ML18101A639

Delmarva Power Electric 1994 Annual Rept.

ML18101A639
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1994
From:	Cosgrove H DELMARVA POWER & LIGHT CO.
To:
Shared Package
ML18101A636	List: ML18101A635 ML18101A637 ML18101A638 ML18101A639 ML18101A643
References
NUDOCS 9504180352
Download: ML18101A639 (56)

Text

9504180352, 950412 PDR ADOCK 05000272 PDR

• I LOOK TO THE ELECTRIC AND NATURAL GAS UTILITY INDUSTRY TO PROVIDE THEM WITH MANY MORE PRICE, SERVICE , AND EVEN SUPPLIER CHOICES THAN THEY HAD BEFORE . FEDERAL DEREGULATION HAS SPED UP THIS INDUSTRY CHANGE IN WHOLESALE ENERGY MARKETS WHILE STATE GOVERNMENTS IN CALIFORNIA AND IN OTHER REGIONS OF THE U.S .

ARE CURRENTLY ACTING TO EXTEND THESE TYPES OF CHOICES TO COMMERCIAL, INDUSTRIAL , AND RESIDENTIAL CUSTOMERS . WHAT WILL HAPPEN EXACTLY AND WHEN? No ONE CAN PREDICT FOR SURE. HOWEVER, WE DO HAVE PLANS TO SUCCEED.

OUR REPORT DESCRIBES OUR STRONG POSITION, SUCCESSFUL PERFORMANCE, AND GROWTH POTEN -

TIAL IN THIS CHANGING INDUSTRY.

With the electric and natural gas business becoming more and more competitive, investors have asked me if Delmarva Power can continue to prosper. The answer is yes. Your Company can prosper in this changing industry because of three reasons. First, Delmarva Power has developed strengths that position it well in an increasingly competitive industry. Second, the Company has performed successfully in the face of competition. Our 1994 performance reflects our ability to compete . Third, we have formed an earnings growth strategy for the next five years that should place us in the top quartile of our industry in terms of financial results . My letter details how the Company intends to be a top performer in the years ahead.

What was once a predictable, monopolistic industry is now a more competitive business. As a result of the Energy Policy Act of 1992, utilities and other non -regulated companies can more easily develop power generation projects and gain access to electric transmission systems throughout the country. Delmarva Power and other electric utilities can now compete for whole-sale customers such as municipals and cooperatives. The act enables wholesale customers, who account for about 13% of our business, to choose a supplier for their electricity. On the East Coast, where there is currently surplus electric generating capacity, this change has led to fierce price discounting among utilities looking to add new wholesale customers. In the future, we expect many of our retail customers (industrial, commercial, and, to some extent, residential) to have similar supplier choices .

Delmarva Power's success in this new environment will depend on its ability to retain and expand current customer relationships and obtain new ones . That's why the strengths that we developed in the 1980s position us well for future opportunities.

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Delmarva Power is the low-cost producer of electricity in the Middle Atlantic region . Our approximate average electricity and natural gas prices of 6¢ per kilowatt-hour (kWh) and 59¢ per I 00 cubic feet (ccf) are below the regional averages of nearly 8¢ per kWh and just over 71 ¢ per ccf, respectively. We have highly satisfied customers . Our commercial and industrial customers rank us significantly above national and regional averages on overall satisfaction measures . In our annual survey, 83 % of the residential customers said they view us favorably.

This figure places Delmarva Power among top-rated energy utilities in the nation. These marks represent a significant advantage in an increasingly competitive industry. The Company serves a growing area . Forecasts indicate that the economy of the Delmarva Peninsula , especially in the Eastern Shore areas of Maryland and Virginia, will continue to grow at a faster rate than the national economy. In addition, Delmarva Power has a corporate culture that fosters inno-vative teamwork; we have a balanced and flexible energy supply plan; and we operate in a responsive regulatory environment.

Our 1994 accomplishments and results reflect how the Company has taken advantage of its strengths. For example, the Company exceeded its earnings target. We put in place a three-part plan that will mitigate the loss of revenues in 1995 from the Old Dominion Electric Cooperative (ODEC) . This plan addresses cutting costs, increasing sales, and adjusting prices.

Delmarva Power beat the competition and secured most of the vulnerable wholesale segment of its business. Our prices and services convinced municipal customers to sign long-term energy supply contracts with us. We also expanded our retail market by winning a bid and signing an agreement to acquire Conowingo Power Company from PECO Energy. This purchase will add more than 35,000 new electric retail customers and earnings of 4¢ to 6¢ per share over time .

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l.ROWTH POTFNTJAI During the next five years, our goal is to grow earnings 3% to 4% annually, approximately double the industry average. To achieve this goal, we will seek opportunities on and off the peninsula to increase our retail revenues through expansion of our customer base, new products and services, and strategic partnering. Along with those activities, we will continue to control our operation and maintenance expenses and capital costs. In addition to our earnings growth strategy, we see the economy of the Delmarva Peninsula rebounding at a faster and greater rate than the national economy, which should also increase revenues.

With increasing uncertainty and risk in the utility business, Delmarva Power will need a larger financial reserve than in the past. However, unlike other utilities that recently cut their divi-

<lends, we believe we can accumulate a sufficient reserve and maintain your current dividend level by lowering our payout ratio gradually through earnings growth.

I feel optimistic about Delmarva Power's prospects in this new business environment. The Company's strengths will provide it with a competitive edge. Our goal is to generate earnings that exceed industry averages and support our stock price and our current dividend level. We're committed to being good stewards of your investment, as well as the high quality energy provider of choice to our customers. Thank you for your confidence and support.

Sincerely, Howard E. Cosgrove Chairman, President, and Chief Executive Officer I

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DEPEND ON OUR CONSISTENT ABILITY TO RETAIN AND EXPAND CURRENT CUSTOMER RELATION-SHIPS AND OBTAIN NEW ONES.

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SEVERAL OBSTACLES , FROM FIERCE PRICE CUTTING TO FRIGID WINTER CONDITIONS, AND SUCCEED.

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OFFERING CUSTOMERS MORE CHOICES THROUGH NEW CON-NECTIONS WITH TECHNOLOGY AND WITH OUR PEOP LE.

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"COMMITTEES Howard E..Cosgrove, Chairman of the Board, President,

• AUDIT COMMITTEE and Cl1ief Executive Officer James C. Johnson, Chairperson; H. Ray Landon, Executive Vice President Robert D. Burris;. Audrey K. Doberstein

• Barbara S. G.raham, ~enior Vice President, Treasurer, COMPENSATION COMMITTE"E and Chief Financial Officer Sarah I. Gore, Chairperson; Ralph E. Klesius, Senior Vice President Michael B. Emery; James H. Gilliam Jr.; James C. Johnson Thomas S. Shaw, Senior Vice President/President, Delmarva Capital Investments, Inc. EXECUTIVE COMMITTEE Donald E. C~in, Vice President, Administration Howqrd E. Cosgrove, Chairperson; James T. McKinstry, Vice Chairperson; Paul S.. Gerritsen, Vice President

,::::_ -- Sarah I. Gore; James C. Johnson; H. Ray Landon Wayr)e A. Lyons, Vice President Fr:an~]. Perry Jr., Vice \resident, Production INVESTMENT COMMITTEE Howard E. Cosgrove, Chairperson; Dale G. Stoodley, Vice President and General ~ounsel Audrey K. Doberstein; James H. Gilliam Jr.; H. Ray Landon; jack Urban, Vice President, Gas Diyision James T: McKinstry W. Douglas Boyce, Vice President, Central D.ivision

. . NOMINA'(_ING COMMITTEE .

Donald P. Connelly, Secretary Audrey K. Doberstein, Chairperson; Richard H. Evans, Vice President, 5:orporate Communications Michael G. Abercrombie; Howard E. Cosgrove Hudson P. Hoen III, Vice President, Southern Division NUCLEAR OVERSIGHT COMMITTEE James P. Lavin, Comptroller and Chief Accounting Officer James T. McKinstry, Chairperson; Dennis R. McDowell, Comptroller-Operating Michael G. Abercrombie; Robert D. Burris; Howard_E. Cosgrove

' C. Taylor, Vice President, Information Systems Duane D. Wayne Yerkes, Vice President, Northern Division More than . .

30% of the Company's common shareholders of record are now participating in the Dividend ' ,

Reinvestment and Common Share Purchase Plan. If you are no.t participating, you may want to consider the benefits of joining this plan. Under the plari, you ,

can invest your cash dividends and also invest additional cash, up to$ 100,000 per calendar year, to purc.hase additional shares of common stock without a service fee. Shares of common stock to be purchased* under the plan may be either newly issued shares or shares purchased in the open market, depending on the financing needs of the Company.

You may obtain a prospectus with the plan description and an enrollment authorization card by writing to:

Delmarva Power & Light Company Shareholder Services 800 King Street P.O. Box 23!

Wilmington, DE 19899 52 DELMARVA POWER 6 LIGHT COMPANY

The Company's common ~tock is listed on the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest, and Pacific Stock Exchanges.

The Company had 58,073 holders of common stock as of December 31, 1994.

- Dividend  : Price Dividend Price First Quarter $.38 l!z $23 5/s $20 1/z First Quarter $.38 llz $24 *$22 1/s' Second Quarter $.38 l!z $21 $16 7/s Second Quarter $.38.'lz $24 'la $21 l!z Third Quarter $.38 1/z $20 $173/4' Third Quarter $.38 l!z $25 7/s $23 1/8.

Fourth Quarter $.38 I /z '- $19 l/4 $17 5/s Fourth Quarter $.38 1/z" $25 5Js $2J- I/4 I

TRANSFER AGENTS AND REGISTRARS Carol C. Conrad, Assistant Secretary FIRST MORTGAGE BOND TRUSTEE Delmarva Power s**ught Company Chemical Bank -

800 King Street, P.O. Box 231 450 West 33rd Street Wilmington, Delaware 198?9 New York, New York 10001 Telephone (302) 429-3355 or toll-free (800) 365-6495 COMMON AND PREFERRED STOCK

• Wilmington Trust Company Common Stock, DEW-listed on the New York and Philadelphia Corpor~te Tr~st Division Stock Exchanges - 1100 N. Market Street Wilmington, Delaware 19890 The Annual Meeting will be held on May "2s: 1995, at 11 :00 a.m. Walk-in office:

in the Clayton Hall, University.of Delaware, Newark. Delaware. I I 03 N. Market Street Wilmington, Delaware ADDITIONAi REPORTS FEDERAL ENERGY REGULATORY COMMISSION To supplement information in this Annual Report, a Financial Elizabeth A. Moler-Chairperson and Statistical Review (1984-1994) and the Form IO-Kare 825 North C_§Ipitol Street, N.E.

• available u_pon request. -Please wr,ite to:

Washington, D.C. 20426 -

_Delmar.va Power & Light Company DELAWARE PUBLIC SERVICE COMMISSION Shareholder Services Dr. Robert ]. McMahon-Chairperson 800 King Street 1560 S. duPont Highway P.O. Box 231

• P.O. Box 457 Wilming_ton, Delaware 19899 Dover, Delaware 19903-0457 DIIPI !CATE MAii INGS MARYLAND PUBLIC SERVICE COMMISSION You may be receiving m'ore than one copy Of the Annual Frank 0. Heintz-Chairperson Report because of multiple accounts within yo_yr household.

6 St. Paul Street The Company is required to mail an Annual Report to each

. Baltif110re, Maryland 2 I 202-6806 name on the shareholder li~t unless* the shareholder ~equests that duplicate mailings be eliminated. To eliminate duplicate VIRGINIA STATE CORPORATION COMMISSION mailing_s, please send a written request to _Shareholder Hullihen W. Mqore-Chairperson Services and enclose the mailing labels from the extra copies.

Tyler Building P.O. Box 1197 Richmond, Virginia 23209 51 DELMARVA POWER fi LIGHT COMPANY

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ELECTRIC REVENUES (Thousands)

• Residential $312,224 $305,446 $273,463 $275,888 $259, 113

.. Commercial 242,506 237,785 220,659 218,558 209, 174 Industrial 145,594 150,178 144,094 144,272 140,288 Resale 105,350 104,983 96,491 98,785 87,574 Other sales revenues en 6 816 9 716 7 142 5 961 5 605 Sales revenues 812,490 808, 108 741 ,849 743,464 701,754 Interchange deliveries 62,388 . -61,437 30,606 33,523 23,905 Miscellaneous revenues 8 237 6 118 7 720 7 612 6 722 Total electric revenues $883, I 15 $875,663. - $780, l75 $784,599 $732,381 ELECTRIC SALES (I ,ODO Kilowatt-Hours) Residential 3,578,743 3,499,387 3,228,237 *3,236,6I6 3,081,943

_Commercial . 3,461,058 3,336,847 .. 3, 140, 149 3,098,599 2,979,738 3, 105,338

~

Industrial 3,248, 131 3,232,233 3, I 15,677 3, 142,439

.. *-Resale 2,'166, 154 . 2,131,920 l,987,393 l,952,312 l,829,573 Other sales Czl 50 996 79 843 49 355 67 415 ' 47 518 Total electric sales 12,505,082 12,280,230 l l,520,81 l l l ,460,280 I l,081,211 ELECTRIC CUSTOMERS

_ (End of Period) . Residential 347,997 342,710 336,076 330,632 326, 175 Commercial 44,060 43,324 42,427 41,539 40,766 Industrial 699 715 726 753 774 Resale 12 12 12 12 12 Other 604 593 578. 566 550 I

Total electric customers 393,372 387,354 . 379,819 I 373,502 368,277 GAS REVENUES (Thousands) Residential $55,091 $47,022 $43, 147. $35,636 $38,487

, Commercial 28,088 23,065 . 20,175 16,370 16,939 I Industrial 17,589 17,586 15,365 14,39.5 16,498 Interruptible and. other <1> 5,498 6,274 3,775 -3,746 6,819 Gas transported 1,191 561 1,032 710 602 Miscellaneous revenues - 449 436 375 365 .. 491 Total gas revenues $107,906 -$94,944 $83,869 $71,222 $79,836 GAS SALES AND GAS TRANSPORTED Residential 7,717 7,31 l 7,264 6,410 6,484.

(Million Cubic Feet) Commercial ' 4,7'16 4,423 4,286 3,653 3,452 Industrial 3,858 4,348 4,358 4,398' 4,418

. Jnte_rruptible and other Ci> l 766 I 984 I 105 . l 113 I 715 Total gas sales 18,087 18,066 17,013 15,574 16,069 Gas transported 2 255 I 539 3 155 2 610 2 194 Total gas sales and

' 18,184 18,263

gas transported* 20,342 19,,605 .. 20,168 GAS CUSTOMERS - ..

(End of Period) Residential 88,518 86,027 82,996 80,874 78,893 . '

Commercial 6,982 6,751 6,500 6,313 5,983 Industrial 150 150 152 154 154 Interruptibl~ and other 1:2 12 ll IO 14 Total gas customers 95,662 92,940 89,659 87,351 85,044 (I) Includes unbilled revenues. .. I (2) Includes unbilled sales.

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DELMARVA POWER fi LIGHT COMPANY

?0 ~-~,.;;;-;.;- *N~* 'K***A*TTr\l\J Segment information with respect to electric and gas operations was as follows; (nnll,,rc ;n Thnnc,,mk) ]OOA JCICI".> JOO?

ELECTRIC OPERATIONS Operating revenues $883,115 $875,663 $780, 175 OperatiI'lg income 153,409 154,412 134,260 Depreciation 102,746 94,549 89,421 Construction expenditures 133,884 142,238 192,493 GAS OPERATIONS Operating revenues 107,906 94,944 83,869 Operating income 9,747 9,727 9,451 Depreciation - 6,777 6,380 5,864 Construction expenditures 20,235 17,753 14,888 IDENTIFIABLE ASSETS, -NET Electric ' 2,314,448 2,267,050 2,042,496 Gas 188,813 160,618 142,740 Assets not allocated 166,524. 164,~ll 189,557

.?I 011ARTFR1v FTNA"'"U' TN~ORMAIIQN Cl!naudited) -

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The quarterly data presented below reflect all adjustments necessary in the opinion of -the Company for a fair presentation of the interim results. Quar~erly data normally vary seasonally with temperature variations, differen!=eS between summer and winter rates, the timing of rate orders, and the scheduled downtime and maintenance of electric generating units.

Earnings Earnings

' Applicable Average per Quart_er Operating Operating Net to Common Shares Average Ended Revenue Income - Income Stock Outstandil)g Share (Dollars in Thousands) (Jn Thousands) 1994 March 31 $292,394 $ 53,770 $39,641 $37,377 59,022 $0.63 I

June 30 218,465 33,994 20,776 18,453 59,402 0.31

- September 30 260,601 4;2,921 29,366 27,008 59,542 0.46 December 31 - 219 561_

- 32 471 18 527 16102 *59 542 o'.27

$991,021 .$163,156 $108,310 $98,940 59,377 $1.67 1993. -

March 3-1

- $248,007 $ 46,278  :$34,414 $31.,911 55*;J35. $0.58 June 30 214,638 31,239 18,758 16,279 58,036 0.27-September 30 275,385 59,015 44,279 41,789 58,372 0.72

• December 31 ' 232 577 27 607 13 625 II 095 58 687 0.19

$970,607 $164,139 $111,076 $101,074 57,557 $1.76 I In the thlrd quart~r of 1994, the Company expensed the costs associated with the early retirement offer (Not~ 4 t9 the Consolidated Financial Statements) which decreased net income by $10. 7 million ($0.18 per share). -

In the fourth quarter of 1994, the Company reduced the rate of salary increase assumed for computation of pen~ion cost, effective January 1, 1994. This change increased net income and earnings per share in the f_ourth quarter by $2.1 million an9 $0.03, respectively.

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49 DELMARVA POWER & LIGHT COMPANY

The following presents condensed financial information of the Company's nonregulated wholly owned subsidiaries: Delmarva Capital Investments, Inc.; Delmarva Energy Company; and Delmarva Industries, Inc. A subsidiary which leases real estate to the Company's utility business,"Delmarva Services Company, is excluded from these statements since its income is derived from inter-comp~ny transactions which are eliminated in consolidation.

CONDENsiD SUBSIDIARY STATEMENTS OF IJ'ICOME REVENUES AND -GAINS Landfill and waste hauling $I4,IS6 $11,745 $9,021

/ Operating services 22.46S 22,IIS 3,03S Other revenues 4,923 2,117 99S Leveraged leases Ol 272 S35 61 Qther inve~;tment income I 293 S21 I 279 43 142 7 636 14 397 COSTS AND EXPENSES Operating expenses 3S.499 36.424 15,765 Interest expense, net 370 319 Income taxes I 921 596 (2 176) 40 790 35 S2S 13 90S Net income $2,352 $I ;sos $4S9 Earnings per share of common.stock attributed to subsidiaries $0.04 $0.03 $0.01

( 1) On an after-tax basis, leveraged leasi~g. including gains on sales of equity and residual value interests, contributed $242,000, $1, 754, 000, and $1, 813 ,000 to earnings in 1994, 1993, ~nd 1992, respectively.

CONDENSED SUBSIDIARY BALANCE SHEETS (Dollars in Thousands) As of December 31

• LIABILITIES AND As of December 3 I.

C1:1rrent assets Current liabilities Cash and Debt due sash equivalents $S,631 $15,929 within one year $4S9 $193 Oth'er 5 702 7 4S9 Other 6 S73 II 903 14 333 23 4IS 7 362 12 096 Noncurrent assets Investment in Noncurrent liabilities Leveraged leases 49,595 50,914

-Long-term debt 5,225 1,114 Other 4,354 . 4,623 Deferred income taxes 53,592 55,00S Landfill fi waste hauling *Other 2 342 I 975 property, plant fi equipment 25,424 27,420 61 159 5S 097 Other 9 55S 4 210 Stockholders'* equity 34 743 40 392 SS 931 S7167 Total $103,264 $Il0,5S5 Total $103,264 $110,5S5 48 DELMARVA POWER 6 LIGHT COMPANY

The Company is subject to regulation with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitation on land _use py various federal, regional, -state, and local authorities. The Company has incurred, and exi;iects to continue to incur, capital expenditures and operating costs because of environmental considerations and requirements. The disposal of Co~pany-generated hazardous substan.ces can result in costs to clean up facili-ties found to be contaminated due to past disposal practices. Federal and state st,atutes authorize governmental agencies to compel responsible parties to clean up* certain abandoned or uncontrolled hazardous, waste sites. The Company is curren.tly a potentially resp!:msible party (PRP) ~t two federal superfund sites and is alleged to be a third parw contributor at two oi:her federal superfund site~. The Company also has three former coal gasification sites and. the Company is currently participating with the State of Deiaware in evaluating two of the three sites for."extent of contamination and risk to the environment. The Company *has accrued a liability for clean-up and other potential costs related to the PRP and coal gasification sites. The-Company does not expect such costs to have a material effec~ on the Company's financial position or results of opera~ions.

NUCLEAR INSURANCE In the event *of an incident at any commercial nuclear P.OWer plant in the.United States, the Company could be assessed for a portion of any third party claims associated with the incident. Under the provisions of the Price Anderson Act, if third party claims relating to-such an jncident exceed $200 million (the amount ~f primary insurance), the Company could be assessed up to $23. 7 mil-lion for thfrd party claims. In addition, Congress could impose a revenue raising measure on the nuclear industry to pay such dai~s.

The co-owners of_ Peach Bottom and Salem maintain nuclear property damage and decontamination insurance in the aggregate amount of $2:8 billion *for each station. The Company is self-insured, to the extent of its ownership interest, for_ its share of property lo~ses in* excess of insurance coverages. Under the terms of the various insurance agreements, ~he Company could be assessed up to $4. 7 million in any policy year for losses incurred at nuclear plants insured by the insurance companies.

The Company is a member of an industry mutual insurance company, which prov.ides replaceme~t power cost coverage in the e~ent of a major ac~idental outage at a nuclear po,wer plant. The premium for this coverage is subject to retrospective assessment for _

• adverse loss experience. The Company's present maximum share of any assessment is $1.4 million p<?r year.

OTHER On October 20, I994, the Company and Star Enterprise signed a settlement agreement resolving Star' Enterprise's claims that it had allegedly been overcharged under a contract 'with the Company. The. settlement did not have a material effect on the Company's financial position or results of operations.

• The Company is involv~d in certain other legal and administrative 'proceedings before v~rious courts and governmental agencies co~cerning rates, fuel contract.s, tax filings, and oth~r matter;. Th.e Company expe~ts that the ultimate disposition of these proceed- *

. ings will not.have a material effect on the Company's financial position or results of operations.

CASH PAID DURING THE YEAR FOR Year Ended December 31, Interest, net of capitalized amount $57,837 $58, 154 $62, 127 Income taxes, nfi!t of re.fu_nds $67,922 $72,384 $46,3IO 47 DELMARVA POWER 6 LIGHT COMPANY

The Company provides health-care and life insurance benefits to.its retired employees and substantially*all of the Company's employees may become eligible for 'these benefits upon retirement. Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits.Other Than_Pensions," which requires accrual aceounting for postretirement benefits either than pensions. As permitted by SFAS No. 106, the Company elected to amortize its transition obligation (the accumu-lated p'ostretirement benefit obligation as of January 1, 1993) over 20 years. Prior to adoption of SFAS No. J06, the Company expensed postretirement benefits other than pensions as ~aid. The amount expensed in 1992 was $4,496,000.

• The Company's polky is to fund its obligation to the extent that SFAS No. 106 costs' are reflected in customer rates, including amounts which are capitalized. Plan assets held in external trust funds consist primarily of investments in bond mutual funds.

The following schedules show the funded status of the plan, the compon~nts of the cost of postretirement benefits other than pen" sions, and assumptions.

RECONCILIATION OF FUNDED STATUS OF THE PLAN As of December 31, Accumulate~ postretirement benefit obligation (APBO)

_Active employees fully eligible for benefits $9,319 $17,380 Other active employees 12,638 . 20,351 Current retirees 58 445 43,118 80.402 80,849 Plan assets at fair value 15 140 5 825 APBO in excess of plan assets 65,262 75,024 Unrecognized transition obligation * .(65,110) (68,728)

Uorecognized*net loss 256 4 939 Accrued/(prepaid) postretirement benefit cost $(104) $1,357 ANNUAL <;osT ,OF PosTRETiREMENT BENEFITS OTHER THAN PENSIO!"'S Year ended December* 31, I

I Service cost-benefits earned during period $2,127 $2,206 Interest cost on projected benefit -Qbligation 5,520 5,613 Actual return on plan assets_ 100*

Amortization of the unrecognized transition obligation 3,617 3,617 Other, net 481 Net postretiremerit benefit cost* $10,883 $11.436 Discount rates used to determine APBO as* of December 31 8.25%. 7.25%

Expected long-term rates of retur,n on assets 8.25% 8.25%

Rates of increase in compensation levels 5.50% 6.50%

Health-care cost trend rate 11.00% 12.00%

The health-care cost trend rate, or the -expected rate of increase in health-care costs, is assumed to decrease to 10.5% in 1995 and gradually decrease to 5.5% by_ 2005. Increasing the health-care cost. trend rates of future years by one percentage point would inc~ease the accumulated postretirement benefit obligation by $2. 9 million and would increase annual aggregate service and iriter-est costs by $0.2 million.

DELMARVA POWER fi LIGHT COMPANY

The Company has a defined benefit pension plan covering all regular employees. The benefits are based on years of service and the employee's compensation. The Company's funding policy is to contribute each year the net periodic pension cost for that year.

However, the contribution for any year will not be less than the minimum required contribution nor greater than the maximum tax de~uctible contribution. Pension plan assets consist primarily of equity securities and public*bond securities.

I The following schedules show the funded status of the plan, the components of pension cost, and a~sumptions.

RECONCILIATION OF FUNDED STATUS OF THE PLAN- As of December 31, -

1nn110-- ;n Thn,,< 0 ..,nc\ !OOLI 100<

Accumulated benefit obligation Vested $265,597 $236,209 Nonvested 19 311 25 721 284,908 261,930 Effect of estimated future compensation increases 67 947 123 562 Projected.benefit obligation - 352,855 385,492 Plan assets at fair value - 502 588 521 897 Excess of plan assets I

over projected benefit obligation 149,733 136,405 Unrecognized prior service cost 19,155 l9,255

~

Unrecognized net gajn (129,842) (108, 183)

Unrecognized net transition asset (33 14)) (36 455)

Prepaid pension cost $5,Q05 $11,022 COMPONENTS OF NET PENSION COST Year Ended December 3 ! ,

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Service cost-benefits earned during perio_d - $10,939 $13, 152 $12,606 Interest cost on projected benefit obligation 26,574 26,411 24,261 Actual return on plan assets 3,349 (58;247) ' (39, 104)

Net amortization and deferral (52 601) 14 748 (J 715)

Net pension cost $(11,739) $(3,936) $(3,952)

IM~ " IQQL! fOO< fOO'J Discount rates used to determine projected benefit obllgation as of December 31 8.25% 7.25%.. 7.25(o Rates o'f incre.as~ in compensation levels . 5.50% 6.50% 6*.50%

Expected long-term rates of return on assets 8.25% 8.25% 8.25%

The net pehsion cost excludes the *expense recorded in 1994 under SFAS !'lo. 88 for the Company's early ~etirement offer. Prepaid pension cost as of December 31, 1994, was reduced by the early retirement offer. Refer to Note 4 to the Consolidated Financial Statements for additional information.

The net _l 994 pension cost'reflects a dec:ease* of'$4. 5 million attributed to a reduction in the assumed rate of incf.ease in compensa-tion levels from 6.5% to 5.5%, effective January l, 1994. Also, the discount _rate was increased from 7.25_% to 8.25%, effective Oct<?ber l,1994.

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DELMARVA POWER fl LIGHT COMPANY

I On Aµgust 17, 1994, a nonutility subsidiary of the Company borrowed $4,640,000 at B% from a bar;ik to partially finance the purchase of an office building. Monthly payments of principal and interest, based on a 15-year principal amortization, are due through September 1999 when the loan matures.

As of December 31, . l 994, the Company had $75 million of bank lines of credit, including $45 million of such _credit li_nes under which the Company may convert short-term borrowings to a term loan maturing on July 26, 1997, (or earlier at the discretion of the Comp~ny). ~s_* of December 31, 1994, * $45 milliop of short-term borrowings. by the Company were classified *as long-ter~ debt

("Term Loan") in recognition of the long-term financing capability provided by the credit lines. The Company-is generally required to pay commitment; fees for its credi_t lines. The lines of credit are periodicaHy reviewed by the Company, at which time they may be renewed or cancelled.

Maturities of long-term debt and sinking fund requirements during the next five years are as follows*: 1995-$1,649,000; 1996~

$1,726,000; 1997-$26,815,000; 1998-$32,546,000; 1999-$31,728,000.

As of December 31, 1994, the fair market value of the Company's long-term debt was $_752,461,000 in compariso_n to the book value

• of $77~, 558,000. As of December 31, 1993, the fair market vajue of the Company's long-term debt was $83~,502,000 in comparison to the book value of $736,368,000. The fair market value Of the Comp.any'~ long-term debt was estimated using dis-

• counted cash flow calculations, ba*sed on interest rates available to the Company for debt with similar terms, maturities, and credit worthiness.

11 C'.OMMTTMFNT<;

• The Company ct.Jrrently estimates its commitments. for construction of utility plant, excluding AFUDC, and. purcbases under fuel supply contracts, excluding nuclear fuel, to.be approximately $207 million in l995.and'$214'million in.1996*. *"

The Comparyy has a 26-year agreement with Star Enterprise effective through May 31, 2018; to purchase 48 MW of capadty supplied -

oy the Delaware City Power Plant. As discussed in Note 6. to the Consolidated Fina~cial Statements, the Company a~so has agreements to purchase capacity and energy from PECO beginning upon the closing of the COPCO acquisition. Under the terms of these agree-ments, the Company's expected col')'lmitments for capacity and energy charges'* are as follows: 199,S-$52.9 million:' 1996-$56.6 mil-lion; 1997-$61.9 million; 1998-$65. l million; 1999-$71.~ million; after 1999-$604.8 million; total-$913.1 million.

The Company's share of nuclear fuel at Peach ~ottom and Salem is financed thn:>Ugh a nuclear fuel energy contract which is accounted for. as a capital lease. Payments unde_r the contract are based on the quantity of nuclear fue! burned by the plants. The

. Company's obligation under the contract is generally the net book value of the nuclear fuel financed, which was $30.3 million as of December 31, 1994.

The Company leases an l l. 9% interest' in the Merrill Creek Reservoir. The lease is considered an operating lease and payments over the remaining lease term, which ends in 2032, are $161.8 million in aggregate. The .Company also has long-term leases for certain other facilities and equipment. Minimum commitments as of December 31, 1994, under the Merrill Creek Reservoir lease and all other noncancellable lease agreements (excluding payments under the* nuclear fuel energy contract which cannot be reasonably

~ ,

estimated) are as follows: 1995-$6.l million; 1996-$6.0 million; 1997-$6.0 million; 19987 $6.0 million; 1999-$5.9 million;.after 1999-$145. l million; total-$175. l million. Approximately 92% of -the minimum lease commitments shown above are payments due under the Merrill Creek Reservoir lease.

RENTALS CHARGED TO OPERATING EXPENSES The following amoun.ts were charged to operating expenses for rental payment~ under both capital and operating lease,s:

JOOA lQQ?

Interest on capital leases $1,560 $1,296 $1,432 Amortization of capital leases l l,456 10,243 10,554 Operating leases 14 552 15 176 14 063

$27,568 $26,715 $26,049 I

I 44 DELMARVA POWER fi LIGHT COMPANY

Refer to the Consolidated Statements of Changes in Common Stockholders' Equity for information concerning issuances and redemptions of common stock during 1992-1994.

The Company's Restated Certificate and Articles of Incorporation and the Mortgage and Deed of Trust securing the Company's out-star:iding bonds contain restrictions on the payment of dividends on common stock. Such restrictions would become applicable if the Company's capital and retained earnings fall below certain *specific levels or if preferred dividends are in arrears. Under the most restrictive of these provisions, as. of December 31, 1994, approximately $231.3 million was available for payment of common dividends.

Prior to January 1, 1993, the Company, had a nonqualified stock option_p!an for certain employees. Options were_ priced at the actual market value on the grant date. Effective January I, 199-3, the Company's Board of Directors declared that no new stock-options will be granted and t_hat *the performance-based restricted stock program will be the program under the Long Term Incentive Plan which is in effect. Changes in stock options are summarized below.

1994 1993 1992 Number Option Number Option Nurriber Option Beginning-of-year balance 53,050 $Ii 11z-$21 l/4 192,100 $17 1/z-$21 '!1 270,200 $17. 1/z-$2i l/4 Options granted 59,900 $20 1/z Options ex'ercised 139,050 $17 1/z-$21 l/4 129,500 $17 1/z-$21 l/4 Options forfeited 8,500 $21 i/4 E_nd-of-year balance 53,050 $17 'lz-$21 l/4 53,050 $17'lz-$21."1;4 192, 100 $17 1/z-$21 l/4 Exercisable 53,050 $17 'lz-$21 l/4 53,0?0 $17 1/z-$21 l/4 132,200 $17 1/z-$21 l/4 On November 4, 1993, the Company issue-d 200,000 shares of 6 3j43, cumulative preferred stock, $100 per share par value, for $20 millign. On December 1, 1993, the Co~pany used ~he proceeds and cash on-hand to redeem $28.28 million of preferred stock pre-viously issued by the CompanY. including $18.28 million of the 7.883 series and $10.0 million of the 7.843 series.

On August 4, 1992, the Company issued l ,6QO,OOO shares of} 3/43, *cumulative preferred stock, $25 per share par value, for $40 million.

Substantially all utility plant ofthe Compariynow or hereafter OY'{~ed is subject to the lien of the Mortgage and Deed of Trust.

The Company redeemed its 4 s/a3 First Mortgage Bonds, $25 million principal amount, at maturity on October I, 1994.

On October *12, 1994, the Delaware Economic Development Authority issued on b~half of the Company $30 million of Variable Rate Demand Gas Facilities -Revenue Bonds, due on demand or at maturity on October I, 2029. The bonds may bear interest at a daily rate, weekly" rate, short-term interest :ate, or fixed rate as determined from time to time in accordance with the indenture.

Proceeds from the bonds are l:ieing.used to finance enhancements to and expansion of the Company's gas system.

The Company's debt obligations included Variable_Rate Demand Bonds (VRDB) in the amounts of $71.5 million as of December 31, 1994 and $41. 5 million* as of December 31, 1993. Although VRDB ar<<;! classified as current lfabilities because VRDB are due on demand by the bondholder, such bonds are immediately remarketed because the interest rate is set at market. The Company may also utili~e one _of the Jixed rate/fixed term conversion options of the bonds. Thus, the Company considers the VRDB to be a source of long~term financing. The $71.5 million balance of VRDB outstanding as of December 31, 1994_ matures in 2017 ($26 million),

~ 2028 ($15. 5 million), and 2029 ($30 million). Average annual. interest rates on the VRDB were 3.03 in 1994.

43 DELMARVA POWER 6 LIGHT COMPANY

In the third quarter of 1994, ~he Company completed a v~luntary early retirement offer (ERO) for all management and union employees at least 55 years old with at least IO years of continµous service by Decembe~ 31, 1994. The ,ERO was accepted by 10.5%

of- the Company's workforce (296 .people), wh_ich represented an 82% participation rate among eligible employees. In accordance with SFAS No. 88 .. "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans a.nd for Termination

-Benefits," the Company expensed.the costs associated with the ERO of $17.5 million($ i°0.7 million after taxes or $0.18 per share).

Effective January l, 1993, the contract for operation and mair:itenance of the Delaware City Power Plant (owned by Star E~terprise) was transferred from the parent-company to a nonutility subsidiary.. Thus, beginning in 1993, revenues and expenses associated with the contract were included in the operating results of -the Company's nonutility subsidiaries as reporte~' in Note l~ to the Consofidated Financial Statements. In 1992, the* revenues and expenses associated wi!h the contract were reflected in the Consolidated Statement of Income as "other income, net .of income taxes."

On July 27, 1988, the Company, Atia~tic City Electric Company, and Public Service Electric and Gas Company filed lawsuits against PECO Energy Company (PECO) to recover replacement power and other costs incurred as a result of the shutdown of Peach Bottom by the NRC on March 31, 1987. The Company's share of costs resulting from the shutdown were charged against earnings during the pe~lod of the shutdown (March 1987 throygh November 1989). On.March 31, 1992, the Peach Bottom co-owners reached a settle-ment agreement-under which PECO paid $!8.5_million to the Company. The settlement agreement increased 1992 ner income by

$1 l .4 million ($0.21 per share).

On May 24, 1994, the Company entered into an agreement with PECO to buy its Maryland r~tail electric-subsidiary, Conowingo Power Company (COPCO), for $150 million. The Company plans to finance the acquisition of COPCO with approximately 50% long-term debt' and 50% common equity. The MPSC has approved the Company's proposal to recO\:'er, through Maryland retail rates, the

$47 million acquisition premium (purchase price in excess of book value) and a carrying charge, over 20 years beginning at the time of-the next Maryland base rate case. The purchase price also reflects COPCO's deferred asset of ab.out $25 million -fo~ costs to be collected pursuant to a rate phase-in plan. The MPSC has approved recovery, from COPCO customers, of this deferred .asset and a carrying charge over IO years beginning in 1996.

In conjunction with the COPCO acquisition, the Company signed a contract with PECO which provides.for the purchase of electric capacity and energy from the PECO system beginning on the later of the dosing date of the COPCO acquisition or February I, 1996, and ending on May 31, 2006. The base amount of the tapa_city purchase, which is subject to certain possible adjustments; will start

• at 205 megawatts (MW) and will increase annually to 259 MW in 2006, If the COPCO acquisition closes prior to February  !, 19.96, the Company has agreed in another contract that it will-purchase COPCO's electric. power requirements fro~ PECO on an interim basis until February l, 1996.

The acquisition and purchased power agreements are ~ontingent on various regulatory approvals. The purchas~d *power agree-ments are conditionea upon ,closing of the COPCO acquisition. The DPSC and MPSC approved the Company's filings for regulatory approval on November 22, _1994, and January 18, 1995, respectively. The Company expects the VSCC and FERC will approve the .

Company's filings by mid-1995.

41 DELMARVA POWER u LIGHT COMPANY

The Company's balance sheet includes its proportionate share of assets and liabilities related to jointly owned plant. The Company's' share of operating a~d. i:naintenance expenses of the jointly owned plant is included in the correspondirig expenses in the Consolidated Statements of Income. The Company is responsible for providing its share of financing for the jointly owned facilities.

Information with respect to the Company's share of jointly owned plant as of December 31, 1994, was as follows:

Megawatt Construction

_Ownership Capability Plant in Accumulated Work-in-Nuclear Peach Bottom 7.51% 157MW $.124,913 $62,641 $9,836 Salem 7.41% 164MW 204,958 86,203 . 8,094 Coal-Fired Keystone 3.70% 63.MW 17,642 6,937 641 Conemaugh 3.72% 63MW 27,627 7,853 3,792 Transmission Facilities Various 4 564 2 037 Total $379,704 $165,671 $22,363 The Company records a liability for, its shares of the estimated *cost of decommissioning the Peach Bottom and Salem nuclear reactors over the remaining lives of the plants based on amounts collected in rates charged to el.ectric customers. For rate~ina~ing .

purposes, the Company estimates its share of future nuclear decommissioning costs _?a;;ed on NRC regulations concerning the mini-mum financial assurance amount for nuclear decommissioning. The Company. is presently recoverii:tg through electric r.ates n_ucl~ar decommissioning costs based on the 1990 NRC minimum financial assurance amotmt of approximately $50 million.

Subsequently, the NRC minimum financial assurance amount increas~d to $118 million prim~rily due_ to higher estimated costs for disposing of ,low level radioactive waste. Based on prior decisions by regulatory commissions, the Company expects that.rates charged to electric customers will be adjusted* to pro\fide for recovery of the Company's current estimate of nuclear decommission-ing costs of-$118 million-over the remaining lives of the plants. As discussed in Note 2 to the Consolidated.Financial Statements, the Company has filed in the Delaware and Maryland retai~ electric jurisdictions applications for base rate increases which include recovery of each jurisdiction's share of the updated nuclear decommissioning cost estimate of $118 million.

The Company's accrued nuclear decommissioning liabilit}',. which is reflected in the accumulated reserve for *depreciation, was

$32.4 million as.of December 31, 1994. The provision reflected in depreciation expense for nuclear decommissioning was $2.4 mil-lion in 1994, $2.3 million in 1993, and $2.2 *million in 1992. External trust funds established by the Company for the purpose of fonding nuclear decommissioning costs had an aggregate balance_of $20.7 million as of December 31.. 1994. Earnings on the trust funds are recorded as an increase to the ~ccrued nuclear decommissiqning liability, which, in effect, reduces the expense recorded for nuclear decommissioning.

The ultimate cost of nuclear decommissioning for the Peach Bottom and Salem reactors may exceed the NRC minimum financial assurance amount which is updated annually under a NRC prescribed formula.

As of December 31,

• 1994, the Company had $36. 6 million of investm~nts in securities which were included in the following balance sheet classifications: cash and cash equivalents-$2.2 million; funds held by trustee-$32.8 million; other investments and nonutility property, net-$1.6 million. These securities, based on the Company's intent and criteria established by SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities," are categorized as available-for-sale securities. The fair value of such secu-rities was riot materially different frorri book value as of December 31, 1994. Gair;is and losses from the sale of investment securities were not material to the Company's operating results in 1994, 1993, or 1992. As of December 31, 1994, the Compar:iy's irwestments in debt securities other than those considered to be cash equivalents had the following maturities: $11.4 million due in 1995-2000; and $7.6 million due in 2001-2004.

42 DELMARVA POWER 6 LIGflT COMPANY

Operation Federal: Current $50,276 $50,264 $30,819 Deferred 5,592 7,710. ' 11,597 State: *Current 11,268 10,839 6,755 Deferred 928 1,832 2,638 Investment tax credit*adjustments, net 1898 2 515) (2 417 Total operation ' 66166 68 130 49 392 Other income Federal: Current 2,789 9,398 7,559 Deferred (2,008) (9,398) (3,482)

State: Current 349 287 1,369 Deferred 317 I 315 4 Total other income 1447 l 028 5 442 Total incciine tax expense $67,613 _$67, 102' $54,834 I

The amount computed by multiplying income before tax by the federal statutory rate is reconciled below to the total income tax expense.

.1994 1993 1992 Statutory federal income tax expense $61,574 . 35% $62,362 35% $52, 142 34%

Increase (decrease) due to Depreciation not normalized 1,797* I 1,676 I l 1,959 ' I ITC amortization/flow-through (1,938)' (I) (2,832) (2) (2,780) (2) .

Sfate income taxes, net of federal tax benefit 8,361 4 7,567 4 7,099 5 Other, net (2 181) * (I) (I 671) -'- (3 586) (2)

Total income tax expense $67,613 38% $67, 102 38% $54,834 - 36%

The tax effect of temporary differences which give rise to the Company's net deferred tax liability are shown below:

As of December 31 ,

Deferred Tax Liabilities Utility plant basis ?ifferences Accelerated depreciation . * $296,651 $292,655 Other . 98,437. 97,530 Leveraged leases 47,080 49,339 Deferred recoverable income taxes 64,130 62,124 Qther 44 418 30 630 Tota) deferred tax liabilities 550 716 532 278 Deferred Tax Assets Deferred ITC 17,763 17,316 Other 36 794 28 218 Total deferred tax assets 54 557 45 534 Total deferred taxes, net $496,159 $486;744 Valuation allowances for deferred tax assets were not material as of December 31, 1994 and 1993.

40 DELMARVA POWER 6 LIGHT COMPANY I

On September I, 1994, the Company filed an application with the MPSC for a $3.9 million "limited issue" increase in electric base rates. The proposed increase, when netted with ODEC related fuel sa~ings, is $2.2 million or I. I%. This "limited issue" increase is designed to recover costs similar to those in the Delaware "limited issue" case, except for demand side management and conserva-tion program costs which are recoverable from Maryland customers through a surcharge. The MPSC staff's testimony proposes a rate decrease of $9.6 million, reflecting a historical test year, a lower return on equity, and certain adjustments which are beyond the scope of the limited-issue filing. On February 3, 1995, the Hearing Examiner issued his report recommending no change in cur--

rent rates. The Company expects a MPSC decision on the case by the end of the first quarter of 1995.

Electric base rate increases wh!ch became effective in 1993 and were in effect for all of 1994 are summarized in the following table, Electric base rates were increased during 1993 pursuant to the Company's filings with regulatory commissions for recovery of higher costs associated with completion of. Hay Road Unit 4, postretirement, benefit costs under SFAS No. 106, and other items including general inflation.

Annualized Base Effective Ti R.,,,.,,.;, ,., lnrrPfl*P OfltP Retail Electric (\) Included an 11.5% return on equity. Net of fuel savings from Hay Road Unit 4, customer rates increased 3.7%.

Delaware Ol $24.9 million or 5.8% 06101193 (Z) Although a return on equity was not specified;'the Company believes that Maryl11nd (Z) $7.8 million or 4:3% 04101193 the implied return on equity approaches IZ%. Net of fuel savings from Hay Virginia (3) $ 1.3 million or 5.4% 10/05/93 (3)

Road Unit 4, customer rates increased 2.3%.

Reflects an I l.05Y, reiurn on equity.

Re?ale (FERC) C4l $1.5 million or 1.5% 06/03/93 (4) The settlement agreement did not specify a return on equity.

On Ocfober 18, 1994, the DPSC_approved a $3.1 million or 3.1%_ increase in gas base rates, including an.11.5% return on _equity. The rate increase was designed to recover higher operating costs and investme~t levels than were reflected in the previous rates. The increase became effective November I, 1994, at which time lower fuel rates also became effective. The reduced fuel rates, when com-bined with the base rate i_ncrease, resulted in a net avera~e decrease of 1.75%.

The Company and_ its wholly_owned subsidiari_~s file*a consolidated federal income tax return. Income taxes are _allocated to the Company's utility business and subsidiaries based upon their respective taxable incomes, tax credits, and effects of the alternative minimum tax, if any.

Effective January I, 1993, thi: Company adopted SFAS No. 109, "Accounting for Income Taxes," which replaced the deferred method of income*tax accounting with the liability method. Under the liability method, deferred inconie tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently en_acted tax rates. The principal effects on the Company's fina~cial statements of adopting SFAS No. 109 were increased net deferred tax liabilities which were offset by an asset, "deferred recoverable income taxes." This asset represents expected future recovery of the net deferred tax liabilities over the lives of the related assets through* rates charged to utility cus-tomers. Deferred recoverable income taxes ~ere $149.Z-million and $144.5 million as of December 31, 1994 and 1993, respectively.

-In 1993,

\

net deferred

. tax liabilities and deferred recoverable income taxes -

increased $17.4 million. *in recognition

. of an increase in

/,

the federal income tax rate from 34% to 35%.

• Deferred income tax expense under sFAS No. 109 represents the net' change during_ the reporting period in the net deferred tax lia-bility and deferred recoverable income taxes.

Investment tax credits (ITC) from regulated operations are being amortized over the useful lives of the related utility plant. ITC as-sociated with leveraged leases are being amortized over the lives of the related leases during the periods in which the net investment is positive.

I I

39 DELMARVA POWER 6 LIGHT COMPANY

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. The relationship of the annual provision for depreciation for finC1ncial accounting purposes to average depre-ciable property was 3.6% for 1994, 3.7% f01: 1993, and 3.6% for 1992. Depreciation expense includes a provision for the_ Company's share of the-estfmated cost of decommissioning nuclear power plant reactors based on amounts billed to custom~rs r'or such costs.

Re~er to Note B to the Consolidated Financial Statements for additional information on nuclear decommissioning.

INTEREST EXPENSE The amortization of debt.discount, premium; and expense, including refinancing expenses, is included in interest expense.

ALLOWANCE FOR FUNDS USED ,DURING CONSTRUCTION Allowance for Funds Used During Construction (AFUDC) is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance constructioQ_of new utility facilities. "In the Consolidated Stat~ments of Income, the borrowed I \

funds component of AFUDC is reported, as a reduction*of interest charges and the equity funds component of AFUDC is reported as other inc?me. AFUDC was capitalized on utiliW. plant construction at the rates of 9.3% ~n 1994 and 9.6% in 1993 and 1992.

CASH EQUIVALENTS In the consolidated financial statements, the Company considers highly liquid m~rketable ~ecurities _and debt instruments pur~

chase9 with a m&turity o_f three months or less to be cash equivalents.

LEVERAGED LEASES As of December 31, 1994, .the Company's portfolio of leveraged* leases, held by a nonutility subsidiary, consisted of five aircraft' which are leased to three separate airlines. The* Company's investment in l_everaged leases includes the aggregate of ren_tals receiv-

• able (net of principal and interest on nonrecourse indebtedness) and esdmated residual values of the leased equipment less unearned and deferred income (including investment tax credits). Unearned and deferred income is recognized at a level rate of return durlng the periods in which the net investment is positive.

I FUNDS HELD BY TRUSTEE Funds held by trustee generally includes deposits in the Company's external _nuclear decommissioning trusts and unexpended,

. restricted, or tax-exempt bond proceeds. Earnings on such trust funds are also reflected in the bµlance.

On August 16, r994, the C<?mpany filed an application with the DPSC for a $13.5 million "limited issue" increase in electric base ra,tes. The Company subsequently revised the amount of the proposed increase. to $11. l million. The proposed increase, when net-ted with fuel savings related to reduc~ion in load by a resale customer (ODEC) beginning in 1995, is $6.4 million or I .3%. This "limit-ed issue" increase is designed to recover costs specific to the Company's compliance* with the Clean Air Act Amendments of 1990, the 1% increase in the 111arginal federal income_tax rate to-35% during 1993, demand side management and conservation programs, and an increase in funding for nuclear decommissioning based. on the current Nuclear Regulatory Commission (NRC) minimum funding requirements. The pPSC staff and other-parties to the case have recommended that no revenue increase be granted due to the Company's current return earned from its Delaware electric operations. However, the DPSC staff has suggested that if the DPSC decides to consider a "limited issue" approach, an alternative to approving a rate 'increase woul.d be to instead authorize a $9 mil-lion increase if rpqnthly or-quarterly 1995 earnings fall below certain levels. The Company expects a oesc decisio!1 on the case by the end of February 1995.

I I /

38 DELMARVA POWER 6 LIGHT COMPANY

NATURE OF -BUSINESS The Company is predominantly a public utility that provides electric service on the Delmarva Peninsula in an area consisting of about 5, 700 square miles with a population of approximately 1.0 million: The Company also provides gas service in an area consist-ing of about 275 square miles with a population of approximately 464, 000 in northern D_elaware, including the City of Wilmington.

In addition, the Company has wholly owned subsidiaries engaged in nonutility activities.

REGl!JLATION OF UTILITY OPERATIONS The Company is subject to regulation with respect to its retail utility sales by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively) and the Vi~ginia State Corporation Commission (VSCC), which have broad powers over rate matters, accounting, and terms of service. Gas sales- are subject to regulation by the DPSC. The Federal Energy !legulatory Commission (FERC} exercises jurisdiction with respect to the Company's accounting systems and policies, and the transmission and wholesale (resale) sale of electricity. The FERC also regulates the price and other terms of transportation of natural- gas purchased by the Company. The percentage of electric and gas utility operating revenues regulated by each Commission for the year ended December 31: 1994, was as follows: DPSc, 64%; MPSC, 22%; VSCC, 3%; *and FERC, 11 %.

REGULATORY ASSETS In conformity with generally accepted *accqunting principles, the Company's accounting policies reflect the financial effects of rate regulatio~ and decisions issued by regulatory commissions having jurisdictio'n over. the Company's utility business. In accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for _the Effects of Certain Jypes of

• Regulation," the Company defers expense.recognition of certain costs and records an asset, *a result of the effects of rate regulation.

These "regulatory assets" are included on the Co~pany's balance sheet under "Deferred Charges and Other Assets." As of December 31, 1994, the Company had $210,368,000 of regulatory assets which included the following: deferred ?ebt refinancing costs-*

$26,530,000; deferred recoverable plant costs-$12,693,000; deferred-recoverable income taxes-$149,206,000 _(refer to Note 3 to the Consolidated Financial Statements); and other regulatory assets_:_$21,939,000. The costs of these assets are either being recov-

• ered through customer rates or are probable of being recovered th.rough customer rates; Generally, -the ~osts of these assets are recognized in operating expenses over the period the ~ost is recovered from customers.

REPORTING OF SUBSIDIARIES The consolidated financial statements include the accounts of the Company and its wholly owned ~ubsidiaries-D~lmarva capital Investments, Inc., Delmarva Energy company; Delmarva Industries, Inc.; and Delmarva Services Company. The results of operations of the Company's nonutility subsii::liaries are reported in the consolidated statements of income as "Other Income." Refer to Notes 5 and 19 to the Consolidated Financial Statements for financial information about the Company's subsidiaries.

UTILITY REVENUES Ar-the end of each month, there is an amount of electric* and gas service rendered from the last meter reading to the month-end which*, has not yet been billed to cust?me~s. The non-foe! (base rate) revenues associated with such unbilled services are recorded by the company through an accrual.

When interim rates are placed in effect subject to refund, the Company recognizes revenues based on expected final rates.

FUEL EXPENSE Fuel costs charged to the* company's results of operations are generally adjusted to 'match fuel costs included in customer billings (fuel revenues). The difference between fuel revenl!es and actual fuel costs, incurred is reported on the balance sheet as "deferred energy costs." The deferred balance-is subsequently recovered from ~r returned to utility customers.

Th~ Company's share of nuclear fuel at the Peach Bottom Atomic Po~er Station (Peach Bottom) and the Salem Nuclear Generating Station (Salem) is financed through a contract which is acco,i.mted for as a capital lease. Nuclear fuel costs, fricluding a provi?ion for the future disposal of spent nuclear fuel, are charged to fuel expense on a unit -of production basis.

37 DELMARVA POWER o_LJGHT COMPANY

(Dollars in Thousands)

Common Additional Unearned Shares Paid-in Retained Treasury Comp en-BALANCE AS OF JANUARY I, I 992 52,668,964 $118,505 $346,509 $241,569 $706,583 Net income 98,526 98,526 Cash dividends declared

. Common stock ($1. 54) (82,570) (82,570)

Preferred stock (8,349) (8,349)

Issuance of common stock DRJP(2) 1,336,871 3,008 26,471 "29,479 Stock options 129,500 292 2,256 2,548 Other issuance 8,518 19 154 173 Expenses of common and preferre.d stock issuances (414) (414)

Reacquired shares (12,490) (259) (259)

Shares granted (3) 12,490 259 (259) ortization of unearned com en a n 72 72 BALANCE AS OF DECEMBER 3 I , I 992 54, 143,853 121,824 374,976 249,176 (187) 745,789 Net income 111,076 l l 1,076 Cash dividends declared Common stock($ l .54) (89,792) (89,792)

Preferred stock (!0,002) (10,002)

Issuance of common stock Public offering 3,300,000 7,425 69,713 77,138 DRIP <2> 1,246,380 2,804 26,519 29,323 Stock options 139,050 313 2,689 3,002 Expenses (2,627) (2,627)

Reacquired shares (31 ,490) (748) (748)

Shares granted (3) 31,490 748 (748)

Amortization of unearned compensation 260 260 Refinancin of referred stock 273 951 l 224 BALANCE AS OF DECEMBER 3 I , I 993 58,829,283 132,366 470,997 259,507 (675) 862, 195 Net income I08,3IO I08,3IO Cash dividends declared Common stock ($I. 54) (91 ,436) (91 ,436)

Preferred stock (9,370) (9,370)

Issuance of common stock DRIP <2> 703,726 1,584 13,199 14,783 Other issuance 8,997 20 171 191 Reacquired shares (36,849) (794) (794)

Shares granted (3) 36,840 794 (794)

Amortization of unearned compensation 289 289 Other 10 9 BALANCE AS OF DECEMBER 3_ I , I 994 59,542,00.6 $133,970 $484,377 $267,002 $(!, 180) $884,169 (I) The Company's common stock has a par value of $2.25 per share and 90,000,000 shares are authorized:

(2) Dividend Reinvestment and Common Share Purchase Plan (DRIP)-As of December 31, 1994, 2, 114, 810 shares were reserved for i~suance through the DRIP.

(3) Shares of restricted common stock granted under the-Company's Long Term Incentive Plan.

See accompanying'Notes to Consolidated Financial .Statements.

36 DELMARVA POWER 6 LIGHT COMPANY

As of December 31 ,

$884 169 $862 195 Par value $1 per share, l 0,000,000 shares authorized, none outstanding Par value $25 per share, 3,000,000 shares authorized,  ;

7 3/4% Series, 1,600,000 shares outstanding (2) 40,000 40,000 Par value $100 per share, 1,800,000 shares authorized:

Current call 3.70%-5% 320,000 $103.00-$105.00 32,000 32,000 6 3/4% 200,000 (3) 20,000 ' 20,000 7.52% 150,000 $103.50 15,000 15,000 Adjustable-5.54%, 5.54% (4) 160,850 $103.00 16,085 16,085 Auction rate-3.32%, 2.71 %(4) 450,000 $100.00 45 000 45 000 168 085 168 085 First Mortgage Bonds:

1994 4 5/a% 25,000 1997 6 3/a% 25,000 25,000 2002-2003 6.40%-6.95% 120,000 120,000 2014-2015 7.30%-8.15% 81,000 81,000 2018-2022 5.90%-8.50% 208,200 208,200 2032 6.05% 15 000 15 000 449;200 474,200

,Other Bonds, due 2011-2017, 7.15%-7.50% 54,500 54,500 Pollution Control Notes:

Series 1973, due 1995-1998, 5.75% . 6,375 6;500 Series 1976, due 1995-2006, 7 l/a%-7 l/4% 3,200 3,300 Medium Term Notes, due 1998, 5.69% 25,000 25,000 Medium Term Notes, due 1999, 7 11z3 30,000 30,000 Medium Term Notes, due 2002-2004, 8.30%-9.29% 39,000 39,000 Medium Term Notes, due 2007, 8 I/a% 50,000 50,000 Medium Term Notes, due 2020-2021, 8.96%-9.95% 61,000 61,000 First Mortgage Notes, 9.65% (5) 7,606 8,244 First Mortgage Note, 8% (6) 4,588 Term Loan, due 1997, 6.56% C7> 45,000 10,000 Other Obligations, due 1995-2000, 9.56% 1,126 1,307 Unamortized premium and discount, net (638) (697)

Current maturities of long-term debt (l 399) 25 986 Total long-term dellt 774 558 736 368 Total capitalization l 826 812 l 766 648 Variable Rate Demand Bonds ca> 71 500 41.500 Total capitalization with Variable Rate Demand Bonds $1,898,312 $1,808,148

( 1) Refer to Consolidated Statements of Changes in Common Stockholders' Equity for additional information.

(2) Redeemable beginning September 30, 2002. at $25 per share.

(3) Redeemable beginning November 1, 2003, at $100 per share.

(4) Average rates during 1994 and 1993, respectively.

(5) Repaid through monthly payments of principal and interest over 15 years ending November 2002. '

(6) Repaid through monthly payments of principal and interest using a 15-year principal amorti~ation, with the unpaid balance due in September 1999.

(7) Refer to Note 12 to the Consolidated Financial Statements for additional information.

(8) Classified under current liabilities as discussed in Note 12 to the Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

35 DELMARVA POWER u LIGHT COMPANY

Year Ended December 31, As of December 31 , ,

• CAPITALIZATION AND LIABILITIES Common stock, $2.25 par value; shares authorized-90,000,000; shares outstanding: 1994-59,542,006, 1993-58,829,283 $133,970 $132,366 Additional paid-in capital 484,377 470,997 Retained earnings 267,902 259,507 Unearned compensation I 180 675 Total common stockholders' equity 884, 169 862, 195 Preferred stock 168,085 168,085 Long-term debt 774 558 736 368 I 826 812 I 766 648 Short-term debt 10,000 Lon~-term debt due within one year 1,399 25,986 Variable rate demand bonds 71,500 41,500 Accounts payable 59,596 55, 175 Taxes accrued 7,264. 10,987 Interest accrued 15,459 15,522 Dividends declared 22,831 22,664 Current capital lease obligation 12,571 12,684 Deferred energy costs 12,241 14,229 Other 27,538 31,631 240 399 230 378 Deferred income taxes, net 505,435 497,457 Deferred investment tax credits *47,577 49,475 Long-term capital lease obligation 19,660 23,335 Other 29 902 25 186 602 574 595 453

/ommitments and Contingencies (Notes 13, 16, and 17)

Total $2,669,785 $2,592,479 See accompanying Notes to Consolidated Financial Statements.

i 33 DELMARVA POWER 6 LIGHT.COMPANY

As of December 31, ASSETS Electric $2,676,871 $2,561,507 Gas 196,188 176,167 Common 120 933 122 182 2,993,992 2,859,856 Less: Accumulated depreciation l 062 565 989 351 Net utility plant in service l,931,427 l,870,505 Construction work-in-progress 85,220 91,001 Leased nuclear fuel, at amortized cost 30 349 33 905 2 046 996 1'995 411 Investment in leveraged leases 49,595 50,914 Funds held by trustee 32,824 17,577 Other investments and nonutility property, net 57 289 55 248 139 708 123 739

• Cash and cash equivalel}ts 25,029 23,017 Accounts receivable Customers 93,739 98,472 Other 15,144 18,405 Inventories, at average cost Fuel (coal, oil and gas) '

48,262 27,335 Materials and supplies* 37,055 '31,687 Prepayments 9,Ql4 9,534 Deferred income taxes, net 9 276 IO 713 237 519 225 163 Unamortized debt expense ll,387 l l,222 Deferred debt refinancing costs 26,_530 28,794 Deferred recoverable plant costs 12,693 14,563 Deferred recoverable income taxes 149,206 144,463 Other 45 746 49 124 245 562 248 166 Total $2,669,785 $2,592,479 See accompanying Notes to Consolidated Financial Statements_

3'2 DELMARVA POWER 6 LIGHT COMPANY

Year Ended December 31,

$883, l 15 $875,663 $780, 175 107 906 94 944 83 869 991 021 970 607 864 044 Electric fuel and purchased power 282,570 298,307 261,784 Gas purchased 63,814 53,631 43,797 Operation and maintenance 267,207 . 248,052 233,038 Depreciation 109,523 100,929 95,285 Taxes other than income taxes 38,585 37,419 37,037 Income taxes 66 166 68 130 49 392 827 865 806 468 720,333 J

163 156 164 139 143 711 Nonutility Subsidiaries Revenues and gains _. 43,142 37,636 14,397 Expenses including interest and income taxes (40 790) (35 828) (13 908)

Net earnings of nonutility subsidiaries 2,352 1,808 489 Allowance for equity funds used during construction 3,389 5,309 5,631 Other income, net of income taxes (285) 511 12 855 5 456 7 628 18 975 168 612 171 767 162 686 Interest expense 62,076 64,095 68,237 Allowance for borrowed funds used during construction (I 774 -3 404) (4 077 60 302 60 691 64 160 Net income* 108,310 111,076 98,520 Dividends on preferred stock 9 370 IO 002 8 349 Earnings applicable to common stock $98,940 $101,074 $90, 177 Average Shares of Common Stock Outstanding (000) 59,377 57,557 53,456 Earnings Per Average Share of Common Stock $1.67 $1.76 $1.69 Dividends Declared Per Share of Common Stock $1.54 $1.54 $1.54 See accompanying Notes to Consolidated Financial Statements.

31 DELMARVA POWER 6 LIGHT COMPANY

Management is responsible for the information and representations contained in the Company's financial statements. Our financ.ial statements have been prepared in confo_rmity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.

\

Delmarva Power & Light Company maint~ins a system of internal controls designed to provide reasonable, but not absolute, assur-ance of the reliability of the financial records ~nd 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 personnel.

Coopers & Lybrand L.L.P., independent accountants, are engaged to audit the financial statements and express their opinion there-OI} Their audits are conducted in accordance with generally accepted auditing standards which include a review of selected inter-nal 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 manag_ement, internal auditors, and independent accountants to review accounting, auditing, and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the Audit Committee, subject to stockholder approval.

~1~

Howard E. Cosgrove Barbara S. Graham Chairman of the Board, President and Senior Vice President, Treasurer, and*

Chief Executive Officer Chief Financial Officer

,~~ ArrnTTNTANTC:

To the Board of Directors and Stockholders Delmarva Power 6 Light Company Wilmington, ?elaware We have audited the accompanying consolidated balance sheets and statements of capitalization of Delmarva Power 6 Light Company and Subsidiary Companies as of December 31, 1994 and 1993, and the related consolidated statements of income, changes in common stockholders' equity, and cash flows for each of the three years in the period ended Decemb~r 31, 1994. These financial statements are the responsibility of the Corrlpany's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and per-

, form the audit to obtain reasonable assurance about whether the financial statements are free of materiar misstatement. An audit I '

includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the* accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

, In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Delmarva Power 6 Light Company and Subsidiary Companies.as of December 31, 1994 and 1993, and the consolidated.r_esults of their operations and their casl:t flows for each of the three years in the period ended December 31, 1994, in conformity with gener-ally accepted accounting principles.

As discussed in notes 3 and 15, respectively, to the consolidated financial statements, in 1993 the Company changed its method of accounting for income taxes and postretirement benefits other than pensions.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 3: 1995 I

I 30 DELMARVA POWER 6 LIGHT COMPANY

The Company's capital structure as of December 31, 1994, and 1993, expressed as a percentage of _total capitalization, is shm:vn below.

lQQ'.'l Long-term debt and variable rate demand bonds 44.6% 43.0%

Preferred stock 8.8% 9.3%

Common stockholders' equity 46.6% 47.7%

Capital requirements for the period 1995-1996 are estimated to be $448 million, includin_~ $150 million for the purchase of COPCO and $263 million for utility construction, excluding AFUDC The estimate of 1995-1996 utility construction requirements includes

. $5-;.; .*.:~~'"! ~f expenditures related to environmental compliance plans, including provisions of the Clean Air Act Amendments of 1990. Durl~997-1999, an additional $27 million of construction expenditures (excluding AFUDC) related to compliance with environmental regulations are planned.

The Company anticipates that $267 million will be generated internally during 1995-1996. Forecasted internally generated funds are net of expected power purchase commitments, inclucling the planned power purchase from PECO associated with the COPCO acquisi-tion. Forecasted internally generated funds for 1995-1996 represent 90% of estimated capital requirements, adjusted to exclude the COPCO acquisition, and 102% of estimated utility construction expenditures. During 1995-1996, long-terl}'I external financings are presently estimated at $221 million, including $170 million of long-term debt and $_51 million (market value) of common stock. These amounts reflect the Company's plans to finance the COPCO acquisition and to reduce the term loan balance in 1996.

NONTITTTTTV ::;, ,K,.. 1IARTF" Information on the Company's nonu'tility subsidiaries, in addition to the following discussion, can be found in Notes I, 5, and 19 to the Conso!idated Finan~iq.l Statements.

Earnings per share of nonutility subsidiaries were $0.04 in 1,994 in comparison to $0.03 in 1993. The $0.01 per share increase in earnings was mainly attributed to gains on the sale of real estate (including the mini-storage facility), improved operating results of the solid waste group, and higher earnings from various other nonutility business activities. These earnings increases were largely :

offset by a 1994 adjustment to the realizable value of oil a_[ld gas wells and by 1993-after-tax gains on sales of leveraged leases. 1 Earnings per share of nonutility subsidiaries were $0.03 in 1993 in comparison to $0.01 in 1992. The $0.02 per share increase in earnings was primarily due to earnings from the waste hauling and landfill businesses in 1993 versus a loss in 1992 and to the transfer of the contract for operation and maintenance of the Delaware City Power Plant (owned by Star* Enterprise) from the parent company to a nonutility subsidiary. The_ 1993 after-tax gains on sales of interests in leveraged leas~s were offset by lower operating leveraged leasing income and the one percent increase in the federal income tax rate.

)

In 1994, total subsidiary revenues and gains increased by $5.5 million to $43. l million principally due to gains on the sale of real estate. In 1993, total subsidiary revenues and gains were $37.6 million compared to $14.4 million in"l992. The $23.2 million revenue increase wa; mainly due to transfer of the contract for operation and maintenance of the Delaw~e City Power Plant from the parent company to a subsidiary.

I I

29 DELMARVA POWER fi LIGHT COMPANY

The Company's primary capital resources are internally generated funds (net cash provided by operating activities less common and preferred dividends) and external financings. These resources provide capital for utility plant construction expenditures and other capital requirements , such as repayment of maturing debt and capital lease obligations. Utility construction expenditures are the Company's largest capital requirement and are affected by many factors including growth in demand for electricity, compliance with environmental regulations, and the need for improvement and replacement of existing facilities.

Operating activities provided net cash inflows of $224.6 million in 1994, $206.7 million in 1993 , and $220.8 million in 1992. Net cash provided by operating activities increased $17.9 million in 1994 primarily due to higher non-fuel electric revenues from rate increases and higher sales. In 1992, operating cash flow was increased by $11.4 million, net of income taxes, from receipt of a pay-ment for settlement of the Peach Bottom lawsuit. After considering common and preferred dividend payments of $100.6 million in 1994, $98.0 million in 1993, and $90.5 million in 1992, internally generated funds were $123.9 million in 1994, $108.7 million in 1993, and $130.3 million in 1992. Internally generated funds provided 80%, 68%, and 63 3 of the cash required for utility construc-tion in 1994, 1993 , and 1992, respectively.

Utility construction expenditures were $154.1 million in 1994, $160.0 million in 1993, and $207.4 million in 1992. Construction expenditures in 1994 included $20.7 million for projects attributed to environmental compliance. Construction expenditures decreased $47.4 million in 1993 primarily because construction of Hay Road Unit 4 was completed in mid- 1993 .

In 1994, investments by the Company's nonutility subsidiaries included purchase of a $5 .7 million office building and $5.3 million of other capital investments, which were primarily construction expenditures at the Pine Grove Landfill . In 1994, the subsidiaries also sold real estate parcels and a mini-storage facility, raising $4.6 million. In 1993, the subsidiaries sold interests in leveraged leases, which resulted in a $21 . 5 million cash inflow.

Capital raised externally during 1992-1994, net of $513.1 million of refinancings and redemptions, consisted of $154.8 million of common stock, $31.7 million of preferred stock, $30 million of variable rate demand bonds, and $3 .7 million of long-term debt.

Issuances of common stock during 1992-1994 included a public offering in 1993 of 3,300,000 shares for $77. I million. The Company 's 1993 financing requirements associated with utility plant were principally satisfied by issuing common stock in order to strengthen the Company's capitalization and reduce the level of financial risk. After considering $29.9 million of costs associated with issuing and refinancing debt and equity securities during 1992-1994, the net amount of capital raised from external financ-ings during this period was $190.3 million.

In 1994, the Company issued $30 million of variable rate demand bonds, which are being used to finance investments in the Company's gas system, and $4.6 million of long-term debt associated with the Company's nonutility subsidiaries. In addition, the Company's term loan balance increased by $35 million. The only significant debt redemption in 1994 resulted from maturity of 4 s/a3 First Mortgage Bonds, $25 million principal amount, on October I, 1994.

The Company issued $15 .0 million of common stock in 1994 primarily through the Dividend Reinvestment and Common Share Purchase Plan (DRIP). Depending on the financing needs of the Company, shares issued through the DRIP may be either newly issued shares or shares purchased in the open market, as occurred during the last seven months of 1994. In conjunction with the Company's plans to finance the COPCO acquisition with 503 common equity, the DRIP began issuing new shares on January I , 1995. Book value per share of common stock increased to $14.85 as of December 31 , 1994, from $14.66 as of December 31 , 1993 .

$210 ;n -""--*

INTERNALLY 180->- GENERATED FUNDS 150- ..... 6 CONSTRUCTION EXPENDITURES 120- .....

The percentage of con-90->- struction expenditures 60->- funded internally is expected to rise 30- .....

through 1996.

0 '--~~~~~~~~~~~~~~~~~~~~~~~

1992 1993 1994 1995" 1996"

- INTERNALLY GENERATED FUNDS - CONSTRUCTION EXPENDITURES

• Forecast 28 DELMARVA POWER fi LIGHT COMPANY

FNFR<W SllPPT y The Challenge 2000 Plan reflects the Company's strategy to provide an adequate, reliable supply of electricity to customers , while minimizing adverse impacts on the environment and keeping prices competitive. The Company's plan, which is updated annually, is based on forecasts of demand for electricity in the service territory and reserve requirements of the PJM Interconnection. The Company's plan emphasizes balance and flexibility, and may be accelerated, slowed, or altered in response to changing energy demands, fluctuating fuel prices, and emerging technologies. The plan combines customer-oriented load management and strategic conservation programs ("Save Some"), short-term power purchases and long-term power contracts ("Buy Some "), and new or reno-vated power plants ("Build Some").

The Company's current plan closely matches customers' energy requirements and does not require large investments for new resources during the next two years . The capacity and energy that will be required to serve COPCO subsequent to the planned acquisition will be purchased from PECO. The power purchase, which is contingent on closing of the acquisition, is expected to pro-vide 205 megawatts (MW) of capacity beginning in 1996 or later, increasing to 259 MW by the end of the contract in 2006.

On October 27, 1994, the Company exercised its right to cancel an agreement with the Delaware Clean Energy Project which would have provided 165 MW of capacity for 30 years beginning in 1999. The decision to terminate the agreement was based on uncer-tainties associated with the Company's load requirements, a general decline in wholesale market prices, and absence of need for long-term capacity.

The Company must balance the potential risks of providing too much or insufficient capacity. The main risks of excess capacity are that the Company's prices may become uncompetitive or that regulators may not allow the associated costs to be recovered through customer rates. The principal risks of inadequate capacity are unreliable service and the payment of capacity deficiency charges to the PJM Interconnection. The PJM Interconnection Agreement requires the Company to plan for and provide an adequate capacity level.

During the past three years, the Challenge 2000 Plan has reduced customers' demand for electricity by an additional 77 MW, pro-vided 48 MW of capacity from a long-term power contract which began in 1992, and provided 175 MW of capacity from a new power plant, Hay Road Unit 4. Looking forward through 1999, the Company's current plan includes the following resources:

(I) "SAVE SoME"-Approximately 51 MW of additional peak load reduction through customer-oriented load management and strate-gic conservation programs.

(2) "Buy SoME"-During 1998 to 1999, up to 200 MW of short-term power purchases, in addition to the power purchase from PECO discussed above.

(3) "Bu1LD SoME"-Repowering of Indian River Units I and 2, 89 MW units, with new, cleaner-burning boilers during consecutive two-year outages beginning in 1999.

12¢ REGIONAL ELECTRIC I0¢ ->-- PRICE COMPARISON*

Our prices for electricity 8¢ -r-are below the regional 6¢-- averages. A balanced and flexible energy 4¢-r-supply plan he! ped us 2¢-- gain this advantage.

0¢ RESIDENTIAL COMMERCIAL INDUSTRIAL

- DELMARVA POWER - REGIONAL AVERAGE "Based on 1993 data for average electric prices per kWh I

I 27 D ELMARVA POWER G LIGHT COMPANY

In comparing 1994 operation and maintenance expenses versus 1993 , four principal factors accounted for a $19.2 million increase:

the $17.5 million pre-tax charge for the Company's voluntary early retirement offer; a $7.8 million reduction in pension expense of which $4.5 million was due to a lower assumed rate of salary increase; higher winter storm damages of $3 .5 million; and a $6.0 mil-lion increase in other expenses, including postretirement benefits other than pensions (OPEB). The Company's OPEB costs were deferred during part of 1993 due to probable rate recovery. In 1994, the deferral for the Delaware jurisdiction (electric and gas) was expensed in accordance with a settlement agreement, approved October 18, 1994, concerning the Company's gas base rate case.

In 1993 , operation and maintenance expenses increased by $15 .0 million from 1992 largely due to higher administrative and gener-al expenses. including increases for salaries and wages, and OPEB costs due to adoption of the accounting required by Statement of Financial Accounting Standards (SFAS) No. 106.

Depreciation expense increased $8.6 million in 1994 and $5.6 million in 1993 primarily due to additions to the electric system, including Hay Road Unit 4 in mid-1993 .

Inflation affects the Company through increased operating expenses and higher replacement costs for utility plant assets. Although timely rate increases can lessen the effects of inflation, the regulatory process can result in a lag between the time when costs rise and when prices can be adjusted . Also, due to competition and the changing nature of the utility industry, raising prices is becoming more difficult. Thus, the Company's existing cost control programs are becoming increasingly important.

In 1994, income tax expense on operations decreased $2 .0 million in comparison to 1993 principally due to lower pre-tax income.

In 1993 , income tax expense on operations increased $18.7 million in comparison to 1992 mainly due to higher pre-tax income. The

$18.7 million increase also reflects $1.6 million of higher income taxes due to an increase in the federal income tax rate from 34% to 35%, effective January I, 1993 .

2.75¢ ELECTRIC OPERATION 6 2.50¢ MAINTENANCE EXPENSES PER KWH SOLD

2. 25¢ Keeping costs down contributes 2 00¢ to our competitiveness. Our REG IONAL A VERAGE 1.75¢ OliM costs remain well below 1.50¢ DELMARVA POWER industry averages.

1.25¢ 1.00¢ 1989 1990 1991 1992 1993 1994 In comparison to the prior year. interest charges of the core utility decreased $2.0 million in 1994 and $4.1 million in 1993 mainly due to redemption on June I, 1993. of $50 million of 10%First Mortgage Bonds with proceeds from a public offering of common stock.

Dividends on *preferred stock decreased $0.6 million in 1994 primarily due to a net $8.3 million reduction in preferred stock out-standing which occurred in November and December 1993, as discussed in Note 11 to the Consolidated Financial Statements. In 1993 , dividends on preferred stock increased $1.7 million mainly because $40 million of 7 3/4% preferred stock issued in August 1992 was outstanding for all of 1993 compared to part of 1992.

Allowance for equity and borrowed funds used during construction (AFUDC) decreased $3 .6 million in 1994 and $1.0 million in 1993 mainly due to lower average construction work-in-progress balances resulting from completion of Hay Road Unit 4 in mid- 1993.

Due to common equity financing, the average number of shares of common stock outstanding increased in 1994 and 1993 . The additional shares outstanding decreased earnings per share by $0.05 in 1994 and $0. 13 in 1993 . However, when customer rates are increased. additional revenues offset the dilution of earnings per share due to increased common equity financing.

26 DELMARVA POWER fl LI GHT COMPANY

In 1994, electric fuel revenues decreased $15.4 million due to lower rates charged to customers under the fuel adjustment clauses, partially offset by higher kWh sales. In 1993, electric fuel revenues increased $5 .9 million due to higher kWh sales, partially offset by lower fuel adjustment clause rates.

In 1993, interchange delivery revenues increased $30.8 million due to higher sales to utilities in the PJM Interconnection, which resulted from increased demand for electricity in the region and greater availability of the Company's generating units.

The Company earns gas revenues from the sale of gas to customers and also from transporting gas through the Company's system for some customers who purchase gas directly from other suppliers.

Total 1994 gas revenues increased $13 .0 million from 1993 due to a $3 .0 million increase in non-fuel revenues and a $10.0 million increase in fuel revenues. The increase in non-fuel revenues was due to $0.6 million of additional revenue from the $3. I million base rate increase that became effective November I, 1994, and a $2.4 million increase in sales volume. Total cubic feet of gas sold and transported in 1994 increased 3.8% over 1993 due to a 2.9% increase in the number of customers and colder winter weather during the first quarter. Gas fuel revenues increased $10.0 million in 1994 due to higher average fuel rates and higher sales.

In 1993, total gas revenues increased $11.1 million from 1992 because of a $1.2 million increase in non-fuel revenues and a $9. 9 mil-lion increase in fuel revenues. Non-fuel revenues increased despite a 2.8% decrease in total cubic feet of gas sold and transported mainly due to increased sales to firm customers which are billed at higher rates than sales to non-firm (interruptible) and transporta-tion customers. Firm sales increased 1.8% due to a 3.7% increase in the number of customers which was partially offset by lower aver-age usage per customer. The $9.9 million increase in gas fuel revenues was principally attributed to higher average fuel rates.

In 1994, electric fuel and purchased power expenses decreased $15.7 million for the following reasons. (I) Expenses decreased $17.5 million due to variances in fuel costs deferred and subsequently amortized under the Company 's fuel adjustment clauses.

(2) Expenses increased $4.4 million due to increased kWh output which was attributed to higher sales demand within the Company's service territory and the region served by the PJM Interconnection. (3) Expenses decreased $2.6 million due to a lower average cost per kWh of output which was largely the result of lower prices paid for purchased gas and the effect of a full year's operation of Hay Road Unit 4, a combined cycle unit added to the electric system on June I, 1993. This generating unit uses exhaust heat from three combus-tion turbine units as its energy source. These favorable average cost variances were partially offset by higher average oil prices.

In 1993 , electric fuel and purchased power expenses increased $36.5 million for the following reasons. (I) Expenses increased

$39.2 million due to increased kWh output which resulted from stronger sales demand in the Company's service territory and in the region served by the PJM Interconnection. (2) Expenses decreased $6.9 million due to a lower average cost per kWh of output which was primarily due to completion of Hay Road Unit 4. (3) Expenses increased $4.2 million due to variances in fuel costs deferred and subsequently amortized under the Company's fuel adjustment clauses.

The kWh output required to serve load within the Company's service territory is basically equivalent to total output less inter-change deliveries. In 1994, the Company's output for load within its service territory was provided by 41 .9% coal generation, 30.7%

oil and gas generation, 15.6% nuclear generation, and 11 .8% net purchased power.

25 DELMARVA POWER G LIGHT COMPANY

Fuel and energy costs billed to customers (fuel revenues) are based on rates in effect in fuel adjustment clauses which are adjusted periodically to reflect cost changes and are subject to regulatory approval. Rates for non-fuel costs billed to customers are depen-dent on rates determined in base rate proceedings before regulatory commissions. Changes in non-fuel (base rate) revenues can directly affect the earnings of the Company. Fuel revenues . or fuel costs billed to customers. generally do not affect net income since the expense recognized as fuel costs is adjusted to match the fuel revenues . The amount of under- or over-recovered fuel costs is generally deferred until it is subsequently recovered from or returned to utility customers.

Electric revenues also include interchange delivery revenues which result primarily from the sale of electric power to utilities in the Pennsylvania - New Jersey-Maryland Interconnection Association (PJM Interconnection). The PJM Interconnection is an electric power pool comprised of eight utilities in the region. including the Company. The power pool provides both capital and operating economies to member utilities. Interchange delivery revenues are reflected in the calculation of rates charged to customers under fuel adjustment clauses. Due to this ratemaking treatment. interchange delivery revenues do not affect net income.

In 1994, the percentages of total billed sales revenues contributed by the various customer cl asses were as follows : residential-38.4%; commercial- 29.8%; industrial-17.9%; resale-13 .0%; and other-0.9%.

Detail s of the changes in the various components of electric revenues are shown below.

COMPARATIVE INCREASE (DECREASE) FROM PRIOR YEAR IN ELECTRIC REVENUES (Dollars in Millions) /

Non-fuel (Base Rate) Revenue Increased Rates $15.9 $26.6 Sales Volume and Other 6.0 32 .2 Fuel Revenue ( 15.4) 5.9 Interchange Delivery Revenue 1.0 30.8 Total $7.5 $95 .5 The increases in non-fuel revenues shown above as "Increased Rates " of $15.9 million for 1994 and $26.6 million for 1993 resulted from the increases in electric customer base rates which became effective in April , June. and October of 1993. Refer to Note 2 to the Consolidated Financial Statements for information concerning these rate increases.

The non-fuel revenue variances shown in the above table as "Sales Volume and Other" are attributable to changes in sales volume.

sales mix, and other factors. For 1994 compared to 1993, "Sales Volume and Other" variances were principally due to a 1.8%

increase in total kilowatt-hours (kWh) sold, which resulted from a 1.6% increase in the total number of customers. an improving economy in the Company's service territory, and colder winter weather during the fir st quarter. The sales increase was reduced by cooler summer weather. Sales to residential , commercial . and resale customers increased by 2.3%, 3.7%, and 1.6%, respectively.

Sales to industrial customers were relatively flat.

"Sales Volume and Other" variances for 1993 compared to 1992 were principally due to a 6.6% increase in total kWh sold. Sales to residential . commercial. and resale customers increased by 8.4%, 6.3%, and 7.3%, respectively, mainly due to hotter summer weather. Industrial sales increased 3 .7% due to increased production levels of certain large customers and more kWh sales to a major customer that provides some of its own power. In 1993, the total number of customers increased by 2.0%

24 DELMARVA POWER 6 LIGHT COMPANY

purchase about one-half of its electricity from another utility beginning in 1995 and price incentives offered to other resale cus-tomers to secure extended purchase commitments. The Company's initiatives are discussed further below.

COST INITIATIVES The Company's voluntary 1994 early retirement offer. which has reduced the workforce by about 10.5%, is expected to result in annual cost savings of $13 million to $17 million. In order to capture these savings. the Company identified areas where work could be streamlined, reduced, or eliminated. In addition. the Company's 1995 budget is structured to attain savings of approximately $5 mil-lion in other operation and maintenance expenses and $8 million in capital-related costs. primarily due to lower capital expenditures.

SALES INITIATIVES In December 1992, General Motors, one of the Company's largest electric and gas customers. announced plans to close its Delaware manufacturing plant in 1996. In November 1994. General Motors announced that it will continue to operate the plant through 1998. General Motor's decision. a regional unemployment rate which is falling and is less than the national average, and other indicators signal that the economy of the Company's service territory is improving. Due to the improving economy, the Company expects that 1995 sales revenues will be higher than previously projected and will contribute to the sales initiative.

On May 24, 1994, the Company entered into an agreement with PECO to buy its Maryland retail electric subsidiary, Conowingo Power Company (COPCO). for $150 million. This purchase is contingent upon various regulatory approvals. which the Company expects to receive by mid-1995. The COPCO purchase will add approximately 35 ,000 new electric retail customers. equivalent to 9% of the Company's current customer base. The Company plans to finance the purchase with approximately 50% long-term debt and 50% com -

mon equity. The Company expects the COPCO purchase to contribute $0.04 to $0.06 incremental earnings per share by 1997.

The Company proposed to purchase the electric system of the City of Dover, Delaware in 1993 for $103 .5 million. On November 23 ,

1994, Dover's City Council requested proposals from utilities and independent power producers for power purchase agreements and potentially the purchase of. or the operation and maintenance of. the city's generating facilities. On January 30, 1995, the Company filed a proposal in response to Dover's request. City officials expect to decide on a future power source in the summer of 1995.

PRICE INITIATIVES In 1994. the Company filed applications with the Delaware Public Service Commission (DPSC) and Maryland Public Service Commission (MPSC) for increases in electric base rates of $13.5 million and $3. 9 million. respectively. The Company subsequently revised its proposed Delaware electric base rate increase to $ i t. I million. As further discussed in Note 2 to the Consolidated Financial Statements, both these cases are designed to recover the cost of "limited issues." which are primarily costs imposed by government and are outside the reasonable control of the Company. Net of related decreases in fuel rates. prices would increase 1.3% in Delaware and I. I % in Maryland under the Company's proposals. Even with these proposed price increases. the Company's prices are expected to remain well below the regional average. The DPSC Staff. MPSC Staff. and other parties to the rate cases are opposing the proposed increases. Decisions on the cases are expected in the first quarter of 1995.

On October 18, 1994, the DPSC approved a settlement agreement for a $3. t million. or 3.1 % increase in gas base rates. The increase became effective November I . 1994, when lower fuel rates also became effective. The reduced fuel rates combined with the base rate increase resulted in a net average decrease of I. 75%.

CERTAIN OTHER POTENTIAL RAMIFICATIONS OF COMPETITION Traditionally, prices charged to utility customers are designed to recover a regulated utility's costs of providing service. Generally accepted accounting principles require regulated utilities that have cost-of-service pricing to defer the recognition of certain costs which are being or are probable of being recovered from customers. These deferred costs are often referred to as "regulatory assets." (Refer to Note I to the Consolidated Financial Statements for additional information on regulatory assets.) As the utility industry shifts from traditional cost-of-service pricing to prices set by competitive market forces or alternate innovative regulatory methods. regulatory assets, and possibly other utility assets. could be required to be written down. The Company cannot predict the amount, if any, of such a write-down; however. it could be material. The Company's regulatory assets as a percentage of total assets or stockholders ' equity are substantially lower than the averages for the utility industry.

I I

23 DELMARVA POWER 6 LI GHT COMPAN Y

Core utility earnings for 1994 and 1992 reflect certain unusual items. In 1994, as discussed in Note 4 to the Consolidated Financial Statements, the Company recorded a charge to earnings ($10.7 million after taxes or $0 . 18 per sha.re) to reflect its voluntary early retirement offer which resulted in a workforce reduction of 10.5% or 296 people. In 1992 , as discussed in Note 5 to the Consolidated Financial Statements, net income and earnings per share were increased by $11.4 million and $0.21, respectively, due to settlement with PECO Energy Company (PECO) of a lawsuit filed by the Company concerning the 1987 to 1989 shutdown of the Peach Bottom Atomic Power Station by the Nuclear Regulatory Commission.

STDAT"r..IC PI A"'" ""D rnMDl'TITin1'!

Competition for the business of electric wholesale (resale) customers has increased primarily due to federal legislation and cus-tomer demands. Resale customers can choose their local utility or another power producer to supply their electricity requirements.

While the Company's resale business accounted for 13% of its 1994 electric revenues. neighboring utilities' resale revenues average only I % to 2% of their electric revenues . Thus. compared to these utilities, the Company has higher resale market risk.

The Company has reduced its resale market risk through extended service contracts and longer notice provisions for load reductions.

The Company has signed electric supply contracts with eight of its nine municipal customers. representing about 95% of municipal rev-enues. for extended terms of eight to twenty years . The Company also has signed agreements with its other electric resale customers which require two years notice for load reductions up to 30%and five years notice for load reductions greater than 30%.

In addition to increased competition in the resale market, changes affecting competition in the retail markets are developing.

Individual states. including Maryland. New jersey, and Pennsylvania, are beginning to consider what changes in regulatory policies might be appropriate, and whether retail customers should be able to purchase electricity from sources other than their local utility.

MARKET-DRIVEN STRATEGIES Recognizing changes in the utility industry, the Company has implemented market-driven strategies and segmented markets accord-ing to customer needs and buying patterns. The major market segments are the core market. the competitive market, and the com-modity market.

The core market segment, which represents about 60 % of the Company's electric sales revenues. is comprised of residential and small to medium-size commercial and industrial customers. The Company's strategies for growth in the core market focus on sustaining relative price stability, maintaining superior customer service, and expanding and growing energy-related value added products and services.

The competitive market segment, which represents about 25%of the Company's electric sales revenues. consists of large commercial and industrial (retail) and service-ori~nted resale customers. The Company's goal for this segment is to grow and secure existing relationships and to position the Company to take advantage of competitive opportunities. Prices charged to current Company customers in the competitive market are among the lowest in the region .

The commodity market segment. which represents about 15% of the Company's electric sales revenues. consists of energy intensive industrial. and price-focused resale customers. As previously discussed, the Company has negotiated electric supply contracts with its resale customers . reducing market risk in the commodity market.

"THREE-LEGGED STOOL" In 1994, the Company announced its "Three-Legged Stool" strategy, which includes three initiatives designed to aid the Company in achieving its financial goals of maintaining the current dividend level . growing earnings, and earning a return on equity of at least II. 5%, while keeping prices competitive. The three initiatives are as follows: (I) reduce costs by $15 million to $20 million; (2) increase revenues by $IO million to $20 million through short-term energy and capacity sales to regional utilities and additional retail sales; (3) increase revenues through $I 0 million to $15 million of targeted price increases. The amounts of the cost reductions and revenue increases are based on comparison to an earlier projection of the Company's 1995 financial results. The Company expects that its targeted total of cost reductions and revenue increases of $40 to $45 million will be achieved, allowing the Company to meet its financial goals despite lower expected sales revenues from resale customers in 1995. Non-fuel revenues from resale customers will decrease approximately $28 million in 1995 due to Old Dominion Electric Cooperative's (ODEC) decision to I

I 22 DELMARVA POWER G LIGHT COMPANY

The earnings per average share of common stock attributed to the core utility business and nonutility subsidiaries are shown below.

Core Utility Operations $1.81 $1.73 $1.47 Early retirement offer (0 18)

Peach Bottom lawsuit settlement 0.21 1.63 1.73 1.68 Nonutility subsidiaries 0.04 0.03 0.01 Total $1.67 $1 .76 $1.69 On December 21 , 1994, the Board of Directors declared a common stock dividend of $0.38 1/z per share for the fourth quarter.

During 1994, the Board reaffirmed their commitment to the current dividend of $1.54 per year. The Board believes the dividend is secure and sustainable at its current level. barring major unforeseen changes. Future earnings and cash flow are expected to sup-port the current dividend, which provides a competitive yield for the Company's stock. On a historical basis. common dividends per share as a percentage of earnings per share were 92% in 1994, 88% in 1993, and 91 %in 1992.

The components of change from the prior year in core utility earnings per share are shown below.

Operations Electric revenues, net of fuel expense Rate increases $0.17 $0.31 Sales volume and other 0.08 0.37 Gas revenues. net of fuel expense 0.03 0.01 Operation and maintenance expense (0 02) (0. 17)

Depreciation (0.09) (0 07)

Effect of increased number of average common shares (0 05) (0 13)

Other 0.04 0.06 0.08 0.26 Early retirement offer (0.18)

Peach Bottom lawsuit settlement 0.21

$(0 10) $0.05 Excluding the effects of unusual items discussed below, earnings per share from core utility operations compared to the prior year increased by $0 .08 in 1994 and $0.26 in 1993 . Both years ' earnings increases were primarily due to additional electric base revenues from increased electric sales and rate increases which were effective for part of 1993 and all of 1994. Significant variances which par-tially offset the growth in earnings from core utility operations in 1994 and 1993 included higher depreciation expense and the dilu-tive effect of additional common shares outstanding. In 1993, higher operation and maintenance expense also substantially reduced the earnings growth. The variance in other net financing costs-interest expense. preferred dividends. and allowance for funds used during construction-did not significantly affect 1994 and 1993 earnings per share comparisons against the prior year.

21 DELMARVA POWER u LIGHT COMPANY

Year Ended December 31, Operating Revenues $991 , 021 $970,607 $864,044 $855,821 $812,217 Operating Income $163, 156(1) $164, 139 $143,711(2) $136,410 $144,473(3)

Income Before Cumulative Effect of a Change in Accounting Principle $108,310(1) $111,076 $98,526(2) $80,506 $37 ,311 (3)

Cumulative Effect of a Change in Accounting for Unbilled Revenues $12, 730 Net Income $108,310(1) $111 ,076 $98,526(2) $93,236 $37,311 (3)

Earnings Applicable to Common Stock $98,940(1 ) $101,074 $90, 177<2> $85,259 $28,527(3)

Electric Sales (kWh 000) (4) 12,505,082 12,280,230 11,520,811 11,460,280 11,081,211 Gas Sold and Transported (mcf 000) 20,342 19,605 20, 168 18, 184 18,263 Earnings Per Share of Common Stock Before Cumulative Effect of a Change in Accounting Principle $1.67(1) $1 .76 $1.69(2) $1.44 $0 .60(3)

Cumulative Effect of a Change in Accounting for Unbilled Revenues $0.25 Total Earnings Per Share $1.67 (I) $1.76 $1.69 <2> $1.69 $0.60 (3)

Dividends Declared Per Share of Common Stock $1.54 $1.54 $1.54 $1.54 $1.54 Average Shares Outstanding (000) 59,377 57,557 53,456 50,581 47,534 Year-End Common Stock Price $18 9/64 $23 5/s $23 l/ 4 $21 l/ 4 $18 1/s Book Value Per Common Share $14.85 $14.66 $13.77 $13.42 $12 .84 Return on Average Common Equity I I. I% 12.0% 12.2 % 12.4 % 4.3 %

Variable Rate Demand Bonds (VRDB) C5> $71 ,500 $41,500 $41,500 $41,500 $41,500 Long-Term Debt 774,558 736,368 787,387 770, 146 741,032 Preferred Stock 168,085 168,085 176,365 136,365 136,365 Common Stockholders' Equity 884 169 862 195 745 789 706 583 614 692 Total Capitalization with VRDB $1,898,312 $1,808, 148 $1 ,751,041 $1 ,654,594 $1 ,533,589 Total Assets $2,669,785 $2,592,479 $2,374,793 $2,263,718 $2, 125,715 Long-Term Capital Lease Obligation $19,660 $23,335 $26,081 $29,337 $32,354 Construction Expenditures C6J $154, 119 $159,991 $207,439 $181,820 $187,823 Internally Generated Funds (IGF) C7J $123,948 $108,693 $130,275 $96,081 $112,551 IGF as a Percent of Construction Expenditures 80 % 68% 63 % 53 % 60 %

(I) An early retirement offer decreased earnings net of income taxes and earnings per share by $i0.7 million and $0. i6, respectively.

(2) The settlement of a lawsuit with PECO Energy Company increased earnings net of income taxes and earnings per share by $11.4 million and $0.2i, respectively.

(3) The write-off of joint venture subsidiary investments decreased earnings net of income taxes and earnings per share by $42.5 million and $0.69, respectively.

(4) Excludes interchange deliveries.

(5) Although Variable Rate Demand Bonds are classified as current liabilities, the Company intends to use the bonds as a source of long-term financing as discussed in Note 12 to the Consolidated Financial Statements.

(6) Excludes Allowance for Funds Used During Construction.

(7) Net cash provided by operating activities less common and preferred dividends.

20 DELMARVA POWER G LIGHT COMPANY

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