ML18101B328

Delmarva Power 1995 Annual Rept.

ML18101B328
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1995
From:	Cosgrove H DELMARVA POWER & LIGHT CO.
To:
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ML18101B327	List: ML18101B326 ML18101B328 ML18101B329 ML18101B330
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NUDOCS 9604190175
Download: ML18101B328 (53)

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/o Increase 1995 1994 (Decrease)

Revenues $995, 103,000 $991,021,000 0.4°/o Net Income $117,488,000 $108,310,000 8.5%

Earnings per Share $1.79 $1.67 (1) 7.2%

Dividends Declared $1.54 $1.54 per Share Electric Sales 12,310,921 mWh 12,505,082 mWh (1.6)%

Gas Sales & 21.37 million mcf 20.34 million mcf 5.1°/o Transportation Electric Customers 436,650 393,372 11.0%

Gas Customers 98,417 95,662 (1) Reduced by an $0.18 per share charge for an early retirement offer.

An expanded version of the Company*s financial hlghllghts can be found on pages 20 to 48.

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Dear Fellow Shareholder,

Our company is in the midst of an exciting industry transition. Examples oe changing utility business are reported almost daily and include extensive bidding for wholesale contracts, regulatory changes, proposed state and federal legisla-tion, power pool restructuring, and planned mergers and acquisitions.

The message is clear: As our industry moves from a regulated to a competi-tive environment, electric utilities must change the way they do business. My message to you is that Delmarva Power is changing and prospering in this new competitive arena.

Across the company, we are working to satisfy our customers, increase effi-ciency, and deliver shareholder value. In the future, our success depends on our ability to retain and attract new customers, market new energy-related services and products, and continuously improve efficiency.

Performing in a Competitive Environment Delmarva Power performed well in 1995. We remain the low-cost energy pro-vider in the Mid-Atlantic region . We successfully integrated former Conowingo Power customers and employees into the company. We met an ambitious earnings target, maintained our current dividend, and remain a solid investment for our shareholders, providing an above-average total return on your investment.

In addition, Delmarva Power demonstrated an ability to compete in a changi' a ,

business environment. Our wholesale customers now have the option

• choosing their energy supplier, which made this segment of the business fiercely competitive last year. Our company made significant progress in this new envi-ronment. Despite widespread bidding from other energy suppliers, we retained all of our municipal customers by signing long-term energy sales agreements.

Increasing Efficiency We serve 125,000 more customers today than we did ten years ago with fewer employees. Our energy prices are less today than they were ten years ago. And today, our customer favorability ratings are higher than a decade ago and are among the highest in the country. More than eight out of ten customers tell us that we deliver quality service in a timely manner.

I applaud our employees for their cost control activities, which continue to keep operating and maintenance expenses well below the regional average. Teams of Delmarva Power employees are improving the way we work throughout the company-from purchasing to fleet management-to increase efficiency and improve service to our customers. In addition, we are revamping our informa-tion technology systems so that employees at all levels have immediate access to key information needed in a competitive business environment.

We serve 125,000 more customers today than we did While we work to increase revenue and reduce expenses, we continue to be ten years ago with fewer

. atively affected by costs related to the outage of the Salem Nuclear Generating Station. As this report goes to press, Public Service Electric and Gas employees. Our energy prices Company (PSE&G) has announced that the outage of Unit I will be extended are less today than they for an indefinite period while they assess the condition of the unit's four steam generators. Unit 2 is scheduled to return to service in the third quarter of 1996. were ten years ago. And today, Last year, we were able to absorb Delmarva Power's share of the outage-related our customer favorability costs as a 7.41 % owner of Salem. I am concerned about the implications of the extended outage at Unit I, increasing costs, and the possibility of adverse regula- ratings are higher than a decade tory treatment. We will pursue other avenues of recovery th is year to mitigate ago and are among the highest the financial impact of the Salem situation.

in the country.

Changing to Meet Customer Needs Providing quality customer service has traditionally been a top priority and a strength for Delmarva Power. As customer needs evolve, we will continue to redefine our relationships with those we serve. The needs of our generation customers are different today than in the past. Our transmission and distribution customers have increasing needs and expanded options. At the same time, we continue to extend our relationships with our customers by providing energy service beyond the meter.

In order to meet these changing customer needs, we are functionally organizing

- business into three strategic business units-energy supply, regulated deliv-

• services , and energy services-focused on customers and supported by internal administrative services. Dividing our business functions into separate groups will allow us to strengthen our ability to deliver profitable, customized energy service to those we serve.

Developing New Products and Services This past year we expanded and redirected our marketing team to enhance our ability to reach out to customers in our service territory and throughout the region . We now offer new energy products and services and will continue to build on our traditional values-reliable service , customer satisfaction ,

and competitive prices.

We are leveraging our core operating and engineering expertise by offering design, construction, operating, and maintenance consulting services to muni-cipal , cooperative, commercial, and industrial customers.

• We launched Surge Solution'M, our first new offering in a growing line of energy products for our residential customers. Surge Solution protects sensitive elec-tronic appliances from damage caused by lightning-related power surges.

• We are working closely with neighboring communities, governments, and busi-nesses to attract new customers and new jobs to our area.

We a re also exploring exciting new opportunities to use our engineering expertise and energy delivery infrastructure to provide services to the tele-9 ommunications industry, whose infrastructure needs are similar to our own .

Delmarva Power will face new challenges and exciting opportunities to build on our Focusing on the Future .a Our overall strategy to remain a top financial performer emphasizes the '9' foundation of reliable service, retail side of our business, where face-to-face contact with individual cus-customer satisfaction, and tomers adds value to our energy service. We will also take advantage of new growth opportunities and continue to grow earnings by aligning our business competitive prices.

with others, and by working with communities to bring new businesses and jobs to our area.

We will manage our wholesale portfolio by strengthening our ties with the customers who value the services we provide and by changing our relation-ships with the customers who have a different emphasis or focus . In the meantime, we know that industrial and commercial customers will be the next groups to be able to choose their energy supplier. We have already signed long-term agreements with several key industrial customers. Our goal is to establish similar alliances with other commercial and industrial customers throughout our region.

We support choice for all of our energy customers. In February 1996, we pre-sented to the Delaware and Maryland Public Service Commissions a proposal to enter into a collaborative process to foster the change from a regulated to a competitive energy market. Our objective is to work together to develop solutions to key issues, including retail wheeling, functional unbundling, per-formance-based pricing, and expanded options for our customers.

As we move forward through 1996 and beyond, Delmarva Power will face new challenges and exciting opportunities to build on our tradition of reliable service, customer satisfaction, and competitive prices. Our company will continue to take steps to exceed customer expectations and provide an above-average total return on your investment. We are committed to directing industry change to your advantage. I am confident we are up to the task.

As always, I appreciate your support.

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

IBuilding On I Tradi ion I Values

From power plants to helpful customer service representatives, Delmarva Power provides the service our customers rely on. That bedrock of our success is the foundation for our future growth.

9 eping Our Energy Reliable. Customers like Martha Morris expect their elec-tronic equipment to be on line when they need it, their lights to go on when they flip a switch, and their air conditioners to run without pause. That reliable electri-city depends on the professional , efficient operation of our power plants. Last fall, our largest coal-burning unit, Unit #4 at our Indian River Power Plant, was scheduled for Clean Air Act revisions. Our production department employees took that opportunity to overhaul the unit to ensure its availability and competitiveness over the long term . We replaced the unit's twenty-four burners and installed an electronic control system that will improve the uni t's performance and assure com-pliance with stringent environmental regulations.

Service When Our Customers Need It. When Donald Ferris's gas furnace broke down , he called us. "Your serviceman was at my door within an hour," Don reported. Don's natural gas appliances are protected through the Gas Service Plan.

He knows we'll fix them whenever they break down, day or night. All our customers trust us to restore their service as quickly as we can , no matter what the cause.

When a fierce windstorm swept over Ocean City, Maryland, trouble-and-servicemen like Graison Wainwright, below, repaired the damage in record time . Delmarva Power's growth in the future is grounded in such consistent, dedicated service.

Responsive To Customer Calls. Our customer service representatives fielded more than one million customer telephone calls last year and they did it with a smile. Our customers responded , writing letters of appreciation and calling with A ir thanks . We anticipate an increase in the number of calls each year as we

~ow. How do we ensure they all get answered? We consolidated our telephone centers and instituted an 800 number. Customers can also make inquiries and download the latest information on Delmarva Power products and services through our Internet site, http://www.delmarva.com . Simple solutions for our busy customers are also cost effective for Delmarva Power.

FAVORABLE CUSTOMERS 100 80 - -

81°/o 80 40

• 47°/o 20 0

1980 1985 1990 1995 Over the past fifteen years, our favorabllity rating has almost doubled.

!Partnering Forl Future G r 0 w t h Through proven winners like the Gas Service Plan, we've successfully taken our business beyond the meter for more than 20 years. We're also taking our commercial and industrial business from the outside in through energy management agreements, strategic business alliances, and power quality evaluations.

We Tailor Our Agreements. In the fall of 1995 , Al Williams, national accounts manager, asked Alan Levin , president of Happy Harry's, a growing regional retailer, about his energy management policies. Who oversees his energy costs? Are his buildings energy efficient? How can we help? Levin is impressed that Delmarva Power has taken an interest in his business at this level. We 're cementing a strate gic relationship, sharing business resources with a longtime, growing customer. Our energy-related expertise can take Happy Harry's well into the next century.

Strategic Alliances With Customers. Our strategic alliances are built on our electrical service and equipment expertise. Fo r example , MBNA America, the world's second largest lender through bank credit cards, recently mo ved into an additional location in Delaware. Through a fifteen-year agreement, Delmarva Power will operate, maintain, test, and repair outdoor electrical equipment there.

Power Quality Keeps Industry Thriving. Our commercial and industrial customers depend on our reliable service to power their electrical equipment.

Most power-related operating problems , however, ar e caused by power distur-bances within a building. Our power quality services group assesses vulnerability to such disturbances, provides electrical diagnostics, and engineers solutions to help businesses eliminate and prevent internally generated problems. Power quality evaluations help keep our customers' equipment operating efficiently, consistently, and profitably.

Energy Expertise. From comfortable living rooms to corporate corridors, we are thinking and acting on our customers' behalf. In fact, since 1994, we've de-veloped eleven new business services, from power quality to substation maintenance.

Our residential customers can also look forward to new beyond-the-meter prod-ucts and services. We're taking our energy expertise beyond the peninsula, talkina to regional companies about establishing energy and business alliances. As t he utilit-industry changes, these alliances will provide another growing source of revenue for Delmarva Power.

" In an Increasingly competitive business environment, we need to find ways to become more efficient. Our alliance with Delmarva Power enables us to concentrate our efforts on our core retail business."

-Alan Levin President, Happy Harry's

!Securing Ourl We work hard to secure Economic energy sales agreements and to bring businesses Future and jobs to the areas we live in and serve. Armed with detailed power cost analyses, we helped bring a dozen new, growing businesses here in 1995.

In 1995, we stabilized all our municipal relationships through long-term energy sales agreements. We're working to finalize facilities Bringing industry and busi-management and other energy-related alliances with other wholesale customers. In addition, through our collaborative efforts with state nesses into the peninsula and local governments and active business recruitment, we help keep helps the people here who businesses here and attract new ones to the area.

need jobs and increases Economic Development. When PRS Guitars ' owner Paul Reed Smith needed more concrete information to make a move to Maryland's Eastern Shore, the revenues for the area and Queen Anne's County Development Office called us. We developed a rate analy-for Delmarva Power.

sis that showed power costs on t he Eastern Shore to be 8% below those PRS was paying. We evaluated different heating and air-conditioning systems for energy efficiency. No detai l was too small , down to who was to own the transformer.

By November 1995, PRS had purchased a building in Stevensville on Kent Island .

We gained a new, growing industrial customer, one of a dozen we helped bring to the peninsula last year. And we're negotiating with more.

Energy Sales And Management. The lights on Lakeview Avenue go on one by one. Gradually the City of Milford, Delaware, is illuminated with power sup-plied by us. In 1995, Milford signed an eight-year energy sales agreement with Delmarva Power. We had restructured its rate, saving the city a significant sum over the length of the contract. But Milford needed more from us-our energy Traditionally Based facilities management expertise. When Milford's utility manager left, we stepped in to manage the facility under a one-year agreement. We' re working with other LOWER PRICES municipalities to formulate energy-related options that meet their needs .

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0 Our energy prices rank among the lowest on the Eastern Seaboard.

An opportunity to add F u t u re 37 ,000 new customers presents itself-250

!Based On l people from all over the Trad it ion company work together to make it happen. A hurricane knocks out power to 100,000 people in Ocean City. Our crews restore 90°/o of all service Our dedicated employees will make our growth in the future a reality. 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> ahead of sched*

Their ability to act quickly and safely as a team is vital to our success.

ule. How can we move so They're ready for the challenge.

fast and so well? Our Taking Action For Change. Our employees have learned to make important decisions quickly . In the early 1980s , we began to streamline our decision- employees have learned to making process with the introduction of PSP, the participative skills process. PSP think on their feet and act.

is based on the premise that the people closest to a problem know best ho w to deal with it. Knowing a problem first-hand and being confident in making a deci - We learned to listen to our sion , however, takes practice. Delmarva Power employees have honed their skills, customers. These skills

. ging a depth of experience to each new situation we face. Our employees can evaluate on the spot and decide on the right action . Then they take it. are paying off every day Gaining Customers. We've already moved quickly when an opportunity came for Delmarva Power, our along. In 1994, we offered to buy the Conowingo Power Company from PECO Energy Company. This purchase would bring 37,000 new customers to Delmarva customers, shareholders, Power. In June 1995, we sealed the sale and created the Conowingo District.

and employees.

Our new customers have services and programs never available to them be-fore. And their rates are approximately 20% lower than those projected by Conowingo Power Company for 1996. Purchasing Conowingo enhanced our value by increasing our retail revenue.

Increasing Sales Opportunities. In early 1995, our marketing department sent out a call to Delmarva Power employees to become actively involved in providing KEEPING OUR sales leads and ideas, supporting sales efforts, and seeking sales opportunities. Using CUSTOMERS SAFIE point rankings for diffe rent categories, employees were encouraged to achieve 100 . .- - - - - - - - -

• I00,000 sales success po ints by the end of 1995. Once again, we exceeded our own expectations, accumulating almost I 55,000 sales success points. But what do those 80 points add up to? Over $12.5 million in revenues for Delmarva Power in 1995.

80 Working Together For The Future. With our Conowingo purchase, we gained more than customers; we also gained 60 new employees. Today they work side by 40 side with long-time Delmarva Power employees. They quickly became part of our a im for the future . Pictured from back to front are District Manager, Tim Smith; 20 W chele McKeever; Mark Dell; Karen Shivers; Rich Stickley; Paige Copes; Deborah 0

Mann ; Julie Tall; Maralyn Webb; Stan Mohn; and Russell Robinson . 1993 1994 19H Our customers consistently rank us highly In our concem for their safety.

SERVING & CONSERVING DELMARVA so .........................

1993 1994 1995 Two-thirds of customers rate us positively on environmental protection.

Traditional Co111111it111ent

!To Ou r Commun ities!

Our employees are highly visible in their communities, volunteering wherever they s e e a need. Those needs are diverse, from senior citizens waiting for a hot meal to traditional watermen concerned about their way of life.

Helping People Who Need It. More than a dozen people around Wilmington look forward to seeing Gary Fullman and Alice Parks at lunch. Throughout the week during their lunch hours, Gary, Alice, and up to 40 other Delmarva Power volunteers deliver Meals on Wheels to senior citizens, ensuring that they get a hot meal that day. For the people who receive the food, this may be their only contact with other people for the day. And that contact is almost as important as the meal.

Upholding Our Traditions. The waterman 's open boat on the Chesapeake Bay is as familiar on the Eastern Shore as the yellow Delmarva Power truck out in a storm. Because of Delmarva Power volunteers, though , the association is more than poetic. At the beginning of the 20th century, 17.S million pounds of shad were harvested each year in the Chesapeake Bay area. By the 1970s, the shad population was almost nonexistent and a moratorium was placed on shad fishing. The morato-rium is still in place today. Last spring, Vienna Power Plant volunteers at our fish hatchery there fed 20,000 shad larvae three times a day, seven days a week for several weeks. They worked hard-off the job-to raise the shad for release into the waters of the Nanticoke River. For commercial watermen, moratoriums spell the end of their way of life . But fish hatchery volunteers helped lift a similar mora-torium on striped bass fishing. They'll do the same with shad.

Volunteering For Our Communities. Meals on Wheels and the fish hatchery work only because employees volunteer their time . And Delmarva Power volun-teers do more. They coach Little League. They fight fires. They teach reading. They coordinate fund- raising events. They mentor students. Why do they work so hard on their off time? Because they live here . Because they want to. Because through their efforts , their communities are better places to live . Resto r ing power or restoring the spirits of an old fr iend , our employees are on the job for their communities every day.

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• Future Your investment in Delmarva Power is in good hands. Our Board of Directors and Strategy Committee are committed to directing industry change to your advantage by building on our traditional strengths and planning ahead for a challenging future.

Board of Directors as of December 31, 1995 Michael G. Abercrombie, President of Cato Inc. (a petroleum distributorship), Salisbury, Maryland; member since 1993; serves on nominating and nuclear oversight committees; term expires in 1996.

R. Franklin Balotti, Member of the law firm of Richards Layton & Finger, WilmingtollA Delaware; member since 1995; term expires in 1997. W' Robert D. Burris, President of Burris Foods Inc. (a refrigerated food distribution company) ;

Milford, Delaware; member since 1993; serves on audit and nuclear oversight committees; term expires in 1996.

Howard E. Cosgrove, Chairman of the Board, President, and Chief Executive Officer of the Company; member since 1986; serves on executive, investment, and nuclear oversight com-mittees; term expires in 1998.

Audrey K. Doberstein, President of Wilmington College, New Castle, Delaware; member since 1992; serves on audit, investment, and no minating committees; term expires in 1998.

Michael B. Emery, Senior Vice President of E.I. duPont de Nemours & Company (a diversi-fied chemical, energy, and specialty products company), Wilmington, Delaware; member since 1994; serves on compensation and executive committees; term expires in 1997.

James H. Gilliam Jr., Director, Executive Vice President, and General Counsel of the Strategy Committee members Beneficial Corporation (a financial services company), Wilmington, Delaware; member since 1993; serves on compensation and investment committees; term expires in 1996.

Tom Shaw, Barbara Graham, Sarah I. Gore, Human Resources Associate, W . L. Gore & Associates, Inc. (a high technology Ralph Kleslus, Howard manufacturing company), Newark, Delaware; member since 1990; serves on compensation Cosgrove, and Joseph Ford and executive committees; term expires in 1997.

discuss ways to seize new James C. Johnson, President and Chief Executive Officer of Loyola Federal Savings Bank, Baltimore, Maryland; member since 1992; serves on audit, compensation, and executive com-opportunities for growth In mittees; term expires in 1998.

the region.

Weston E. Nellius, President, Nellius Management Associates (a financial , management, and government relations consulting firm) , Dover, Delaware; member since 1995; serves o .

investment and nominating committees; term expires in 1998.

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Pennsylvania Baltimore 8 Virginia New York 13.64 76.61 Newark, N.J. 9.64 52.76 Electric sales (mWh) 3.7°/o Philadelphia 7.91 76.62 Gas sales 3.1°/o Baltimore 6.06 59.73 & transportation (mcf)

Norfolk, Va. 6.38 74.13 Delmarva Peninsula 6.07 51.97 Electric customers 3.2%

The chart states electric prices In cents per kilowatt-hour and natural gas prices In Gas customers cents per 100 cubic feet tor the 12 months ended September 30, 1995

Delmarva Power has a 100-year tradition of

. oviding electric and

~tural gas services to customers on the Delmarva Peninsula.

We're growing in our tra*

ditional area, having added more than 46,000 customers last year. But we're expanding our hori-zons for the future. Our proximity to major mar-kets along the Eastern Seaboard and upcoming regulatory changes will

. able us to move new energy products and ser-vices beyond the meter and beyond the peninsula into the greater region.

Within 150 miles lie Baltimore, Washington, Philadelphia, and New York City. One third of the population of the United State lives within 350 miles of us. We're well positioned for the com*

petitive future, using our

. ditional strengths to meet it successfully.

Selected Financial Data (Dollars in Thousands, Except Per Share Amounts}

Year Ended December 3 I, 1995 1994 1993 1992 1991 Operating Results and Data Operating Revenues $995,103 $991 ,021 $970,607 $864,044 $855 ,821 Operat ing Income $178,406 $163 , I 56(1) $ 164,1 39 $143 ,711 (2) $136,410 Income Before Cumulative Effect of a Change in Accounti ng Principle $117,488 $108,310(1 ) $1 11,076 $98,526(2) $80,506 Cumulat ive Effect of a Change in Accounting fo r Unbilled Revenues $ 12,730 Net Income $117,488 $108,310(1) $111 ,076 $98,526(2) $93 ,236 Earnings Applicable to Common Stock $107,546 $98,940(1) $101 ,074 $90, 177(2) $85,259 Electric Sales (kWh OOO)C3) 12,310,921 12,505 ,082 12,280,230 11 ,520,811 11 ,460,280 Gas Sold and Transported (mcf 000) 21,371 20,342 19,605 20, 168 18, 184 Common Stock Information Earnings Per Share of Common Stock Before Cumulative Effect of a Change in Accounting Principle $1.79 $1.67 <1> $ 1.76 $1 .69 (2) $ 1.44 Cumulative Effect of a Change in Accounting for Unbilled Revenues $0.25 Total Earnings Per Share $1.79 $1 .67 <1> $ 1.76 $1 .69 (2) $1 .69 Dividends Declared Per Share of Common Stock $1.54 $1 .54 $1 .54 $1 .54 $1 .54 Average Shares Outstanding (000) 60,217 59,377 57,557 53,456 50,581 Year-End Common Stock Price $22 3/4 $18 9/64 $23 S/ 9 $23 l/ 4 $21 l/4 Book Value Per Common Share Return on Average Common Equity

$15.20 11.7°/o

$14.85 11 . 1%

$14.66 12.0 %

$13.77 12.2 %

$13.42 12.4 % e Capitalization Variable Rate Demand Bonds (VRDB) (4) $86,500 $71 ,500 $41 ,500 $41 ,500 $41 ,500 Long-Term Debt 853,904 774,558 736,368 787,387 770, 146 Preferred Stock 168,085 168,085 168,085 176,365 136,365 Common Stockholders' Equity 923,440 884,169 862, I 95 745,789 706,583 Total Capitalization with VRDB $2,031,929 $1,898,312 $1 ,808, 148 $1 ,751,041 $1 ,654,594 Other Information Total Assets $2,866,685 $2,669,785 $2,592,479 $2,374,793 $2,263,718 Long-Term Capital Lease Obligation $20,768 $19,660 $23,335 $26,081 $29,337 Construction Expenditures (S) $135,614 $154, 119 $159,991 $207,439 $181,820 Internally Generated Funds (IGF) (6) $137,394 $123 ,948 $108,693 $130,275 $96,081 IGF as a Percent of Const ruction Expenditures 101 O/o 80 % 68 % 63 % 53 %

(I) An early retirement offer decreased earnings net of income taxes and earnings per share by $ 10. 7 mi llion and $0. 18. respectively.

(2) The settle ment of a lawsuit with PECO Energy Company increased earnings net of income taXes and earnings per share by $ 1 1.4 million and $0.2 1, respectively.

(3) Excludes interchange deliveries.

(4) Al though Variabl e Rate D emand Bo nds are classified as current liabilities, the Company intends to use the bonds as a source of long-term fi nancing as di scussed in Note 12 to the Consolidated Financial Statements.

(5) Excludes Allowance for Funds Used During Construction.

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

II Delmarv* Power & Light Comp*ny

--- ----1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings Summary The earnings per average share of common stock attributed to the core utility business and nonutility subsidiaries are shown below.

1995 1994 1993 Core Utility Operations $1.72 $1 .81 $1.73 Early Retirement Offer (0.18) 1.72 1.63 1.73 Nonutility Subsidiaries 0.07 0.04 O.Q3 Total $1.79 $1.67 $1 .76 Earnings per share from core utility operations decreased by (COPCO), had a minimal impact on earnings, as expected.

$0.09 in 1995 compared to 1994 due to a portion of estimated Refer to Note 4 to the Consolidated Financial Statements for additional costs that were expensed for the Salem Nuclear information concerning the Company's acquisition of COPCO.

Generating Station (Salem) arising from operational problems, Earnings per share from core utility operations increased by including the current outage, which is discussed further under

$0.08 in 1994 compared to 1993 primarily due to additional "Salem Outage." Excluding the portion of estimated additional electric base revenues from rate increases and additional elec-costs that were expensed for Salem, earnings per share from tric sales. The earnings growth from additional electric base core utility operations in 1995 were unchanged from 1994, revenues was partially offset by higher depreciation expense and reflecting the Company's success in offsetting decreased the dilutive effect of additional common shares outstanding.

wholesale (resale) revenues with a combination of cost reduc-tion efforts, retail sales growth, and modest price increases Core utility earnings were reduced in 1994 by $10.7 million pursuant to the Company's "Three-Legged Stool" strategy, after taxes, or $0. 18 per share, to reflect a voluntary early which is discussed further under "Strategic Plans for retirement offer (ERO), which resulted in a work force Competition-Resale Business." Operating results from the reduction of I0.5% or 296 people. Refer to Note 5 to the new Conowingo District, which began in June 1995 as a result Consolidated Financial Statements for additional information of the Company's acquisition of Conowingo Power Company concerning the ERO.

Dividends On December 20, 1995, the Board of Directors declared a dividend level and providing annual earnings growth. Over time, common stock dividend of $0.38 l/2 per share for the fourth this strategy is expected to reduce the Company's dividend quarter. As the utility industry moves from a regulated to a payout ratio and allow the Company to invest in opportunities competitive environment, the Company believes it can best that are anticipated to have a sustainable positive impact on provide shareholder value through maintaining the current earnings growth.

II Delmarva Power & Light Company

Salem Outage The Company owns 7.41 % of Salem, which consists of two generators is within current repair limits at the present time.

pressurized water nuclear reactors (PWR) and is operated However, to confirm the Unit 2 test results, PSE&G also will by Public Service Electric & Gas Company (PSE&G). As of conduct laboratory analysis of the tubes for Unit 2. As a result December 31 , 1995, the Company's net investment in plant of the delay in the restart of Un it I, PSE&G is focusing its in-service for Salem was approximately $57 mill ion for Unit I efforts on the return of Unit 2 to service in the third quarter and $60 million for Unit 2. Each unit represents approximately of 1996, as scheduled. However, the Company cannot predict 2% of the Company's total assets and approximately 3% of the when the NRC will approve the restart of the unit or when Company's installed electric generating capacity. the restart actually will occur.

Salem Units I and 2 were removed from operation by PSE&G In 1995, the Company incurred higher than expected on May 16, 1995, and June 7, 1995, respectively, due to opera- operation and maintenance costs at Salem of approximately tional problems and maintenance concerns. The units will $5 million, which reflect the operational problems at the plant.

remain shut down until PSE&G makes the equipment and man- These costs were expensed as incurred. Also, outage-related agement changes necessary to operate the units reliably over replacement power costs were estimated to be approximately the long term. The restart of the units is subject to Nuclear $8 million. One-half of the estimated replacement power costs Regulatory Commission (NRC) authorization. In December was expensed and the other one-half was deferred on the 1995, PSE&G completed a workscope assessment of both units Company's Consolidated Balance Sheet in expectation of and estimated that Unit I would return to service in the sec- future recovery. Based on PSE&G's current estimates, the ond quarter of 1996 and Unit 2 in the third quarter of 1996. Company estimates that its share of additional costs related to the outage in 1996 will consist of operation and maintenance On February 21, 1996, PSE&G informed the Company that costs ranging from $4 million to $7 million, which will be partial results from recent inspections of Unit I using a new expensed as incurred, and replacement power costs while the testing technology revealed indications of degradation in a sig-units are out of service of approximately $750,000 per month, nificant number of steam generator tubes. PSE&G is continuing per unit. In total, the Company estimates that its share of its inspections and also will conduct further laboratory analysis outage-related costs in 1996 will range from $17 million to of the tubes with results expected in April 1996. Based on the

$22 million. However, these 1996 estimates could change as results of inspections to date, PSE&G has concluded that the a result of PSE&G's analysis of the degradation of the steam Unit I outage will be extended for an indefinite period to generator tubes. Beyond 1996, the Company cannot predict evaluate the state of the steam generators and to subsequently the amount of outage-related costs it could incur. During determine an appropriate course of action. Degradation of 1996, the Company plans to file a proposal with the Delaware steam generators in PWRs has become of increasing concern Public Service Commission (DPSC), the Company's primary for the nuclear industry. Nationally and internationally, utilities rate jurisdiction, for recovery of replacement power costs.

have undertaken actions to repair or replace steam genera-tors. In the extreme, degradation of steam generators has Since the periods during which these units will be out of ser-contributed to the retirement of several American nuclear vice, the extent of the maintenance that will be required, and power reactors. the costs of replacement power and the extent of its recovery may be different from those currently anticipated, the actual PSE&G also has informed the Company that recent steam costs to be incurred by the Company may vary from the fore-generator inspections of Unit 2 using the new testing technol-going estimates.

ogy have revealed that the condition of the Unit 2 steam Strategic Plans for Competition The electric resale segment of the utility industry has become combination of cost reduction efforts, retail sales growth, and highly competitive as a result of federal legislation. Resale cus- modest price increases.

tomers now can choose their electric supplier. Competition in The Company has reduced substantially the financial risk the retail markets also is being discussed at both the Federal related to its resale business. In 1994 and 1995, the Company and State levels. As the retail segment of the industry transi-successfully bid against other suppliers and retained all of its tions to a more competitive market, the Company is making municipal customers under long-term contracts. In addition, changes in the way it manages its business.

the Company negotiated extended notice provisions on the Resale Business remaining portion of ODEC's capacity and energy require-ments served by the Company. These notice provisions The Company's total electric resale revenues as a percent of total billed electric sales revenues decreased from 13% in require ODEC to provide the Company with two years' notice 1994 to 7% in 1995, primarily due to Old Dominion Electric for up to a 30% load reduction and five years' notice for load reductions greater than 30%. ODEC has indicated that it may Cooperative's (OQEC) purchase of about one-half of its capacity and energy requirements from other suppliers begin- issue a request for proposals in early 1996 for the remaining ning January I, 1995. The resulting decrease in resale non-fuel portion of its capacity and energy requirements currently revenues in 1995 of $24.2 million was offset through the served by the Company. To the extent there is any further Company's "Three-Legged Stool" strategy, which involved a reduction in load, the notice provisions provide the Company with t he ability to manage the financial impact.

Delmarva P ower & Ligh t Company II

REDUCED RESALE FINANCIAL RISK will provide immediate access to the information needed to manage the business units in a competitive environment.

In February 1996, the Company presented to the DPSC and the Maryland Public Service Commission a proposal to enter Residential into a collaborative process to develop the transition from a Commercial regulated to a competitive energy market. The Company Industrial believes that the benefits of a competitive market can best Resale be realized when addressed together by the Company, the Other Commissions, and customers. The Company also believes that this process should develop solutions for the following key issues: retail wheeling, stranded investment, the unbund-ling of electric price elements, and performance-based pricing mechanisms. The first goal will be to seek agreement on the objectives and principles for the transition to a market that 1995 Billed Electric Sales Revenues allows choices for all customers. Afterwards, specific details The Company has substantially reduced the financial and filings with the Commissions will be addressed.

risk of its resale business by signing long-term con- Impact of Competition on Stranded Costs tracts and extended notice provisions with all of its As the electric utility industry transitions from a regulated to a resale customers.

competitive environment, utilities may not be able to recover certain costs, resulting in these costs being "stranded."

Retail Business Stranded costs could result from the shift from current cost-Retail customers also are expected to be able to choose their of-service based pricing to market-based pricing and from cus-energy suppliers in the future. The Company is well positioned tomers changing energy suppliers. Potential stranded costs for competition, due to its relatively low prices within the include above-market costs associated with generation facili-region, and is taking steps to manage its separate businesses in ties; long-term purchased power contracts; and regulatory a competitive market, as discussed below. assets, which are expenses that have been deferred pending recovery from customers pursuant to Statement of Financial During 1995, the Company introduced various new products Accounting Standards (SFAS) No. 71, "Accounting for the and services and extended its markets into the region.

Effects of Certain Types of Regulation." If changes in the reg-Through an expanded marketing team, the Company is ulatory environment ultimately require a recognition of any offering consulting, design, construction, and operating and stranded costs, the Company could be required to write down maintenance services to commercial, industrial, and resale asset values, and such write-downs could be material.

customers; developing and marketing residential products However, since the time frame of further deregulation, the and services; and exploring the use of its energy delivery market conditions relative to capacity and energy demand and infrastructure to provide services to the telecommunications prices at the time of de regulation, and the extent to which industry. In addition, the Company is working closely with regulatory commissions allow recovery of stranded costs are neighboring communities, governments, and businesses not known at this time, the Company cannot predict the level to attract new customers and new jobs to the Company's of stranded costs it could incur. Based on recent independent service territory.

studies, the Company has less exposure to stranded costs During 1996, the Company will reorganize into three separate than many other utilities in the industry.

business units--energy supply, regulated delivery, and energy Refer to "Impact of New Accounting Standards" for discussion services-to better focus on the evolving energy markets. The of a related topic and Note 8 to the Consolidated Financial Company also is investing in information technology systems that Statements for additional information on regulatory assets.

¢/kilowatt-hour sold ELECTRIC PRICE COMPARISON*

The Company's prices for electricity are below the regional average. A balanced and flexible energy supply plan helped the Company gain this advantage.

• Based on 1994 data Residential Commercial Industrial

• Delmarva Power D Regional Average Delm*rv* Power & Light Company

Components of Utility Revenues Fuel and energy costs billed to customers (fuel revenues) gen- Electric revenues also include interchange delivery revenues erally are based on rates in effect in fue l adjustment clauses which result primarily from the sale of electric power to utili-which are adjusted periodically to reflect cost changes and are ties in the Pennsylvania-New Jersey-Maryland Interconnection subject to regulatory approval. Rates for non-fuel costs billed Association (PJM Interconnection). The PJM Interconnection is to customers are dependent on rates determined in base rate an electric power pool comprised of eight utilities in the proceedings before regulatory commissions. Changes in non- region, including the Company. The power pool provides both fuel (base rate) revenues can affect directly the earnings of the capital and operating economies to member utilities.

Company. Fuel revenues, or fuel costs billed to customers, Interchange delivery revenues are reflected in the calculation generally do not affect net income, since the expense recog- of rates charged to customers under fuel adjustment clauses.

nized as fuel costs is adjusted to match the fuel revenues. The Due to this ratemaking treatment, interchange delivery rev-amount of under- or over-recovered fuel costs generally is enues generally do not affect net income.

deferred until it is subsequently recovered from or returned to utility customers.

Electric Revenues and Sales In 1995, the percentages of total billed sales revenues con- For 1994 compared to 1993, Non-fuel Revenues increased tributed by the various customer classes were as follows: $4. 1 million from Retail Sales Volume due to a 1.9% increase in residential--41.4%; commercial-32.1 %; industrial-18.6%; total retail sales, which resulted primarily from a 1.6% increase resale--7.0%; and other--0.9%. in the total number of retail customers, an improving economy in the Company's service territory, and colder winter weather, Details of the changes in the various components of electric offset in part by cooler summer weather. Billed sales to resi-revenues are shown below.

dential and commercial customers increased by 2.3% and 3.7%,

Comparative Increase (Decrease) from respectively; industrial sales were flat.

Prior Year in Electric Revenues Non-fuel Revenues decreased $24.2 million in 1995 from (Dollars in Millions) 1995 1994 Resale Sales Volume due to a 44.0% decrease in resale sales, Non-fuel (Base Rate) Revenues mainly due to ODEC's purchase of about one-half of its capac-ity and energy requirements from other suppliers beginning Retail Sales Volume $54.9 $4.I January I, 1995. Changes in resale sales have less of an impact Resale Sales Volume (24.2) (0.2) on non-fuel revenues than changes in retail sales, since average Increased Rates 3.3 15.9 resale non-fuel rates are significantly lower than average retail Fuel Revenues (6.9) ( 15.4) non-fuel rates.

Interchange Delivery Revenues (15.1) 1.0 Other Operating Revenues 4.5 2. 1 The increases in Non-fuel Revenues from Increased Rates Total $16.5 $7.5 resulted from increases in electric customer base rates which became effective during 1993 and 1995. Refer to Note 2 to the Consolidated Financial Statements for information For 1995 compared to 1994, Non-fuel Revenues increased concerning these rate increases.

$54.9 million from Retail Sales Volume due to a 7.3% increase in total retail kilowatt-hour (kWh) sales, which resulted primarily In 1995, Fuel Revenues decreased $6.9 million mainly due from Conowingo District sales beginning June 19, 1995. to lower total sales. In 1994, Fuel Revenues decreased $15.4 Excluding the Conowingo District, retail sales increased 2.9%, million due to lower rates charged to customers under the mainly due to higher commercial sales resulting from a strong fuel adjustment clauses, partially offset by higher total sales.

economy in the Company's service territory, a 1.4% increase in In 1995, Interchange Delivery Revenues decreased $15. 1 the number of retail customers, and the favorable impact of million, mainly due to lower sales and billing rates to the hotter summer weather. Excluding the Conowingo District, PJM Interconnection.

billed sales to residential and commercial customers increased by I . I% and 4.5%, respectively; industrial sales were flat.

D e lma rva Power & Light Company II

Gas Revenues, Sales, and Transportation The Company earns gas revenues from the sale of gas to cus- revenues decreased $16.5 million in 1995 due to lower tomers and also from transporting gas through the Company's average fuel rates charged to customers and a $6.8 million system for some customers who purchase gas directly from refund in 1995 of over-recovered fuel costs.

other suppliers.

In 1994, total gas revenues increased $13.0 million from In 1995, total gas revenues decreased $12.5 million from 1994 1993 due to a $3 .0 million increase in non-fuel revenues and because of a $4.0 million increase in non-fuel revenues and a $10.0 million increase in fuel revenues. The increase in non-a $16.5 million decrease in fuel revenues. The increase in non- fuel revenues was due to $0.6 million of additional revenue fuel revenues was due to $2.7 million of additional revenue from a November I, 1994 base rate increase and a $2.4 from a base rate increase that became effective November I, million increase in sales volume. Total volumes of gas sold and 1994, and a $1.3 million increase in sales volume. Total transported in 1994 increased 3.8% du e to a 2.9% increase in volumes of gas sold and transported in 1995 increased 5. 1% the number of customers and colder winter weather during due to a 1.9% increase in firm gas sales, resulting primarily the first quarter. Gas fuel revenues increased $I 0.0 million in from a 2.9% increase in the number of customers, and a 1994 due to higher average fuel rates and higher sales.

17.2% increase in non-firm sales and gas transported. Gas fuel Electric Fuel and Purchased Power Expenses In 1995, electric fuel and purchased power expenses in fuel costs deferred and subsequently amortized under the decreased $14.7 million from 1994 primarily due to lower Company's fuel adjustment clauses.

kWh output and lower purchased power prices. The $14.7 The kWh output required to serve load w ithin the Company's million decrease is net of $4. 1 million of expense, which repre-service territory is substantially equivalent to total output less sents one-half of the total Salem outage-related replacement interchange deliveries. In 1995, the Company's output for load power costs that were estimated for 1995.

within its service territory was provided by 39.4% coal genera-In 1994, electric fuel and purchased power expenses de- tion, 32. I% oil and gas generation, 16.4% net purchased power, creased $15.7 million from 1993 primarily due to variances and 12. I% nuclear generation.

Gas Purchased For 1995, compared to 1994, the cost of gas purchased purchased because fuel expense is adjusted to match fuel rev-decreased $15.2 million, primarily due to a $6.8 million re- enues as explained under "Components of Utility Revenues."

fund in 1995 of over-recove red fuel costs and variances in fuel For 1994, compared to 1993, the cost of gas purchased costs deferred and subsequently amortized under the Company's increased $10.2 million, primarily due to variances in fuel costs fuel adjustment clause. The refund of over-recovered fuel deferred and subsequently amortized under the Company's costs reduced the amount of expense recorded for gas fuel adjustment clause.

II Delmarva Power & Light Company

Operation, Maintenance, Depreciation, and Income Tax Expenses Operation and maintenance expenses increased in 1995 by 1993 due to probable rate recovery. In 1994, the deferral for

$8.0 million compared to 1994. The most significant factor the Delaware jurisdiction (electric and gas) was expensed in contributing to the increase was $29.5 million of costs related accordance with a settlement agreement, approved October to the Conowingo District, including $26. I million for capacity 18, 1994, concerning the Company's gas base rate case.

purchase charges under the Company's contracts to purchase Depreciation expense increased in 1995, primarily due to the the Conowingo District's electric power requirements from addition of the Conowingo District. In 1994, depreciation PECO Energy Company (PECO). Also contributing to the expense increased mainly due to additions to the electric sys-increase in expense were higher than expected costs at Salem tem, including Hay Road Unit 4 in mid-1993.

of approximately $5 million, which reflect the operational problems at the plant, including the current outage. Largely Inflation affects the Company through increased operating offsetting these increases were a $17.5 million ERO expense expenses and higher replacement costs for utility plant assets.

recorded in 1994, salary and wage savings in 1995 from Although timely rate increases can lessen the effects of infla-reduced staff levels, and lower storm damage costs. tion, due to competition and the changing nature of the utility industry, the Company does not plan to file for an increase in Operation and maintenance expenses increased in 1994 by base rates in the near term. The Company plans to use its

$19.2 million compared to 1993 due mainly to the following existing cost control programs and sales initiatives as its pri-factors: the $17.5 million ERO expense, a $3.5 million increase mary means to mitigate the effects of inflation.

in winter storm damage costs, a $3.5 million increase in the cost for postretirement benefits other than pensions (OPEB), Income tax expense on operations increased $7.4 million in and a $7.8 million reduction in pension expense, of which $4.5 1995 in comparison to 1994 and decreased $2.0 million in million was due to a lower assumed rate of salary increase. 1994 in comparison to 1993, mainly due to a corresponding The Company's OPEB costs were deferred during part of increase and decrease in pre-tax income.

Utility Financing Costs Interest expense increased $6.3 million in 1995 in comparison struction (AFUDC) decreased $2.4 million in 1995, mainly due to 1994, primarily due to the issuance of debt to acquire to a lower AFUDC rate. The decrease in AFUDC of $3.6 COPCO. Also contributing to the increase were higher million in 1994 was primarily due to lower average construc-average short-term debt balances and rates. Interest expense tion balances.

decreased $2.0 million in 1994, mainly due to the redemption Due to common equity financing, the average number of on June I, 1993, of $50 million of I0% First Mortgage Bonds shares of common stock outstanding increased in 1995 and with proceeds from a public offering of common stock.

1994. The additional shares outstanding decreased earnings Allowance for equity and borrowed funds used during con- per share by $0.03 in 1995 and $0.05 in 1994.

Energy Supply The Company's energy supply plan reflects its strategy to pro- capacity deficiency charges to the PJM Interconnection. The vide an adequate, reliable supply of electricity to customers, PJM Interconnection requires the Company to plan for and while minimizing adverse impacts on the environment and to provide an adequate capacity level.

keeping prices competitive. This plan, which is updated During the past three years, the Company's plan has reduced annually, is based on forecasts of demand for electricity in customers' demand for electricity by an additional 47 mega-the service territory and reserve requirements of the PJM watts (MW), provided 205 MW of capacity from a long-term Interconnection. The plan emphasizes balance and flexibility, power contract with PECO beginning in 1996, and provided and may be accelerated, slowed, or altered in response to 175 MW of capacity from a new power plant, Hay Road Unit changing energy demands, fluctuating fuel prices, and emerging

4. Looking forward through 2000, the Company's plan includes technologies. The plan considers customer-oriented load man-the following provisions:

agement and strategic conservation programs ("demand-side" alternatives), with short-term power purchases, long-term (I) "Demand-side" - No additional peak load reduction power contracts, and new or renovated power plants ("sup- through customer-oriented load management and strategic ply-side" alternatives). conservation programs. The Company filed to close its exist-ing demand-side programs to new participants in Delaware The plan currently matches customers' energy requirements and Maryland on October 3, 1995, because these programs and does not require large investments for new resources.

are not considered the most appropriate and cost effective The Company must balance the risks of providing too much resources for meeting future demand requirements.

or too little capacity. The main risks of too much capacity are that the Company's prices may become uncompetitive and (2) "Supply-side" - Starting in 1997 and continuing through that regulators may not allow the associated costs to be 2000, up to 125 MW of short-term power purchases, in addi-recovered through customer rates. The principal risks of inad- tion to the long-term power contract discussed above.

equate capacity are unrel iable se rvi ce and the payment of II D e lm* rv* Power &. L ight Comp* ny

Liquidity and Capital Resources The Company's primary capital resources are internally gen- Capital raised externally during 1993- 1995, net of $303.3 erated funds (net cash provided by operating activities less million of redemptions and refinancings, consisted of $146.3 common and preferred dividends) and external financings. million of common stock, $67.0 million of long-term debt, and These resources provide capital for utility plant construction $45.0 million of variable rate demand bonds. Preferred stock expenditures and other capital requirements, such as repay- outstanding decreased $8.3 million. After considering $15 .2 ment of maturing debt and capital lease obligations. Utility million of costs associated with issuing and refinancing debt construction expenditures are the Company's largest on-going and equity securities during 1993-1995, the net amount of capital requirement and are affected by many factors, including capital raised from external financings during this period was growth in demand for electricity, compliance with environ- $234.8 million.

mental regulations, and the need for improvement and Issuances of common stock during 1993- 1995 included a pub-replacement of existing facilities.

lic offering in 1993 of 3,300,000 shares for $77. I million. The Operating activities provided cash inflows of $239.4 million Company's 1993 financing requirements associated with utility in 1995, $224.6 million in 1994, and $206.7 million in 1993. plant were principally satisfied by issuing common stock in After deducting common and preferred dividend payments of order to strengthen the Company's capital structure.

$I 02.0 million in 1995, $100.6 mill ion in 1994, and $98.0 mil- Additional common stock was issued during 1993-1995, pri-lion in 1993, internally generated funds were $137.4 million in marily through the Dividend Reinvestment and Common 1995, $124.0 million in 1994, $108.7 million in 1993. Internally Share Purchase Plan (DRIP). Depending on the financing needs generated funds provided I 0 I%, 80%, and 68% of the cash of the Company, shares issued through the DRIP may be required for utility construction in 1995, 1994, and 1993, either newly issued shares or shares purchased in the open respectively. market. During 1993-1995, shares issued through the DRIP were newly issued shares, except during the last seven months Utility construction expenditures were $135 .6 million in 1995, of 1994 when the shares were purchased in the open market.

$154. I million in 1994, and $160.0 million in 1993. Construc- Effective January I, 1996, shares issued through the DRIP are tion expenditures in 1995, 1994, and 1993 included $16.4 being purchased in the open market. Book value per share of million, $20.7 million, and $9.2 million, respectively, for common stock increased to $15.20 as of December 31 , 1995, projects attributed to environmental compliance. from $14.85 as of December 31, 1994.

In 1995, the Company acquired COPCO for $158.2 million In addition to the Company's issuance in 1995 of $125.8

($157.0 million net of cash acquired) with $125.8 million of million of long-term debt to acquire COPCO, one of the long-term debt and the balance with short-term debt. During Company's non utility subsidiaries issued $15.0 million of variable 1993- 1995, investments by the Company's nonutility sub- rate demand bonds to finance the past and future expansion of sidiaries were primarily construction expenditures at a landfill its landfill business. During the year, the Company's term loan business as well as the purchase of a $5 .7 million office balance of $45.0 million was repaid using cash from opera-building in 1994. In 1995 and 1994, the subsidiaries raised $3.7 tions. No other significant debt redemption occurred in 1995.

million and $4.6 million, respectively, through the sale of real estate. In 1993, the subsidiaries sold interests in leveraged leases, which resulted in a $21.5 million cash inflow.

$million*

INTERNALLY GENERATED FUNDS &

150 CONSTRUCTION EXPENDITURES The percentage of construction expenditures funded internally is expected to remain high through I 997.

100

• Forecast 50 0

1993 1994 1995 1996* 1997*

• Internally Generated Funds D Construction Expenditures Delm*rva Power & Light Company II

The Company's capital structure as of December 31 , 1995 an additional $42 million of construction expenditures (ex-and 1994, expressed as a percentage of total capitalization, is cluding AFUDC) related to compliance with environmental shown below. regulations are planned.

1995 1994 The Company anticipates that $283 million will be generated in-Long-term debt and variable ternally during 1996-1997, net of power purchase commitments.

rate demand bonds 46.3°/o 44.6% This represents 87% of estimated capital requirements and Preferred stock 8.3°/o 8 .8% 96% of estimated utility construction expenditures for 1996-Common stockholders' equity 45.4°/o 46.6% 1997. During this period, no long-term external financings are presently planned.

Capital requirements for the period 1996-1997 are estimated to be $324 million, including $25 million for maturity of First Since the Company's future construction program, internal Mortgage Bonds in 1997 and $294 million for utility construc- generation of funds, and need for outside capital will be tion expenditures, excluding AFUDC. The estimate of 1996- affected by such matters as customer demand, inflation, com-1997 utility construction expenditures includes $I I million petition, and rate regulation, future results may vary from related to environmental compliance plans, including provision the foregoing estimates.

of the Clean Air Act Amendments of 1990. During 1998-2000, Nonutility Subsidiaries Information on the Company's nonutility subsidiaries, in addi- by lower earnings from solid waste group operations. Both tion to the following discussion, can be found in Notes I and 1995 and 1994 included gains from the sale of real estate.

18 to the Consolidated Financial Statements.

Earnings per share of nonutility subsidiaries were $0.04 in Earnings per share of nonutility subsidiaries were $0.07 in 1994 in comparison to $0.03 in 1993. The $0.0 I increase in 1995 in comparison to $0.04 in 1994. The $0.03 increase in earnings was mainly attributed to gains on the sale of real earnings was primarily due to higher recoveries of previously estate, improved operating results of the solid waste group, written-off joint venture assets, the receipt of an additional and higher earnings from various other nonutility business payment related to a prior year sale of a leveraged lease inter- activities. These earnings increases were largely offset by a est, and a 1994 adjustment to reduce the realizable value of oil 1994 adjustment to the realizable value of oil and gas wells and gas wells. The increase in 1995 earnings was partially offset and by 1993 after-tax gains on sales of leveraged leases.

Impact of New Accounting Standards In March 1995, the Financial Accounting Standards Board discussed under "Strategic Plans for Competition-Impact of (FASB) issued SFAS No. 121 , "Accounting for the Impairment Competition on Stranded Costs."

of Long-Lived Assets and for Long-Lived Assets to Be In October 1995, the FASB issued SFAS No. 123, "Accounting Disposed Of," which requires the Company to review long-for Stock-Based Compensation," which encourages, but does lived assets and certain identifiable intangibles held and used by not require, entities to recognize compensation costs for the Company for impairment whenever events or changes in stock-based employee compensation plans using a fair value circumstances indicate that the carrying amount of an asset based method of accounting rather than the intrinsic value may not be recoverable. If an asset is considered impaired, based method of accounting currently prescribed by then its value would be written down with a corresponding Accounting Principles Board (APB) Opinion No. 25, charge to earnings. SFAS No. 121 also requires rate-regulated "Accounting for Stock Issued to Employees." Entities electing companies to write off regulatory assets against earnings to continue using the accounting prescribed by APB Opinion whenever those assets no longer meet the criteria for recog-No. 25 are required to disclose pro forma net income and nition of a regulatory asset as defined by SFAS No. 71. The earnings per share as if the fair value based method of new standard is effective in 1996. Based on current circum-accounting under SFAS No. 123 had been applied. The new stances, the Company does not expect the adoption of SFAS standard is effective in 1996. The Company does not expect No. 121 to have a material effect upon the Company's financial to adopt the accounting provisions of SFAS No. 123 for condition or results of operations. However, the effects of the income statement recognition purposes.

electric utility industry's transition to a competitive environ-ment could result in the future write-down of asset values as II D e lm* rv* Powe r & Light Compa ny

Report of Independent Report of Management Accountants Management is responsible for the information and represen- To the Board of Directors and Stockholders tations contained in the Company's financial statements. Our Delmarva Power & Light Company financial statements have been prepared in conformity with Wilmington, Delaware O generally accepted accounting principles, based upon currently We have audited the accompanying consolidated balance available facts and circumstances and management's best esti-sheets and statements of capitalization of Delmarva Power &

mates and judgments of the expected effects of events and Light Company and Subsidiary Companies as of December 31, transactions.

1995 and 1994, and the related consolidated statements of Delmarva Power & Light Company maintains a system of income, changes in common stockholders' equity, and cash internal controls designed to provide reasonable, but not flows for each of the three years in tlie period ended absolute, assurance of the reliability of the financial records December 31, 1995. These financial statements are the and the protection of assets. The internal control system is responsibility of the Company's management. Our responsi-supported by written administrative policies, a program of bility is to express an opinion on these financial statements internal audits, and procedures to assure the selection and *based on our audits.

training of qualified personnel.

We conducted our audits in accordance with generally Coopers & Lybrand L.L.P., independent accountants, are accepted auditing standards. Those standards require that we engaged to audit the financial statements and express their plan and perform the audit to obtain reasonable assurance opinion thereon. Their audits are conducted in accordance about whether the financial statements are free of material with generally accepted auditing standards which include a misstatement. An audit includes examining, o,n a test basis, review of selected internal controls to determine the nature, evidence supporting the amounts and disclosures in the timing, and extent of audit tests to be applied. financial statements. An audit also includes assessing the accounting principles used and significant estimates made by The Audit Committee of the Board of Directors, composed management, as well as evaluating the overall financial state-of outside directors only, meets with management, internal ment presentation. We believe that our audits provide a auditors, and independent accountants to review accounting, reasonable basis for our opinion.

auditing, and financial reporting matters. The independent accountants are appointed by the Board on recommendation In our opinion, the financial1.statements referred to above pre-of the Audit Committee, subject to stockholder approval. sent fairly, in all material respects, the consolidated financial position of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1995 and 1994, and the con-solidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.

Howard E. Cosgrove Chairman of the Board, President, and Chief Executive Officer 2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1996, except as to the information presented under the caption Salem Outage in Note 16, fo~ which the Barbara S. Graham date is February 26, 1996 Senior Vice President, Treasurer, and Chief Financial Officer II Delmarva Power & Light Company

Consolidated Statements of Income (Dollars in Thousands) 1995 Year Ended December 3 I ,

1994 1993 e Operating Revenues*

Electric $899,662 $883,1,15 $875,663 Gas 95,441 107,906 94,944 995,103 991,021 970,607 Operating Expenses Electric fuel and purchased power 267,885 282,570 298,307 Gas purchased* 48,615 63,814 53,631 Operation and maintenance 275,165 267,207 248,052 Depreciation 113,022 109,523 100,929 Taxes other than income taxes 38,449 38,585 ~ 37,419 Income taxes 73,561 66,166 68,130 816,697 827,865 806,468 Operating Income 178,406 163,156 164,139 Other Income Nonutility Subsidiaries Revenues and gains 52,042 43,142 37,636 Expenses including interest and income taxes (47,896) (40,790) (35,828)

Net earnings of nonutility subsidiaries 4,146 2,352 1,808 Allowance for equity funds used during construction 708 3,389 5,309 Other income, net of income taxes 557 (285) 511 5,411 5,456 7,628 Income Before Utility Interest Charges 183,817 168,612 171,767 Utility Interest Charges Interest expense 68,395 62,076 64,095 Allowance for borrowed funds used during construction (2,066) (1,774) (3,404) 66,329 60,302 60,691 Earnings Net income 117,488 108,310 111,076 Dividends on preferred stock 9,942 9,370 10,002 Earnings applicable to common stock $107,546 $ 98,940 $101 ..074 Common Stock Average shares of common stock outstanding (000) 60,217 59,377 57,557 Earnings "per average share of common stock . $1.79 $1.67 $1.76 Dividends declared per share of common stock $1.54 $1.54 $1.54 See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company

Consolidated Statements of Cash Flows

- (Dollars in Thousands)

Cash* Flows from Operating Activities Net income Adjustments to reconcile net income to 1995

$117,488 Year Ended December 3 I ,

1994

$108,310 $111,076 1993 net cash provided by operating activities Depreciation and amortization 120,897 120,803 112,926 Allowance for equity funds used during construction (708) (3,389) (5,309)

Investment tax credit adjustments, net (2,516) (1,898) (2,515)

Deferred income taxes, net 15,992 4,829 (I, 171)

Provision for early retirement offer_ 17,500 Net change in:

Accounts receivable (14,022) 7,980 (15,851)

Inventories 18,590 (21,409) 5,314 Accounts payable 3,269 5,811 (3,749)

Other current assets & liabilities(IJ (14,349) (10,668) 11,441 Other, net (5,213) (3,282) (5,438)

Net cash provided by operating activities 239,428 224,587 206,724 Cash Flows from Investing Activities Construction expenditures, excluding AFUDC (135,614) ( 154, 119) (159,991)

Allowance for borrowed funds used during construction (2,066) (1,774) (3,404)

Change in working capital for construction 1,102 (439) 3,123 Acquisition of COPCO, net of cash acquired (157,014)

Cash flows from leveraged leases Sales of interests in leveraged leases 1,314 21,542 Other 1,685 1,592 1,511 Proceeds from sales of subsidiary property 3,656 4,596 Investment in subsidiary projects and operations (3,645) (11,045) (2,827)

Net (increase)/decrease in bond proceeds held in trust funds 2,658 (11,816) 1,152 Deposits to nuclear decommissioning trust funds (3,612) (2,438) (2,657)

Other, net (3,544) (2,336) (389)

Net cash used by investing activities (295,080) (177,779) (141,940)

Cash Flows from Financing Activities Dividends: Common (92,221) (91, 175) (87,989)

Preferred (9,813) (9,464) (10,042)

Issuances: Long-term debtC2J 125,800 4,640 148,200 Variable rate demand bonds 15,000 30,000 15,500 Common stock 24,693 14,974 109,463 Preferred stock 20,000 Redemptions: Long-term debt(2) (1,388) (26,096) (184,206)

Variable rate demand bonds ( 15,500)

Common stock (1,253) (794) (748)

Preferred stock (28,280)

Principal portion of capital lease payments (7,875) (11,280) (9,956)

Net change in term loan (45,000) 35,000 10,000 Net change in short-term debt 53,154 10,000 (17,000)

Cost of issuances and refinancings (1,523) (601) (13,097)

Net cash provided/(used) by financing activities 59,574 (44,796) (63,655)

Net change in cash and cash equivalents 3,922 2,012 1,129 e Beginning of year cash and cash equivalents End of year ca~h and cash equivalents (I) Other than debt and deferred income taXes classified as current.

25,029

$28,951 23,017

$25,029 21,888

$23,017 (2) Excluding net change in term loan.

See accompanying Notes to Consolidated Financial Statements.

II Delmarva Power & Light Company

Consolidated Balance Sheets (Dollars in Thousands) As of December 3 I, 1995 1994 Assets Utility Plant-At Original Cost Electric $2,942,969 $2,676,871 Gas 208,245 196,188 Common 130,949 120,933 3,282,163 2,993,992 Less: Accumulated depreciation 1,189,269 1,062,565 Net utility plant in service 2,092,894 1,931,427 Construction work-in-progress 105,588 85,220 Leased nuclear fuel, at amortized cost 31,661 30,349 2,230,143 2,046,996 Investments and Nonutility Property Investment in leveraged leases 48,367 49,595 Funds held by trustee 36,275 32,824 Other investments and nonutility property, net 54,781 57,289 139,423 139,708 Current Assets Cash and cash equivalents 28,951 25,029 Accounts receivable Customers 116,606 93,739 Other 14,630 15,144 Inventories, at average cost Fuel (coal, oil, and gas) 30,076 48,262 Materials and supplies 36,823 37,055 Prepayments 12,969 9,014 Deferred income taxes, net 5,400 9,276 245,455 237,519 Deferred Charges and Other Assets Prepaid pension cost 16,899 5,905 Unamortized debt expense 12,256 11,387 Deferred debt refinancing costs 23,972 26,530 Deferred recoverable income taxes 151,250 149,206 Other 47,287 52,534 251,664 245,562 Total $2,866,685 $2,669,785 See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company II

Consolidated Balance Sheets (Dollars in Thousands) As of December 31, 1995 1994 Capitalization and Liabilities Capitalization (See Statements of Capitalization)

Common stock, $2.25 par value; 90,000,000 shares authorized; shares outstanding: 1995-60,759,365, 1994---59,542,006 $136,713 $133,970 Additional paid-in capital 506,298 484,377 Retained earnings 281,862 267,002 Unearned compensation (1,433) (1,180)

Total common stockholders' equity 923,440 884,169 Preferred stock 168,085 168,085 Long-term debt 853,904 774,558 1,945,429 1,826,812 Current Liabilities Short-term debt 63,154 10,000 Long-term debt due within one year 1,485 1,399 Variable rate demand bonds 86,500 71,500 Accounts payable 64,056 59,596 Taxes accrued 4,802 7,264 Interest accrued 16,355 15,459 Dividends declared 23,426 22,831 Current capital lease obligation 12,604 12,571 Deferred energy costs 222 12,241 Other 33,595 27,538 306,199 240,399 Deferred Credits and Other Liabilities Deferred income taxes, net 519,597 505,435 Deferred investment tax credits 45,061 47,577 Long-term capital lease obligation 20,768 19,660 Other 29,631 29,902 615,057 602,574 Commitments and Contingencies (Notes 13 and 16)

Total $2,866,685 $2,669,785 See accompanying Notes to Consolidated Financial Statements.

II Delmarva Power & Light Company

Consolidated Statements of Capitalization (Dollars in Thousands) As of December 3 I, 1995 1994 Common Stockholders' Equity Total common stockholders' equity(!) $923,440 $884,169 Cumulative Preferred Stock Par value $1 per share, I0,000,000 shares authorized, none outstanding Par value $25 per share, 3,000,000 shares authorized, 7 3/4% Series, 1,600,000 shares issued (2) 40,000 40,000

"' Par value $I 00 per share, 1,800,000 shares authorized:

Current call Series Shares outstanding price per share 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-5.56%, 5.54% (4) 160,850 $103.00 (5) 1&,085 16,085 Auction rate-4.54%, 3.32% (4) 450,000 $100.00 45,000 45,000 168,085 168,085 Long-Term Debt First Mortgage Bonds:

Maturity Interest Rates 1997 6 3/s% . 25,000 25,000 2002-2003. 6.40'Yo-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 2025 7.71% 100,000 2032 6.05% 15,000 15,000 549,200 449,200 Amortizing First Mortgage Bonds, due 1997-2008, 6.95% 25,800 Other Bonds, due 20 I 1-2017, 7. I5'Yo-7.50% 54,500 54,500 Pollution Control Notes:

Series 1973, due 1996-1998, 5 3/4% 6,250 6,375 Series 1976, due 1996--2006, 7 1/s'Yo-7 l/4% 3,100 3,200 Medium Term Notes, due 1998, 5.69% 25,000 25,000 Medium Term Notes, due 1999, 7 1123 30,000 30,000 Medium Term Notes, due 2002-2004, 8.30%-9.29% 39,000 39,000 Medium Term Notes, due 2007, 8 1/s% 50,000 50,000 Medium Term Notes, due 2020-2021, 8.96%-9.95% 61,000 61,000 Mortgage Notes, 9.65% (6) 6,938 7,606 Mortgage Note, 8% (7) 4,279 4,588 Term Loan (BJ 45,000 Other Obligations, due 1996-2000, 9.63% 940 1,126 Unamortized premium and discount, net (618) (638)

Current maturities of long-term debt (1,4S5) ( 1,399)

Total long-term debt 853,904 774,558 Total capitalization 1,945,429 1,826,812 Variable Rate Demand Bonds (9) 86,500 71,500 Total capitalization with Variable Rate Demand Bonds $2,031,929 $1,898,312 (I) 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 I, 2003, at $100 per share.

(4) Average rates during 1995 and 1994, respectively.

(5) Call price changes to $100 per share for redemptions on or after July I, 1996.

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

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

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

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

See accompanying Notes to Consolidated Financial Statements.

Delmarva Powor & Light Company

_J

Consolidated Statements of Changes in Common Stockholders~ Equity

- (Dollars in Thousands)

Balance as of January 1, 1993 Net income Common Shares

,- Outstanding 54,143,853 Par Value(I)

$121,824 Additional Paid-in Capital

$374,976 Retained Earnings

$249,176 111,076 Treasury Stock<2l Unearned Com pen-sation Total

$(187) $745,789 111,076 Cash dividends declared Common stock ($1.54) (89,792) (89,792)

Preferred stock (10,002) (10,002)

Issuance of common stock Public offering 3,300,000 7,425 69,713 77,138 DRIP (3J 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 (4) 31,490 748 (748)

Amortization of unearned compensation 260 260 Refinancing of preferred stock (273) (951) (1,224)

Balance as of December 31, 1993 58,829,283 132,366 470,997 259,507 (675) 862,195 Net income 108,310 108,310 Cash dividends declared Common stock ($1.54) (91,436) (91,436)

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

Issuance of common stock DRIP (3J 703,726 1,584 13,199 14,783 e Other Issuance Reacquired shares Shares granted (4J 8,997 (36,840) 36,840 20 171 (794) 794 (794) 191 (794)

Amortization of unearned compensation 289 289 Other 10 (9)

Balance as of December 31, 1994 59,542,006 133,970 484,377 267,002 (I, 180) 884,169 Net income 117,488 117,488 Cash dividends declared Common stock ($1.54) (92,686) (92,686)

Preferred stock (9,942) (9,942)

Issuance of common stock DRIP (3J 1,210,048 2,723 21,806 24,529 Stock options 3,900 9 63 72 Other issuance 4,731 11 82 93 Reacquired shares (63,370) ( 1,253) 19 (1,234)

Shares granted (4) 62,050 1,223 (1,223)

Amortization of unearned compensation 951 951 Balance as of December 31, 1995 60,759,365 $136,713 $506,328 $281,862 $(30) $( 1,433) $923,440 (I) The Company's common stock has a par value of $2.25 per share and 90,000,000 shares are authorized.

(2) Treasury Stock, which is recorded at cost, is included in Additional Paid-in Capital on the Consolidated Balance Sheet.

(3) Dividend Reinvestment and Common Share Purchase Plan (DRIP)--As of December 31, 1995, 149,648 shares remained on the registration for issuance through the DRIP. On January 29, 1996, the Company filed with the Securities and Exchange Commission to register an additional 6,000,000 shares for issuance through the DRIP.

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

e See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company II_J,

1. Significant Accounting Policies Nature of Business to make certain estimates and assumptions that affect the The Company is predominately a public utility that provides reported amounts of assets and liabilities and disclosure of con-electric and gas servjce. The Company provides electric ser- tingent assets and liabilities at the date of the financial statements vice to retail (residential, commercial, and industrial) and and the reported amounts of revenues and expenses during the wholesale (resale) customers in Delaware, ten primarily reporting period. Actual results could differ from those estimates.

Eastern Shore counties in Maryland, and the Eastern Shore Utility Revenues area of Virginia in an area consisting of about 6,000 square miles with a population of approximately I. I million. In 1995, At the end of each month, there is an amount of electric and 90% of the Company's operating revenues were derived from gas service rendered from the last meter reading to the the sale of electricity. The Company provides gas service to month-end which has not yet been billed to customers. The retail and transportation customers in an area consisting of non-fuel (base rate) revenues associated with such unbilled about 275 square miles with a population of approximately services are accrued by the Company.

470,000 in northern Delaware, including the City of Wilmington. When interim rates are placed in effect subject to refund, the In addition, the Company and its wholly-owned subsidiaries Company recognizes revenues based on expected final rates.

are engaged in nonutility activities. The Company is developing Fuel Expense and marketing energy-related products and services primarily targeted to customers in retail markets. The subsidiaries' Fuel costs charged to the Company's results of operations

_nonutility activities include landfill and wastehauling*operations, generally are adjusted to match fuel costs included in cus-the operation and maintenance of energy-related projects, real tomer billings (fuel revenues). The difference between fuel revenuers and actual fuel costs incurred is reported on the estate sales and development, and investments in leveraged equipment leases. Consolidated Balance Sheets as "Deferred energy costs." The deferred balance is subsequently recovered from or returned Regulation of Utility Operations to utility customers.

The Company is subject to regulation with respect to its retail The Company's share of nuclear fuel at the Peach Bottom utility sales by the Delaware and Maryland Public Service Atomic Power Station (Peach Bottom) and the Salem Nuclear Commissions (DPSC and MPSC, respectively) and the Virginia Generating Station (Salem) is financed through a contract State Corporation Commission (VSCC), which have powers which is accounted for as a capital lease. Nuclear fuel costs, over rate matters, accounting, and terms of service. Gas sales including a provision for the future disposal of spent nuclear are subject to regulation by the DPSC. The Federal Energy fuel, are charged to fuel expense on a unit-of-production basis.

Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting systems and policies; Depreciation Expense the transmission of electricity, the wholesale sale of electricity, The annual provision for depreciation on utility property is and interchange and other purchases and sales of electricity computed on the straight-line basis using composite rates by involving,other utilities. The FERC also regulates the price and classes of depreciable property. The relationshi_p of the annual other terms of transportation of natural gas purchased by the provision for depreciation for financial accounting purposes Company. The percentage of electric and gas utility operating to average depreciable property was 3.6% for 1995 and 1994, revenues regulated by each Commission for the year ended and 3.7% for 1993. Depreciation expense includes a provision December 31, 1995, was as follows: DPSC, 64%;. MPSC, 27%; for the Company's share of the estimated cost of decommis-VSCC, 3%; and FERC, 6%. sioning nuclear power plant reactors based on amounts billed to customers for such costs. Refer to Note 7 to the Con-Refer to Note 8 to the Consolidated Financial Statements for solidated Financial Statements for additional information on a discussion of regul;;itory assets arising from the financial nuclear decommissioning.

effects of rate regulation.

Interest Expense Reporting of Subsidiaries The amortization of debt discount, premium, and expense, The consolidated financial statements include the accounts of including refinancing expenses, is included in interest expense.

the Company and its wholly-owned subsidiaries-Delmarva Capital Investments, Inc.; Delmarva Energy Company; Allowance for Funds Used During Construction Delmarva Industries, Inc.; and Delmarva Services Company.

Allowance for Funds Used During Construction (AFUDC) is The results of operations of the Company's nonutility sub-included in the cost of utility plant and represents the cost of sidiaries are reported in the Consolidated Statements of borrowed and equity funds used to finance construction of Income as "Other Income." Refer to Note 18 to the new utility facilities. In the Consolidated Statements of Income, Consolidated Financial Statements for financial information the borrowed funds component of AFUDC is reported under about the Company's nonutility subsidiaries.

"Utility Interest Charges" as a reduction of interest expense Use of Estimates and the equity funds component of AFUDC is reported as "Other Income." AFUDC was capitalized on utility plant The preparation of financial statements in conformity with generally accepted accounting principles requires management construction at the rates of 7.1 % in 1995, 9.3% in 1994, and 9.6% in 1993.

II Delmarva Power & Light Company

Cash Equivalents on nonrecourse indebtedness) and estimated residual values In the consolidated financial state111ents, the Company con- of the leased equipment less unearned and deferred income siders highly liquid marketable securities and debt instruments (including investment tax credits). Unearned and deferred purchased with a maturity of three months or less to be cash income is recognized at a level rate of return during the periods equivalents. in which the net investment is positive.

Leveraged Leases Funds Held By Trustee As of December 3 I, 1995, the Company's portfolio of lever- Funds held by trustee generally include deposits in the aged leases, held by a non utility subsidiary, consists of five Company's external nuclear decommissioning trusts and aircraft which are leased to three separate airlines. ThE) unexpended, restricted, tax-exempt bond proceeds. Earnings Company's investment in leveraged leases includes the on such trust funds are also reflected in the balance.

aggregate of rentals receivable (net of principal and interest

2. Base Rate Matters Electric and gas base rate increases which became effective in 1993, 1994, and 1995 are summarized in the following table.

Return On Annualized Base Effective Common Equity Jurisdiction Revenue Increase Date Allowed Retail Electric Delaware Cl) $ 4.5 million or 0. 9% 05/01/95 11.5%

Delaware(2) $24.9 million or 5.8% 06/01/93 11.5%

Maryland CJ) $ 7.8 million or 4.3% 04/01/93 Virginia $ 1.3 million or 5.4% I 0/05/93 11.05%

Resale (FERC)C4l $ 1.5 million or 1.5% 06/03/93 Gas(S) $ 3.1 million or 3.1 % 11/01/94 11.5%

(I) Net of reduced fuel rates, customer rates decreased 1.45%. (4) The settlement agreement did not specify a return on equity.

(2) Net of fuel savings from Hay Road Unit 4, customer rates increased 3.7%. (5) Net of reduced fuel rates, customer rates decreased 1.75%.

(3) Although a return on equity was not specified, the Company believes that 0

the implied return on equity approaches 12%. Net of fuel savings from Hay Road Unit 4, customer rates increased 2.3%.

On April 18, 1995, the DPSC approved a joint resolution sub-

• Funding of nuclear decommissioning costs at the current mitted by the Company and two customer groups for a $4.5 Nuclear Regulatory Commission (NRC) minimum financial million or 0. 9% increase in electric base rates effective May I, assurance amount. See Note 7 to the Consolidated Financial 1995. The rate increase was designed to recover the costs of Statements for a further discussion of the Company's "limited issues," which primarily are costs imposed by govern- accounting and funding policies for nuclear decommissioning.

ment and are outside the reasonable control of the Company.

In 1994, the Company also had flied an application with the The joint resolution also provided for the following:

MPSC for a $3.9 million "limited issues" increase in electric base rates. In April 1995, the MPSC denied the Company's

• A rate moratorium whereby the Company will not increase application to increase rates because it was unable to deter-its electric base rates before January I, 1997. However, the mine the reasonableness of the Company's current base rates Company is permitted to file for a redesign of electric base due to the "limited issues" format of the case.

rates that would not result in" a change in total electric base revenues. The electric base rate increases that became effective in 1993 were designed to recover higher costs associated with com-

• A provision whereby the Company would be required to pletion of Hay Road Unit 4, costs for postretirement benefits submit a proposal supporting current rate levels if its return other than pensions, and other items, including general inflation.

on common equity exceeds its currently approved rate of I 1.5%. A return on common equity test will be performed The gas base rate increase effective in 1994 was designed to quarterly beginning with the twelve-month period ended recover higher operating costs and plant investment levels December 3 I, 1995, and continuing through the twelve- than were reflected in the previous rates.

month period ended December 3 I , 1996.

II Delmarva Power & Light Company

3. Income Taxes The Company and its wholly-owned subsidiaries file a consoli- is reflected on the Consolidated Balance Sheets as "Deferred dated federal income tax return. Income taxes are allocated to recoverable income taxes." Deferred recoverable income the Company's utility business and subsidiaries based upon taxes were $151.3 million and $149.2 million as of December their respective taxable incomes, tax credits, and effects of the 31, 1995 and 1994, respectively.

alternative minimum tax, if any.

Deferred income tax expense represents the net change dur-Deferred income tax assets and liabilities represent the tax ing the reporting period in the net deferred tax liability and effects of temporary differences between the financial state- deferred recoverable income taxes.

ment and tax bases of existing assets and liabilities and are Investment tax credits (ITC) from regulated operations are measured using presently enacted tax rates. The portion of being amortized over the useful lives of the related utility the Company's deferred tax liability applicable to utility opera-plant. ITC associated with leveraged leases are being amor-tions that has not been reflected in current customer rates tized over the lives of the related leases during the periods in represents income taxes recoverable through future rates and which the net investment is positive.

Components of Consolidated Income Tax Expense (Dollars in Thousands) 1995 1994 1993 Operation Federal: Current $46,517 $50,276 $50,264 Deferred 16,452 5,592 7,710 State: Current 9,851 11,268 10,839 Deferred 3,257 928 1,832 Investment tax credit adjustments, net (2,516) (1,898) (2,515)

Total Operation 73,561 66,166 68,130 Other income Federal: Current 5,263 2,789 9,398 Deferred (3,686) (2,008) (9,398)

State: Current 433 349 287 Deferred (31) 317 (1,315)

Total Other Income 1,979 1,447 (1,028)

Total income tax expense $75,540 $67,613 $67,102 Reconciliation of Effective Income Tax Rate The amount computed by multiplying income before tax by the federal statutory rate is reconciled below to the total income tax expense.

1995 1994 1993 (Dollars in Thousands) Amount Rate Amount Rate Amount Rate Statutory federal income tax expense $67,560 35°/o $61,574 35% $62,362 35%

Increase (decrease) due to State income taxes, net of federal tax benefit 8,792 5 8,361 4 7,567 4 Other, net (812) (1) (2,322) (1) (2,827) (1)

Total income tax expense $75,540 39°/o $67,613 38% $67,102 38%

Components of Deferred Income Taxes The tax effect of temporary differences that give rise to the Company's net deferred tax liability are shown below.

As of December 31 (Dollars in Thousands) 1995 1994 Deferred Tax Liabilities Utility plant basis differences Accelerated depreciation Other Leveraged leases Deferred recoverable income tro<es Other Total deferred tax liabilities Deferred Tax Assets Deferred ITC Other Total deferred tax assets Total deferred taxes, net Valuation allowances for deferred tax assets were not material as of December 3 I, 1995 and Delmarva Power & Light Company

4. Purchase of Conowingo Power Company On June 19, 1995, the Company acquired Conowingo Power assets, or $75.8 million, has been recorded as goodwill and Company (COPCO), the Maryland retail electric subsidiary of is included in electric utility plant. The MPSC has approved PECO Energy Company (PECO), for $158.2 million ($157.0 recovery of this goodwill using a sinking fund method through million net of cash acquired). As disclosed in Note 12 to the Maryland retail rates in two components. Approximately $50 Consolidated Financial Statements, the Company financed million of the goodwill will be recovered as an acquisition the acquisition with $125.8 million of long-term debt and the adjustment with a carrying charge over 20 years beginning at balance with short-term debt. The acquisition resulted in the time of the Company's next Maryland base rate case. The approximately 37,500 new electric retail customers, which remaining $26 million will be recovered with a carrying charge represents 9% of the Company's current customer base. over approximately I 0 years via a pre-approved surcharge to the Company's existing Maryland retail rates. This surcharge The acquisition has been accounted for as a purchase.

was placed in effect for Conowingo District customers on Immediately after the acquisition, COPCO was merged into February I, 1996. For financial statement purposes, the good-the Company and is now being operated as the Conowingo will is being amortized on a straight-line _basis over 40 years District. Operating results of the Conowingo District have been beginning July 1995.

included in the Consolidated Statements of Income sirice June 19, 1995. Proforma results of the Company, assuming the acqui- In conjunction with the acquisition, the Company signed a sition had taken place at the beginning of each period presented, contract with PECO to purchase electric capacity and energy would not be materially different from the results reported. from the PECO system beginning February I, 1996, and ending May 3 I, 2006. The base amount of the capacity purchase, Under FERC accounting requirements, the COPCO assets which is subject to cemin possible adjustments: will start at have been recorded at their net book value, reflecting electric 205 megawatts (MW) and will increase annually to 279 MW plant of $107.8 million and related accumulated depreciation in 2006. Under another contract, the Company agreed to of $31.7 million and other net assets and liabilities of $7.9 purchase the Conowingo District's interim electric power million. The difference between the amount paid to PECO requirements from PECO from the acquisi~ion date until plus acquisition costs and the net book value of the COPCO February I, 1996.

5. Early Retirement Offer In the third quarter of 1994, the Company completed a volun- employees. In accordance with _Statement of Financial tary early retirement offer (ERO) for all management and Accounting Standards (SFAS) No. 88, "Employers' Accounting union employees at least 55 years old with at least I 0 years of for Settlements and Curtailments of Defined Benefit Pension continuous service by December 3 I, 1994. The ERO was Plans and for Termination Benefits," the Company ei:cpensed accepted by I 0.5% of the Company's workforce (296 people), $17.5 million of costs associated with the ERO ($10.7 million which represented an 82% participation rate among eligible after taxes or $0.18 per share).

6. Jointly Owned Plant The Company's Consolidated Balance Sheets include its pro- Income. The Company is responsible for providir:g its share of portionate share of assets and liabilities related to jointly financing for the jointly owned facilities. Information with owned plant. The Company's share of operating and mainte- respect to the Company's share of jointly owned plant as of nance expenses of the jointly owned plant is included in the December 31, 1995 was as follows:

corresponding expenses in the Consolidated Statements of Megawatt Cqnstruction Ownership Capability Plant in Accumulated Work in (Dollars in Thousands) Share Owned Service Depreciation Progress Nuclear Peach Bottom 7.51% 164MW $129,028 $69,134 $9,595 Salem 7.41% 164MW 210,458 93,728 10,103 Coal-Fired Keystone 3.70% 63 MW 19,244 7,506 339 Conemaugh 3.72% 63MW 32,406 8,543 520 Transmission Facilities Various 4,564 2,103 Other Facilities Various 1,721 128 797 Total $397,421 $181,142 $21,354 e

Delmarva Power & Light Company II

7. Nuclear Decommissioning The Company records a liability for its share of the estimated The Company's accrued nuclear decommissioning liability, cost of decommissioning the Peach Bottom and Salem nuclear which is reflected in the accumulated reserve for depreciation, reactors over the remaining lives of the plants based on was $37.2 million as of December 31, 1995. The provision amounts collected in rates charged to electric customers. For reflected in depreciation expense for nuclear decommissioning utility rate-setting purposes, the Company estimates its share was $3.6 million in 1995, $2.4 million in 1994, and $2.3 million offuture nuclear decommissioning costs based on NRC regu- in 1993. External trust funds established by the Company for lations concerning the. minimum financial assurance amount for the purpose of funding nuclear decommissioning costs had an nuclear decommissioning. The Company is presently recover- aggregate balance of $25.5 million as of December 31, 1995.

ing, through electric rates in the Delaware and Virginia juris- Earnings on the trust funds are recorded as an increase to the dictions, nuclear decommissioning costs based on the current accrued nuclear decommissioning liability, which, in effect, NRC minimum financial assurance amount of approximately reduces the expense recorded for nuclear decommissioning.

$122 million. In the Maryland and FERC jurisdictions, the The ultimate cost of nuclear decommissioning for the Peach Company is presently recovering nuclear decommissioning Bottom and Salem reactors may exceed the NRC minimum costs based on the 1990 NRC minimum financial assurance financial assurance amount, which is updated annually under amount of approximately $50 million. '

a NRC prescribed formula.

8. Regulatory Assets In conformity with generally accepted accounting principles, recovered or are probable of being recovered through the Company's accounting policies reflect the financial effects customer rates. Generally, the costs of these assets are recog-of rate regulation and decisions issued by regulatory commis- nized in operating expenses over the. period the cost is recovered sions having jurisdiction over the Company's utility business. In from customers.

accordance with the provisions of SFAS No. 71, "Accounting In March 1995, the FASB issued SFAS No. 121, "Accounting for the Effects of Certain Types of Regulation," the Company for the Impairment of Long-Lived Assets and for Long-Lived defers expense recognition of certain costs and records an Assets to Be Disposed Of," which requires the Company to asset, a result of the effects of rate regulation. These "regula-review long-lived assets and certain identifiable intangibles held tory assets" are included on the Company's Consolidated and used by the Company for impairment whenever events or Balance Sheets under "Deferred Charges and Other Assets."

changes in circumstances indicate that the carrying amount As of December 31, 1995, the Company had $207.0 million of of an asset may not be recoverable. If an asset is considered regulatory assets, which included the following: Deferred debt impaired, then its value would be written down with a corre-refinancing costs-$24.0 million; Deferred recoverable income sponding charge to earnings. SFAS No. 121 also requires taxes-$151.3 million (refer to Note 3 to the Consolidated rate-regulated companies to write off regulatory assets against Financial Statements); Deferred recoverable plant costs-$9.8 earnings whenever those assets no longer meet the criteria million; Deferred costs for decontamination and decommis-for recognition of a regulatory asset as defined by SFAS No.

sioning of United States Department of Energy gaseous diffu-

71. The new standard is effective in 1996. Based on current sion enrichment facilities-$7.2 million; Deferred demand-side circumstances, the Company does not expect the adoption of management costs-$5.4 million; and other regulatory assets SFAS No. 121 to have a material effect upon the Company's

-$9.3 million. The costs of these assets are either being financial condition or results of operations.

9. Investments As of December 31, 1995, the Company had $39.6 million of different from book value as of December 31, 1995. Gains and investments in securities which were included in the following losses from the sale of investment securities were not material balance sheet classifications: Funds held by trustee-$36.3 mil- to the Company's operating results in 1995, 1994, and 1993.

lion; Other investments and nonutility property, net-$1.6 As of December 3 I, 1995, the Company's investments in debt million; Cash and cash equivalents-$1.7 million. These securi- securities, other than those consiCiered to be cash equivalents, ties, based on the Company's interit and criteria established by had the following maturities: $2.4 million due in 1996; $9.3 SFAS No. I 15, "Accounting for Certain Investments in Debt million due in 1997-2000; and $8.7 million due in 2001-2005.

and Equity Securities," are categorized as available-for-sale securities. The fair value of such securities was not materially II Delmarva Power & Light Company

10. Common Stock Refer to the Consolidated Statements of Changes in Common approximately $246.2 million was available for payment of Stockholders' Equity for information concerning issuances and common dividends.

redemptions of common stock during 1993-1995.

Prior to January I, 1993, the Company had a nonqualified The Company's Restated Certificate and Articles of Incor- sto~k option plan for certain employees. Options were priced poration and the Mortgage and Deed of Trust collateralizing at the actual* market value on the grant date. Effective January the Company's outstanding First Mortgage Bonds contain I, 1993, the Company's Board of Directors declared that no restrictions on the payment of dividends on common stock. new stock options will be granted and that the performance-Such restrictions would become applicable if the Company's based restricted stock program will be the program in effect capital and retained earnings fall below certain specific levels under the Long Term Incentive Plan. Changes in stock options or if preferred dividends are in arrears. Under the most are summarized.below.

restrictive of these provisions,' as of December 31, 1995, 1995 1994 1993 Number Option Number Option Number Option of Shares Price of Shares Price of Shares Price Beginning-of-year balance 53,050 $171/2-$211/4 53,050 $171/2-$211/4 192,100 $17112-$211/4 Options exercised 3,900 $171/2-$181/e 139,050 $171/2-$211/4 Options forfeited 2,800 $201/2-$211/4 End-of-year balance 46,350 $171/2-$211/4 53,050 $171/2-$211/4 53,050 $171/2-$211/4 Exercisable 46,350 $171/2-$211/4 53,050 $171/2-$211/4 53,050 $17112-$211/4 In October 1995, the FASB issued SFAS No. 123, "Accounting to continue using the accounting prescribed by APB Opinion for Stock-Based Compensation," which encourages, but does No. 25 are required to disclose pro forma net income and not require, entities to recognize compensation costs for earnings per share as if the fair value based method of stock-based employee compensation plans using a fair value accounting under SFAS No. 123 had been applied. The new based method of accounting rather than the intrinsic value standard is effective in 1996. Tl:ie Company does not expect based method of accounting currently prescribed by to adopt the accounting provisions of SFAS No. 123 for Accounting Principles Bo~rd (APB) Opinion No. 25, income statement recognition purposes.

"Accounting for Stock Issued to Employees." Entities electing

11. Preferred Stock On November 4, 1993, the Company issued 200,000 shares of ceeds and cash on-hand to redeem $18.28 million of its 7.88%

6 3/4%, cumulative preferred stock, $100 per share par value, for series and $I 0.0 million of its 7.84% series preferred stock.

$20 million. On December I, 1993, the Company used the pro-

12. Debt Substantially all utility plant of the Company is subject to the bonds are being used to finance the past and future expansion lien 'of the Mortgage and Deed of Trust collateralizing the of a landfill which is owned and operated by the subsidiary.

Company's First Mortgage Bonds.

The Company's debt obligations included Variable Rate On June 19, 1995, the Company issued the following debt to Demand Bonds (VRDB) in the amounts of $86.5 million as of finance the $158.2 million acquisition of COPCO: $100 million December 3 I, 1995, and $71.5 million as of December 3 I, of First Mortgage Bonds, Series I, 7.71 % Bonds Due June I, 1994. Although VRDB are classified as current liabilities 2025; $25.8 million of First Mortgage Bonds, Series I, 6.95% because VRDB are due on demand by the bondholder, such Amortizing Bonds Due June I, 2008, with principal repayable bonds are immediately remarketed because the interest rate in annual installments beginning June I, 1997; and the balance is set at market. The Company may also utilize one of the fixed with short-term debt. rate/fixed term conversion options of the bonds. Thus, the Company considers the VRDB to be a source of long-term On August 30, 1995, the Schuylkill County Industrial financing. The $86.5 million balance of VRDB outstanding as Development Authority, Commonwealth of Pennsylvania, of December 3 I, 1995, matures in 2017 ($26 million), 2019 issued on behalf of a nonutility subsidiary of the Company,

($15 million), 2028 ($15.5 million), and 2029 ($30 million).

$15 million of Variable Rate Demand Rewenue Bonds due on Average annual interest rates on the VRDB were 4.0% in 1995.

demand or at maturity on October I, 2019. Proceeds from the II Delmarva Power & Light Company

As of December 31, 1995, the Company had $150 million Maturities of long-term debt and sinking fund requirements of bank lines of credit, including $130 million of such credit during the next five years are as follows: 1996-$3.2 million; lines under which the Company may convert short-term 1997-$29.0 million; 1998-$35.0 million; 1999-$37.4 mil-borrowings to a term loan with a maturity date of 12 to 24 lion; 2000-$4.2 million.

months following the date of the requested conversion. As of As of December 31, 1995, the fair market value of the December 31, 1994, the Company had reclassified $45 million Company's long-term debt was $936.5 million in comparison of short-term debt as long-term debt ("Term Loan") in recog-to the book value of $853.9 million. As of December 31, 1994, nition of the expected refinancing on a long-term basis and the fair market value of the Company's long-term debt was long-term financing capability provided by the credit lines.

$752.5 million in comparison to the book value of $774.6 mil-During 1995, this short-term debt was repaid resulting in no lion. The fair market value of the Company's long-term debt term loan balance as of December 31, 1995. The Company was based on quoted market prices of the Company's securi-generally is required to pay commitment fees for its credit ties or securities with similar characteristics.

lines. The lines of credit are periodically reviewed by the Company, at which time they may be renewed or canceled.

13. Commitments The Company currently estimates its expenditures for con- tract are based on the quantity of nuclear fuel burned by the struction of utility plant, excluding AFUDC, and commitments plants. The Company's obligation under the contract generally for purchases under fuel supply contracts, excluding nuclear is the net book value of the nuclear fuel financed, which was fuel, to be approximately $223 milliqn in 1996 and $236 mil- $31.7 million as of December 31, 1995.

lion in 1997.

The Company leases an 11.9% interest in the Merrill Creek The Company has a 26-year agreement with Star Enterprise, Reservoir. The lease is considered an operating lease and effective through May 2018, to purchase 48 MW of capacity paymen.ts over the remaining lease term, which ends in 2032, supplied by the Delaware City Power Plant. As discussed are $158. I million in aggregate. The Company also has long-in Note 4 to the Consolidated Financial Statements, the term leases for certain other facilities and equipment.

Company also has agreements to purchase* capacity and energy Minimum commitments as of December 31, 1995, under the from PECO effective June 19, 1995, through May 31, 2006. Merrill Creek Reservoir lease a~d all other noncancelable Under the terms of these agreements, the Company's expected lease agreements (excluding payments under.the nuclear fuel commitments for capacity and energy charges are as follows: energy contract which cannot be reasonably estimated) are as 1996-$57.6 million; 1997-$58.6 million; 1998-$63.6 follows: 1996-$6. I million; 1997-$6.1 million; 1998-$6.1 million; 1999-$70.9 million; 2000-$77.3 million; after million; 1999-$6.0 million; 2000-$4.1 million, after 2000-2000-$505.5 million; total-$833.5 million. $140.9 million; total-$169.3 million. Approximately 93% of the minimum lease commitments shown above are payments The Company's share of nuclear fuel at Peach Bottom and due under the Merrill Creek Reservoir lease.

Salem is financed through a nuclear fuel energy contract which is accounted for as a capital lease. Payments under the con-Rentals Charged to Operating Expenses The following amounts were charged to operating expenses for rental payments under both capital and operating leases:

(Dollars in Thousands) 1995 1994 1993 Interest on capital leases $1,773 $1,560 $1,296 Amortization of capital leases 8,044 11,456 10,243 Operating leases 13,619 14,552 15,176

$23,436 $27,568 $26,715 II Delmarva Power & Light Company

14. Pension Plan The Company has a defined benefit pension plan covering all than the maximum tax deductible contribution. Pension plan regular employees. The benefits are based on years of service assets consist primarily of equity securities, fixed income and the employee's compensation. The Company's funding securities, and cash equivalents.

policy is to contribute each year the net periodic pension cost The following schedules show the funded status of the plan, for that year. However, the contribution for any year will not the components of pension cost, and assumptions.

be less than the minimum required contribution nor greater Reconciliation of Funded Status of the Plan As of December 3 I, (Dollars in Thousands) 1995 1994 Accumulated benefit obligation Vested $338,485 $265,597 Nonvested 26,024 19,311 364,509 284,908 Effect of estimated future compensation increases 109,706 67,947 Projected benefit obligation 474,215 352,855 Plan assets at fair value 616,600 502,588 Excess of plan assets over projected benefit obligation 142,385 149,733 Unrecognized prior service cost 29,191 19,155 Unrecognized net gain {124,850) (129,842)

Unrecognized net transition asset {29,827) (33,141)

Prepaid pension cost $16,899 $5,905 Components of Net Pension Cost Year ended December 3 I, (Dollars in Thousands) 1995 1994 1993 Service cost-benefits earned during period $9,719 $10,939 $13,152 Interest cost on projected benefit obligation 30,654 26,574 26,411 Actual return on plan assets {135,850) 3,349 (58,247)

Net amortization and deferral 83,981 (52,60 I) 14,748 Net pension cost ${11,496) $( 11,739) $(3,936)

Assumptions 1995 1994 1993 Discount rates used to determine projected benefit obligation as of December 31 7.00°/o 8.25% 7.25%

Rates of increase in compensation levels 5.00°10 5.50% 6.50%

Expected long-term rates of return on assets 9.00% 8.25% 8.25%

The net pension cost excludes the expense recorded in 1994 The net 1994 pension cost reflects a decrease of $4.5 million under SFAS No. 88 for the Company's ERO. Prepaid pension attributed to a reduction in the assumed rate of increase in cost as of December 3 I, 1994, was reduced by the ERO. Refer compensation levels from 6.5% to 5.5%, effective January I, to Note 5 to the Consolidated Financial Statements for addi- 1994. Also, the discount rate was increased from 7.25% to tional information on the ERO. 8.25%, effective October I, 1994.

II Delmarv:J Power & Light Company

15. Postretirement Benefits Other Than Pensions The Company provides health-care and life insurance benefits trust funds consist primarily of investments in domestic equity to its retired employees and substantially all of the Company's securities and fixed income securities.

employees may become eligible for these benefits upon retire-The following schedules show the funded status of the plan, ment. The Company's policy is to fund its obligation to the the components of the cost of postretirement benefits other extent that costs are reflected in customer rates, including than pensions, and assumptions.

amounts which 'are capitalized. Plan assets held in external Reconciliation of Funded Status of the Plan As of December 3 I, (Dollars in thousands) 1995 1994 Accumulated postretirement benefit obligation (APBO)

Active employees fully eligible for benefits $6,019 $9,319 Other active employees 23,990 12,638 Current retirees 63,629 58,445 93,638 80,402 Plan assets at fair value 24,900 15,140 APBO in excess of plan assets 68,738 65,262 Unrecognized prior service cost (423)

Unrecognized net loss (5,212) (256)

Unrecognized transition obligation (61,493) (65,110)

Accrued/(prepaid) postretirement benefit cost $1,610 $(104)

Annual Cost of Postretirement Benefits Other Than Pensions Year ended December 3 I, (Dollars in thousands) 1995 1994 1993 Service cost-benefits earned during period $2,152 $2,127 $2,206 Interest cost on projected benefit obligation 6,601 5,520 5,613 Actual return on plan assets (1,008) 100 Amortization of the unrecognized transition obligation 3,617 3,617 3,617 Other, net 149 (481)

Net postretirement benefit cost $11,511 $10,883 $11,436 Assumptions 1995 1994 1993 Discount rates used to determine APBO as of December 3 I 7.00o/o 8.25% 7.25%

Rates of increase in compensation levels 5.00°/o 5.50% 6.50%

Expected long-term rates of return on assets 9.00°/o 8.25% 8.25%

Health-care cost trend rate 10.50°/o 11.00% 12.00%

The health-care cost trend rate, or the expecte"d rate of point would increase the accumulated postretirement benefit increase in health-care costs, is assumed to decrease to I0.0% obligation by $4.4 million and would increase annual aggregate in 1996 and gradually decrease to 5.5% by 2005. Increasing the service and interest costs by $0.3 million.

health-care cost trend rates of future years by one percentage

16. Contingencies Salem Outage tional problems and maintenance concerns. The units will The Company owns 7.41 % of Salem, which consists of two remain shut down until PSE&G makes the equipment and man-pressurized water nuclear reactors (PWR) and is operated by agement changes necessary to operate the units reliably over Public Service Electric & Gas Company (PSE&G). As of the long term. The restart of the units is subject to NRC December 3 I, 1995, the Company's net investment in plant authorization. In December 1995, PSE&G completed a in-service for Salem was approximately $57 million for Unit I workscope assessment of both units and estimated that Unit I and $60 million for Unit 2. Each unit represents approximately would return to service in the second quarter of 1996 and 2% of the Company's total assets and approximately 3% of the Unit 2 in the third quarter of 1996.

Company's installed electric generating capacity. On February 21, 1996, PSE&G informed the Company that Salem' Units I and 2 were removed from operation by PSE&G partial results from recent inspections of Unit I using a new on May 16, 1995, and June 7, 1995, respectively, due to opera- testing technology revealed indications of degradation in a sig-Delmarva Power & Light Company II

nificant number of steam generator tubes. PSE&G is continuing quality control, solid and hazardous waste disposal, and limita-its inspections and also will conduct further laboratory analysis tion on land use by various federal, regional, state, and local of the tubes with results expected in April 1996. Based on the authorities. The Company has incurred, and expects to contin-results of inspections to date, PSE&G has concluded that the ue to incur, capital expenditures and operating costs because Unit I outage will be extended for, an indefinite period to of environmental considerations and requirements. The dis-evaluate the state of.the steam generators and to subsequently posal of Company-generated hazardous substances can result determine an appropriate course of action. Degradation of in costs to clean up facilities found to be contaminated due to steam generators in PWRs has become of increasing concern past disposal practices. Federal and state statutes authorize for the nuclear industry. Nationally and internationally, utilities governmental agencies to compel responsible parties to clean have undertaken actions to repair or replace steam genera- up certain abandoned or uncontrolled hazardous waste sites.

tors. In the extreme, degradation of steam generators has The Company is currently a potentially responsible party contributed to the retirement of several American nuclear (PRP) at three federal superfund sites and is alleged to be a power reactors. third-party contributor at two other federal superfund sites.

The Company also has two former coal gasification sites in PSE&G also has informed the Company that recent steam Delaware and one former coal gasification site in Maryland, generator inspections of Unit 2 using the new testing tech-each of which is a state superfund site. The Company is cur-nology have revealed that the condition of the Unit 2 steam rently participating with the States of Delaware and Maryland generators is within current repair limits at the present time.

in evaluating the coal gasification sites to assess the extent of However, to confirm the Unit 2 test results, PSE&G also will contamination and risk to the environment. The Company has conduct laboratory analysis of the tubes for Unit 2. As a result accrued a liability of $2 million for clean-up and other poten-of the delay in the restart of Unit I, PSE&G is focusing its tial costs related to the federal and state superfund sites. The efforts on the return of Unit 2 to service in the third quarter Company does not expect such future costs to have a material of 1996, as scheduled. However, the Company cannot predict effect on the Company's financial position or results of operations.

when the NRC will approve the restart of the unit or when the restart actually will occur. Nuclear Insurance In 1995, the Company incurred higher than expected In the event of an incident at any commercial nuclear power operation and maintenance costs at Salem of approximately plant in the United States, the Company could be assessed for

$5 million, which reflect the operational problems at the plant. a portion of any third-party claims associated with the inci-These costs were expensed as incurred. Also, outage-related dent. Under the prpvisions of the Price Anderson Act, if third replacement power costs were estimated to be approximately party claims relating to such an incident exceed $200 million

$8 million. One-half of the estimated replacement power costs (the amount of primary insurance), the Company could be was expensed and the other one-half was deferred on the assessed up to $23.7 million for such third-party claims. In Company's Consolidated Balance Sheet in expectation of addition, Congress could impose a revenue-raising measure on future recovery. Based on PSE&G's current estimates, the the nuclear industry to pay such claims.

Company estimates that its share of additional costs related to The co-owners of Peach Bottom and Salem maintain property the outage in 1996 will consist of operation and maintenance insurance coverage in the aggregate amount of $2.8 billion for costs ranging from $4 million to $7 million, which will be each unit for loss or damage to the units, including coverage expensed as incurred, and replacement power costs while the for decontamination expense and premature decommissioning.

units are out of service of approximately $750,000 per month, The Company is self-insured, to the extent of its ownership per unit. In total, the Company estimates that its share of interest, for its share of property losses in excess of insurance outage-related costs in 1996 will range from $17 million to coverages. Under the terms of the various insurance agree-

$22 million. However, these 1996 estimates could change as ments, the Company could be assessed up to $5.4 million in a result of PSE&G's analysis of the degradation of the steam any policy year for losses incurred at nuclear plants insured by generator tubes. Beyond 1996, the Company cannot predict the insurance companies.

the amount of outage-related costs it could incur. During 1996, the Company plans to file a proposal with the DPSC, The Company is a member of an industry mutual insurance the Company's primary rate jurisdiction, for recovery of company, which provides replacement power cost coverage in replacement power costs. the event of a major accidental outage at a nuclear power plant.

The premium for this coverage is subject to retrospective Since the periods during which these units will be out of ser- assessment for adverse loss experience. The Company's pre-vice, the extent of the maintenance that will be required, and sent maximum share of any assessment is $1.4 million per year.

the costs of replacement power and the extent of its recovery may be different from those currently anticipated, the actual Other costs to be incurred by the Company may vary from the fore- The Company is involved in certain legal and administrative going estimates. proceedings before various courts and governmental agencies Environmental Matters concerning rates, fuel contracts, tax filings, and other matters.

The Company expects that the ultimate disposition of these The Company is subject to regulation with respect to the proceedings will not have a material effect on the Company's environmental effects of its operations, including air and water financial position or results of operations.

II Delmarva Power & Light Company

17. Supplemental Cash Flow Information Cash Paid during the Year for Year Ended December 31, (Dollars In Thousands) 1995 1994 1993 Interest, net of capitalized amount $62,660 $57,837 $58,154 Income taxes, net of refunds $66,764 $67,922 $72,384

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

Condensed Subsidiary Statements of Income (Dollars In Thousands) 1995 1994 1993 Revenues and Gains Landfill and waste hauling $13,505 $14,186 $11,745 Operating services 26,564 22,468 22,118 Real estate 5,820 4,450 1,677 Leveraged leases 1,772 272 835 Other revenue 4,381 1,766 1,261 52,042 43,142 37,636 Costs and Expenses Operating expenses 45,594 38,499 36,424 Interest expense, net 492 370 Income tax expense (benefit) 1,810 47,896 1,921 40,790 (596) 35,828 e Net income $4,146 $2,352 $1,808 Earnings per share of common stock attributed to subsidiaries $0.07 $0.04 $0.03 Condensed Subsidiary Balance Sheets (Dollars In Thousands)

As of December 31, Liabilities and As of December 31, Assets 1995 1994 Stockholder's Equity 1995 1994 Current assets Current liabilities Cash and cash equivalents $19,483 $8,631 Debt due within one year $506 $489 Other 6,633 5,702 Variable rate demand bonds 15,000 26,116 14,333 Other 7,801 6,873

. Noncurrent assets 23,307 7,362 Investment in Leveraged leases 48,367 49,595 Noncurrent liabilities Other 9,925 4,354 Long-term debt

• 4,713 5,225 Landfill & waste hauling Deferred income taxes 50,064 53,592 property, plant & equipment 24,177 25,424 Other 2,389 2,342 Other 9,778 9,558 57,166 61,159 92,247 88,931 Stockholder's Equity 37,890 34,743 Total $118,363 $103,264 Total $118,363 $103,264 Delmarva Power & Light Company

_J

19. Segment Information Segment information with respect to electric and gas operations was as follows:

(Dollars In Thousands) 1995 1994 1993 Electric Operations Operating revenues $899,662 $883,115 $875,663 Operating income 165,914 153,409 154,412 Depreciation 105,780 102,746 94,549 Construction expenditures 118,655 133,884 142,238 Gas Operations Operating revenues 95,441 ,, 107,906 94,944 Operating income 12,492 9,747 9,727 Depreciation 7,242 6,777 6,380 Construction expenditures 16,959 20,235 17,753 Identifiable Assets, Net Electric 2,493,797 2,314,448 2,297,050 Gas 189,339 188,813 160,618 Assets not allocated 183,549 166,524 164,811

20. Quarterly Financial Information (Unaudited)

The quarterly data presented below reflect all adjustments, normally vary seasonally because of temperature variations, consisting of normal recurring accruals and unusual items

• differences between summer and winter rates, the timing of as noted below, necessary in the opinion of the Company rate orders, and the scheduled downtime and maintenance of for a fair presentation of the interim results. Quarterly data electric generating units.

Earnings Earnings Applicable Average per Quarter Operating Operating Net to Common Shares Average Ended Revenue Income Income Stock Outstanding Share (Dollars in Thousands) (In Thousands) 1995 March 31 $257,600 $48,252 $35,408 $32,889 59,738 $0.55 June 30 213,228 34,178 19,444 16,962 60,109 0.28 September 30 283,065 60,960 42,714 40,238 60,372 0.67 December 31 241,210 35,016 19,922 17,457 60,651 0.29

$995,103 $178,406 $117,488 $107,546 60,217 $1.79 1994 March 31 $292,394 $53,770 $39,641 $37,377 59,022 $0.63

• ')

June 30 218,465 33,994 20,776 18,453 59,402 0.31 September 30 260,601 42,921 29,366 27,008 59,542 0.46 December 31 219,561 32,471 18,527 16,102 59,542 0.27

$991,021 $163, 156 $108,310 $98,940 59,377 $1.67 In the third quarter of 1994, the Company expensed In the fourth quarter of 1994, the Company reduced the the costs associated with the ERO (Note 5 to the rate of salary increase assumed for computation of pension Consolidated Financial Statements), which decreased cost, effective January I, 1994, which increased net income net income by $10.7 million ($0.18 per share). by $2.1 million ($0.03 per share).

Delmarva Power & Light Company II I

____* I

Consolidated Statistics 1995 1994 1993 1992 1991 9, Electric Revenues (Thousands) Residential $344,351, $312,224 $305,446 $273,463 $275,888 Commercial 267,239 242,506 237,785 220,659 218,558 Industrial 155,108 145,594 150,178 144,094 144,272 Resale 58,680 105,350 104,983 96,491 98,785 Other sales revenues(I) 14,211 6,816 9,716 7,142 5,961 Sales revenues 839,589 ~12,490 808,108 741,849 743,464 0

Interchange deliveries 47,271 62,388 61,437 30,606 33,523 Miscellaneous revenues 12,802 8,237 6,118 7,720 7,612 Total electric revenues $899,662 $883,115. $875,663 $780,175 $784,599 Electric Sales

( 1,000 Kilowatt-Hours) Residential 3,829,807 3,578,743 3,499,387 3,228,237 3,236,616 Commercial 3,744,879 3,461,058 3,336,847 3,140,149 3,098,599 Industrial 3,351,834 3,248, 131 3,232,233 3,115,677 3,105,338 Resale 1,213,459 2,166,154 2,131,920 1,987,393 1,952,312 Other sales(2) 170,942 50,996 79,843 49,355 67,415 Total electric sales 12,310,921 12,505,082 12,280,230 11,520,811 11,460,280 Electric Customers (End of Period) Residential 386,948 347,997 342,710 336,076 330,632 Commercial 48,345 44,060 43,324 42,427 41,539 Industrial 704 699 715 726 753 Resale 12 12 12 12 12 Other 641 604 593 578 566 Total electric custo.mers 436,650 393,372 387,354 379,819 373,502 Gas Revenues (Thousands) Residential $47,135 $55,091 $47,022 $43,147 $35,636 Commercial 2;4,458 28,088 23,065 20,175 16,370 Industrial 14,588 17,589 17,586 15,365 14,395 Interruptible and other(I) 6,969 5,498 6,274 3,775 3,746 Gas transported 1,870 1,191 561 1,032 710 Miscellaneous revenues 421 449 436 375 365 Total gas revenues $95,441 $107,906 $94,944 $83,869 $71,222 Gas Sales and Gas Transported Residential 7,328 7,717 7,311 7,264 6,410 (Million Cubic Feet) Commercial 4,809 4,746 4,423 4,286 3,653 Industrial 3,935 3,858 4,348 4,358 4,398 Interruptible and other(2) 2,406 i,766 1,984 1,105 1,113 Total gas sales 18,478 18,087 18,066 17,013 15,574 Gas transported 2,893 2,255 1,539 3,155 2,610 Total gas sales and gas transported 21,371 20,342 19,605 20,168 18,184 Gas Customers (End of Period) Residential 90,890 88,518 86,027 82,996 80,874 Commercial 7,369 6,982 6,751 6,500 6,313 Industrial 146 150 150 152 154 Interruptible and other Total gas customers 98,417 12 95,662 12 92,940 12 89,659 11 87,351 10 -

e (I) Includes unbilled revenues.

(2) Includes unbilled sales.

L*

Delmarva Power & Light Company

Quarterly Common Stock Dividend and Price Ranges The Company's common stock 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 56,646 holders of common stock as of December 3 I, 1995.

Dividend Price Dividend Price 1995 Declared High Low 1994 r.J Declared High Low First Quarter $.38 1/2 $20 $17 7/e First Quarter $.38 l/i $23 5/a $20 l/i Second Quarter $.38 1/2 $21 1/4 $19 */e Second Quarter $.38 l/i $21 $16 7/a Third Quarter $.38 1/2 $23 $19 1/z Third Quarter $.38 l/i $20 $17 3/4 Fourth Quarter $.38 1/2 $23 s/e $21 7/e Fourth Quarter $.38 l/i $19 l/4 $17 5/a Shareholder Services Transfer Agents and Registrars Carol C. Conrad, Assistant Secretary First Mortgage Bond Trustee Delmarva Power & Light Company Chemical Bank 800 King Street, P.O. Box 23 I 450 West 33rd Street Wilmington, Delaware 19899 New York, New York IOOO I or Common and Preferred Stock Wilmington Trust Company Wilmington Trust Company Corporate Trust Operations Corporate Trust Operations P.O. Box 2111 P.O. Box 2111 Wilmington, Delaware 19899 Wilmington, Delaware 19899 Telephone (302) 429-3355 or toll-free (800) 365-6495 Walk-in office:

I I 05 N. Market Street Stock Symbol Wilmington, Delaware Common Stock, DEW-listed on the New York and Philadelphia Stock Exchanges Additional Reports To supplement information in this Annual Report, a Financial Annual Meeting and Statistical Review ( 1985-1995) and the Annual Report on The Annual Meeting will be held on May 30, 1996, Form I 0-K are available upon request. Please write to:

at I I:00 a.m. in the Clayton Hall, University of Delaware, Newark, Delaware. Delmarva Power & Light Company c/o Wilmington Trust Company Regulatory Commissions Corporate Trust Operations P.O. Box 2111 Federal Energy Regulatory Commission Wilmington, Delaware 19899 Elizabeth A. Moler-Chairperson 825 North Capitol Street, N.E.

Duplicate Mailings Washington, D.C. 20426 You may be receiving more than one copy of the Annual Delaware Public Service Commission Report because of multiple accounts within your household.

Dr. Robert J. McMahon-Chairperson The Company is required to mail an Annual Report to each 1560 S. duPont Highway name on the shareholder list unless the shareholder requests P.O. Box 457 that duplicate mailings be eliminated. To eliminate duplicate Dover, Delaware 19903-0457 mailings, please send a written request to Wilmington Trust Company at the above address and enclose the mailing labels Maryland Public Service Commission from the extra copies.

H. Russell Frisby Jr.-Chairperson 6 St. Paul Street More Information Baltimore, Maryland 21202-6806 For more information about Delmarva Power, visit our Internet site:

Virginia State Corporation Commission Hullihen W. Moore--Chairperson http://www.delmarva.com Tyler Building P.O. Box I 197 Richmond, Virginia 23209 II Delmarva Power & Light Company

Officers as of December 3 I, 1995 Board of Directors Committees Howard E. Cosgrove, Chairman of the Board, 'President, Audit Committee and Chief Executive Officer James C. Johnson, Chairperson; Robert D. Burris; Audrey K. Doberstein Joseph W. Ford, Senior Vice President tfl' Compensation Committee Barbara S. Graham, Senior Vice President, Treasurer, and Chief Financial Officer Sarah I. Gore, Chairperson; Michael B. Emery; James H.

Gilliam Jr.; James C. Johnson Ralph E. Klesius, Senior Vice President Executive Committee Thomas S. Shaw, Senior Vice President/President, Delmarva Capital Investments, Inc. Howard E. Cosgrove, Chairperson; Sarah I. Gore, Vice Chairperson; Michael B. Emery; James C. Johnson Donald E. Cain, Vice President, Administration Investment Committee Paul S. Gerritsen, Vice President Howard E. Cosgrove, Chairperson; Audrey K. Doberstein; Wayne A. Lyons, Vice President James H. Gilliam Jr.; Weston E. Nellius Frank J. Perry Jr., Vice President, Production Nominating Committee Dale G *. Stoodley, Vice President and General Counsel Audrey K. Doberstein, Chairperson; Michael G. Abercrombie; Weston E. Nellius

• W. Douglas Boyce, Vice President, Central Division Nuclear Oversight Committee Donald P. Connelly, Secretary Michael G. Abercrombie, Chairperson; Robert D. Burris; Hudson P. Hoen Ill, Vice President, Southern Division Howard E. Cosgrove James P. Lavin, Comptroller and Chief Accounting Officer Dennis R. McDowell, Comptroller-Operating Dividend Reinvestment and Duane C. Taylor, Vice President, Electric Systems Engineering Common Share Purchase Plan Jack Urban, Vice President, Gas Division More than 40% of the Company~s commcfn shareholders of record are now participating in the Dividend Reinvestment D. Wayne Yerkes, Vice President, Northern Division and Common Share Purchase Plan. If you are not participating, you may want to consider the benefits of joining this plan.

Under the plan, you can invest your cash dividends and also invest additional cash, up to $100,000 per calendar year, to purchase additional shares of common stock without a service fee. You may obtain a prospectus with the plan description and an enrollment authorization card by writing to:

Delmarva Power & Light Company clo Wilmington Trust Company Corporate Trust Operations P.O. Box 2111 Wilmington, DE 19899 Delmarva Power & Light Company II