UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarter Ended

September 30, 2002

Commission File Number

1-13895

CONECTIV
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of
incorporation or organization)

51-0377417
(I.R.S. Employer Identification No.)

800 King Street, P.O. Box 231, Wilmington, Delaware
(Address of principal executive office)

19899
(Zip Code)

202-872-2000
(Registrant's telephone number, including area code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days.

Yes

[ X ]

No

[  ]

     Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.

     All 100 issued and outstanding shares of Conectiv common stock, $0.01 per share par value, are owned by Pepco Holdings, Inc.

Conectiv

Table of Contents

Page

Part I. Financial Information:

     Item 1.

Financial Statements

Consolidated Statements of Income for the three and nine months ended September 30, 2002, and September 30, 2001

1

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2002, and September 30, 2001

2

Consolidated Balance Sheets as of September 30, 2002, and December 31, 2001

3-4

Consolidated Statements of Cash Flows for the nine months ended September 30, 2002, and September 30, 2001

5

Notes to Consolidated Financial Statements

6-19

     Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

19-35

     Item 3.

Quantitative and Qualitative Disclosures About Market Risk

36-37

     Item 4.

Controls and Procedures

37

Part II. Other Information

     Item 1.

Legal Proceedings

37

     Item 6.

Exhibits and Reports on Form 8-K

38

Signatures and Certifications

39-43

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONECTIV
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)

Three Months Ended
               September 30,            

Nine Months Ended
            September 30,           

        2002       

        2001      

       2002      

        2001      

OPERATING REVENUES

  Electric

$

1,051,318 

$

860,640 

$

2,227,811 

$

2,178,132 

  Gain on sales of electric generating plants

- 

- 

15,817 

297,140 

  Gas

72,582 

61,927 

294,998 

341,174 

  Other services

     118,427 

   118,228 

   307,174 

   391,810 

  1,242,327 

1,040,795 

2,845,800 

3,208,256 

OPERATING EXPENSES

  Electric fuel and purchased energy and capacity

744,120 

597,525 

1,489,585 

1,385,346 

  Gas purchased

56,035 

57,913 

224,351 

316,775 

  Other services' cost of sales

108,723 

104,257 

272,581 

328,441 

  Merger-related costs

72,963 

13,488 

75,394 

14,573 

  Operation and maintenance

127,420 

125,143 

366,062 

359,573 

  Loss on sale of leveraged leases

2,089 

- 

19,674 

- 

  Impairment of office building held for sale

3,977 

- 

3,977 

- 

  Depreciation and amortization

48,077 

55,024 

146,448 

175,559 

  Taxes other than income taxes

18,098 

20,891 

48,896 

59,246 

  Deferred electric service costs

        (8,974)

    (67,049)

    (49,406)

  (125,370)

  1,172,528 

   907,192 

2,597,562 

2,514,143 

OPERATING INCOME

       69,799 

   133,603 

   248,238 

   694,113 

OTHER INCOME

         7,018 

      5,096 

    13,548 

     74,291 

INTEREST EXPENSE

  Interest charges

39,722 

43,689 

117,462 

146,730 

  Capitalized interest and allowance for borrowed
    funds used during construction

        (3,706)

     (3,206)

   (12,049)

   (12,958)

       36,016 

    40,483 

   105,413 

   133,772 

PREFERRED STOCK DIVIDEND
  REQUIREMENTS OF SUBSIDIARIES

         3,803 

     4,487 

    11,891 

    14,689 

INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES

36,998 

93,729 

144,482 

619,943 

INCOME TAXES

       18,254 

    31,810 

     64,205 

   253,401 

INCOME FROM CONTINUING OPERATIONS

18,744 

61,919 

80,277 

366,542 

DISCONTINUED TELECOMMUNICATION OPERATIONS

  LOSS FROM OPERATIONS, NET OF INCOME TAXES

- 

- 

- 

(7,696)

  LOSS FROM DISPOSAL, NET OF INCOME TAXES

                 - 

              - 

              - 

  (118,788)

INCOME BEFORE EXTRAORDINARY ITEM

18,744 

61,919 

80,277 

240,058 

EXTRAORDINARY ITEM--LOSS ON EXTINGUISHMENT
  OF DEBT (NET OF $1,885 OF INCOME TAXES)

                 - 

    (2,790)

               - 

      (2,790)

NET INCOME

$

       18,744 

$

    59,129 

$

     80,277 

$

   237,268 

See accompanying Notes to Consolidated Financial Statements.

CONECTIV
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Dollars in Thousands)
(Unaudited)

Three Months Ended
       September 30,       

Nine Months Ended
        September 30,        

    2002    

    2001    

    2002     

    2001    

Net income

$

18,744 

$

59,129 

$

80,277 

$

237,268 

Other comprehensive income / (loss), net of taxes

    Energy commodity derivative instruments designated as cash flow hedges

        Unrealized gain / (loss) from cash flow hedges net of reclassification
            adjustments and net of taxes of $3,654 and $8,434 for the
            three months ended September 30, 2002 and 2001, respectively,
            and net of taxes of $42,754 and $46,806 for the nine months ended
            September 30, 2002 and 2001, respectively

(5,289)

(12,208)

61,881 

(67,746)

        Cumulative effect of a change in accounting resulting from
            adoption of Statement of Financial Accounting Standards
            No. 133, "Accounting for Derivative Instruments and
            Hedging Activities," net of taxes of $2,380

- 

- 

- 

3,445 

    Unrealized loss on marketable securities net of reclassification
        adjustments and net of taxes of $302 and $4,757 for the three
        months ended September 30, 2002 and 2001, respectively, and
        net of taxes of $1,462 and $5,578 for the nine months ended
        September 30, 2002 and 2001, respectively

(561)

(8,835)

(2,714)

(10,360)

    Interest rate swap agreement designated as cash flow hedge

        Unrealized gain / (loss) from cash flow hedge net of reclassification
            adjustments and net of taxes of $3,695 and $3,695 for the three
            and nine months ended September 30, 2002, respectively

  (6,823)

            - 

    (6,823)

            - 

Other comprehensive income / (loss), net of taxes

(12,673)

(21,043)

   52,344 

(74,661)

Comprehensive income

$

   6,071 

$

 38,086 

$

132,621 

$

162,607 

See accompanying Notes to Consolidated Financial Statements.

CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

ASSETS

     September 30,
             2002       

   December 31,
           2001       

Current Assets

    Cash and cash equivalents

$      80,434

$      52,871

    Accounts receivable, net of allowances of
        $31,212 and $32,162, respectively

662,705

636,404

    Inventories, at average cost

        Fuel (coal, oil and gas)

58,250

81,448

        Materials and supplies

45,529

44,604

    Deferred energy supply costs

-

25,525

    Deferred income taxes, net :

        Assets held and used

4,698

-

         Office building held for sale as of September 30, 2002

793

-

    Prepayments and other

       47,237

     76,107

     899,646

   916,959

Investments

    Investment in leveraged leases

-

45,314

    Funds held by trustee

6,602

12,136

    Other investments

       58,130

        60,845

       64,732

      118,295

Property, Plant and Equipment

    Electric generation

1,221,642

1,067,464

    Electric transmission and distribution

2,864,170

2,761,570

    Gas transmission and distribution

294,943

284,982

    Other electric and gas facilities

222,646

298,033

    Other property, plant, and equipment

        Assets held and used

171,948

173,501

        Office building held for sale as of September 30, 2002

        8,406

          8,337

4,783,755

4,593,887

    Less: Accumulated depreciation

        Assets held and used

1,791,848

1,730,551

        Office building held for sale as of September 30, 2002

        5,422

          1,335

    Net plant in service

2,986,485

2,862,001

    Construction work-in-progress

785,915

584,440

    Intangibles

56,235

73,311

    Goodwill, net of accumulated amortization
        of $42,817 and $42,817, respectively

    313,124

      312,789

 4,141,759

   3,832,541

Deferred Charges and Other Assets

    Regulatory assets:

        Recoverable stranded costs, net

879,129

944,529

        Other non-current regulatory assets

311,295

294,114

    Prepaid pension costs

94,609

91,891

    Unamortized debt expense

38,099

25,513

    Other

       39,556

       32,440

  1,362,688

 1,388,487

Total Assets

$6,468,825

$6,256,282

See accompanying Notes to Consolidated Financial Statements.

CONECTIV
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

CAPITALIZATION AND LIABILITIES

       September 30,
               2002       

    December 31,
           2001        

Current Liabilities

    Short-term debt

$   396,843 

$1,039,820 

    Long-term debt due within one year

424,757 

397,963 

    Variable rate demand bonds

158,430 

158,430 

    PHI money pool lendings

121,394 

- 

    Notes payable to associated companies

577,744 

- 

    Accounts payable

349,315 

351,382 

    Accounts payable to associated companies

31,230 

- 

    Derivative instruments

61,757 

87,876 

    Other current liabilities

    321,336 

    197,109 

 2,442,806 

 2,232,580 

Deferred Credits and Other Liabilities

    Other postretirement benefits obligation

88,699 

89,836 

    Deferred income taxes, net

766,744 

843,039 

    Deferred investment tax credits

47,100 

49,542 

    Regulatory liability for New Jersey income tax benefit

49,262 

49,262 

    Above-market purchased energy contracts
        and other electric restructuring liabilities

74,483 

85,326 

    Derivative instruments

17,332 

28,852 

    Other

      39,526 

      43,736 

 1,083,146 

 1,189,593 

Capitalization

    Common stock: $0.01 per share par value; 1,000 shares
        authorized in 2002, shares outstanding - - 100;
        150,000,000 shares authorized in 2001,
        shares outstanding - - 82,957,613

- 

830 

    Class A common stock, $0.01 per share par value;
        10,000,000 shares authorized, shares outstanding - -
        5,742,315 in 2001

- 

57 

    Additional paid-in capital - - common stock

1,121,448 

1,027,790 

    Additional paid-in capital - - Class A common stock

- 

93,738 

    Retained earnings

234,546 

209,336 

    Unearned compensation

- 

(1,719)

    Accumulated other comprehensive income

     (13,587)

     (65,931)

        Total common stockholders' equity

1,342,407 

1,264,101 

    Preferred stock and securities of subsidiaries:

        Not subject to mandatory redemption

35,813 

35,813 

        Subject to mandatory redemption

- 

12,450 

    Company obligated mandatorily redeemable preferred
        securities of subsidiary trusts holding solely company
        debentures

165,000 

165,000 

    Long-term debt

1,399,023 

1,356,003 

    Long-term capital lease obligation

           630 

           742 

 2,942,873 

 2,834,109 

Commitments and Contingencies (Note 14)

Total Capitalization and Liabilities

$6,468,825 

$6,256,282 

See accompanying Notes to Consolidated Financial Statements.

CONECTIV
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

Nine Months Ended
          September 30,         

    2002    

    2001    

CASH FLOWS FROM OPERATING ACTIVITIES

    Net income

$ 80,277 

$237,268 

    Adjustments to reconcile net income to
      net cash provided by operating activities:

        Depreciation and amortization

147,629 

187,985 

        Deferred income taxes, net

(65,447)

16,319 

        Gains on sales of electric generating plants

(15,817)

(297,140)

        Loss on sale of leveraged leases

19,674 

- 

        Deferred electric service costs and gas supply costs

12,002 

(106,190)

        Recognition of deferred gain on contract termination

- 

(73,015)

        Provision for loss on disposal of discontinued operations

- 

177,245 

        Non-cash loss / (earnings) of equity method investee

5,264 

5,223 

        Net change in:

            Accounts receivable

(324,334)

8,139 

            Inventories

22,273 

(24,961)

            Accounts payable

375,618 

(120,914)

            Accrued / prepaid taxes

132,123 

104,864 

            Other current assets & liabilities (1)

22,854 

(67,988)

    Other, net

    17,873 

     (4,330)

    Net cash provided (used) by operating activities

  429,989 

    42,505 

CASH FLOWS FROM INVESTING ACTIVITIES

    Capital expenditures

(500,830)

(416,439)

    Investments in partnerships

(2,945)

(22,974)

    Proceeds from sales of electric generating plants

10,000 

641,734 

    Proceeds from other assets sold

33,150 

24,566 

    Net cash of subsidiaries transferred to PHI

(1,530)

- 

    Increase in funds held by trustee

- 

141 

    Leveraged leases, net

- 

606 

    Other, net

       (774)

        (930)

    Net cash provided (used) by investing activities

(462,929)

  226,704 

CASH FLOWS FROM FINANCING ACTIVITIES

    Common stock dividends paid

(75,987)

(65,391)

    Preferred stock redeemed

(12,450)

(71,370)

    Long-term debt issued

296,000 

59,000 

    Long-term debt redeemed

(226,349)

(355,306)

    Principal portion of capital lease payments

(112)

(8,835)

    Notes payable to associated companies

577,744 

- 

    PHI money pool lendings

164,877 

- 

    Net increase (decrease) in short-term debt

(642,977)

119,501 

    Cost of issuances and refinancings

  (20,243)

  (20,624)

    Net cash provided (used) by financing activities

    60,503 

(343,025)

    Net change in cash and cash equivalents

27,563 

(73,816)

    Cash and cash equivalents at beginning of period

   52,871 

  123,562

    Cash and cash equivalents at end of period

$ 80,434 

$ 49,746 

    (1) Other than debt and deferred income taxes classified as current.

     See accompanying Notes to Consolidated Financial Statements.

CONECTIV
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Financial Statement Presentation

Conectiv's consolidated condensed interim financial statements contained herein include the accounts of Conectiv and its majority-owned subsidiaries and reflect all adjustments, consisting of only normal recurring adjustments, necessary in the opinion of management for a fair presentation of interim results. In accordance with regulations of the Securities and Exchange Commission (SEC), disclosures that would substantially duplicate the disclosures in Conectiv's 2001 Annual Report on Form 10-K have been omitted. Accordingly, Conectiv's consolidated condensed interim financial statements contained herein should be read in conjunction with Conectiv's 2001 Annual Report on Form 10-K.

As discussed in Notes 1, 5, and 27 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K, due to the sale of substantially all of the assets of the Telecommunication business segment on November 14, 2001, the Telecommunication business segment operating results for the three and nine months ended September 30, 2001 and the loss from disposal of the business are classified as discontinued telecommunication operations within the Consolidated Statements of Income. As discussed in Notes 1 and 27 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K, under-recoveries of costs related to Basic Generation Service (BGS) for the three and nine months ended September 30, 2001 have been reclassified within the Consolidated Statements of Income from electric operating revenues to operating expenses, as a separate line item captioned "Deferred electric service costs." See the discussion below fo r information concerning the change to a net presentation of revenues and expenses associated with "energy trading book" contracts that were previously reported on a gross basis. Certain other reclassifications of prior period data have been made to conform with the current presentation.

In 2002, a pronouncement was issued by the Emerging Issues Task Force entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenues and expenses associated with "energy trading book" contracts on a gross versus net basis. Previously, the EITF concluded that presentation on a gross basis was acceptable and Conectiv presented the revenues and expenses of its energy trading business on that basis in its public financial disclosures. Effective for the third quarter of 2002, based on EITF 02-3 and the subsequent guidance provided by the EITF in June and September 2002, Conectiv early adopted the provisions to present energy trading revenues and expenses on a net basis for all reporting periods. As a result, energy trading revenues and expenses previously reported on a gross basis have been reclassified to a net presentation, as shown in the table below. The reclassification had no effect on operating income and net income.

Three Months   
Ended         
September 30, 2001

Nine Months   
Ended         
September 30, 2001

                                         (Dollars in Thousands)

Operating revenues,
   as previously reported

$1,601,927             

$4,836,657            

Reclassification

     (561,132)           

        (1,628,401)          

Operating revenues,
   as reclassified

$1,040,795            

$3,208,256           

Operating expenses,
   as previously reported

$1,468,324            

$4,142,544           

Reclassification

   (561,132)           

(1,628,401)          

Operating expenses,
   as reclassified

   $907,192            

$2,514,143           

On October 25, 2002, the EITF rescinded Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Conectiv's interpretation of EITF 98-10 is consistent with the current rules that are being applied under Statement of Financial Accounting Standards (SFAS) No. 133 and therefore, management does not believe that rescinding EITF 98-10 will impact its financial position or results of operations.

On April 30, 2002, the Financial Accounting Standards Board (FASB) issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in Conectiv's Consolidated Statement of Income.

On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

Effective January 1, 2002, Conectiv implemented SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). Under SFAS No. 142, goodwill that has not been included in the rates of a regulated utility subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," is no longer amortized. The portion of goodwill included in regulated utility rates ($15.4 million as of September 30, 2002 and $17.5 million as of December 31, 2001) has been reclassified from goodwill to "other non-current regulatory assets" and continues to be amortized as a regulatory asset. Conectiv's goodwill balance of $313.1 million as of September 30, 2002 and December 31, 2001 is associated with the Power Delivery business segment, as defined in Note 15 to the Consolidated Financial Statements included herein. Conectiv has completed the test for impairment of goodwill in accordance with the implementation requirements of SFAS No. 142. The test resulted in no impairment of goodwill, as of January 1, 2002, because the fair value of the Power Delivery business segment exceeded its book value carrying amount, including goodwill.

The following table reconciles reported net income to amounts adjusted to exclude the amortization of goodwill, after income taxes.

Three Months Ended
      September 30,       

    Nine Months Ended                 
        September 30,                    

    2002                   2001

                                               2002                          2001

              (Dollars in Thousands)

Reported net income

$18,744      

$59,129     

$80,277    

$237,268      

Add back: Goodwill amortization

           -       

     2,018     

             -    

      6,109      

Adjusted net income

$18,744      

$61,147     

$80,277    

$243,377      

Note 2. Supplemental Cash Flow Information

         Nine Months Ended
               September 30,       

        2002                     2001

(Dollars in Thousands)

Cash paid (received) for:

   Interest, net of amounts capitalized

$100,198    

$138,201       

   Income taxes, net of refunds

$(13,488)   

$74,303       

Non-cash Investing and Financing Transactions

See Note 4 to the Consolidated Financial Statements for information concerning (i) Conectiv's contribution of Conectiv Resource Partners, Inc. (the name of which was changed to PHI Service Company on August 8, 2002) (CRP) to Pepco Holdings, Inc. (PHI), and (ii) the cancellation of Conectiv's common stock and Class A common stock.

Note 3. Income Taxes

The amounts computed by multiplying "Income from continuing operations before income taxes" by the federal statutory rate is reconciled in the table below to income tax expense on continuing operations.

Three Months Ended September 30,

Nine Months Ended September 30,    

            2002           

         2001          

           2002             

         2001         

Amount

Rate

Amount

Rate

Amount

Rate 

Amount

Rate

(Dollars in Thousands)

Statutory federal    income tax expense

$12,949   

35%   

$32,805 

35%

$50,569    

35% 

$216,980 

35%

State income taxes,    net of federal    benefit

5,006   

13      

7,505 

8   

14,209    

10    

41,062 

7   

Regulatory asset basis
   difference

- -   

- -      

- - 

- -   

- -    

- -    

4,876 

1   

Depreciation

1,000   

3      

1,474 

2   

3,000    

2    

4,421 

1   

Non-deductible    goodwill

- -   

- -      

632 

1   

- -    

- -    

1,897 

- -   

Investment tax credit
   amortization

(814)  

(2)    

(936)

(1)  

(2,442)   

(2)   

(8,787)

(1)  

Resolution of income
   tax matters *

- -   

- -      

(10,000)

(11)  

- -    

- -     

(10,000)

(2)  

Other, net

      113   

  -      

       330 

  -    

   (1,131)   

 (1)   

      2,952 

  -   

Income taxes

$18,254   

49%  

$31,810 

34%

$64,205    

44% 

$253,401 

41%

* Reflects changes in estimates of previously accrued income taxes due to resolution of uncertainties.

State income taxes are higher than statutory rates due to required valuation allowances against deferred tax assets for net operating losses being carried forward into future tax years.

Note 9. Office Building Held For Sale

As a result of Conectiv's decision to sell an office building, Conectiv was required to test the building's carrying value for impairment and the test showed that Conectiv's carrying value for the office building was impaired as of September 30, 2002. Accordingly, a $4.0 million before-tax impairment charge ($2.4 million after-tax) was recorded in the third quarter of 2002, which reduced the carrying amount of Conectiv's office building from $12.4 million to $8.4 million.

Note 10. Accumulated Other Comprehensive Income
(Dollars in Thousands)

The September 30, 2002 balance for accumulated other comprehensive income of $(13,587) included $(3,495) for unrealized losses on marketable securities, $(3,269) for unrealized losses from energy commodity derivative instruments designated as cash flow hedges, and $(6,823) for unrealized losses from an interest rate swap agreement designated as a cash flow hedge. The December 31, 2001 balance for accumulated other comprehensive income of $(65,931) included $(781) for unrealized losses on marketable securities and $(65,150) for unrealized losses from energy commodity derivative instruments designated as cash flow hedges.

As discussed in Note 12 to the Consolidated Financial Statements included herein, Conectiv Bethlehem, LLC (CBI), a subsidiary of Conectiv Energy Holding Company and an indirect subsidiary of Conectiv, entered into an interest rate swap agreement for the purpose of managing its overall borrowing rate and limiting its interest rate risk associated with debt it has issued. CBI currently hedges 50-75% of its variable rate debt. CBI formally designated its interest rate swap agreement as a cash flow hedge.

The following table summarizes the after-tax activity for the nine months ended September 30, 2002 for the portion of accumulated other comprehensive income arising from transactions related to energy commodity derivative instruments designated as cash flow hedges.

Accumulated other comprehensive income as of December 31, 2001
   for energy commodity derivative instruments

$(65,150)

Net unrealized hedging gains

26,188 

Reclassification to earnings because the forecasted energy commodity
   transactions were no longer expected to occur within the forecast period

- - 

Reclassification to earnings because the forecasted energy commodity
     transaction occurred

35,693 

Accumulated other comprehensive income as of September 30, 2002
   for energy commodity derivative instruments

$(3,269)

Air Quality Regulations

On July 11, 2001, the New Jersey Department of Environmental Protection (NJDEP) denied ACE's request to renew a permit variance, effective through July 30, 2001, that authorized Unit 1 at the B.L. England station to burn coal containing greater than 1% sulfur. ACE has appealed the denial. The NJDEP has issued a stay of the denial to authorize ACE to operate Unit 1 with the current fuel until February 28, 2003 and an addendum to the permit/certificate to operate authorizing a trial burn of coal with a sulfur content less than 2.6%. Management is not able to predict the outcome of ACE's appeal, including the effects, if any, of trial burn results on the appeal.

On May 4, 2002, ACE, Conectiv Atlantic Generation, LLC (CAG), and the NJDEP entered into an Administrative Consent Order (ACO) to address ACE's and CAG's inability to procure Discrete Emission Reductions (DER) credits to comply with New Jersey's NO_x RACT requirements and NJDEP's allegations that ACE had failed to comply with DER credit use restrictions from 1996 to 2001. The ACO eliminates requirements for ACE and CAG to purchase DER credits for certain ACE and CAG electric generating units through May 1, 2005 and provides, among other things, for installation of new controls on CAG's electric generating units ($7 million estimated cost), a $1.0 million penalty, a $1.0 million contribution to promote, develop and enhance an urban airshed reforestation project, and operating hour limits at ACE's Deepwater Unit No. 4.

The United States Environmental Protection Agency (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 settlements of litigation brought as a result of such inquiries alleging violations of so-called new source standards have been announced. ACE has responded to a number of requests from the USEPA and the NJDEP for data on coal-fired operations at the Deepwater and B.L. England electric generating stations. Management cannot predict the impact, if any, of these inquiries on Deepwater or B.L. England operations.

Other Matters

On October 24, 2000, the City of Vineland, New Jersey (City), filed an action in a New Jersey Superior Court to acquire ACE electric distribution facilities located within the City limits by eminent domain. On March 13, 2002, ACE and the City signed an agreement that provides for ACE to sell the electric distribution facilities within the City limits, and the related customer accounts, for $23.9 million. The proceeds are being received in installments as milestones are met, and are proceeding on schedule. The remaining proceeds should be received in the second quarter of 2004, when the final milestones will be completed. At that time the assets and customers will be transferred to the City and the sale will be recorded by ACE.

Note 15. Business Segments

The following information is presented in accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Amounts previously reported for the business of supplying electricity to customers of ACE and DPL who have not chosen an alternative electricity supplier have been reclassified from the Energy business segment to the Power Delivery business segment. Conectiv's business segments under SFAS No. 131 are as follows:

               "Energy" includes (i) electricity generation by mid-merit electric generating plants, and the
                 purchase, trading and sale of electricity, including wholesale sales between affiliated
                 subsidiaries,; (ii) gas and other energy supply and trading activities, (iii) power plant operation
                 services, and (iv) district heating and cooling systems operation services provided by Conectiv
                 Thermal Systems, Inc.

               "Power Delivery" includes (i) activities related to delivery and supply of electricity at regulated
                 rates to customers of ACE and DPL, (ii) the operations of ACE's electric generating plants, (iii)
                the operations of DPL's electric generating plants through their sale on June 22, 2001, and (iv)
                the delivery and supply of natural gas at regulated rates to DPL's customers.

The operating results for business segments are evaluated based on "Earnings Before Interest and Taxes," which is generally equivalent to Operating Income plus Other Income, less certain interest charges allocated to the business segments. The business segment information presented herein excludes certain transactions as disclosed in the notes to the tables presented below.

Under contracts between CESI and DPL, effective April 1, 2001, CESI began supplying to DPL the electricity requirements of DPL's default customers (customers that have not chosen an alternative supplier). The pricing of electricity under a contract, which became effective September 1, 2001, transferred the risk, or reward, associated with DPL's default electric service business to CESI. The earnings (loss) before interest and taxes related to DPL's default electric service business is included in the business segments as follows: (1) third quarter of 2002 - $22.3 million in the Energy business segment; (2) third quarter of 2001 - $13.1 million and $(13.5) million in the Energy and Power Delivery business segments, respectively, (3) nine months ended September 30, 2002 - $89.1 million in the Energy business segment, and (4) nine months ended September 30, 2001 - $13.1 million and $20.6 million in the Energy and Power Delivery business segments, respectively.

For the nine months ended September 30, 2001, the earnings before interest and taxes of the Power Delivery business segment includes $16.3 million from DPL's termination of its membership in a nuclear industry mutual insurance company, as discussed in Note 14 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

         Three Months Ended
           September 30, 2002                

              Three Months Ended
                September 30, 2001                

Business Segments

    Revenues

Earnings
Before Interest
      and Taxes   

   Revenues

    Earnings
Before Interest
     and Taxes    

(Dollars in Thousands)

Energy

$786,235         

$55,077               

$545,197                  

$67,737                

Power Delivery

707,427         

99,853              

673,112                  

88,076                

All Other

         1,434         

      (4,440)             

          1,200                  

      (6,546)              

Total

$1,495,096 (1)   

$150,490 (2)         

$1,219,509 (3)            

$149,267 (4)           

(1)

Intercompany revenues that are eliminated in consolidation are included in business segment revenues as follows: Energy business segment--$251,409; Power Delivery business segment--$711; All Other business segments--$649.

(2)

"Earnings before interest and taxes" less $72,963 of costs associated with the Conectiv/Pepco Merger, $35,765 of interest expense and preferred stock dividends, the $2,089 loss on sale of leverage leases, and the $3,977 impairment of office building held for sale, plus $1,302 of certain other adjustments equals consolidated income from continuing operations before income taxes.

(3)

Intercompany revenues that are eliminated in consolidation are included in business segment revenues as follows: Energy business segment--$177,446; Power Delivery business segment $1,268.

(4)

"Earnings before interest and taxes" less $13,488 of costs associated with the Conectiv/Pepco Merger, $40,458 of interest expense and preferred stock dividends and $1,592 of consolidation and other adjustments equals consolidated income from continuing operations before income taxes.

           Nine Months Ended
           September 30, 2002                

               Nine Months Ended
                September 30, 2001                

Business Segments

   Revenues

Earnings
Before Interest
      and Taxes   

      Revenues

Earnings
Before Interest
     and Taxes    

(Dollars in Thousands)              

Energy

$1,714,549         

$116,320           

$1,548,804          

$125,707      

Power Delivery

1,762,799         

234,342           

1,922,488          

311,570      

All Other

         5,581         

      (9,758)          

          6,748          

    (29,511)     

Total

$3,482,929 (1)    

$340,904 (2)      

$3,478,040 (3)    

$407,766 (4) 

(1)

Intercompany revenues that are eliminated in consolidation are included in business segment revenues as follows: Energy business segment-$647,976; Power Delivery business segment-$1,916; All Other business segments-$3,054. Excludes $15,817 of revenues reported as "Gain on sales of electric generating plants" in the Consolidated Statements of Income.

(2)

"Earnings before interest and taxes" less $75,394 of costs associated with the Conectiv/Pepco Merger, the $19,674 loss on sale of leveraged leases, the $3,977 impairment of office building held for sale, and $105,614 of interest expense and preferred stock dividends, plus $4,329 of the pre-tax gain on sale of electric generating plants and $3,908 of certain other adjustments equals consolidated income from continuing operations before income taxes.

(3)

The $297,140 pre-tax gain from the sale of electric generating plants is excluded from business segment revenues. Intercompany revenues that are eliminated in consolidation are included in business segment revenues as follows: Energy business segment-$565,305; Power Delivery business segment $1,431; All Other business segments-$188.

(4)

"Earnings before interest and taxes" plus the $297,140 pre-tax gain from the sale of electric generating plants and the $73,015 pre-tax gain primarily from recognition of a previously deferred gain related to termination of a contract with the Pedricktown partnership, less $14,573 of costs associated with the Conectiv/Pepco Merger, $140,312 of interest expense and preferred stock dividends, and $3,093 of consolidation and other adjustments equals consolidated income from continuing operations before income taxes.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Acquisition of Conectiv by Pepco Holdings, Inc.

The information below updates the information included in Note 4 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. (PHI) in a transaction pursuant to an Agreement and Plan of Merger (the Conectiv/Pepco Merger Agreement), dated as of February 9, 2001, among PHI (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco), in which Pepco and Conectiv merged with subsidiaries of PHI (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Conectiv and Pepco each became subsidiaries of PHI. The outstanding shares of Conectiv common stock and Conectiv Class A common stock were cancelled and the common stock of Merger Sub B was converted into 100 shares of $0.01 par value per share common stock of Conectiv, owned by PHI. The change in common stock outstanding resulted in a $0.9 million decrease in the par value of common stock and a $0.9 million increase in additional paid-in capital; total common stockholder's equity was unaffected.

The holders of Conectiv common stock, par value $.01 per share, and Conectiv Class A common stock, par value $.01 per share, outstanding immediately prior to the Conectiv/Pepco Merger received, in exchange for their shares, cash in the aggregate amount of $1.1 billion and approximately 56.2 million shares of PHI common stock. The number of shares of PHI common stock, cash or combination thereof received by each holder of Conectiv common stock or Class A common stock depended on the stockholder's individual election (or failure to make an election) and the prorationing provisions of the Conectiv/Pepco Merger Agreement. Pursuant to the terms of the Rights Amendment, dated as of February 9, 2001, to the Rights Agreement, dated as of April 23, 1998, between Conectiv and Conectiv Resource Partners, Inc., as Rights Agent, the Conectiv common stock Rights and Conectiv Class A common stock Rights, declared as dividends by the Conectiv board of directors on April 23, 1998, expired immediately prior to the consummat ion of the Conectiv/Pepco Merger.

Conectiv's operating results for the three months ended September 30, 2002 and 2001 included costs related to the Conectiv/Pepco Merger of $72.9 million ($44.5 million after income taxes) and $13.5 million ($8.8 million after income taxes), respectively. For the nine months ended September 30, 2002 and 2001, the results included costs related to the Conectiv/Pepco Merger of $75.4 million ($46.0 million after income taxes) and $14.6 million ($9.5 million after income taxes), respectively. The $75.4 million of costs for the nine months ended September 30, 2002 included the following: (i) a $30.5 million write-down of deferred electric service costs based on the terms of the Decision and Order issued by the New Jersey Board of Public Utilities (NJBPU) on July 3, 2002 that required Atlantic City Electric Company (ACE) to forgo recovery of such costs effective upon the Conectiv/Pepco Merger; (ii) $18.4 million for stock options settled in cash, severances, and retention payments; and (iii) $26.5 million for inv estment banking, legal, consulting and other costs. The $14.6 million of costs for the nine months ended September 30, 2001 included investment banking, legal, consulting and other costs. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over Conectiv, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

In connection with the Conectiv/Pepco Merger, Conectiv contributed Conectiv Resource Partners, Inc. (the name of which was changed to PHI Service Company on August 8, 2002) to PHI, effective August 1, 2002. The contribution of CRP to PHI resulted in a $112.5 million reduction in Conectiv's assets ($56.2 million of current assets, $40.2 million of property plant and equipment, and $16.1 million of other assets), an $88.3 million decrease in current liabilities, a $24.6 million decrease in deferred credits and other liabilities, and a $0.4 million increase in retained earnings.

Regulatory Matters

Securitization

The information below updates the information included in Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

On September 9, 2002, New Jersey enacted an amendment (Amendment) to the 1999 Electric Discount and Energy Competition Act (the New Jersey Act). The Amendment permits the NJBPU to authorize the securitization of deferred balances of electric public utilities resulting from the provisions of the New Jersey Act. The NJBPU may authorize the issuance of transition bonds by an electric public utility or other financing entity in order to (i) recover stranded costs deemed eligible for rate recovery in a stranded cost recovery order; (ii) recover rate reduction requirements determined by the NJBPU to be necessary under the provisions of the New Jersey Act; or (iii) recover basic generation service transition costs. The NJBPU may approve transition bonds with scheduled amortization of up to fifteen years if related to stranded cost recoveries or recoveries of basic generation service transition costs, or the remaining term of purchase power agreements if related to the buyout or buydown of long-term purchase powe r contracts with non-utility generators (NUGs).

On September 20, 2002, the NJBPU issued a Bondable Stranded Costs Rate Order (Financing Order) to ACE authorizing the issuance of $440 million of Transition Bonds. The proceeds of these bonds will be used to recover the stranded costs associated with the divestiture of the ACE nuclear assets, the buyout of the Pedricktown NUG contract and the buydown of the American Ref-Fuel NUG contract. Also included in the amount authorized is $20 million of transaction costs and capital reduction costs. Conectiv expects that the bonds will be issued by the end of 2002, although this is dependent on conditions in the relevant capital markets at the times of the offerings.

ACE formed Atlantic City Electric Transition Funding LLC (ACE Transition Funding) during 2001 as a special purpose entity (SPE) for the sole purpose of purchasing and owning the bondable transition property (BTP), issuing transition bonds (Bonds), pledging ACE Transition Funding's interest in BTP and other collateral to the bond trustee to collateralize the Bonds, and performing activities that are necessary, suitable or convenient to accomplish these purposes. Proceeds from the sale of Bonds will be transferred to ACE in consideration for the BTP, and ACE will use the proceeds to repurchase debt and re-balance its capital structure. When issued, the Bonds of ACE Transition Funding will be included in Conectiv's Consolidated Balance Sheet.

Common Stock Earnings From Continuing Operations

Earnings applicable to common stock from continuing operations were $18.7 million for the third quarter of 2002, compared to $61.9 million for the third quarter of 2001. Earnings applicable to common stock from continuing operations were $80.3 million for the nine months ended September 30, 2002, compared to $366.5 million, for the nine months ended September 30, 2001. The items that contributed to earnings from continuing operations applicable to common stock are listed in the table below and are explained by the accompanying text.

After-tax contribution to earnings applicable to common stock from continuing operations

Three Months Ended
     September 30,       

Nine Months Ended
      September 30,     

     2002     

    2001    

    2002    

   2001    

(Dollars in millions)

(1)  Energy, Power Delivery, and Other Businesses

$66.1        

$62.2        

$134.1    

$156.1    

(2) Investment income (loss)

0.6        

8.5        

(3.6)   

3.5    

(3)  Loss on sale of investment in leveraged leases

(1.1)       

-        

(11.2)   

-    

(4) Impairment of office building held for sale

(2.4)       

-        

(2.4)   

-    

(5) Merger-related costs

(44.5)       

(8.8)       

(46.0)   

(9.5)   

(6) Gains on sales of electric generating plants

-        

-        

9.4    

175.0    

(7) Gain on contract termination

        -        

        -        

        -    

    41.4    

$18.7        

$61.9        

$80.3    

$366.5    

(1) Energy, Power Delivery, and Other Businesses

As discussed in Note 15 to the Consolidated Financial Statements herein, Conectiv redefined its business segments in 2002. Power Delivery, which had previously included the operating results for delivering electricity to customers of Atlantic City Electric Company (ACE) and Delmarva Power & Light Company (DPL) and delivering gas to DPL's customers, now also includes the operating results for supplying electricity and gas to those customers. Although the Energy business does not include operating results for the sale of electricity directly to DPL's customers, the operating results of the Energy business for the three and nine months ended September 30, 2002 include the results of a contract under which Conectiv Energy Supply, Inc. (CESI) supplies to DPL the electricity requirements of DPL's default electric service customers (CESI/DPL Power Agreement). The pricing of electricity under the contract, which became effective September 1, 2001, transferred the risk, or reward, associated with DPL's def ault electric service business from the Power Delivery business segment (and DPL) to the Energy business segment (and CESI).

As shown above, the contribution to earnings applicable to common stock by "Energy, Power Delivery, and Other Businesses" increased by $3.9 to $66.1 for the third quarter of 2002, from $62.2 for the third quarter of 2001. This increase primarily resulted from lower interest expense, cessation of goodwill amortization, and higher earnings from the Power Delivery business segment, partly offset by lower earnings from the Energy business segment. Earnings of the Power Delivery business segment increased due to the CESI/DPL Power Agreement and increased retail electric sales and revenues resulting from hotter weather in 2002. These favorable factors for the Power Delivery business segment were partly offset by lower revenues and profits from the deregulated Deepwater electric generating plant due to lower market prices for electricity. Earnings of the Energy business segment decreased mainly due to lower revenues and profits from deregulated electric generating plants due to lower market prices for electrici ty, and also due to increases in operating expenses. These unfavorable factors for the Energy business segment were partly offset by gains from natural gas and electricity trading.

As shown above, the contribution to earnings applicable to common stock by "Energy, Power Delivery, and Other Businesses" decreased by $22.0 to $134.1 for the nine months ended September 30, 2002, from $156.1 for the nine months ended September 30, 2001. This decrease was primarily due to lower earnings from the Power Delivery and Energy business segments, partly offset by lower interest expense and cessation of goodwill amortization. The Power Delivery business segment earnings decrease reflects the cost of replacing the electricity produced by DPL's electric generating plants that were sold June 22, 2001, increases in other operating expenses, lower customer usage of electricity and gas due to warmer winter weather during 2002, and lower revenues and profits from the deregulated Deepwater electric generating plant due to lower market prices for electricity. Earnings of the Energy business segment decreased due to lower revenues and profits from deregulated electric generating plants due to lower market prices for electricity and higher depreciation costs related to new plants placed in service. These unfavorable factors for the Energy business segment were partly offset by gains from natural gas and electricity trading. Also, the Energy business segment's earnings for the nine months ended September 30, 2001 included a $9.8 million after-tax gain from termination of DPL's membership in a nuclear mutual insurance company, as discussed in Note 14 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

Conectiv's participation in energy markets results in exposure to commodity market risk. Conectiv has controls in place that are intended to keep risk exposures within certain management-approved risk tolerance levels. For additional information concerning commodity market risk, see "Item 3. Quantitative and Qualitative Disclosures About Market Risk," included herein.

(2) Investment income (loss)

Investment income (loss) associated with interests in EnerTech Capital Partners, L.P. and EnerTech Capital Partners II, L.P., marketable securities, and other investments resulted in a gain of $0.6 million after taxes for the three months ended September 30, 2002 and a gain of $8.5 million after taxes for the three months ended September 30, 2001. For the nine months ended September 30, 2002 and 2001, the results from Conectiv's investments were a loss of $3.6 million after taxes and a gain of $3.5 million after taxes, respectively.

The unrealized net holding loss on marketable securities included in accumulated other comprehensive income was $3.5 million after income taxes as of September 30, 2002 and $0.8 million after income taxes as of December 31, 2001.

(3) Loss on sale of investment in leveraged leases

On July 3, 2002, Conectiv sold its leveraged lease portfolio of three aircraft and two containerships, which had a carrying value of $44.6 million, before an impairment reserve associated with the sale. The assets were sold for net book value, as the impairment was already reflected in another period. In consideration for the assets sold, Conectiv received cash of $24.4 million and a note, which had an estimated fair value of $5.1 million at the time of the sale. Subsequent to the sale, changing market conditions led Conectiv to test the note for impairment. The test showed the note was impaired as of July 31, 2002. Accordingly, a $2.1 million before-tax impairment charge ($1.1 million after-tax) was recorded in operating results for the three months ended September 30, 2002 as an additional loss on the original sale. As a result of the sale, operating results for the nine months ended September 30, 2002 include a loss of $19.7 million before taxes, or $11.2 million after-taxes.

(4) Impairment of office building held for sale

As a result of Conectiv's decision to sell an office building, Conectiv was required to test the building's carrying value for impairment and the test showed that Conectiv's carrying value for the office building was impaired as of September 30, 2002. Accordingly, a $4.0 million before-tax impairment charge ($2.4 million after-tax) was recorded in the third quarter of 2002, which reduced the carrying amount of Conectiv's office building from $12.4 million to $8.4 million.

(5) Merger-related costs

Conectiv's operating results for the three months ended September 30, 2002 and 2001 included costs related to the Conectiv/Pepco Merger of $72.9 million ($44.5 million after income taxes) and $13.5 million ($8.8 million after income taxes), respectively. For the nine months ended September 30, 2002 and 2001, the results included costs related to the Conectiv/Pepco Merger of $75.4 million ($46.0 million after income taxes) and $14.6 million ($9.5 million after income taxes), respectively. The $75.4 million of costs for the nine months ended September 30, 2002 included the following: (i) a $30.5 million write-down of deferred electric service costs based on the terms of the Decision and Order issued by the NJBPU on July 3, 2002 that required ACE to forgo recovery of such costs effective upon the Conectiv/Pepco Merger; (ii) $18.4 million for stock options settled in cash, severances, and retention payments; and (iii) $26.5 million for investment banking, legal, consulting and other costs. The $14.6 milli on of costs for the nine months ended September 30, 2001 included investment banking, legal, consulting and other costs. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over Conectiv, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

(6) Gains on sales of electric generating plants

As disclosed in Note 13 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K, DPL and another Conectiv subsidiary realized a gain on June 22, 2001 on the sale of ownership interests in fossil fuel-fired electric generating plants (1,080.8 megawatts (MW) of capacity), including the Indian River electric generating plant. The $297.1 million pre-tax gain ($175.0 million after taxes ) recorded in the second quarter of 2001 is included in operating revenues in the Consolidated Statements of Income for the nine months ended September 30, 2001.

The second quarter 2001 gain on the sale of electric generating plants was recorded net of estimated selling expenses, including anticipated environmental clean-up costs for the Indian River electric generating plant. In the first quarter of 2002, DPL reached an agreement with an insurer to settle DPL's insurance claim for environmental clean-up costs associated with the Indian River electric generating plant. Due to DPL's insurance claim settlement and revised estimates of selling expenses, the gain on the sale of the plants increased by $15.8 million before income taxes ($9.4 million after income taxes) in the first quarter of 2002 and is included in operating revenues for the nine months ended September 30, 2002.

(7) Gain on contract termination

Income from continuing operations for the nine months ended September 30, 2001 includes a gain of $41.4 million after income taxes from the recognition of a previously deferred gain related to termination of a purchased power contract. The pre-tax gain of $73.0 million is included in Other Income. For additional information, see Note 11 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

Discontinued Telecommunication Operations

As discussed in Notes 1, 5, and 27 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K, substantially all of the assets of the Telecommunication business segment were sold on November 14, 2001. The $118.8 million after-tax loss that resulted from the disposal of the Telecommunication business segment is classified under discontinued telecommunication operations within the Consolidated Statements of Income. The after-tax losses for operations of the Telecommunication business segment of $7.7 million for the nine months ended September 30, 2001, are classified under discontinued telecommunication operations within the Consolidated Statements of Income.

Conectiv Common Stock and Conectiv Class A Common Stock

As a result of the Conectiv/Pepco Merger on August 1, 2002, the outstanding shares of Conectiv common stock and Conectiv Class A common stock were cancelled and the common stock of Merger Sub B was converted into 100 shares of $0.01 par value per share common stock of Conectiv, owned by PHI. For additional information, see Note 4 to the Consolidated Financials Statements herein.

For the nine months ended September 30, 2002, Conectiv's Board of Directors declared $50.7 million of dividends on common stock and $4.8 million of dividends on Class A common stock, including a special dividend declared in connection with the closing of the Conectiv/Pepco Merger of $5.8 million on common stock and $0.5 million on Class A common stock.

Termination of Agreements for Sale of Electric Generating Plants

As disclosed in Note 13 to Conectiv's Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K, the agreements between ACE and NRG Energy, Inc. (NRG) for the sale of ACE's fossil fuel-fired electric generating plants (740 MW of capacity), including the Deepwater Station and B.L. England Station, and ACE's interests in Conemaugh and Keystone Stations, were subject to termination by either party after February 28, 2002. NRG delivered notice to Conectiv on April 1, 2002 terminating these agreements. On May 23, 2002, Conectiv announced that it initiated a second competitive bidding process to sell these ACE-owned fossil fuel-fired electric generating plants. Conectiv expects that the competitive bidding process will conclude by the end of 2002. Conectiv cannot predict the results of the competitive bidding process, whether the process will result in any sales agreements, whether the NJBPU will grant the required approval of any resulting sales agreements, or any related impacts upon recoverable stranded costs.

As discussed in Note 10 to Conectiv's Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K, the Basic Generation Service (BGS) auction awarded about 1,900 MW, or 80% of ACE's BGS load to four suppliers for the period from August 1, 2002 to July 31, 2003. The remaining 20% of ACE's BGS load is supplied utilizing ACE's electric supply, consisting of its fossil fuel-fired electric generating plants (excluding Deepwater), which are used first to meet such BGS load, and its NUG contracts, to the extent such electric generating plants are not sufficient to satisfy such load. Any portion of ACE's electric supply that exceeds the load requirement of the BGS customers is sold in the wholesale market. In addition, if any of the four suppliers awarded 80% of ACE's BGS load default on performance, the Company will offer the defaulted load to the other winning bidders. If they are not interested, ACE will then procure the needed supply from the wholesale market . Any costs related to this new supply that are not covered by remuneration from the supplier in default will be included in the calculation of deferred electric service costs, which are subject to NJBPU review and future recovery in customer rate increases.

Accounting for Contracts Involved in Energy Trading and Risk Management Activities

In 2002, a pronouncement was issued by the Emerging Issues Task Force entitled EITF Issue No. 02-3 (EITF 02-3) "Accounting for Contracts Involved in Energy Trading and Risk Management Activities," which addresses the presentation of revenues and expenses associated with "energy trading book" contracts on a gross versus net basis. Previously, the EITF concluded that presentation on a gross basis was acceptable and Conectiv presented the revenues and expenses of its energy trading business on that basis in its public financial disclosures. Effective for the third quarter of 2002, based on EITF 02-3 and the subsequent guidance provided by the EITF in June and September 2002, Conectiv early adopted the provisions to present energy trading revenues and expenses on a net basis for all reporting periods. As a result, energy trading revenues and expenses previously reported on a gross basis have been reclassified to a net presentation, as shown in the table below. The reclassification had no effect on operating income and net income.

Three Months
Ended
September 30, 2001

Nine Months
Ended
September 30, 2001

(Dollars in Thousands)

Operating revenues,
   as previously reported

$1,601,927            

$4,836,657           

Reclassification

     (561,132)           

        (1,628,401)          

Operating revenues,
   as reclassified

$1,040,795            

$3,208,256           

Operating expenses,
   as previously reported

$1,468,324            

$4,142,544           

Reclassification

(561,132)           

(1,628,401)          

Operating expenses,
   as reclassified

$907,192            

$2,514,143           

On October 25, 2002, the EITF rescinded Issue No. 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." Conectiv's interpretation of EITF 98-10 is consistent with the current rules that are being applied under Statement of Financial Accounting Standards (SFAS) No. 133 and therefore, management does not believe that rescinding EITF 98-10 will impact its financial position or results of operations.

Three Months Ended
      September 30,       

    Nine Months Ended
        September 30,          

    2002                 2001

        2002               2001

                            (Dollars in millions)

Regulated electric revenues

   $680.8

   $649.6

   $1,623.9

$1,625.4

Non-regulated electric revenues

     370.5

     211.1

        603.9

     552.7

Total electric revenues

$1,051.3

   $860.7

   $2,227.8

  2,178.1

The table above shows the amounts of electric revenues earned that are subject to price regulation (regulated) and that are not subject to price regulation (non-regulated). "Regulated electric revenues" include revenues for delivery (transmission and distribution) service and electricity supply service within the service areas of ACE and DPL.

Regulated Electric Revenues

"Regulated electric revenues" increased by $31.2 million to $680.8 million for the third quarter of 2002, from $649.6 million for the third quarter of 2001. "Regulated electric revenues" decreased by $1.5 million to $1,623.9 million for the nine months ended September 30, 2002, from $1,625.4 million for the nine months ended September 30, 2001. The third quarter increase was primarily attributed to higher customer usage of electricity due to hotter summer weather in 2002, partly offset by a decrease in retail revenues due to more use of alternative suppliers by customers. For the nine months ended September 30, 2002, retail revenues also reflect the effect of lower interchange and resale sales due to the sale of electric generating plants during 2001.

Effective August 1, 2002, in accordance with the provisions of New Jersey's Electric Discount and Energy Competition Act and the NJBPU's Final Decision and Order concerning restructuring ACE's electric utility business, ACE reduced electric rates by approximately $30 million, or 3.2%, on an annualized basis. For background information concerning the rate decreases which resulted from the restructuring of ACE's electric utility business, see Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

Effective October 1, 2003, in accordance with the provisions of the Order of the Delaware Public Service Commission in Docket No. 01-194, dated April 16, 2002, approving the Conectiv/Pepco Merger, DPL will increase retail electric rates by approximately $4.4 million, or 0.9% on an annualized basis. The overall increase in DPL's regulated electric revenues is dependent on DPL customers retaining DPL as their supplier of energy. Management cannot predict the results of customer choice in the future; however, any such impact could be material. For background information concerning the rate increase which resulted from the Conectiv/Pepco Merger, see Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual report on Form 10-K.

On October 15, 2002, the Maryland Public Service Commission issued an order approving a settlement with DPL to extend its obligation to provide default service (as known as standard offer service, or SOS) to commercial and industrial customers through July 1, 2004. Absent the settlement, these customers were scheduled to lose their currently effective SOS on July 1, 2003, a year prior to most other customers throughout the State of Maryland.

See "Deferred Electric Service Costs" within the discussion of Operating Expenses below for information concerning a filing by ACE for a $71.6 million annual rate increase, with a proposed effective date of August 1, 2003.

Non-regulated Electric Revenues

"Non-regulated electric revenues" result primarily from electricity trading activities and strategic generation, which is the sale of electricity, capacity and ancillary services from deregulated electric generating plants. "Non-regulated electric revenues" for all periods presented reflect the effects of the netting of expenses with revenues for "energy trading book" contracts, per the provisions of EITF 02-3, as discussed above in the section "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." "Non-regulated electric revenues" increased by $159.4 million, to $370.5 million for the third quarter of 2002 from $211.1 million for the third quarter of 2001. The $159.4 million increase for the third quarter of 2002 was primarily attributed to increases in electricity trading volumes and prices, and also reflected higher sales by strategic electric generation plants. "Non-regulated electric revenues" increased by $51.2 million, to $603.9 million for the nine months ended Sep tember 30, 2002 from $552.7 million for the nine months ended September 30, 2001. The $51.2 million increase in "non-regulated electric revenues" for the nine months ended September 30, 2002 was primarily due to offsets of third-quarter gains by lower sales by strategic electric generation plants, reflecting lower wholesale electricity prices and the adverse effect of warmer winter weather on electricity usage, during the first six months of 2002, and Conectiv's exit from the competitive retail electricity markets.

The gross margin earned from total electric revenues is equal to electric revenues decreased by "electric fuel and purchased energy and capacity" expenses and increased by "deferred electric service costs." The gross margin earned from total electric revenues decreased $44.5 million to $285.7 million for the third quarter of 2002, from $330.2 million for the third quarter of 2001. The gross margin earned from total electric revenues decreased $161.0 million to $757.2 million for the nine months ended September 30, 2002, from $918.2 million for the nine months ended June 30, 2001. These decreases reflect the cost of replacing the electricity produced by DPL's electric generating plants that were sold in the second quarter of 2001, a lower amount of "deferred electric service costs," lower wholesale sales by deregulated electric generating plants, and lower wholesale electricity prices. The gross margin for the nine months ended September 30, 2002 was also adversely affected by lower customer usage of elec tricity due to warmer winter weather in 2002.

Gas Revenues

Three Months Ended
      September 30,       

    Nine Months Ended
        September 30,          

    2002                 2001

        2002               2001

                              (Dollars in millions)

Regulated electric revenues

   $15.5 

   $16.3

     $106.9

  $119.6

Non-regulated electric revenues

     57.1

     45.6

       188.1

    221.6

Total electric revenues

   $72.6

   $61.9

     $295.0

  $341.2

Liquidity and Capital Resources

Due to $430.0 million of cash provided by operating activities, $462.9 million of cash used by investing activities, and $60.5 million of cash provided by financing activities, cash and cash equivalents increased by $27.6 million during the nine months ended September 30, 2002.

For the nine months ended September 30, 2002 compared to the same period in 2001, net cash flows from operating activities increased by $387.5 million. A decrease in working capital requirements for energy trading and hedging activities, lower interest expense payments, and higher income tax refunds were the primary factors that resulted in the increase in net cash flow from operations.

At September 30, 2002, current assets totaled $900 million versus current liabilities of $2.4 billion, including approximately $425 million in long- term debt due within one year. The Company intends to lower its current liabilities over the next twelve months through a combination of long- term financing strategies, including debt, securitized debt, and other securities.

Capital expenditures of $500.8 million for the nine months ended September 30, 2002 included $350.3 million for mid-merit electric generation plants and the remaining expenditures were primarily for the electric transmission and distribution systems of ACE and DPL. On May 15, 2002, the waste heat recovery boiler and steam turbine that was installed for combined cycle operation at the new mid-merit Hay Road plant (Hay Road Units 5-8) began commercial operation, bringing the electric generating capacity of Hay Road Units 5-8 to 545 MW. Construction at the Bethlehem, Pennsylvania site also continued to move forward. At the Bethlehem site, two 545 MW combined cycle power plants are expected to be installed. Three combustion turbines are expected to be in service by the end of 2002, and the remaining three are expected to be operational by the second quarter of 2003. The waste heat recovery boilers and related steam turbines are expected to be operational in phases, beginning in mid-2003.

In order to finance the power plants under construction at the Bethlehem site, Conectiv Bethlehem, LLC (CBI), a subsidiary of Conectiv Energy Holding Company and an indirect subsidiary of Conectiv, entered into a Credit Agreement (CBI Credit Agreement) with various banks and financial institutions on June 25, 2002. Under this agreement, CBI may borrow up to $365 million as a construction loan and convert the construction loan to a term loan after completing construction of the two 545 MW combined cycle power plants (CBI Project). The construction loan period and term loan period are expected to be approximately two years each. Borrowings under the CBI Credit Agreement bear interest based upon a variable interest rate and are secured by a lien on CBI and all tangible, intangible, and real property of CBI. On July 11, 2002, CBI entered into an interest rate swap agreement which effectively converted the variable interest rate on 75% of the expected average loan balance ($221 million) to a fixed rate of 4.1 5%.

The CBI Credit Agreement contains various terms and conditions which include the following: (i) Guarantees by Conectiv associated with CESI's agreement to purchase energy and capacity from CBI and other guarantees related to obligations of Conectiv subsidiaries under agreements related to constructing and operating the CBI Project; (ii) A "ratings trigger" requirement that could possibly result in the deposit of cash up to the amount of the loan in the event Conectiv's debt ratings fall below certain levels, (iii) A "depository agreement" governing the disbursement of cash provided by the operations of the power plants, and (iv) Events of default. See "Conectiv Bethlehem, Inc. Project Financing" in Note 12 to the Consolidated Financial Statements herein for additional information concerning these terms and conditions.

Conectiv's financing activities for the nine months ended September 30, 2002 included the following: (i) payment of $76.0 million of common dividends; (ii) the redemption of the $12.45 million of ACE's $7.80 annual dividend rate preferred stock on May 1, 2002; (iii) a $643.0 million decrease in short-term debt; (iv) payment of $20.2 million of financing costs primarily associated with the CBI Credit Agreement; (v) the issuance of $296.0 million of long-term debt, including $250 million of 5.3% notes, due June 1, 2005, issued by Conectiv and $46 million of bonds issued on behalf of DPL, including $15.0 million of variable rate bonds due May 1, 2032 and $31.0 million of 5.2% bonds due February 1, 2019; and (vi) the redemption of $226.3 million of long-term debt including $27.5 million of DPL's 8.5% First Mortgage Bonds on February 1, 2002, $46.0 million of DPL's bonds (6.78% average fixed rate) on June 3, 2002, $20.0 million of ACE's 6.46% Medium Term Notes on April 1, 2002, $5.0 million of ACE's 7.04% Medium Term Notes on May 28, 2002, $25.0 million of ACE's 7.01% Medium Term Notes on August 23, 2002, and $100.0 million of Conectiv's 6.73% Medium Term Notes on June 1, 2002. Also see Note 12 to the Consolidated Financial Statements herein for other information concerning debt of Conectiv and its subsidiaries.

Subsequent to September 30, 2002, DPL redeemed long-term debt at maturity as follows: (i) $30.0 million of 6.95% First Mortgage Bonds, on October 1, 2002 and (ii) $12 million of unsecured 6.59%, Medium Term Notes, on October 1, 2002.

Conectiv's capital structure, including short-term debt and current maturities of long-term debt, expressed as a percentage of total capitalization, is shown below.

September 30,
2002

December 31,
2001

Common stockholders' equity

34.2%            

28.5%             

Preferred stock

0.9%            

1.1%             

Preferred trust securities

4.2%            

3.7%             

Long-term debt and variable rate demand bonds

39.7%            

34.2%            

Short-term debt and current maturities of long-term debt

21.0%            

32.5%            

As of September 30, 2002, Conectiv had a $396.8 million short-term debt balance (3.3% average interest rate) which included $279.6 million of short-term notes held by financial institutions and $117.2 million of commercial paper.

Effective with the Conectiv/Pepco Merger, Conectiv's credit agreements of $1.035 billion in the aggregate and DPL's credit agreement of $105 million were terminated. PHI entered into a $1.5 billion credit agreement for general corporate purposes, including commercial paper back-up. Under the PHI credit agreement, a borrowing sublimit of $1.0 billion exists for PHI and a borrowing sublimit of $500 million exists for aggregate borrowings by Pepco, DPL, and ACE, limited to $300 million for each such borrower. Conectiv is not a party to the PHI credit agreement. Conectiv expects that its future funding requirements will be satisfied primarily through dividends received from its subsidiaries and funding from PHI.

Conectiv's ratio of earnings to fixed charges is shown below. See Exhibit 12, Ratio of Earnings to Fixed Charges, for additional information.

Nine Months
Ended
September 30,

          Year Ended December 31,     

      2002      

2001

2000

1999

1998

1997

Ratio of Earnings to
   Fixed Charges

2.36

3.80

2.33

2.20

2.55

2.72

As a result of recent declines in the values of securities in the financial markets, the pension assets of Conectiv have failed to achieve the level of returns assumed in the determination of their pension expense accruals thus far during 2002. As a result, should the financial markets remain at the lower levels of September 30, 2002, or decline further, Conectiv will need to contribute additional funds to its pension plans in order to achieve a funding level of 100% with respect to its pension liabilities. In addition, due to the current lower asset values in its pension plans and the potential need to modify the assumptions used to value its pension liabilities, Conectiv could experience a substantially higher level of pension expense in the near term and until the financial markets' performance improves. Both the funding amount and the pension expense accrual will be determined by the actual return on plan assets for the year, which depends on the performance of the financial markets du ring the balance of the year, and the level of interest rates at year end 2002, which cannot be definitively predicted.

Conectiv's energy contracts for trading activities, which are accounted for at fair value are shown in the table below. All fair values are based on prices actively quoted or prices provided by other external sources.

Energy Trading Contracts
Fair Value as of September 30, 2002

Sources of Fair Value

Total
Fair
Value

Maturity
Less than
1 Year

Maturity
1-3
Years

(Dollars in Millions)

Prices actively quoted

$40.2   

$43.6   

$(3.4)  

Prices provided by other
   external sources

  10.0   

   3.0   

   7.0   

Total

$50.2   

$46.6   

   $3.6   

The change in the fair value of Conectiv's energy trading contracts for the nine months ended September 30, 2002 is shown in the table below.

      Fair Value
      Of Energy
 Trading Contracts
(Dollars in Millions)

Fair value of contracts outstanding as of December 31, 2001

           $29.0

Less: Contracts realized or otherwise settled

             36.6

Plus:   Fair value of new contracts when initially entered

                  -

           Changes in fair value attributable to change in
              valuation techniques and assumptions

                  -

           Other changes in fair value

             57.8

Fair value of contracts outstanding as of September 30, 2002

           $50.2

Forward-Looking Statements

Some of the statements contained in this Form 10-Q are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act and are subject to the safe harbor created by the Private Securities Litigation Reform Act of 1995. These statements include declarations regarding the Company's intents, beliefs and current expectations. In some cases, you can identify forward-looking statements by terminology such as "may," "will," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential" or "continue" or the negative of such terms or other comparable terminology. Any forward-looking statements are not guarantees of future performance, and actual results could differ materially from those indicated by the forward-looking statements. Forward-looking statements involve estimates, assumptions, known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materia lly different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements.

The forward-looking statements contained and incorporated by reference herein are qualified in their entirety by reference to the following important factors, which are difficult to predict, contain uncertainties, are beyond the Company's control and may cause actual results to differ materially from those contained in forward-looking statements:

·

Prevailing governmental policies and regulatory actions affecting the energy industry, including with respect to allowed rates of return, industry and rate structure, acquisition and disposal of assets and facilities, operation and construction of plant facilities, recovery of purchased power expenses, and present or prospective wholesale and retail competition (including but not limited to retail wheeling and transmission costs);

·

Changes in and compliance with environmental and safety laws and policies;

·

Weather conditions;

·

Population growth rates and demographic patterns;

·

Competition for retail and wholesale customers;

·

General economic conditions, including potential negative impacts resulting from an economic downturn;

·

Growth in demand, sales and capacity to fulfill demand;

·

Changes in tax rates or policies or in rates of inflation;

·

Changes in project costs;

·

Unanticipated changes in operating expenses and capital expenditures;

·

Capital market conditions;

·

Restrictions imposed by the Public Utility Holding Company Act of 1935;

·

Competition for new energy development opportunities and other opportunities;

·

Legal and administrative proceedings (whether civil or criminal) and settlements that influence our business and profitability;

·

Pace of entry into new markets;

·

Success in marketing services;

·

Trading counterparty credit risk;

·

Ability to secure electric and natural gas supply to fulfill sales commitments at favorable prices;

·

Volatility in market demand and prices for energy, capacity and fuel;

·

Operating performance of power plants;

·

Interest rate fluctuations and credit market concerns; and

·

Effects of geopolitical events, including the threat of domestic terrorism.

Any forward-looking statements speak only as to the date of this Form 10-Q and the Company undertakes no obligation to update any forward-looking statements to reflect events or circumstances after the date on which such statements are made or to reflect the occurrence of unanticipated events. New factors emerge from time to time, and it is not possible for the Company to predict all such factors, nor can the Company assess the impact of any such factor on our business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement.

The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. The foregoing review of factors should not be construed as exhaustive.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

Exhibit
Number

12               Ratio of Earnings to Fixed Charges

99               Certificate of Chief Executive Officer and Chief Financial Officer (pursuant to Section 906
                   of the Sarbanes-Oxley Act of 2002)

(b) Reports on Form 8-K

On July 18, 2002, Conectiv filed a Current Report on Form 8-K dated July 18, 2002, reporting on Item 5, Other Events.

On July 25, 2002, Conectiv filed a Current Report on Form 8-K dated July 25, 2002, reporting on Item 5, Other Events and Item 7, Financial Statements and Exhibits.

On July 26, 2002, Conectiv filed a Current Report on Form 8-K dated July 24, 2002, reporting on Item 5, Other Events and Item 7, Financial Statements and Exhibits.

On August 2, 2002, Conectiv filed a Current Report on Form 8-K dated August 1, 2002, reporting on Item 1, Changes in Control of Registrant and Item 7, Financial Statements, Pro Forma Financial Information and Exhibits.

On August 14, 2002, Conectiv filed a Current Report on Form 8-K dated August 14, 2002, reporting on Item 7, Financial Statements, Pro Forma Financial Information and Exhibits and Item 9, Regulation FD Disclosure.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: November 13, 2002

Conectiv    
(Registrant)





/s/  Andrew W. Williams 
     Andrew W. Williams
     Senior Vice President and
     Chief Financial Officer

CERTIFICATIONS

     I, John M. Derrick, Jr., Chief Executive Officer of Conectiv, certify that: