director, given verbally, in writing or electronically, either personally, by telephone (including by message or recording device), by facsimile transmission, by telegram, by telex, by electronic mail or by other electronic means or on not less than three (3) calendar days' notice to each Director given by mail. Notice given by any of the foregoing means shall be sufficient to constitute notice of a meeting without the necessity of further notice. Special meetings shall be called by the Secretary on like notice at the written request of a majority of the Directors then in office. 4.7 Quorum and Powers of a Majority. At all meetings of the Board ------------------------------- of Directors and of each committee thereof, a majority of the members shall be necessary and sufficient to constitute a quorum for the transaction of business, and the act of a majority of the members present at any meeting at which a quorum is present shall be the act of the Board of Directors or such committee, unless by express provision of law, of the Certificate of Incorporation or these Bylaws, a different vote is required, in which case such express provision shall govern and control. In the absence of a quorum, a majority of the members present at any meeting may, without notice other than announcement at the meeting, adjourn such meeting from time to time until a quorum is present. 6 4.8 Waiver of Notice. Notice of any meeting of the Board of ---------------- Directors, or any committee thereof, need not be given to any member if waived by him or her in writing, whether before or after such meeting is held, or if he or she shall sign the minutes or attend the meeting, except that if such Director attends a meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened, then such Director shall not be deemed to have waived notice of such meeting. 4.9 Manner of Acting. (a) Members of the Board of Directors, or any ---------------- committee thereof, may participate in any meeting of the Board of Directors or such committee by means of conference telephone or similar communications equipment by means of which all persons participating therein can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (b) Any action required or permitted to be taken at any meeting of the Board of Directors or any committee thereof may be taken without a meeting if all members of the Board of Directors or such committee, as the case may be, consent thereto in writing, and the writings are filed with the minutes of proceedings of the Board of Directors or such committee. 4.10 Compensation. (a) The Board of Directors, by a resolution or ------------ resolutions, may fix, and from time to time change, the compensation of Directors. (b) Each Director shall be entitled to reimbursement from the Corporation for his or her reasonable expenses incurred with respect to duties as a member of the Board of Directors or any committee thereof. (c) Nothing contained in these Bylaws shall be construed to preclude any Director from serving the Corporation in any other capacity and from receiving compensation from the Corporation for service rendered to it in such other capacity. 4.11 Committees. The Board of Directors may designate one or more ---------- committees, each committee to consist of one or more Directors, which to the extent provided in said resolution or resolutions shall have and may exercise the powers and authority of the Board of Directors in the management of the business and affairs of the Corporation; provided, however, that no such committee shall have the power or authority in reference to the following matters: (i) approving or adopting, or recommending to the stockholders, any action or matter expressly required by the General Corporation Law of Delaware (the "GCLD") to be submitted to stockholders for approval or (ii) adopting, amending, or repealing any bylaw of the Corporation. The Board of Directors may designate one or more 7 directors as alternate members of any committee, who may replace any absent or disqualified member of the committee. In the absence or disqualification of a member of a committee, the member or members present at any meeting of such committee and not disqualified from voting, whether or not such member of members constitute a quorum, may unanimously appoint another member of the board of directors to act at the meeting in place of such absent or disqualified director. 4.12 Committee Procedure, Limitations of Committee Powers. (a) ---------------------------------------------------- Except as otherwise provided by these Bylaws, each committee shall adopt its own rules governing the time, place and method of holding its meetings and the conduct of its proceedings and shall meet as provided by such rules or by resolution of the Board of Directors. Unless otherwise provided by these Bylaws or any such rules or resolutions, notice of the time and place of each meeting of a committee shall be given to each member of such committee as provided in Section 4.6 of these Bylaws with respect to notices of special meetings of the Board of Directors. (b) Each committee shall keep regular minutes of its proceedings and report the same to the Board of Directors when required. (c) Any member of any committee may be removed from such committee either with or without cause, at any time, by the Board of Directors at any meeting thereof. Any vacancy in any committee shall be filled by the Board of Directors in the manner prescribed by the Certificate of Incorporation or these Bylaws for the original appointment of the members of such committee. 5. OFFICERS. -------- 5.1 Number. (a) The officers of the Corporation shall include a ------ Chief Executive Officer, a President, one or more Vice Presidents (including one or more Executive Vice Presidents and one or more Senior Vice Presidents if deemed appropriate by the Board of Directors), a Chief Financial Officer, a Secretary and a Treasurer. The Board of Directors shall also elect a Chairman of the Board and may elect a Vice Chairman of the Board. Except for the Chairman of the Board, the Vice Chairman of the Board and the Chief Executive Officer, none of the officers of the Corporation needs to be a director of the Corporation. Any two or more offices may be held by the same person to the extent permitted by the GCLD. (b) The Chief Executive Officer shall have the power to appoint one or more employees of the Corporation as divisional or departmental vice presidents and fix the duties of such appointees. However, no such divisional or departmental vice president shall be considered as an officer of the Corporation. 8 5.2 Election of Officers, Qualification and Term. The Chief -------------------------------------------- Executive Officer, the President, any Executive Vice President, any Senior Vice President, the Chief Financial Officer, the Secretary and the Treasurer of the Corporation shall be elected from time to time by the Board of Directors and, except as may otherwise be expressly provided in a contract of employment duly authorized by the Board of Directors or the Merger Agreement, shall hold office at the pleasure of the Board of Directors. The Board of Directors and the Chief Executive Officer also may elect such other officers as the Board of Directors or the Chief Executive Officer may from time to time deem appropriate or necessary. 5.3 Removal. Except as otherwise expressly provided in the Merger ------- Agreement, any officer elected by the Board of Directors may be removed, either with or without cause, by the Board of Directors at any meeting thereof, or to the extent delegated to the Chairman of the Board or the Chief Executive Officer, by the Chairman of the Board or the Chief Executive Officer. In addition, any officer elected by the Chief Executive Officer may be removed, either with or without cause, by the Chief Executive Officer. 5.4 Resignations. Any officer of the Corporation may resign at any ------------ time by giving written notice to the Board of Directors or to the Chairman of the Board or to the Chief Executive Officer. Such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. 5.5 Compensation. The compensation of all officers of the ------------ Corporation shall be fixed by or in the manner provided by the Board of Directors from time to time, and no officer shall be prevented from receiving such compensation by reason of the fact that he or she is also a Director of the Corporation. 5.6 The Chairman of the Board. The Chairman of the Board shall have ------------------------- the powers and duties customarily and usually associated with the office of the Chairman of the Board and shall have such other powers and perform such other duties as may be delegated to him or her by the Board of Directors. The Chairman of the Board shall preside at meetings of the stockholders and of the Board of Directors. 5.7 Vice Chairman of the Board. The Vice Chairman of the Board, if -------------------------- any, shall have the powers and duties customarily and usually associated with the office of the Vice Chairman of the Board and shall have such other powers and perform such other duties as may be delegated to him or her by the Board of Directors. 9 5.8 Chief Executive Officer. The Chief Executive Officer shall ----------------------- have, subject to the supervision, direction and control of the Board of Directors, the general powers and duties of supervision, direction and management of the affairs and business of the Corporation usually vested in the chief executive officer of a corporation, including, without limitation, all powers necessary to direct and control the organizational and reporting relationships within the Corporation. In addition, the Chief Executive Officer shall have such other powers and perform such other duties as may be delegated to him or her by the Board of Directors. If at any time the office of the Chairman of the Board and the Vice Chairman of the Board shall not be filled, or in the event of the temporary absence or disability of the Chairman of the Board and the Vice Chairman of the Board, the Chief Executive Officer shall have the powers and duties of the Chairman of the Board. 5.9 The President. The President shall serve as chief operating ------------- officer, shall have the powers and duties customarily and usually associated with the office of President and shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors or the Chief Executive Officer. 5.10 The Vice Presidents. Each Vice President shall have such powers ------------------- and duties customarily and usually associated with the office of Vice President and shall have such other powers and perform such other duties as may from time to time be assigned to him or her by the Board of Directors, the Chief Executive Officer or the President. 5.11 The Chief Financial Officer. The Chief Financial Officer shall --------------------------- be responsible for the financial affairs of the Corporation, including overseeing the duties performed by the Treasurer of the Corporation. In addition, the Chief Financial Officer shall have such powers and duties customarily and usually associated with the office of the Chief Financial Officer and shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors or the Chief Executive Officer. 5.12 The Secretary and the Assistant Secretary. (a) The Secretary ----------------------------------------- shall attend meetings of the Board of Directors and meetings of the stockholders and record all votes and minutes of all such proceedings in a book kept for such purpose. In addition, the Secretary shall have such powers and duties customarily and usually associated with the office of Secretary and shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors, the Chief Executive Officer or the President. (b) Each Assistant Secretary shall have such powers and perform such duties customarily and usually associated with the office of 10 Assistant Secretary and shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors, the Chief Executive Officer, the President or the Secretary. In case of the absence or disability of the Secretary, the Assistant Secretary designated by the Chief Executive Officer (or, in the absence of such designation, by the Secretary) shall perform the duties and exercise the powers of the Secretary. 5.13 The Treasurer and the Assistant Treasurer. (a) The Treasurer ----------------------------------------- shall have custody of the Corporation's funds and securities and shall keep full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit or cause to be deposited moneys or other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. The Treasurer shall also maintain adequate records of all assets, liabilities and transactions of the Corporation and shall see that adequate audits thereof are currently and regularly made. In addition, the Treasurer shall have such powers and duties customarily and usually associated with the office of Treasurer and shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors, the Chief Executive Officer, the President or the Chief Financial Officer. (b) Each Assistant Treasurer shall have such powers and perform such duties customarily and usually associated with the office of Assistant Treasurer and shall have such other powers and perform such other duties as may be delegated to him or her from time to time by the Board of Directors, the Chief Executive Officer, the President or the Treasurer. In case of the absence or disability of the Treasurer, the Assistant Treasurer designated by the Chief Executive Officer (or, in the absence of such designation, by the Treasurer) shall perform the duties and exercise the powers of the Treasurer. 6. STOCK ----- 6.1 Certificates. Certificates for shares of stock of the ------------ Corporation shall be issued under the seal of the Corporation, or a facsimile thereof, and shall be numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall bear a serial number, shall exhibit the holder's name and the number of shares evidenced thereby, and shall be signed by the Chairman of the Board or a Vice Chairman, if any, or the Chief Executive Officer or the President or any Vice President, and by the Secretary or an Assistant Secretary or the Treasurer or an Assistant Treasurer. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect 11 as if such person or entity were such officer, transfer agent or registrar at the date of issue. 6.2 Transfers. Transfers of stock of the Corporation shall be made --------- on the books of the Corporation only upon surrender to the Corporation of a certificate (if any) for the shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, provided such succession, assignment or transfer is not prohibited by the Certificate of Incorporation, these Bylaws, applicable law or contract. Thereupon, the Corporation shall issue a new certificate (if requested) to the person entitled thereto, cancel the old certificate (if any) and record the transaction upon its books. 6.3 Lost, Stolen or Destroyed Certificates. Any person claiming a -------------------------------------- certificate of stock to be lost, stolen or destroyed shall make an affidavit or an affirmation of that fact, and shall give the Corporation a bond of indemnity in satisfactory form and with one or more satisfactory sureties, whereupon a new certificate (if requested) may be issued of the same tenor and for the same number of shares as the one alleged to be lost, stolen or destroyed. 6.4 Registered Stockholders. The Corporation shall be entitled to ----------------------- recognize the exclusive right of a person registered on its books as the owner of shares as the person entitled to exercise the rights of a stockholder and shall not be bound to recognize any equitable or other claim to or interest in any such shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise expressly provided by the GCLD. 6.5 Additional Powers of the Board. (a) In addition to those powers ------------------------------ set forth in Section 4.1, the Board of Directors shall have power and authority to make all such rules and regulations as it shall deem expedient concerning the issue, transfer and registration of certificates for shares of stock of the Corporation, including the use of uncertificated shares of stock subject to the provisions of the GCLD. (b) The Board of Directors may appoint and remove transfer agents and registrars of transfers, and may require all stock certificates to bear the signature of any such transfer agent and/or any such registrar of transfers. 7. MISCELLANEOUS ------------- 7.1 Place and Inspection of Books. (a) The books of the Corporation ----------------------------- other than such books as are required by law to be kept within the State of Delaware shall be kept in such place or places either within or without the State of Delaware as the Board of Directors may from time to time determine. 12 (b) At least ten days before each meeting of stockholders, the officer in charge of the stock ledger of the Corporation shall prepare a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not specified, at the place where the meeting is to be held. The list shall also be produced and kept at the time and place of the meeting during the whole time thereof, and may be inspected by any stockholder who is present. (c) The Board of Directors shall determine from time to time whether and, if allowed, when and under what conditions and regulations the accounts and books of the Corporation (except such as may be by law specifically open to inspection or as otherwise provided by these Bylaws) or any of them shall be open to the inspection of the stockholders and the stockholders' rights in respect thereof. 7.2 Voting Shares in Other Corporations. The Chief Executive ----------------------------------- Officer, the President, the Chief Financial Officer or any other officer of the Corporation designated by the Board of Directors may vote any and all shares held by the Corporation in any other corporation. 7.3 Fiscal Year. The fiscal year of the Corporation shall be such ----------- fiscal year as the Board of Directors from time to time by resolution shall determine. 7.4 Gender/Number. As used in these Bylaws, the masculine, feminine ------------- or neuter gender, and the singular or plural number, shall each include the others whenever the context so indicates. 7.5 Paragraph Titles. The titles of the paragraphs have been ---------------- inserted as a matter of reference only and shall not control or affect the meaning or construction of any of the terms and provisions hereof. 7.6 Amendment. These Bylaws may be altered, amended or repealed by --------- (a) the affirmative vote of 80% or more of the aggregate number of votes that the holders of the then outstanding shares of common stock and preferred stock are entitled to cast on the amendment, or (b) by resolution adopted by the affirmative vote of not less than a majority of the Directors in office, at any annual or regular meeting of 13 the Board of Directors or at any special meeting of the Board of Directors if notice of the proposed alteration, amendment or repeal be contained in written notice of such special meeting. Notwithstanding the foregoing, the amendment of any provision of these Bylaws requiring an affirmative vote in excess of a majority of the Directors in office shall require the affirmative vote of at least the number of directors the affirmative vote of whom is required by such provision. 7.7 Certificate of Incorporation. Notwithstanding anything to the ---------------------------- contrary contained herein, if any provision contained in these Bylaws is inconsistent with or conflicts with a provision of the Certificate of Incorporation, such provision of these Bylaws shall be superseded by the inconsistent provision in the Certificate of Incorporation to the extent necessary to give effect to such provision in the Certificate of Incorporation. - -------------------------------------------------------------------------------- 1. Adopted by Unanimous Written Consent of the Conectiv Board of Directors, 3/1/98 2. Amended (Arts. 3.3(b), 3.8(a) and 3.8(b)) by resolution of the Conectiv Board of Directors, 2/16/99 3. Adopted by Action of the Board of Directors at a meeting held on October __, 1999. 14 EX-10.C 3 0003.txt CONECTIV CHANGE-IN-CONTROL SEVERANCE PLAN EXHIBIT 10-C Conectiv Change-in-Control Severance Plan For Certain Executive Officers FORM OF CHANGE-IN-CONTROL SEVERANCE AGREEMENT This Agreement, dated as of _______, 19__, by and between Conectiv, with its principal place of business at 800 King Street, P.O. Box 231, Wilmington, Delaware, 19899 (the "Company"), and ________ (the "Executive"). WHEREAS, the Company considers it essential to the best interests of its stockholders to foster the continuous employment of key management personnel, and recognizes that, as is the case with many publicly held corporations, the possibility of a change in control may exist and that such possibility, and the uncertainty and questions which it may raise among management, may result in the distraction or departure of management personnel to the detriment of the Company and its stockholders; and WHEREAS, the Board of Directors of the Company has determined that appropriate steps should be taken to reinforce and encourage the Executive's continued attention and dedication to the Executive's assigned duties without distraction in the face of potentially disturbing circumstances arising from the possibility of a change in control of the Company, although no such change is presently known to be contemplated. NOW THEREFORE, in consideration of the mutual covenants and agreements hereinafter contained and other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereto agree as follows: Section 1 DEFINITIONS Except as may otherwise be specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used herein: "Base Salary" shall mean the annual base rate of regular compensation of the Executive immediately before a Change in Control, or if greater, the highest annual such rate at any time during the 12-month period immediately preceding the Change in Control. "Board" shall mean the Board of Directors of the Company. "Cause" shall mean (i) the willful and continued failure by the Executive substantially to perform [his] [her] duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness of the Executive, or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason) or (ii) the willful engaging by the Executive in conduct which is demonstrably and materially injurious to the Employer, monetarily or otherwise. For purposes hereof, no act, or failure to act, on the Executive's part, shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that any act or omission was in the best interest of the Employer. "Change in Control" shall mean the first to occur, after the date hereof, of any of the following: 2 (i) if any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 25% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; (ii) if during any period of 24 consecutive months during the existence of this Agreement commencing on or after the date hereof, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this clause (ii); (iii) the consummation of a merger or consolidation of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, as defined in clause (i), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 40% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of the Company immediately prior to such sale. Upon the occurrence of a Change in Control as provided above, no subsequent event or condition shall constitute a Change in Control for purposes of this Agreement, with the result that there can be no more than one Change in Control hereunder. "Code" shall mean the Internal Revenue Code of 1986, as amended. 3 "Company" shall mean, subject to Section 4.1(a), Conectiv, a Delaware corporation. "Covered Termination" shall mean if, within the one-year period immediately following a Change in Control, the Executive (i) is terminated by the Employer without Cause (other than on account of death or Disability), or (ii) terminates [his] [her] employment with the Employer for Good Reason. The Executive shall not be deemed to have terminated for purposes of this Agreement merely because he or she ceases to be employed by the Employer and becomes employed by a new employer involved in the Change in Control; provided that such new employer shall be bound by this Agreement as if it were the Employer hereunder with respect to the Executive. It is expressly understood that no Covered Termination shall be deemed to have occurred merely because, upon the occurrence of a Change in Control, the Executive ceases to be employed by the Employer and does not become employed by a successor to the Employer after the Change in Control if the successor makes an offer to employ the Executive on terms and conditions which, if imposed by the Employer, would not give the Executive a basis on which to terminate employment for Good Reason. "Date of Termination" shall mean the date on which a Covered Termination occurs. "Disability" shall mean the occurrence after a Change in Control of the incapacity of the Executive due to physical or mental illness, whereby the Executive shall have been absent from the full-time performance of [his] [her] duties with the Employer for six consecutive months. "Employer" shall mean the Company (if and for so long as the Executive is employed thereby) and each Subsidiary which may now or hereafter employ the Executive or, where the context so requires, the Company and such Subsidiaries collectively. A subsidiary which ceases to be, directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the Company prior to a Change in Control (other than in connection with and as an integral part of a series of transactions resulting in a Change in Control) shall, automatically and without any further action, cease to be (or be part of) the Employer for purposes hereof. "Good Reason" shall mean, without the express written consent of the Executive, the occurrence after a Change in Control of any of the following circumstances, unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) assignment to the Executive of any duties inconsistent in any materially adverse respect with [his] [her] position, authority, duties or responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction in the Executive's Base Salary as in effect immediately before the Change in Control; (iii) a material reduction in the Executive's aggregate compensation opportunity, comprised only of (A) the Executive's Base Salary, (B) bonus opportunity, if any, and (C) long-term or other incentive compensation opportunity, if any (taking into account, in the case of such bonus and incentive opportunities, without limitation, 4 any target, minimum and maximum amounts payable and the attainability and otherwise the reasonability of any performance hurdles, goals and other measures); (iv) the Company's requiring the Executive to be based at any office or location more than 50 miles from that location at which the Executive performed [his] [her] services immediately prior to the occurrence of a Change in Control, except for travel reasonably required in the performance of the Executive's responsibilities; or (v) the failure of the Employer to obtain a reasonable agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 4.1(a). "Notice of Termination" shall mean a notice given by the Employer or Executive, as applicable, which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provisions so indicated. "Person" shall have the meaning ascribed thereto by Section 3(a)(9) of the Securities Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof (except that such term shall not include (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company, or (v) such Executive or any "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) which includes the Executive). "Potential Change in Control" shall mean the occurrence, before a Change in Control, of any of the following: (i) if the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) if the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) if any Person becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Persons any securities acquired directly from the Company or its Subsidiaries) representing 15% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) if the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 5 "Stock" shall mean the common stock, $.01 par value, of the Company. "Subsidiary" shall mean any entity, directly or indirectly, through one or more intermediaries, controlled by the Company. "Target Annual Bonus" shall mean the Executive's annual bonus for the Employer's fiscal year in which the Date of Termination occurs, which bonus would be paid or payable if the Executive and the Employer were to satisfy all conditions to the Executive's receiving the annual bonus at target (although not necessarily the maximum annual bonus); provided that such amount shall be annualized for any fiscal year consisting of less than 12 full months; and provided, further, that, if at the time of a Change in Control it is substantially certain that a bonus at a level beyond target will be paid or payable for the fiscal year, then the bonus which is substantially certain to be paid or payable, rather than the target bonus, shall be used for these purposes. Section 2 BENEFITS 2.1 If a Covered Termination occurs, then the Executive shall be entitled hereunder to the following: (a) the product of (i) the Executive's Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365; (b) an amount equal to three times the sum of (i) the Executive's annual Base Salary for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) the Executive's Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control); (c) for a period of three years after such termination, the Employer shall arrange to make available to the Executive medical, dental, vision, group life and disability benefits that are at least at a level (and cost to the Executive) that is substantially similar in the aggregate to the level of such benefits which was available to the Executive immediately prior to the Change in Control; provided that (i) the Employer shall be required to provide group life and disability benefits only to the extent it is able to do so on reasonable terms and at a reasonable cost, (ii) the Employer shall not be required to provide benefits under this Section 2.1(c) upon and after the Change in Control which are in excess of those provided to a significant number of executives of similar status who are employed by the Employer from time to time upon and after the Change in Control, and (iii) no type of benefit otherwise to be made available to the Executive pursuant to this Section 2.1(c) shall be required to be made available to the extent that such type of benefit is made available to the Executive by any subsequent employer of the Executive; and (d) in addition to the benefits to which the Executive is entitled under the Company's tax-qualified defined benefit retirement plan (the "Retirement Plan") and defined benefit supplemental executive retirement plan (the "SERP"), including any successor plans thereto, the Employer shall pay to the Executive in cash at the time and in the manner provided in Section 2.2: 6 (i) the present value of the retirement benefits (or, if available, the lump-sum retirement benefits) which would have accrued under the terms of the Retirement Plan and the SERP (without regard to any amendment to the Retirement Plan or the SERP made subsequent to a Change in Control and prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if the Executive was 36 months older than their actual age at the Date of Termination and had accumulated (after the Date of Termination) 36 additional months of service credit for vesting, benefit accrual and eligibility purposes thereunder at their highest annual rate of compensation during the 12 months immediately preceding the Date of Termination (or, if higher, as in effect at the time of the Change in Control) and as if any benefit indexing factors continued at the rate applicable at the Date of Termination, minus (ii) the present value of the vested retirement benefits (or, if available, the lump-sum retirement benefits) which had then accrued pursuant to the provisions of the Retirement Plan and the SERP; provided, however, that any payment otherwise provided for under this Section 2.1(d) shall be reduced by the present value of any retirement (including early retirement) incentives offered for a limited time to, and accepted by, the Executive (whether or not under a tax-qualified plan). 2.2 (a) The payments provided for in Section 2.1 shall (except as otherwise expressly provided therein or as provided in Section 2.2(b) or as otherwise expressly provided hereunder) be made as soon as practicable, but in no event later than 30 days, following the Date of Termination. (b) Notwithstanding any other provision of this Agreement to the contrary, no payment or benefit otherwise provided for under or by virtue of the foregoing provisions of this Agreement shall be paid or otherwise made available unless and until the Employer shall have first received from the Executive (no later than 60 days after the Employer has provided to the Executive estimates relating to the payments to be made under this Agreement) a valid, binding and irrevocable general release, in form and substance acceptable to the Employer in its discretion; provided that the Employer shall be permitted to defer any payment or benefit otherwise provided for in this Agreement to the 15th day after its receipt of such release and time at which it has become valid, binding and irrevocable. The Employer may require that any such release contain an agreement of the Executive to notify the Employer of any benefit made available by a subsequent employer as contemplated by clause (iii) of the proviso to Section 2.1(c). 2.3 Notwithstanding any other provision of this Agreement to the contrary, to the extent permitted by the Worker Adjustment and Retraining Notification Act ("WARN"), any benefit payable hereunder to the Executive as a consequence of the Executive's Covered Termination shall be reduced by any amounts required to be paid under Section 2104 of WARN to the Executive in connection with such Covered Termination. 7 Section 3 PARACHUTE TAX PROVISIONS 3.1 If all, or any portion, of the payments and benefits provided under this Agreement, if any, either alone or together with other payments and benefits which the Executive receives or is entitled to receive from the Company or its affiliates, would constitute an excess "parachute payment" within the meaning of Section 280G of the Code (whether or not under an existing plan, arrangement or other agreement) (each such parachute payment, a "Parachute Payment"), and would result in the imposition on the Executive of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Executive is entitled under this Agreement or otherwise, the Executive shall be paid an amount in cash equal to the sum of the excise taxes payable by the Executive by reason of receiving Parachute Payments plus the amount necessary to place the Executive in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under this Section 3.1)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this Section 3.1 shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax, even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this Section 3.1 shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under this Agreement, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Executive's employment with the Employer shall have been terminated. 3.2 Except as may otherwise be agreed to by the Company and the Executive, the amount or amounts (if any) payable under this Section 3 shall be as conclusively determined by the Company's independent auditors (who served in such capacity immediately prior to the Change in Control), whose determination or determinations shall be final and binding on all parties. The Executive hereby agrees to utilize such determination or determinations, as applicable, in filing all of the Executive's tax returns with respect to the excise tax imposed by Section 4999 of the Code. If such independent auditors refuse to make the required determinations, then such determinations shall be made by a comparable independent accounting firm of national reputation reasonably selected by the Company. Notwithstanding any other provision of this Agreement to the contrary, as a condition to receiving any Parachute Gross-up payment, the Executive hereby agrees to be bound by and comply with the provisions of this Section 3.2. Section 4 MISCELLANEOUS 4.1 (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform under the terms of this Agreement in the same manner and to the same extent that the Company and its affiliates would be required to perform it if no such succession had taken place (provided that such a requirement to perform which arises by operation of law shall be deemed to satisfy the requirements for such an express assumption and agreement), and in such event the Company (as 8 constituted prior to such succession) shall have no further obligation under or with respect to this Agreement. Failure of the Company to obtain such assumption and agreement with respect to the Executive prior to the effectiveness of any such succession shall be a breach of the terms of this Agreement with respect to the Executive and shall entitle the Executive to compensation from the Employer (as constituted prior to such succession) in the same amount and on the same terms as the Executive would be entitled to hereunder were the Executive's employment terminated for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in this Agreement, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which assumes and agrees (or is otherwise required) to perform this Agreement. Nothing in this Section 4.1(a) shall be deemed to cause any event or condition which would otherwise constitute a Change in Control not to constitute a Change in Control. (b) Notwithstanding Section 4.1(a), the Company shall remain liable to the Executive upon a Covered Termination after a Change in Control if (i) the Executive is not offered continuing employment by a successor to the Employer or (ii) the Executive declines such an offer and the Executive's resulting termination of employment otherwise constitutes a Covered Termination hereunder. (c) This Agreement, and the Executive's and the Company's rights and obligations hereunder, may not be assigned by the Executive or, except as provided in Section 4.1(a), the Company, respectively; any purported assignment by the Executive or the Company in violation hereof shall be null and void. (d) The terms of this Agreement shall inure to the benefit of and be enforceable by the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees of the Executive. If the Executive shall die while an amount would still be payable to the Executive hereunder if they had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee or other designee or, if there is no such designee, the Executive's estate. 4.2 Except as expressly provided in Section 2.1, the Executive shall not be required to mitigate damages or the amount of any payment provided for under this Agreement by seeking other employment or otherwise, nor will any payments or benefits hereunder be subject to offset in the event the Executive does mitigate. 4.3 The Employer shall pay all legal fees and expenses incurred in a legal proceeding by the Executive in seeking to obtain or enforce any right or benefit provided by this Agreement. Such payments are to be made within five days after the Executive's request for payment accompanied with such evidence of fees and expenses incurred as the Employer reasonably may require; provided that if the Executive institutes a proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that the Executive has failed to prevail substantially, the Executive shall pay [his] [her] own costs and expenses (and, if applicable, return any amounts theretofore paid on the Executive's behalf under this Section 4.3). 4.4 (a) The Executive may file a claim for benefits under this Agreement by written communication to the Board. A claim is not considered filed until such 9 communication is actually received by the Board. Within 90 days (or, if special circumstances require an extension of time for processing, 180 days, in which case notice of such special circumstances shall be provided within the initial 90-day period) after the filing of the claim, the Board shall: (i) approve the claim and take appropriate steps for satisfaction of the claim; or (ii) if the claim is wholly or partially denied, advise the Executive of such denial by furnishing to him or her a written notice of such denial setting forth (A) the specific reason or reasons for the denial; (B) specific reference to pertinent provisions of this Agreement on which the denial is based and, if the denial is based in whole or in part on any rule of construction or interpretation adopted by the Board, a reference to such rule, a copy of which shall be provided to the Executive; (C) a description of any additional material or information necessary for the Executive to perfect the claim and an explanation of the reasons why such material or information is necessary; and (D) a reference to this Section 4.4. 4.5 For the purposes of this Agreement, notice and all other communications provided for in this Agreement shall be in writing and shall be deemed to have been duly given when hand delivered or mailed by United States certified or registered express mail, return receipt requested, postage prepaid, if to the Executive, addressed to the Executive at his or her respective address on file with the Secretary of the Company; if to the Company, addressed to Conectiv, 800 King Street, P.O. Box 231, Wilmington, Delaware 19899-0231, and directed to the attention of its General Counsel; if to the Board, addressed to the Board of Directors, c/o Conectiv, 800 King Street, P.O. Box 231, Wilmington, Delaware, 19899-0231, and directed to the Company's General Counsel; or to such other address as any party may have furnished to the others in writing in accordance herewith, except that notice of change of address shall be effective only upon receipt. 4.6 Unless otherwise determined by the Employer in an applicable plan or arrangement, no amounts payable hereunder upon a Covered Termination shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its employees unless the Employer shall determine otherwise. 4.7 This Agreement is the exclusive arrangement with the Executive applicable to payments and benefits in connection with a change in control of the Company (whether or not a Change in Control), and supersedes any prior arrangements involving the Company or its predecessors or affiliates (including, without limitation, Delmarva Power & Light Company and Atlantic Energy, Inc.) relating to changes in control (whether or not Changes in Control). This Agreement shall not limit any right of the Executive to receive any payments or benefits under an employee benefit or executive compensation plan of the Employer, initially adopted as of or after the date hereof, or otherwise listed in Exhibit A hereto, which are expressly contingent thereunder upon the occurrence of a change in control (including, but not limited to, the acceleration of any rights or benefits thereunder); provided that in no event shall the Executive be entitled to any payment or benefit under this Agreement which duplicates a 10 payment or benefit received or receivable by the Executive under any severance or similar plan or policy of the Employer. 4.8 Any payments hereunder shall be made out of the general assets of the Employer. The Executive shall have the status of general unsecured creditor of the Employer, and this Agreement constitutes a mere promise by the Employer to make payments under this Agreement in the future as and to the extent provided herein. 4.9 Nothing in this Agreement shall confer on the Executive any right to continue in the employ of the Employer or interfere in any way (other than by virtue of requiring payments or benefits as may expressly be provided herein) with the right of the Employer to terminate the Executive's employment at any time. 4.10 The Employer shall be entitled to withhold from any payments or deemed payments any amount of tax withholding required by law. 4.11 Any controversy or claim arising out of or relating to this Agreement or the breach of this Agreement that is not resolved by the Employer and the Executive shall be submitted to arbitration in Wilmington, Delaware, in accordance with Delaware law and the procedures of the American Arbitration Association. The determination of the arbitrator(s) shall be conclusive and binding on the Employer and Executive and judgment may be entered on the arbitrator(s)' award in any court having jurisdiction. 4.12 (a) This Agreement may be amended, superseded, canceled, renewed or extended, and the terms hereof may be waived, only by a written instrument signed by the parties or, in the case of a waiver, by the party waiving compliance. No delay on the part of any party in exercising any right, power or privilege hereunder shall operate as a waiver thereof, nor shall any waiver on the part of any party of any such right, power or privilege nor any single or partial exercise of any such right, power or privilege, preclude any other or further exercise thereof or the exercise of any other such right, power or privilege. (b) Without limiting the generality of Section 4.12(a), the Board, on written notice to the Executive, may unilaterally terminate this Agreement with respect to Changes in Control occurring after the later of (i) December 31, 2000 or (ii) the first anniversary of the date of such notice. Notwithstanding the foregoing, in the event of a Potential Change of Control, until such time as the transaction or transactions contemplated in connection with such Potential Change in Control, and all related negotiations, are abandoned in their entirety [as determined in good faith and reflected in writing (before a Change in Control) by the Board], this Agreement may not be terminated under this Section 4.12(b) with respect to any Change of Control which ultimately results directly from facts and circumstances constituting such Potential Change in Control if such Potential Change in Control occurs on or before the later of (i) December 31, 2000 or (ii) one year after the first anniversary of the date of the notice referred to in the foregoing sentence. (c) Without limiting the generality of Section 4.12(a), if material negotiations involving the Board or the Chief Executive Officer of the Company have commenced regarding a transaction which, if consummated, would constitute a Change in Control, and this Agreement is terminated while such negotiations are continuing and actively being pursued by the Board or the Chief Executive Officer, then such termination of this Agreement shall be null and void as 11 applied with respect to the Change in Control (if any) which ultimately results directly from such negotiations; it being expressly understood that this Section 4.12(c) shall not apply with respect to any negotiations which at any time prior to a Change in Control have ceased [as determined in good faith and reflected in writing (prior to a Change in Control) by the Board or Chief Executive Officer (or which otherwise have ceased at a time prior to a Change in Control)]. 4.13 The invalidity or unenforceability of any provision of this Agreement shall not affect the validity or enforceability of any other provision of this Agreement which shall remain in full force and effect. 4.14 The use of captions in this Agreement is for convenience. The captions are not intended to and do not provide substantive rights. 4.15 THIS AGREEMENT SHALL BE CONSTRUED, ADMINISTERED AND ENFORCED ACCORDING TO THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW. IN WITNESS WHEREOF, the parties hereto have signed their names, effective as of the date first above written. CONECTIV By: -------------- Name: ------------ Title: ----------- ----------------- [Executive's Name] 12 EX-10.D 4 0004.txt CONECTIV CHANGE-IN-CONTROL SEVERANCE PLAN EXHIBIT 10-D Conectiv Change-in-Control Severance Plan For Certain Select Employees CONECTIV CHANGE-IN-CONTROL SEVERANCE PLAN FOR CERTAIN SELECT EMPLOYEES ------------------------ Section 1 INTRODUCTION The Plan is intended to provide severance benefits to certain selected employees of the Employer in the event that their employment is terminated under certain circumstances following a Change in Control. The Plan shall be effective as of the Effective Date. Section 2 DEFINITIONS Except as may otherwise be specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used herein: "Base Salary" shall mean the annual base rate of regular compensation of a Participant immediately before a Change in Control, or if greater, the highest annual such rate at any time during the 12-month period immediately preceding the Change in Control. "Board" shall mean the Board of Directors of the Company. "Cause" shall mean (i) the willful and continued failure by a Participant substantially to perform his or her duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness of the Participant, or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason) or (ii) the willful engaging by a Participant in conduct which is demonstrably and materially injurious to the Employer, monetarily or otherwise. For purposes hereof, no act, or failure to act, on a Participant's part, shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that any act or omission was in the best interest of the Employer. "Change in Control" shall mean the first to occur, after the Effective Date, of any of the following: (i) if any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 25% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; (ii) if during any period of 24 consecutive months during the existence of the Plan commencing on or after the Effective Date, the individuals who, at the 2 beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this clause (ii); (iii) the consummation of a merger or consolidation of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, as defined in clause (i), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 40% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of the Company immediately prior to such sale. Upon the occurrence of a Change in Control as provided above, no subsequent event or condition shall constitute a Change in Control for purposes of the Plan, with the result that there can be no more than one Change in Control hereunder. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean such Committee as may be appointed and constituted from time to time under Section 5. "Company" shall mean, subject to Section 8.1(a), Conectiv, a Delaware corporation. "Covered Termination" shall mean, with respect to a Participant, if, within the one-year period immediately following a Change in Control, the Participant (i) is terminated by the Employer without Cause (other than on account of death or Disability), or (ii) terminates his or her employment with the Employer for Good Reason. A Participant shall not be deemed to 3 have terminated for purposes of the Plan merely because he or she ceases to be employed by the Employer and becomes employed by a new employer involved in the Change in Control; provided that such new employer shall be bound by the Plan as if it were the Employer hereunder with respect to such Participant. It is expressly understood that no Covered Termination shall be deemed to have occurred merely because, upon the occurrence of a Change in Control, the Participant ceases to be employed by the Employer and does not become employed by a successor to the Employer after the Change in Control if the successor makes an offer to employ the Participant on terms and conditions which, if imposed by the Employer, would not give the Participant a basis on which to terminate employment for Good Reason. "Date of Termination" shall mean the date on which a Covered Termination occurs. "Disability" shall mean the occurrence after a Change in Control of the incapacity of a Participant due to physical or mental illness, whereby such Participant shall have been absent from the full-time performance of his or her duties with the Employer for six consecutive months. "Effective Date" shall mean March 1, 1998. "Employer" shall mean the Company and each Subsidiary designated by the Board to adopt the Plan (and which so adopts the Plan), or, where the context so requires, the Company and such Subsidiaries collectively. The adoption of the Plan by a Subsidiary may be revoked only with the consent of the Board, any such revocation to be subject to Section 7; provided that a Subsidiary which ceases to be, directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the Company prior to a Change in Control (other than in connection with and as an integral part of a series of transactions resulting in a Change in Control) shall, automatically and without any further action, cease to be (or be a part of) the Employer for purposes hereof (and the provisions of Section 7.3 shall not apply in such a case). "Good Reason" shall mean, without the express written consent of the Participant, the occurrence after a Change in Control of any of the following circumstances, unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) assignment to the Participant of any duties inconsistent in any materially adverse respect with his or her position, authority, duties or responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction in the Participant's Base Salary as in effect immediately before the Change in Control; (iii) a material reduction in the Participant's aggregate compensation opportunity, comprised only of (A) the Participant's Base Salary, (B) bonus opportunity, if any, and (C) long-term or other incentive compensation opportunity, if any (taking into account, in the case of such bonus and incentive opportunities, without limitation, any target, minimum and maximum amounts payable and the attainability and otherwise the reasonability of any performance hurdles, goals and other measures); 4 (iv) the Company's requiring a Participant to be based at any office or location more than 50 miles from that location at which he or she performed his or her services immediately prior to the occurrence of a Change in Control, except for travel reasonably required in the performance of the Participant's responsibilities; or (v) the failure of the Employer to obtain a reasonable agreement from any successor to assume and agree to perform the Plan, as contemplated in Section 8.1(a). "Notice of Termination" shall mean a notice given by the Employer or Participant, as applicable, which shall indicate the specific termination provision in the Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provisions so indicated. "Participant" shall have the meaning ascribed thereto by Section 3. "Person" shall have the meaning ascribed thereto by Section 3(a)(9) of the Securities Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof (except that such term shall not include (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company, or (v) with respect to any particular Participant, such Participant or any "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) which includes such Participant). "Plan" shall mean this Conectiv Change-in-Control Severance Plan for Certain Select Employees, as it may from time to time be amended in accordance with Section 7. "Potential Change in Control" shall mean the occurrence, before a Change in Control, of any of the following: (i) if the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) if the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) if any Person becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Persons any securities acquired directly from the Company or its Subsidiaries) representing 15% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) if the Board adopts a resolution to the effect that, for purposes of the Plan, a Potential Change in Control has occurred. 5 "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Stock" shall mean the common stock, $.01 par value, of the Company. "Subsidiary" shall mean any entity, directly or indirectly, through one or more intermediaries, controlled by the Company, and which has duly adopted the Plan. "Target Annual Bonus" shall mean a Participant's annual bonus for the Employer's fiscal year in which the Date of Termination occurs, which bonus would be paid or payable if the Participant and the Employer were to satisfy all conditions to the Participant's receiving the annual bonus at target (although not necessarily the maximum annual bonus); provided that such amount shall be annualized for any fiscal year consisting of less than 12 full months; and provided, further, that, if at the time of a Change in Control it is substantially certain that a bonus at a level beyond target will be paid or payable for the fiscal year, then the bonus which is substantially certain to be paid or payable, rather than the target bonus, shall be used for these purposes. Section 3 PARTICIPATION The employees of the Employer who shall be "Participants" for purposes hereof shall be, subject to Section 7, those employees of the Employer as shall be proposed by the management of the Company for coverage hereby and approved by the Chief Executive Officer of the Company, as reflected in a duly executed certificate of the Chief Executive Officer from time to time. The initial Participants shall be as listed on Exhibit A hereto (which is hereby incorporated herein by reference) as in effect as of the Effective Date. The Company shall cause such Exhibit A to be amended to reflect the Participants participating in the Plan from time to time. Section 4 BENEFITS 4.1 If a Covered Termination occurs with respect to a Participant, then such Participant shall be entitled hereunder to the following: (a) the product of (i) the Participant's Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365; (b) an amount equal to one and one-half times the sum of (i) the Participant's annual Base Salary for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) the Participant's Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control); (c) for a period of one and one-half years after such termination, the Employer shall arrange to make available to such Participant medical, dental, vision, group life and disability benefits that are at least at a level (and cost to the Participant) that is substantially similar in the aggregate to the level of such benefits which was available to such Participant 6 immediately prior to the Change in Control; provided that (i) the Employer shall be required to provide group life and disability benefits only to the extent it is able to do so on reasonable terms and at a reasonable cost, (ii) the Employer shall not be required to provide benefits under this Section 4.1(c) upon and after the Change in Control which are in excess of those provided to a significant number of employees of similar status who are employed by the Employer from time to time upon and after the Change in Control, and (iii) no type of benefit otherwise to be made available to a Participant pursuant to this Section 4.1(c) shall be required to be made available to the extent that such type of benefit is made available to the Participant by any subsequent employer of such Participant; and (d) in addition to the benefits to which a Participant is entitled under the Company's tax-qualified defined benefit retirement plan (the "Retirement Plan") and defined benefit supplemental executive retirement plan (the "SERP"), including any successor plans thereto, the Employer shall pay to each Participant in cash at the time and in the manner provided in Section 4.2: (i) the present value of the retirement benefits (or, if available, the lump-sum retirement benefits) which would have accrued under the terms of the Retirement Plan and the SERP (without regard to any amendment to the Retirement Plan or the SERP made subsequent to a Change in Control and prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if such Participant was 18 months older than their actual age at the Date of Termination and had accumulated (after the Date of Termination) 18 additional months of service credit for vesting, benefit accrual and eligibility purposes thereunder at their highest annual rate of compensation during the 12 months immediately preceding the Date of Termination (or, if higher, as in effect at the time of the Change in Control) and as if any benefit indexing factors continued at the rate applicable at the Date of Termination, minus (ii) the present value of the vested retirement benefits (or, if available, the lump-sum retirement benefits) which had then accrued pursuant to the provisions of the Retirement Plan and the SERP; provided, however, that any payment otherwise provided for under this Section 4.1(d) shall be reduced by the present value of any retirement (including early retirement) incentives offered for a limited time to, and accepted by, the Participant (whether or not under a tax-qualified plan). 4.2 (a) The payments provided for in Section 4.1 shall (except as otherwise expressly provided therein or as provided in Section 4.2(b) or as otherwise expressly provided hereunder) be made as soon as practicable, but in no event later than 30 days, following the Date of Termination. (b) Notwithstanding any other provision of the Plan to the contrary, no payment or benefit otherwise provided for under or by virtue of the foregoing provisions of the Plan shall be paid or otherwise made available unless and until the Employer shall have first received from the applicable Participant (no later than 60 days after the Employer has provided to the Participant estimates relating to the payments to be made under the Plan) a valid, binding and irrevocable general release, in form and substance acceptable to the Employer in its 7 discretion; provided that the Employer shall be permitted to defer any payment or benefit otherwise provided for in the Plan to the 15th day after its receipt of such release and time at which it has become valid, binding and irrevocable. The Employer may require that any such release contain an agreement of the Participant to notify the Employer of any benefit made available by a subsequent employer as contemplated by clause (iii) of the proviso to Section 4.1(c). 4.3 Notwithstanding any other provision of the Plan to the contrary, to the extent permitted by the Worker Adjustment and Retraining Notification Act ("WARN"), any benefit payable hereunder to a Participant as a consequence of the Participant's Covered Termination shall be reduced by any amounts required to be paid under Section 2104 of WARN to such Participant in connection with such Covered Termination. Section 5 ADMINISTRATION The Plan shall be administered by the Committee appointed by the Chief Executive Officer, consisting of one or more individuals employed by the Employer prior to the Change in Control. The acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by a majority of the entire Committee, shall be the acts of the Committee for purposes of the Plan. If and to the extent applicable, no member of the Committee may act as to matters under the Plan specifically relating to such member. If any member of the Committee is to be replaced or otherwise ceases to be a member thereof upon or after a Change in Control, then the Chief Executive Officer of the Company (or, if he or she fails to act, the President, the Chief Operating Officer and the Chief Financial Officer, in that order) immediately prior to the Change in Control, and no other person, shall be permitted to designate a successor member. If at any time there is no Committee, the Chief Executive Officer shall have the rights and responsibilities of the Committee hereunder. The Committee shall have the full authority to employ and rely on such legal counsel, actuaries and accountants (which may also be those of the Employer), and other agents, designees and delegatees, as it may deem advisable to assist in the administration of the Plan. The Employer hereby indemnifies each member of the Committee for any liability or expense relating to the administration of the Plan, to the maximum extent permitted by law. Section 6 PARACHUTE TAX PROVISIONS 6.1 If all, or any portion, of the payments and benefits provided under the Plan, if any, either alone or together with other payments and benefits which a Participant receives or is entitled to receive from the Company or its affiliates, would constitute an excess "parachute payment" within the meaning of Section 280G of the Code (whether or not under an existing plan, arrangement or other agreement) (each such parachute payment, a "Parachute Payment"), and would result in the imposition on the Participant of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Participant is entitled under the Plan or otherwise, the Participant shall be paid an amount in cash equal to the sum of the excise taxes payable by the Participant by reason of receiving Parachute Payments plus the amount necessary to place the Participant in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible applicable rates on such Parachute Payments (including, without limitation, any payments under 8 this Section 6.1)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this Section 6.1 shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax, even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this Section 6.1 shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under the Plan, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Participant's employment with the Employer shall have been terminated. 6.2 Except as may otherwise be agreed to by the Company and the Participant, the amount or amounts (if any) payable under this Section 6 shall be as conclusively determined by the Company's independent auditors (who served in such capacity immediately prior to the Change in Control), whose determination or determinations shall be final and binding on all parties. The Participant shall agree to utilize such determination or determinations, as applicable, in filing all of the Participant's tax returns with respect to the excise tax imposed by Section 4999 of the Code. If such independent auditors refuse to make the required determinations, then such determinations shall be made by a comparable independent accounting firm of national reputation reasonably selected by the Company. Notwithstanding any other provision of the Plan to the contrary, as a condition to receiving any Parachute Gross-up payment, the Participant shall agree, in form and substance acceptable to the Company, to be bound by and comply with the provisions of this Section 6.2. Section 7 AMENDMENT AND TERMINATION 7.1 Subject to Section 7.2, the Board shall have the right in its discretion at any time to amend the Plan in any respect or to terminate the Plan prior to a Change in Control; provided that Exhibit A hereto may be amended from time to time as provided in Section 7.3(b) below. 7.2 Notwithstanding any other provision of the Plan to the contrary: (a) The Plan (including, without limitation, this Section 7.2) as applied to any particular Participant may not be amended or terminated at any time on or after the occurrence of a Change in Control in any manner adverse to the interests of such Participant, without the express written consent of such Participant. (b) The Plan (including, without limitation, this Section 7.2) as applied to any particular Participant may not be amended or terminated at any time on or after the occurrence of a Potential Change in Control in any manner adverse to the interests of such Participant, without the prior written consent of such Participant, until such time as the transaction or transactions contemplated in connection with the Potential Change in Control, and all related negotiations, are abandoned in their entirety as determined in good faith and reflected in writing (before a Change in Control) by the Board. (c) If material negotiations involving the Board or the Chief Executive Officer of the Company have commenced regarding a transaction which, if consummated, would constitute a Change in Control, and the Plan is amended or terminated while such negotiations 9 are continuing and actively being pursued by the Board or the Chief Executive Officer, then such amendment or termination of the Plan (including, without limitation, this Section 7.2), to the extent adverse to the interests of any particular Participant, shall be null and void as applied to such Participant with respect to the Change in Control (if any) which ultimately results directly from such negotiations, unless the written consent of such Participant to the amendment or termination is or has been obtained; it being expressly understood that this Section 7.2(c) shall not apply with respect to any negotiations which at any time prior to a Change in Control have ceased as determined in good faith and reflected in writing (prior to a Change in Control) by the Board or Chief Executive Officer (or which otherwise have ceased at a time prior to a Change in Control). 7.3 (a) If a Subsidiary, with the consent of the Board, purports to revoke its adoption of the Plan in accordance with the other terms of the Plan, such revocation shall be considered to constitute a Plan amendment for purposes of Section 7.2, and, therefore, any such purported revocation shall be subject to the restrictions of Section 7.2. (b) If after an individual has become a Participant, any attempt is made in accordance with the other terms of the Plan not to include such individual as one of the Participants hereunder, then such exclusion shall be considered to constitute an amendment to the Plan for purposes of Section 7.2, and, therefore, any such purported exclusion shall be subject to the restrictions of Section 7.2. Section 8 MISCELLANEOUS 8.1 (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform under the terms of the Plan in the same manner and to the same extent that the Company and its affiliates would be required to perform it if no such succession had taken place (provided that such a requirement to perform which arises by operation of law shall be deemed to satisfy the requirements for such an express assumption and agreement), and in such event the Company (as constituted prior to such succession) shall have no further obligation under or with respect to the Plan. Failure of the Company to obtain such assumption and agreement with respect to any particular Participant prior to the effectiveness of any such succession shall be a breach of the terms of the Plan with respect to such Participant and shall entitle each such Participant to compensation from the Employer (as constituted prior to such succession) in the same amount and on the same terms as the Participant would be entitled to hereunder were the Participant's employment terminated for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in the Plan, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which assumes and agrees (or is otherwise required) to perform the Plan. Nothing in this Section 8.1(a) shall be deemed to cause any event or condition which would otherwise constitute a Change in Control not to constitute a Change in Control. (b) Notwithstanding Section 8.1(a), the Company shall remain liable to those Participants who have a Covered Termination upon a Change in Control because (i) they are not offered continuing employment by a successor to the Employer or (ii) the Participant declines 10 such an offer and the Participant's resulting termination of employment otherwise constitutes a Covered Termination hereunder. (c) To the maximum extent permitted by law, the right of any Participant or other person to any amount under the Plan may not be subject to voluntary or involuntary anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant or such other person. (d) The terms of the Plan shall inure to the benefit of and be enforceable by the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees of each Participant. If a Participant shall die while an amount would still be payable to the Participant hereunder if they had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Plan to the Participant's devisee, legatee or other designee or, if there is no such designee, their estate. 8.2 Except as expressly provided in Section 4.1, Participants shall not be required to mitigate damages or the amount of any payment provided for under the Plan by seeking other employment or otherwise, nor will any payments or benefits hereunder be subject to offset in the event a Participant does mitigate. 8.3 The Employer shall pay all legal fees and expenses incurred in a legal proceeding by a Participant in seeking to obtain or enforce any right or benefit provided by the Plan. Such payments are to be made within five days after a Participant's request for payment accompanied with such evidence of fees and expenses incurred as the Employer reasonably may require; provided that if the Participant institutes a proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that such Participant has failed to prevail substantially, he or she shall pay his or her own costs and expenses (and, if applicable, return any amounts theretofore paid on his or her behalf under this Section 8.3). 8.4 (a) A Participant may file a claim for benefits under the Plan by written communication to the Committee or its designee. A claim is not considered filed until such communication is actually received by the Committee or such designee. Within 90 days (or, if special circumstances require an extension of time for processing, 180 days, in which case notice of such special circumstances shall be provided within the initial 90-day period) after the filing of the claim, the Committee shall: (i) approve the claim and take appropriate steps for satisfaction of the claim; or (ii) if the claim is wholly or partially denied, advise the claimant of such denial by furnishing to him or her a written notice of such denial setting forth (A) the specific reason or reasons for the denial; (B) specific reference to pertinent provisions of the Plan on which the denial is based and, if the denial is based in whole or in part on any rule of construction or interpretation adopted by the Committee, a reference to such rule, a copy of which shall be provided to the claimant; (C) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of the reasons why such material or information is necessary; and (D) a reference to this Section 8.4. 11 (b) The claimant may request a review of any denial of his or her claim by written application to the Committee within 60 days after receipt of the notice of denial of such claim. Within 60 days (or, if special circumstances require an extension of time for processing, 120 days, in which case notice of such special circumstances shall be provided within the initial 60-day period) after receipt of written application for review, the Committee shall provide the claimant with its decision in writing, including, if the claimant's claim is not approved, specific reasons for the decision and specific references to the Plan's provisions on which the decision is based. 8.5 All notices under the Plan shall be in writing, and if to the Company or the Committee, shall be delivered to the General Counsel of the Company, or mailed to the Company's principal office, addressed to the attention of the General Counsel of the Company; and if to a Participant (or the estate or beneficiary thereof), shall be delivered personally or mailed to the Participant at the address appearing in the records of the Company. 8.6 Unless otherwise determined by the Employer in an applicable plan or arrangement, no amounts payable hereunder upon a Covered Termination shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its employees unless the Employer shall determine otherwise. 8.7 With respect to each Participant, the Plan is the exclusive arrangement applicable to payments and benefits in connection with a change in control of the Company (whether or not a Change in Control), and supersedes any prior arrangements involving the Company or its predecessors or affiliates (including, without limitation, Delmarva Power & Light Company and Atlantic Energy, Inc.) relating to changes in control (whether or not Changes in Control). Participation in the Plan shall not limit any right of a Participant to receive any payments or benefits under an employee benefit or executive compensation plan of the Employer, initially adopted as of or after the Effective Date, or otherwise listed on Exhibit B hereto, which are expressly contingent thereunder upon the occurrence of a change in control (including, but not limited to, the acceleration of any rights or benefits thereunder); provided that in no event shall any Participant be entitled to any payment or benefit under the Plan which duplicates a payment or benefit received or receivable by the Participant under any severance or similar plan or policy of the Employer. 8.8 Any payments hereunder shall be made out of the general assets of the Employer. Each Participant shall have the status of general unsecured creditors of the Employer, and the Plan constitutes a mere promise by the Employer to make payments under the Plan in the future as and to the extent provided herein. 8.9 Nothing in the Plan shall confer on any individual any right to continue in the employ of the Employer or interfere in any way (other than by virtue of requiring payments or benefits as may expressly be provided herein) with the right of the Employer to terminate the individual's employment at any time. 8.10 The Employer shall be entitled to withhold from any payments or deemed payments any amount of tax withholding required by law. 12 8.11 The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan which shall remain in full force and effect. 8.12 The use of captions in the Plan is for convenience. The captions are not intended to and do not provide substantive rights. 8.13 THE PLAN SHALL BE CONSTRUED, ADMINISTERED AND ENFORCED ACCORDING TO THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW. 13 EX-10.E 5 0005.txt FORM OF CHANGE-IN-CONTROL SEVERANCE AGREEMENT EXHIBIT 10-E Form of Change-in-Control Severance Agreement between Conectiv and certain executives CONECTIV CHANGE-IN-CONTROL SEVERANCE PLAN FOR CERTAIN EXECUTIVE EMPLOYEES --------------------------- Section 1 INTRODUCTION The Plan is intended to provide severance benefits to certain selected executive employees of the Employer in the event that their employment is terminated under certain circumstances following a Change in Control. The Plan shall be effective as of the Effective Date. Section 2 DEFINITIONS Except as may otherwise be specified or as the context may otherwise require, the following terms shall have the respective meanings set forth below whenever used herein: "Base Salary" shall mean the annual base rate of regular compensation of a Participant immediately before a Change in Control, or if greater, the highest annual such rate at any time during the 12-month period immediately preceding the Change in Control. "Board" shall mean the Board of Directors of the Company. "Cause" shall mean (i) the willful and continued failure by a Participant substantially to perform his or her duties with the Employer (other than any such failure resulting from incapacity due to physical or mental illness of the Participant, or any such actual or anticipated failure after the issuance of a Notice of Termination for Good Reason) or (ii) the willful engaging by a Participant in conduct which is demonstrably and materially injurious to the Employer, monetarily or otherwise. For purposes hereof, no act, or failure to act, on a Participant's part, shall be deemed "willful" unless done, or omitted to be done, by the Participant not in good faith and without reasonable belief that any act or omission was in the best interest of the Employer. "Change in Control" shall mean the first to occur, after the Effective Date, of any of the following: (i) if any Person is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 25% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; 2 (ii) if during any period of 24 consecutive months during the existence of the Plan commencing on or after the Effective Date, the individuals who, at the beginning of such period, constitute the Board (the "Incumbent Directors") cease for any reason other than death to constitute at least a majority thereof; provided that a director who was not a director at the beginning of such 24-month period shall be deemed to have satisfied such 24-month requirement (and be an Incumbent Director) if such director was elected by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually (because they were directors at the beginning of such 24-month period) or by prior operation of this clause (ii); (iii) the consummation of a merger or consolidation of the Company with any other corporation other than (A) a merger or consolidation which would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity or any parent thereof) at least 60% of the combined voting power of the voting securities of the Company or such surviving entity or any parent thereof outstanding immediately after such merger or consolidation, or (B) a merger or consolidation effected to implement a recapitalization of the Company (or similar transaction) in which no Person is or becomes the beneficial owner, as defined in clause (i), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Person any securities acquired directly from the Company or its Subsidiaries) representing 40% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; or (iv) the stockholders of the Company approve a plan of complete liquidation or dissolution of the Company, or there is consummated an agreement for the sale or disposition by the Company of all or substantially all of the Company's assets, other than a sale or disposition by the Company of all or substantially all of the Company's assets to an entity, at least 60% of the combined voting power of the voting securities of which are owned by Persons in substantially the same proportion as their ownership of the Company immediately prior to such sale. Upon the occurrence of a Change in Control as provided above, no subsequent event or condition shall constitute a Change in Control for purposes of the Plan, with the result that there can be no more than one Change in Control hereunder. "Code" shall mean the Internal Revenue Code of 1986, as amended. "Committee" shall mean such Committee as may be appointed and constituted from time to time under Section 5. "Company" shall mean, subject to Section 8.1(a), Conectiv, a Delaware corporation. "Covered Termination" shall mean, with respect to a Participant, if, within the one-year period immediately following a Change in Control, the Participant (i) is terminated by 3 the Employer without Cause (other than on account of death or Disability), or (ii) terminates his or her employment with the Employer for Good Reason. A Participant shall not be deemed to have terminated for purposes of the Plan merely because he or she ceases to be employed by the Employer and becomes employed by a new employer involved in the Change in Control; provided that such new employer shall be bound by the Plan as if it were the Employer hereunder with respect to such Participant. It is expressly understood that no Covered Termination shall be deemed to have occurred merely because, upon the occurrence of a Change in Control, the Participant ceases to be employed by the Employer and does not become employed by a successor to the Employer after the Change in Control if the successor makes an offer to employ the Participant on terms and conditions which, if imposed by the Employer, would not give the Participant a basis on which to terminate employment for Good Reason. "Date of Termination" shall mean the date on which a Covered Termination occurs. "Disability" shall mean the occurrence after a Change in Control of the incapacity of a Participant due to physical or mental illness, whereby such Participant shall have been absent from the full-time performance of his or her duties with the Employer for six consecutive months. "Effective Date" shall mean March 1, 1998. "Employer" shall mean the Company and each Subsidiary designated by the Board to adopt the Plan (and which so adopts the Plan), or, where the context so requires, the Company and such Subsidiaries collectively. The adoption of the Plan by a Subsidiary may be revoked only with the consent of the Board, any such revocation to be subject to Section 7; provided that a Subsidiary which ceases to be, directly or indirectly, through one or more intermediaries, controlling, controlled by or under common control with the Company prior to a Change in Control (other than in connection with and as an integral part of a series of transactions resulting in a Change in Control) shall, automatically and without any further action, cease to be (or be a part of) the Employer for purposes hereof (and the provisions of Section 7.3 shall not apply in such a case). "Good Reason" shall mean, without the express written consent of the Participant, the occurrence after a Change in Control of any of the following circumstances, unless such circumstances are fully corrected prior to the Date of Termination specified in the Notice of Termination given in respect thereof: (i) assignment to the Participant of any duties inconsistent in any materially adverse respect with his or her position, authority, duties or responsibilities from those in effect immediately prior to the Change in Control; (ii) a reduction in the Participant's Base Salary as in effect immediately before the Change in Control; (iii) a material reduction in the Participant's aggregate compensation opportunity, comprised only of (A) the Participant's Base Salary, (B) bonus opportunity, if any, and (C) long-term or other incentive compensation opportunity, if any (taking into account, in the case of such bonus and incentive opportunities, without limitation, any target, minimum and maximum amounts 4 payable and the attainability and otherwise the reasonability of any performance hurdles, goals and other measures); (iv) the Company's requiring a Participant to be based at any office or location more than 50 miles from that location at which he or she performed his or her services immediately prior to the occurrence of a Change in Control, except for travel reasonably required in the performance of the Participant's responsibilities; or (v) the failure of the Employer to obtain a reasonable agreement from any successor to assume and agree to perform the Plan, as contemplated in Section 8.1(a). "Notice of Termination" shall mean a notice given by the Employer or Participant, as applicable, which shall indicate the specific termination provision in the Plan relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Participant's employment under the provisions so indicated. "Participant" shall have the meaning ascribed thereto by Section 3. "Person" shall have the meaning ascribed thereto by Section 3(a)(9) of the Securities Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof (except that such term shall not include (i) the Company or any of its Subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its Subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportion as their ownership of stock of the Company, or (v) with respect to any particular Participant, such Participant or any "group" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act) which includes such Participant). "Plan" shall mean this Conectiv Change-in-Control Severance Plan for Certain Executive Employees, as it may from time to time be amended in accordance with Section 7. "Potential Change in Control" shall mean the occurrence, before a Change in Control, of any of the following: (i) if the Company enters into an agreement, the consummation of which would result in the occurrence of a Change in Control; (ii) if the Company or any Person publicly announces an intention to take or to consider taking actions which, if consummated, would constitute a Change in Control; (iii) if any Person becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act), directly or indirectly, of securities of the Company (not including in the securities beneficially owned by such Persons any securities acquired directly from the Company or its Subsidiaries) representing 15% or more of either the then outstanding shares of Stock of the Company or the combined voting power of the Company's then outstanding securities; or 5 (iv) if the Board adopts a resolution to the effect that, for purposes of the Plan, a Potential Change in Control has occurred. "Securities Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Stock" shall mean the common stock, $.01 par value, of the Company. "Subsidiary" shall mean any entity, directly or indirectly, through one or more intermediaries, controlled by the Company, and which has duly adopted the Plan. "Target Annual Bonus" shall mean a Participant's annual bonus for the Employer's fiscal year in which the Date of Termination occurs, which bonus would be paid or payable if the Participant and the Employer were to satisfy all conditions to the Participant's receiving the annual bonus at target (although not necessarily the maximum annual bonus); provided that such amount shall be annualized for any fiscal year consisting of less than 12 full months; and provided, further, that, if at the time of a Change in Control it is substantially certain that a bonus at a level beyond target will be paid or payable for the fiscal year, then the bonus which is substantially certain to be paid or payable, rather than the target bonus, shall be used for these purposes. Section 3 PARTICIPATION The employees of the Employer who shall be "Participants" for purposes hereof shall be, subject to Section 7, those executive employees of the Employer as shall be proposed by the management of the Company for coverage hereby and approved by the Board, as reflected in duly adopted resolutions of the Board from time to time. The initial Participants shall be as listed on Exhibit A hereto (which is hereby incorporated herein by reference) as in effect as of the Effective Date. The Company shall cause such Exhibit A to be amended to reflect the Participants participating in the Plan from time to time. Section 4 BENEFITS 4.1 If a Covered Termination occurs with respect to a Participant, then such Participant shall be entitled hereunder to the following: (a) the product of (i) the Participant's Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) a fraction, the numerator of which is the number of days in the current fiscal year through the Date of Termination, and the denominator of which is 365; (b) an amount equal to two times the sum of (i) the Participant's annual Base Salary for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control) and (ii) the Participant's Target Annual Bonus for the year in which the Date of Termination occurs (or, if higher, as in effect at the time of the Change in Control); (c) for a period of two years after such termination, the Employer shall arrange to make available to such Participant medical, dental, vision, group life and disability benefits that are at least at a level (and cost to the Participant) that is substantially similar in the 6 aggregate to the level of such benefits which was available to such Participant immediately prior to the Change in Control; provided that (i) the Employer shall be required to provide group life and disability benefits only to the extent it is able to do so on reasonable terms and at a reasonable cost, (ii) the Employer shall not be required to provide benefits under this Section 4.1(c) upon and after the Change in Control which are in excess of those provided to a significant number of employees of similar status who are employed by the Employer from time to time upon and after the Change in Control, and (iii) no type of benefit otherwise to be made available to a Participant pursuant to this Section 4.1(c) shall be required to be made available to the extent that such type of benefit is made available to the Participant by any subsequent employer of such Participant; and (d) in addition to the benefits to which a Participant is entitled under the Company's tax-qualified defined benefit retirement plan (the "Retirement Plan") and defined benefit supplemental executive retirement plan (the "SERP"), including any successor plans thereto, the Employer shall pay to each Participant in cash at the time and in the manner provided in Section 4.2: (i) the present value of the retirement benefits (or, if available, the lump-sum retirement benefits) which would have accrued under the terms of the Retirement Plan and the SERP (without regard to any amendment to the Retirement Plan or the SERP made subsequent to a Change in Control and prior to the Date of Termination, which amendment adversely affects in any manner the computation of retirement benefits thereunder), determined as if such Participant was 24 months older than their actual age at the Date of Termination and had accumulated (after the Date of Termination) 24 additional months of service credit for vesting, benefit accrual and eligibility purposes thereunder at their highest annual rate of compensation during the 12 months immediately preceding the Date of Termination (or, if higher, as in effect at the time of the Change in Control) and as if any benefit indexing factors continued at the rate applicable at the Date of Termination, minus (ii) the present value of the vested retirement benefits (or, if available, the lump-sum retirement benefits) which had then accrued pursuant to the provisions of the Retirement Plan and the SERP; provided, however, that any payment otherwise provided for under this Section 4.1(d) shall be reduced by the present value of any retirement (including early retirement) incentives offered for a limited time to, and accepted by, the Participant (whether or not under a tax-qualified plan). 4.2 (a) The payments provided for in Section 4.1 shall (except as otherwise expressly provided therein or as provided in Section 4.2(b) or as otherwise expressly provided hereunder) be made as soon as practicable, but in no event later than 30 days, following the Date of Termination. (b) Notwithstanding any other provision of the Plan to the contrary, no payment or benefit otherwise provided for under or by virtue of the foregoing provisions of the Plan shall be paid or otherwise made available unless and until the Employer shall have first received from the applicable Participant (no later than 60 days after the Employer has provided to the Participant estimates relating to the payments to be made under the Plan) a valid, binding 7 and irrevocable general release, in form and substance acceptable to the Employer in its discretion; provided that the Employer shall be permitted to defer any payment or benefit otherwise provided for in the Plan to the 15th day after its receipt of such release and time at which it has become valid, binding and irrevocable. The Employer may require that any such release contain an agreement of the Participant to notify the Employer of any benefit made available by a subsequent employer as contemplated by clause (iii) of the proviso to Section 4.1(c). 4.3 Notwithstanding any other provision of the Plan to the contrary, to the extent permitted by the Worker Adjustment and Retraining Notification Act ("WARN"), any benefit payable hereunder to a Participant as a consequence of the Participant's Covered Termination shall be reduced by any amounts required to be paid under Section 2104 of WARN to such Participant in connection with such Covered Termination. Section 5 ADMINISTRATION The Plan shall be administered by the Committee appointed by the Chief Executive Officer, consisting of one or more individuals employed by the Employer prior to the Change in Control. The acts of a majority of the members present at any meeting of the Committee at which a quorum is present, or acts approved in writing by a majority of the entire Committee, shall be the acts of the Committee for purposes of the Plan. If and to the extent applicable, no member of the Committee may act as to matters under the Plan specifically relating to such member. If any member of the Committee is to be replaced or otherwise ceases to be a member thereof upon or after a Change in Control, then the Chief Executive Officer of the Company (or, if he or she fails to act, the President, the Chief Operating Officer and the Chief Financial Officer, in that order) immediately prior to the Change in Control, and no other person, shall be permitted to designate a successor member. If at any time there is no Committee, the Chief Executive Officer shall have the rights and responsibilities of the Committee hereunder. The Committee shall have the full authority to employ and rely on such legal counsel, actuaries and accountants (which may also be those of the Employer), and other agents, designees and delegatees, as it may deem advisable to assist in the administration of the Plan. The Employer hereby indemnifies each member of the Committee for any liability or expense relating to the administration of the Plan, to the maximum extent permitted by law. Section 6 PARACHUTE TAX PROVISIONS 6.1 If all, or any portion, of the payments and benefits provided under the Plan, if any, either alone or together with other payments and benefits which a Participant receives or is entitled to receive from the Company or its affiliates, would constitute an excess "parachute payment" within the meaning of Section 280G of the Code (whether or not under an existing plan, arrangement or other agreement) (each such parachute payment, a "Parachute Payment"), and would result in the imposition on the Participant of an excise tax under Section 4999 of the Code, then, in addition to any other benefits to which the Participant is entitled under the Plan or otherwise, the Participant shall be paid an amount in cash equal to the sum of the excise taxes payable by the Participant by reason of receiving Parachute Payments plus the amount necessary to place the Participant in the same after-tax position (taking into account any and all applicable federal, state and local excise, income or other taxes at the highest possible 8 applicable rates on such Parachute Payments (including, without limitation, any payments under this Section 6.1)) as if no excise taxes had been imposed with respect to Parachute Payments (the "Parachute Gross-up"). Any Parachute Gross-up otherwise required by this Section 6.1 shall not be made later than the time of the corresponding payment or benefit hereunder giving rise to the underlying Section 4999 excise tax, even if the payment of the excise tax is not required under the Code until a later time. Any Parachute Gross-up otherwise required under this Section 6.1 shall be made whether or not there is a Change in Control, whether or not payments or benefits are payable under the Plan, whether or not the payments or benefits giving rise to the Parachute Gross-up are made in respect of a Change in Control and whether or not the Participant's employment with the Employer shall have been terminated. 6.2 Except as may otherwise be agreed to by the Company and the Participant, the amount or amounts (if any) payable under this Section 6 shall be as conclusively determined by the Company's independent auditors (who served in such capacity immediately prior to the Change in Control), whose determination or determinations shall be final and binding on all parties. The Participant shall agree to utilize such determination or determinations, as applicable, in filing all of the Participant's tax returns with respect to the excise tax imposed by Section 4999 of the Code. If such independent auditors refuse to make the required determinations, then such determinations shall be made by a comparable independent accounting firm of national reputation reasonably selected by the Company. Notwithstanding any other provision of the Plan to the contrary, as a condition to receiving any Parachute Gross-up payment, the Participant shall agree, in form and substance acceptable to the Company, to be bound by and comply with the provisions of this Section 6.2. Section 7 AMENDMENT AND TERMINATION 7.1 Subject to Section 7.2, the Board shall have the right in its discretion at any time to amend the Plan in any respect or to terminate the Plan prior to a Change in Control; provided that Exhibit A hereto may be amended from time to time as provided in Section 7.3(b) below. 7.2 Notwithstanding any other provision of the Plan to the contrary: (a) The Plan (including, without limitation, this Section 7.2) as applied to any particular Participant may not be amended or terminated at any time on or after the occurrence of a Change in Control in any manner adverse to the interests of such Participant, without the express written consent of such Participant. (b) The Plan (including, without limitation, this Section 7.2) as applied to any particular Participant may not be amended or terminated at any time on or after the occurrence of a Potential Change in Control in any manner adverse to the interests of such Participant, without the prior written consent of such Participant, until such time as the transaction or transactions contemplated in connection with the Potential Change in Control, and all related negotiations, are abandoned in their entirety as determined in good faith and reflected in writing (before a Change in Control) by the Board. (c) If material negotiations involving the Board or the Chief Executive Officer of the Company have commenced regarding a transaction which, if consummated, would 9 constitute a Change in Control, and the Plan is amended or terminated while such negotiations are continuing and actively being pursued by the Board or the Chief Executive Officer, then such amendment or termination of the Plan (including, without limitation, this Section 7.2), to the extent adverse to the interests of any particular Participant, shall be null and void as applied to such Participant with respect to the Change in Control (if any) which ultimately results directly from such negotiations, unless the written consent of such Participant to the amendment or termination is or has been obtained; it being expressly understood that this Section 7.2(c) shall not apply with respect to any negotiations which at any time prior to a Change in Control have ceased as determined in good faith and reflected in writing (prior to a Change in Control) by the Board or Chief Executive Officer (or which otherwise have ceased at a time prior to a Change in Control). 7.3 (a) If a Subsidiary, with the consent of the Board, purports to revoke its adoption of the Plan in accordance with the other terms of the Plan, such revocation shall be considered to constitute a Plan amendment for purposes of Section 7.2, and, therefore, any such purported revocation shall be subject to the restrictions of Section 7.2. (b) If after an individual has become a Participant, any attempt is made in accordance with the other terms of the Plan not to include such individual as one of the Participants hereunder, then such exclusion shall be considered to constitute an amendment to the Plan for purposes of Section 7.2, and, therefore, any such purported exclusion shall be subject to the restrictions of Section 7.2. Section 8 MISCELLANEOUS 8.1 (a) The Company shall require any successor (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company expressly to assume and agree to perform under the terms of the Plan in the same manner and to the same extent that the Company and its affiliates would be required to perform it if no such succession had taken place (provided that such a requirement to perform which arises by operation of law shall be deemed to satisfy the requirements for such an express assumption and agreement), and in such event the Company (as constituted prior to such succession) shall have no further obligation under or with respect to the Plan. Failure of the Company to obtain such assumption and agreement with respect to any particular Participant prior to the effectiveness of any such succession shall be a breach of the terms of the Plan with respect to such Participant and shall entitle each such Participant to compensation from the Employer (as constituted prior to such succession) in the same amount and on the same terms as the Participant would be entitled to hereunder were the Participant's employment terminated for Good Reason following a Change in Control, except that for purposes of implementing the foregoing, the date on which any such succession becomes effective shall be deemed the Date of Termination. As used in the Plan, "Company" shall mean the Company as hereinbefore defined and any successor to its business or assets as aforesaid which assumes and agrees (or is otherwise required) to perform the Plan. Nothing in this Section 8.1(a) shall be deemed to cause any event or condition which would otherwise constitute a Change in Control not to constitute a Change in Control. (b) Notwithstanding Section 8.1(a), the Company shall remain liable to those Participants who have a Covered Termination upon a Change in Control because (i) they are not 10 offered continuing employment by a successor to the Employer or (ii) the Participant declines such an offer and the Participant's resulting termination of employment otherwise constitutes a Covered Termination hereunder. (c) To the maximum extent permitted by law, the right of any Participant or other person to any amount under the Plan may not be subject to voluntary or involuntary anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, attachment or garnishment by creditors of the Participant or such other person. (d) The terms of the Plan shall inure to the benefit of and be enforceable by the personal or legal representatives, executors, administrators, successors, heirs, distributees, devisees and legatees of each Participant. If a Participant shall die while an amount would still be payable to the Participant hereunder if they had continued to live, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of the Plan to the Participant's devisee, legatee or other designee or, if there is no such designee, their estate. 8.2 Except as expressly provided in Section 4.1, Participants shall not be required to mitigate damages or the amount of any payment provided for under the Plan by seeking other employment or otherwise, nor will any payments or benefits hereunder be subject to offset in the event a Participant does mitigate. 8.3 The Employer shall pay all legal fees and expenses incurred in a legal proceeding by a Participant in seeking to obtain or enforce any right or benefit provided by the Plan. Such payments are to be made within five days after a Participant's request for payment accompanied with such evidence of fees and expenses incurred as the Employer reasonably may require; provided that if the Participant institutes a proceeding and the judge or other decision-maker presiding over the proceeding affirmatively finds that such Participant has failed to prevail substantially, he or she shall pay his or her own costs and expenses (and, if applicable, return any amounts theretofore paid on his or her behalf under this Section 8.3). 8.4 (a) A Participant may file a claim for benefits under the Plan by written communication to the Committee or its designee. A claim is not considered filed until such communication is actually received by the Committee or such designee. Within 90 days (or, if special circumstances require an extension of time for processing, 180 days, in which case notice of such special circumstances shall be provided within the initial 90-day period) after the filing of the claim, the Committee shall: (i) approve the claim and take appropriate steps for satisfaction of the claim; or (ii) if the claim is wholly or partially denied, advise the claimant of such denial by furnishing to him or her a written notice of such denial setting forth (A) the specific reason or reasons for the denial; (B) specific reference to pertinent provisions of the Plan on which the denial is based and, if the denial is based in whole or in part on any rule of construction or interpretation adopted by the Committee, a reference to such rule, a copy of which shall be provided to the claimant; (C) a description of any additional material or information necessary for the claimant to perfect the claim and an explanation of the reasons why such material or information is necessary; and (D) a reference to this Section 8.4. 11 (b) The claimant may request a review of any denial of his or her claim by written application to the Committee within 60 days after receipt of the notice of denial of such claim. Within 60 days (or, if special circumstances require an extension of time for processing, 120 days, in which case notice of such special circumstances shall be provided within the initial 60-day period) after receipt of written application for review, the Committee shall provide the claimant with its decision in writing, including, if the claimant's claim is not approved, specific reasons for the decision and specific references to the Plan's provisions on which the decision is based. 8.5 All notices under the Plan shall be in writing, and if to the Company or the Committee, shall be delivered to the General Counsel of the Company, or mailed to the Company's principal office, addressed to the attention of the General Counsel of the Company; and if to a Participant (or the estate or beneficiary thereof), shall be delivered personally or mailed to the Participant at the address appearing in the records of the Company. 8.6 Unless otherwise determined by the Employer in an applicable plan or arrangement, no amounts payable hereunder upon a Covered Termination shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of the Employer for the benefit of its employees unless the Employer shall determine otherwise. 8.7 With respect to each Participant, the Plan is the exclusive arrangement applicable to payments and benefits in connection with a change in control of the Company (whether or not a Change in Control), and supersedes any prior arrangements involving the Company or its predecessors or affiliates (including, without limitation, Delmarva Power & Light Company and Atlantic Energy, Inc.) relating to changes in control (whether or not Changes in Control). Participation in the Plan shall not limit any right of a Participant to receive any payments or benefits under an employee benefit or executive compensation plan of the Employer, initially adopted as of or after the Effective Date, or otherwise listed on Exhibit B hereto, which are expressly contingent thereunder upon the occurrence of a change in control (including, but not limited to, the acceleration of any rights or benefits thereunder); provided that in no event shall any Participant be entitled to any payment or benefit under the Plan which duplicates a payment or benefit received or receivable by the Participant under any severance or similar plan or policy of the Employer. 8.8 Any payments hereunder shall be made out of the general assets of the Employer. Each Participant shall have the status of general unsecured creditors of the Employer, and the Plan constitutes a mere promise by the Employer to make payments under the Plan in the future as and to the extent provided herein. 8.9 Nothing in the Plan shall confer on any individual any right to continue in the employ of the Employer or interfere in any way (other than by virtue of requiring payments or benefits as may expressly be provided herein) with the right of the Employer to terminate the individual's employment at any time. 8.10 The Employer shall be entitled to withhold from any payments or deemed payments any amount of tax withholding required by law. 12 8.11 The invalidity or unenforceability of any provision of the Plan shall not affect the validity or enforceability of any other provision of the Plan which shall remain in full force and effect. 8.12 The use of captions in the Plan is for convenience. The captions are not intended to and do not provide substantive rights. 8.13 THE PLAN SHALL BE CONSTRUED, ADMINISTERED AND ENFORCED ACCORDING TO THE LAWS OF THE STATE OF DELAWARE, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW, EXCEPT TO THE EXTENT PREEMPTED BY FEDERAL LAW. 13 EX-12 6 0006.txt RATIO OF EARNINGS TO FIXED CHARGES Exhibit 12 ---------- Conectiv Ratio of Earnings to Fixed Charges ---------------------------------- (Dollars in Thousands)
Year Ended December 31, ------------ ------------ ------------ ------------ ------------ 2000 1999 1998 1997 1996 ------------ ------------ ------------ ------------ ------------ Income before extraordinary item $ 170,830 $113,578 $153,201 $101,218 $107,251 ------------ ------------ ------------ ------------ ------------ Income taxes 133,514 105,816 105,817 72,155 78,340 ------------ ------------ ------------ ------------ ------------ Fixed charges: Interest on long-term debt including amortization of discount, premium and expense 166,256 149,732 133,796 78,350 69,329 Other interest 60,818 37,743 26,199 12,835 12,516 Preferred dividend require- ments of subsidiaries 20,383 19,894 17,871 10,178 10,326 ------------ ------------ ------------ ------------ ------------ Total fixed charges 247,457 207,369 177,866 101,363 92,171 ------------------------------- ------------ ------------ ------------ Nonutility capitalized interest (9,278) (3,264) (1,444) (208) (311) ------------ -------------- ------------ ------------ ------------ Undistributed earnings of equity method investees (4,496) - - - - ------------ -------------- ------------ ------------ ------------ Earnings before extraordinary item, income taxes, and fixed charges $ 538,027 $ 423,499 $435,440 $274,528 $277,451 =============================== ============ ============ ============ Total fixed charges shown above $ 247,457 $ 207,369 $ 177,866 $ 101,363 $ 92,171 Increase preferred stock dividend requirements of subsidiaries to a pre-tax amount 5,531 6,123 4,901 3,065 6,025 Fixed charges for ratio ------------------------------- ------------ ------------ ------------ computation $ 252,988 $ 213,492 $ 182,767 $ 104,428 $ 98,196 ============ ============== ============ ============ ============ Ratio of earnings to fixed charges 2.13 1.98 2.38 2.63 2.83
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-21 7 0007.txt SUBSIDIARIES OF THE REGISTRANT Exhibit 21 CONECTIV SUBSIDIARIES OF THE REGISTRANT - ------------------------------ State of Name of Company Incorporation - ------------------------------------------------------------ --------------- CONECTIV Atlantic City Electric Company NJ Atlantic Generation, Inc. NJ Binghamton General, Inc. DE Binghamton Limited, Inc. DE Pedrick General., Inc. NJ Vineland General, Inc. DE Vineland Limited, Inc. DE Atlantic Southern Properties, Inc. NJ Conectiv Communications, Inc. DE Conectiv Energy, Inc. DE Conectiv Energy Holding Company DE Conectiv Energy Supply, Inc. DE Conectiv Operating Services Company DE ACE REIT, Inc. DE Conectiv Atlantic Generation, LLC DE Conectiv Delmarva Generation DE Conectiv Resource Partners, Inc. DE Conectiv Solutions, L.L.C. DE ATE Investments, Inc. NJ King Street Assurance Ltd. Bermuda Conectiv Services, Inc DE Conectiv Thermal Systems, Inc. DE Atlantic Jersey Thermal Systems, Inc. DE ATS Operating Services, Inc. DE Thermal Energy Limited Partnership DE Delmarva Capital Investments, Inc. DE DCI I, Inc. DE DCI II, Inc. VI DCTC-Burney, Inc. DE Delmarva Power & Light Company DE EX-23 8 0008.txt CONSENT OF PUBLIC ACCOUNTANTS Exhibit 23 Consent of Independent Accountants We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (File No. 333-44219), Form S-8 (File No. 333-50063), and Form S-8 (File No. 333-51068) of Conectiv of our report dated February 12, 2001, relating to the financial statements and financial statement schedules, which appear in this Form 10-K. /s/ PricewaterhouseCoopers LLP - --------------------------------- PricewaterhouseCoopers LLP Philadelphia, Pennsylvania March 15, 2001 EX-27 9 0009.txt FINANCIAL DATA SCHEDULE
UT THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM CONECTIV'S 2000 10-K AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-2000 JAN-01-2000 DEC-31-2000 PER-BOOK 2,817,050 457,859 1,092,261 1,331,075 779,750 6,477,995 887 1,122,518 42,768 1,160,269 188,950 95,933 2,021,789 709,530 0 0 100,721 0 13,744 15,591 2,171,468 6,477,995 5,029,124 133,514 4,541,290 4,674,804 354,320 49,495 403,815 232,985 170,830 0 170,830 91,590 223,445 465,286 $1.97 $1.97
EX-99 10 0010.txt 2000 CONECTIV PRO FORMA FINANCIAL STATEMENTS EXHIBIT 99 2000 CONECTIV PRO FORMA FINANCIAL STATEMENTS - GENERATION ASSET SALE AND TRANSFER BACKGROUND In 1999, the electric utility businesses of Delmarva Power & Light Company (DPL) and Atlantic City Electric Company (ACE) were restructured pursuant to legislation enacted in Delaware, Maryland and New Jersey and orders issued by the Delaware Public Service Commission (DPSC), Maryland Public Service Commission (MPSC), and New Jersey Board of Public Utilities (NJBPU). This restructuring of DPL's and ACE's electric utility businesses are discussed in Notes 1, 7, 10, 11 and 17 to the Consolidated Financial Statements, included in Item 8 of Part II, and "Electric Utility Industry Restructuring," within Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A), included in Item 7 of Part II. In connection with electric utility industry restructuring and Conectiv's "mid- merit" strategy, as discussed under "Mid-Merit Electric Generation" in the MD&A, Conectiv is realigning the mix of electric generating plants owned by its subsidiaries. DPL and ACE have entered into agreements to sell their nuclear and non-strategic baseload fossil electric generating plants. On December 29, 2000, DPL sold its ownership interests in nuclear electric generating plants. As of December 31, 2000, the electric generating plants which were subject to agreements for sale had 2,203.5 megawatts of capacity and a net book value of $423.2 million, excluding the nuclear decommissioning liability included in accumulated depreciation. The agreements for the sale of the electric generating plants provide for an aggregate sales price of approximately $811 million, before certain adjustments and selling expenses, as discussed in Note 14 to the Consolidated Financial Statements included in Item 8 of Part II. Upon the sale of the ownership interests of ACE in nuclear electric generating units, ACE will transfer its nuclear decommissioning funds to the purchasers who will assume full responsibility for decommissioning such units. The sales of the electric generating plants are expected to take place during 2001. However, as discussed in Note 14 to the Consolidated Financial Statements included in Item 8 of Part II, there can be no assurances that the sales will be completed. Effective July 1, 2000, DPL and ACE contributed to Conectiv electric generating plants with 1,501 and 502, respectively, megawatts of capacity. Then, Conectiv transferred the electric generating plants to subsidiaries of Conectiv Energy Holding Company (CEH). CEH and its subsidiaries are engaged in non-regulated electricity production and sales, energy trading, and marketing. DESCRIPTION OF PRO FORMA FINANCIAL INFORMATION The following consolidated financial statements for Conectiv are filed with this Exhibit: . Unaudited Pro Forma Balance Sheet at December 31, 2000, and . Unaudited Pro Forma Statement of Income for the Year Ended December 31, 2000. The following major assumptions were made in preparing these pro forma financial statements: . For purposes of the pro forma balance sheet, the sales of nuclear and non-strategic baseload fossil electric generation plants were all assumed to occur as of December 31, 2000. . For purposes of the pro forma statement of income, the sales and transfers described above were assumed to occur as of January 1, 2000. As a result, expenses related to generation assets assumed to be sold were eliminated. -1- . Replacement energy and capacity were assumed to be purchased from the PJM Interconnection, L.L.C. (PJM). The energy costs were based on an hourly PJM Locational Marginal Price (LMP) and the capacity costs were based on semi-annual weighted average PJM capacity rates. . Under its rates for electricity supplied to utility customers, ACE was assumed to be permitted to earn a return on the stranded costs resulting from the power plant sales and to no longer earn a return on the power plants sold. . Revenues which resulted from the Wholesale Transaction Confirmation Letter Agreements during 2000, as discussed in Note 15 to the Consolidated Financial Statements, were assumed to have not been earned due to the assumed sale of the nuclear power plants on January 1, 2000. . For the portion of 2000 that the electricity supply operations of DPL in Maryland were still subject to regulation (January 1 through June 30, 2000) customer rates were assumed to be adjusted to remove amounts for a return on generation rate base and to add amounts for recovery of replacement power costs. . The proceeds from the sale of nuclear and non-strategic baseload fossil electric generation plants by Conectiv's subsidiaries were assumed to be used to repay short-term and long-term debt, after considering expected debt retirement costs and tax payments on the gain on the sale of the electric generation assets. . The transfer of the decommissioning trusts as a result of the sale of the ownership interests of ACE in nuclear generation units was assumed to occur on a non-taxable basis. . The net pro forma gain from the sale of ACE's generation units, except for the Deepwater generation unit, was recorded as a reduction to recoverable stranded costs. The net loss of approximately $38 million which is expected to result from the sale of the Deepwater generation unit was recorded as an extraordinary charge in the 4th quarter of 1999. A pro forma adjustment resulting from the recognition of unamortized investment tax credits which are recognized upon completion of the sale was credited to retained earnings. . The net pro forma gain from the sale of DPL's generation units was credited to retained earnings. . The transfer of strategic generating assets from Conectiv's utility subsidiaries to subsidiaries of CEH was assumed to occur on January 1, 2000, at book value, on a non-taxable basis. . An effective tax rate of 40% was utilized to calculate the income tax effects of adjustments to the pro forma income statement. These pro forma financial statements have been prepared for comparative purposes only and do not purport to be indicative of operations or financial condition which would have actually resulted if the sale and transfer of generation assets or other related transactions occurred on the dates of the periods presented, or which may result in the future. Further, these pro forma financial statements have been prepared using information available at the date of this filing. As a result, certain amounts indicated herein are preliminary in nature and, therefore, will be subject to adjustment in the future. -2- DESCRIPTION OF PRO FORMA ADJUSTMENTS The Unaudited Pro Forma Statement of Income and Balance Sheet filed with this Exhibit reflect the following adjustments: Adjustments to the Statement of Income: 1. A net decrease in "Electric revenues" due to (i) no revenues from the operations of the deregulated Deepwater generation unit and the nuclear plants under the "Wholesale Transaction Confirmation Letter Agreements," and (ii) no return earned on generation rate base of divested plants, partly offset by a return earned on the stranded costs of ACE and recovery of replacement power costs in DPL's Maryland jurisdiction. 2. Increases in "Electric fuel and purchased energy and capacity" primarily because the cost increase from Conectiv's subsidiaries purchasing all energy and capacity requirements to meet their retail load exceeded the cost decrease from no longer purchasing fuel for the electric generating units. 3. Decreases in other operating expenses as a result of the sale of certain generation assets by Conectiv's subsidiaries. 4. A decrease in "Interest charges" as a result of retirement of debt after the sale of certain generation assets. Balance Sheet Adjustments: 1. A net increase to "Cash and cash equivalents" primarily as a result of net proceeds received from the sale of certain generation units, less cash used for the retirement of certain debt issues. 2. A decrease to "Fuel" and "Materials and supplies" inventories as a result of the sale of certain generation assets. 3. A decrease to "Funds held by trustee" as a result of the transfer of nuclear decommissioning trust funds to the buyers of the nuclear generation assets. 4. A decrease to "Property, plant and equipment" and "Construction work-in-progress" as a result of the sale of certain generation assets. 5. A decrease to "Accumulated Depreciation" as a result of the sale of certain generation assets and the assumption of the nuclear decommissioning obligations of ACE by the purchasers of the nuclear plants. 6. Decreases to "Leased nuclear fuel, at amortized cost", "Current capital lease obligation", and "Long-term capital lease obligation" as a result of the sale of the nuclear fuel to the buyers of the nuclear generation assets and the corresponding liquidation of the capital lease obligation. 7. Decrease to "Recoverable stranded costs" and an increase to "Regulatory Liability for New Jersey income tax benefit" due to the sale of certain generation assets of ACE, which are subject to stranded cost recovery. As a result of an expected net gain from the sale of such assets, there is a decrease in recoverable stranded costs. 8. Decreases to "Other deferred charges" and "Other deferred credits and Other Liabilities" as a result of the sale of certain generation assets. -3- 9. Decrease to "Short-term debt" and "Long-term debt" due to assumed repayment of debt with the net sales proceeds expected to be available after debt retirement costs and tax payments on the gain on the sale of the electric generation assets. 10. Changes to "Taxes Accrued", "Deferred income taxes, net" and "Deferred investment tax credits" as a result of the sale of certain generation assets. 11. Net increase to "Retained Earnings" as a result of an expected net gain from the sale of certain generation assets. -4- CONECTIV UNAUDITED CONSOLIDATED PRO FORMA STATEMENTS OF INCOME YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------- Reported Adjustments Pro Forma --------------------------------------------------- (Dollars in Thousands) OPERATING REVENUES Electric $ 2,906,342 $ (77,353) (1) $ 2,828,989 Gas 1,529,785 1,529,785 Other services 592,997 592,997 ------------ ---------- ------------ 5,029,124 (77,353) 4,951,771 ------------ ---------- ------------ OPERATING EXPENSES Electric fuel and purchased energy and capacity 1,613,579 220,515 (2) 1,834,094 Gas purchased 1,445,911 1,445,911 Other services' cost of sales 504,615 504,615 Special charges 25,162 25,162 Gain on sale of interest in nuclear plants (16,612) (16,612) Operation and maintenance 627,667 (146,601) (3) 481,066 Depreciation and amortization 260,082 (62,542) (3) 197,540 Taxes other than income taxes 80,886 (2,077) (3) 78,809 ------------ ---------- ------------ 4,541,290 9,295 4,550,585 ------------ ---------- ------------ OPERATING INCOME 487,834 (86,648) 401,186 ------------ ---------- ------------ OTHER INCOME 49,495 49,495 ------------ ---------- ------------ INTEREST EXPENSE Interest charges 223,445 (50,574) (4) 172,871 Capitalized interest and allowance for borrowed funds during construction (10,843) (10,843) ------------ ---------- ------------ 212,602 (50,574) 162,028 ------------ ---------- ------------ PREFERRED STOCK DIVIDEND REQUIREMENTS OF SUBSIDIARIES 20,383 20,383 ------------ ---------- ------------ INCOME BEFORE INCOME TAXES 304,344 (36,074) 268,270 INCOME TAXES 133,514 (14,430) 119,084 ------------ ---------- ------------ NET INCOME $ 170,830 $ (21,644) $ 149,186 ============ ========== ============ INCOME (LOSS) APPLICABLE TO: Common Stock $ 164,719 $ (21,057) $ 143,662 Class A common stock 6,111 (587) 5,524 ------------ ---------- ------------ Total $ 170,830 $ (21,644) $ 149,186 ============ ========== ============ AVERAGE SHARES OUTSTANDING (000): Common Stock 83,686 83,686 Class A common stock 5,742 5,742 INCOME (LOSS) PER AVERAGE SHARE, BASIC AND DILUTED Common Stock $ 1.97 $ (0.25) $ 1.72 Class A common stock $ 1.06 $ (0.10) $ 0.96
-5- CONECTIV UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS DECEMBER 31, 2000
----------------------------------------------------------- Reported Adjustments Pro Forma ----------------------------------------------------------- (Dollars in Thousands) ASSETS Current Assets Cash and cash equivalents $ 123,562 $ 94,185 (1) $ 217,747 Accounts receivable, net of allowance of $31,339 792,843 792,843 Inventories, at average cost Fuel (coal, oil and gas) 54,578 (11,429) (2) 43,149 Materials and supplies 62,675 (3,982) (2) 58,693 Deferred energy supply costs 22,094 22,094 Prepayments 23,354 23,354 Deferred income taxes, net 13,155 13,155 --------------- ---------------- ---------------- 1,092,261 78,774 1,171,035 --------------- ---------------- ---------------- Investments Investment in leveraged leases 53,706 53,706 Funds held by trustee 122,387 (109,777) (3) 12,610 Other investments 70,780 70,780 --------------- ---------------- ---------------- 246,873 (109,777) 137,096 --------------- ---------------- ---------------- Property, Plant and Equipment Electric generation 1,576,550 (827,425) (4) 749,125 Electric transmission and distribution 2,711,907 2,711,907 Gas transmission and distribution 277,650 277,650 Other electric and gas facilities 390,313 390,313 Telecommunications, thermal systems, and other property, plant, and equipment 251,567 251,567 --------------- ---------------- ---------------- 5,207,987 (827,425) 4,380,562 Less: Accumulated depreciation 2,179,951 (516,088) (5) 1,663,863 --------------- ---------------- ---------------- Net plant in service 3,028,036 (311,337) 2,716,699 Construction work-in-progress 406,884 (2,853) (4) 404,031 Leased nuclear fuel, at amortized cost 28,352 (28,352) (6) - Goodwill, net of accumulated amortization of $33,437 344,514 344,514 --------------- ---------------- ---------------- 3,807,786 (342,542) 3,465,244 --------------- ---------------- ---------------- Deferred Charges and Other Assets Recoverable stranded costs 988,153 (46,757) (7) 941,396 Deferred recoverable income taxes 84,730 84,730 Unrecovered purchased power costs 14,487 14,487 Unrecovered New Jersey state excise tax 10,360 10,360 Deferred debt refinancing costs 20,656 20,656 Deferred other postretirement benefit costs 29,981 29,981 Prepaid pension costs 69,963 69,963 Unamortized debt expense 25,553 25,553 License fees 21,956 21,956 Other 65,236 (13,819) (8) 51,417 --------------- ---------------- ---------------- 1,331,075 (60,576) 1,270,499 --------------- ---------------- ---------------- Total Assets $ 6,477,995 $ (434,121) $ 6,043,874 =============== ================ ================
-6- CONECTIV UNAUDITED CONSOLIDATED PRO FORMA BALANCE SHEETS DECEMBER 31, 2000
----------------------------------------------------------- Reported Adjustments Pro Forma ----------------------------------------------------------- (Dollars in Thousands) CAPITALIZATION AND LIABILITIES Current Liabilities Short-term debt $ 709,530 $ (58,389) (9) $ 651,141 Long-term debt due within one year 100,721 100,721 Variable rate demand bonds 158,430 158,430 Accounts payable 490,887 490,887 Taxes accrued 10,877 79,185 (10) 90,062 Interest accrued 45,296 45,296 Dividends payable 27,111 27,111 Deferred energy supply costs 34,650 34,650 Current capital lease obligation 15,591 (15,480) (6) 111 Above-market purchased energy contracts and other electric restructuring liabilities 23,891 23,891 Other 107,025 (1,170) 105,855 --------------- ---------------- ---------------- 1,724,009 4,146 1,728,155 --------------- ---------------- ---------------- Deferred Credits and Other Liabilities Other postretirement benefits obligation 90,335 90,335 Deferred income taxes, net 823,094 65,414 (10) 888,508 Deferred investment tax credits 64,316 (18,458) (10) 45,858 Regulatory liability for New Jersey income tax benefit 49,262 5,174 (7) 54,436 Above-market purchased energy contracts and other electric restructuring liabilities 103,575 (6,813) (8) 96,762 Deferred gain on termination of purchased energy contract 74,968 74,968 Long-term capital lease obligation 13,744 (12,872) (6) 872 Other 67,751 (12,309) (8) 55,442 --------------- ---------------- ---------------- 1,287,045 20,136 1,307,181 --------------- ---------------- ---------------- Capitalization Common stock: $0.01 per share par value 150,000,000 shares authorized; 82,859,779 shares outstanding 830 830 Class A common stock, $0.01 per share par value; 10,000,000 shares authorized; 5,742,315 share outstanding 57 57 Additional paid-in capital - - common stock 1,028,780 1,028,780 Additional paid-in capital - - Class A common stock 93,738 93,738 Retained earnings 42,768 185,761 (11) 228,529 Treasury shares, at cost, 130,604 shares (2,688) (2,688) Unearned compensation (1,172) (1,172) Accumulated other comprehensive income (2,044) (2,044) --------------- ---------------- ---------------- Total common stockholders' equity 1,160,269 185,761 1,346,030 Preferred stock and securities of subsidiaries: Not subject to mandatory redemption 95,933 95,933 Subject to mandatory redemption 188,950 188,950 Long-term debt 2,021,789 (644,164) (9) 1,377,625 --------------- ---------------- ---------------- 3,466,941 (458,403) 3,008,538 --------------- ---------------- ---------------- --------------- ---------------- ---------------- Total Capitalization and Liabilities $ 6,477,995 $ (434,121) $ 6,043,874 =============== ================ ================
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