ML18102A963
| ML18102A963 | |
| Person / Time | |
|---|---|
| Site: | Salem, Hope Creek  |
| Issue date: | 12/31/1996 |
| From: | Cosgrove H DELMARVA POWER & LIGHT CO. |
| To: | |
| Shared Package | |
| ML18102A960 | List: |
| References | |
| NUDOCS 9704150106 | |
| Download: ML18102A963 (60) | |
Text
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DELMARVA POWER 1996 ANNUAL REPOR T x-.z7a.
118'ltJ7
- NOTICE -
Cf7v¥/-/3o J!)O THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE INFORMATION &
RECORDS MANAGEMENT BRANCH.
THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUSTBERETURNEDTOTHE RECORDS & ARCHIVES SERVICES SECTION, TS C3. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE REFERRED TO FILE PERSONNEL.
- NOTICE -
NS WE WILL INCREASE OUR CUSTOMER CONNECTIONS THROUGH TAILORED SERVICES THAT EXTEND OUR CORE ENERGY EXPERTISE AND GR OW OUR BUSINESS.
9704150106 970408 PDR ADOCK 05000272 I
% Increase 1996 1995 (Decrease)
$ l,094,961,000
$ 995,103,000 10.0 et Income
$ 116,187,000
$ 117,488,000 (1.1)
Earnings per Share
$ 1.77
$ l.79 (1.1)
Dividends Declared per Sha re
$ 1.54
$ 1.54 Electri c Sales 12,925,716 mWh 12,310,921 mWh 5.0 Gas Sales & Transportation 24,157,000 mcf 21,371,000 mcf 13.0 Electri c Customers 442,116 436,650 1.3 Gas Customers 100,904 98,417 2.5
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2 DEAR FELLOW SHAREHOLDER, The rapid pace of deregulation continues to reshape our industry and our Company. Wi thin the next few years, all customers will be able to choose their energy suppliers. Last year, eight states either announced plans to initiate experimental competition programs or actually began programs, which allow a limited number of customers to shop around for an energy supplier. As of January 1997, 28 other states and the District of Columbia are taking steps that are expected to lead to open and competitive energy markets.
In a regulated environment, power companies provided a standard set of services wi th a one-size-fits-all approach. We must now focus on providing customized services that meet individual customer needs. We see the utility business dividing into three segments: supply, delivery, and servi ces. Supply consists of the production and procurement of energy com-modities-electri city and natural gas. Deli very deals with bringing electricity and gas to customers through wires and pipes. Services markets energy and other energy-related offerings to customers.
We expect energy delivery to remain a regulated utility business with a franchised service area. However, customers will have multiple options of who supplies their energy and who provides them with services for their homes and businesses.
Bu I LD I NG VALUE. Our challenge for tomorrow is to distinguish ourselves in a business where value to the customer will determine our measure of success. Through our growth strategy, we're ex tending our core energy business expertise to meet individual customer needs. We believe this strategy will enable us to bring increased value to customers and provide you with a greater return on your investment.
Before I outline our strategy in more detail, let's briefly review the Company's 1996 perfor-mance and our efforts to bring about customer choice.
A STRO NG C 0 RE BUS INES S. Delmarva Power's core regulated electric and natural gas busine s had a strong year and 1996 earnings would have surpassed last year's results if the Salem uclear Generating Station outage had not continued throughout 1996.
Increased expenses at Salem, related to shutdowns of two generating units in 1995, reduced 1996 earnings by $0.19 per share. As a minority owner of Salem, we believe the shutdowns could have been avoided. We've filed legal suits to recover costs associated with Salem to minimize financial impact on our customers and shareholders. Public Service Electric & Gas Company, Salem's operator, reports it is making progress in returning the units to service and expects to restart both Salem units during 1997.
Through 1996, we are still one of the low-cost energy providers in the Mid-Atlantic region.
We've accomplished this through tight cost control during the past few years. Keeping an eye on expenses, we have concentrated on delivering reliable, high-quality energy service.
In our 1996 annual customer survey, more than eight out of 10 customers gave us a favor-able rating. These res ults position us well for the transition to customer choice.
BRINGING CHOICE To CUSTOMERS. In the next year, people across the country from California to New England, including our neighbors in Pennsylvania, will be free to buy energy and related services from any supplier or provider.
We support customer choice and we're leading the way in the States of Delaware and Maryland. In February 1996, we proposed to the Delaware and Maryland Public Service Commissions a collaborative process to bring about customer choice within the next 18 months. This process enables regulators, customers, and the Company to develop a blueprint for customer choice that represents the interests of everyone and benefits all customers.
The Company has prepared itself for competition. We are confident that our high customer satisfaction, competitive prices, and strategy for growth will position us for success when customers have a choice.
STRAT EGY FOR GROWTH.
We plan to expand the number of connections we have with customers through broader corporate name recognition, mergers and acquisitions, and tailored services that enhance and complemen t our core energy business. This strategy seeks to establish long-term customer relationships by offering customized services that provide comfort, convenience, and efficiency. We made significant progress im plementing this strategy in 1996.
Last year we announced a plan to merge with Atlantic Energy. Atlantic Energy shares our vision of the opportunities that exist in our changi ng industry. We also share a tradition and commitment to customer service excellence and a belief that our employees play a crucial role in our future success. Our planned merger will double our size and add nearly 500,000 connections with customers in southern New Jersey, who will receive energy ser-vice from our new combined company. We also annou nced a new name for our merged com-pany, "Conectiv." Thi name reflects our strategy and will give our new company a broader reach-a chance for us to build a strong rep utation in areas outside our existing service area where people don't recognize the Delmarva Power name.
3
4 We initiated customized service relationships, which include consolidated utility billing and energy management, with prominent and respected area companies. We also purchased five HVAC (heating, ventilation, and air conditioning) companies, three in our traditional service territory and two in nearby Pennsylvania. We are taking advantage of a provision in the Telecommunications Act of 1996, which allows utilities to provide telecommunications ser-vices. As the operator of Delaware's second-largest communications system, and with over 400 miles of fiber optic cable on the Delmarva Peninsula, we can play a role in the telecom-munications market through a subsidiary compan y, Conectiv Communications, Inc.
Our service agreements, HVAC acquisitions, and telecommunications ac tivities represent our efforts to extend our core energy business and connect to customer needs. For example, those who live outside our service territory and buy HVAC services or any other new service from us today, could buy energy from us tomorrow when they have a choice.
MAKING CONNECTIONS. Even in this environment of change, Delmarva Power employees still focus on customer satisfaction and service, teamwork and safety. They continue to do a great job for customers-responding to requests, restoring service during emergencies, and handling day-to-day tasks with skill, dependability, and courtesy.
Their knowledge and skills will enable us to seize opportunities for growth. This year's report highlights how we're expanding our connections.
In closing, I want to thank yo u for yo ur strong support at our special January meeting.
Eighty percent of you approved of our proposed merger with Atlantic Energy. I believe this reflects an affirmation of our strategy that will offer our customers and you, our shareholders, increased value.
Sincerely, Howard Cosgrove Chairman, President and Chief Executive Officer
If'
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S1'RA1'EGY 1' 0 0PPOR1'UNl1'1ES RIGHT NOW, SOME DELMARVA POWER CUSTOMERS MAY STILL THINK OF US AS A TRADITIONAL UTILITY. WE'RE OUT TO CHANGE THAT. WE'RE EXTENDING OUR ENERGY EXPERTISE TO OFFER CUSTOMIZED SERVICES THAT MEET INDIVIDUAL CUSTOMER NEEDS AND HELP US DISTINGUISH OURSELVES FROM COMPETITORS.
WE'RE INITIATING STRATEGIES TO TAKE ADVANTAGE OF NEW OPPORTUNITIES FOR GROWTH AS THE INDUSTRY CONTINUES TO RESTRUCTURE. We'll still light lights and fuel furnaces. We'll generate and deliver energy. Soon, however, our cus-tomers and people outside our traditional service territory will connect our name more and more with energy-related services that make their lives easier.
IN 1996, AS PLANNED. WE RESTRUCTURED DELMARYA POWER INTO THREE BUSINESS GROUPS THAT ALLOW US TO FOCUS ON DIFFERENT CUSTOMER MARKETS. Our core bu iness remains energy-electricity and natural gas. We're extending out from that core to meet the changing needs of cus-tomers who, because of deregulation, will soon be able to choose their energy sup-pliers. Our business groups concentrate on building strong customer relationships, so that when customers can choose, they'll think of us first.
ENERGY SERVICES SELLS ENERGY-ELECTRICITY AND NATURAL GAS-AND RELATED PREMIUM PRODUCTS AND SERVICES TO CUSTOMERS WITHIN THE COMPETITIVE REGIONAL MARKETPLACE.
Energy Services markets electricity and natural gas to a wide variety of retail customers. Through the creation of strong customer relationships and deep customer knowledge, Energy Services also identifies and designs tailored solutions to customers' specific energy and related needs. In 1996, Energy Services launched a retail market strategy, extending goods and services to customers in the greater Mid-Atlantic region. We established two subsidiary businesses-a heating, ventilation, and air conditioning (HVAC) company; and a company offering fiber optic access to businesses and telecommunications com-panies. These subsidiaries provide a plat-form from which Energy Services can expand the breadth of services we offer to include electrical, appliance services, refrigeration, and plumbing. Energy Services works with commercial customers to provide tailored contractual services, 7
8 INDUSTRY CHANGE EXCLUSIVE FRANCHISE DEFINED MODEST GROWTH LIMITED REGULATION SERVICE PRODUCTS TERRITORIES AND SERVICES (OM PETITION DEREGULATION GEOGRAPHIC SIGNIFICANT GROWTH BROAD ARRAY OF PRODUCTS EXPANSION AND SERVICES The rapid pace of restructuring continues to reshape our industry and our company.
such as utility management; outdoor lighting design; and substation design, construc-tion, and management, at sites within and outside of our traditi onal service territory.
In the future, Energy Services will continue marketing energy and creating innovative products and services for business and resi-dential service-seeking customers. Energy Services is laying the groundwork for worry-free service to regional customers, so that we can move swiftly outward from our present territory when opportunities arise.
ENERG Y SUPPLY FUR NISHE S NEW AND EXISTI NG CUSTOMERS 'dJ TH A COMPLE E PACKAGE OF ENERGY COMMODITY PRODUCTS AND SERVICES. Energy Supply focuses on commodity energy markets and oversees the operation of our power plants. These generating assets were built to produce power for our regulated utility customers.
As industry restructuring accelerates, energy production will enter the competi-tive generation market, elling to power pools and other broad groups of customers in a much wider region.
Energy Supply has finalized long-term con-tracts with wholesale municipal customers.
These commitments resulted in significant revenue and strengthened our relationships with municipals, who are long-time cus-tomers. With our other business groups, Energy Supply provides utility-related ser-vices, such as substation maintenance, materials management, and distribution engineering and construction, to municipal and cooperative customers.
The Energy Supply group established new wholesale customer relationships during 1996, which led to an energy contract with a municipal customer in northern New Jersey. We also teamed with Texas-Ohio Gas to participate in an experimental com-petition program in New York. We provided energy to four commercial/industrial cus-tomers and gained valuable experience in supplying energy to customers outside the Company's traditional service area.
In the future, Energy Supply will use its experience in the operation of power plants, knowledge of energy markets, and expertise
in moving energy throughout the region to capture new customers. Energy Supply will leverage the existing gas and electric physical assets to meet our customers' needs, maintain market flexibility, and move rapidly to develop new and innovative energy products.
REGULATED DELIVERY SERVICES PROVIDES HIGH VALUE UTILITY DELIVERY SERVICES TO CUSTOMERS IN THE REGION. \\Vhen customers think of reliable service, Regulated Delivery Services can take the credit. In charge of the "wires and pipes" through which electricity and natural gas are delivered, thi s business group remains the most traditional, utility-oriented part of Delmarva Power, and, as its name suggests, will remain regulated. Regulated Delivery plays an integral role in profitability as retail wheeling becomes more of a reality.
As owners and operators of the wires and pipes through which electricity and gas are delivered-known as the infrastructure-we must receive fair payment for every kilowatt of electricity and cubic foot of gas traveling over or through those lines. Thus, Regulated Delivery Services, as the delivery arm of Delmarva Power, will bring in steady income as competition enters our area.
In the future, Regulated Delivery Services will continue to reduce the cost of energy delivery, which in turn will help keep our costs low while providing reasonable return. Regulated Delivery also plans to maximize the utilization of poles, wires, and pipes, increasing our earnings. The group will continue to find ways to improve customer service. As the value of customer relationships goes up, excellent customer service is essential to maintaining and building good relationships with all our customers.
OUR CORPORATE SUPPORT GROUPS OR K WITH EACH BUSIN ESS UNIT TO SU PPORT THEIR MISSIO NS AND ENSURE THEIR COST - EFFECTIVE, EFFICIE NT OPERATIO N.
As we move from a highly regulated busi-ness to one competing for customers, how do we make sure the whole company is operating cost effectively? How do we keep customers and potential customers apprised of Delmarva Power's expansion and the meaning of competition for them? How do we determine and adhere to the complicated legalities in both regulated utility and com-petiti ve activities? \\Vhat do the changes mean to employees and how do we commu-nicate them? Our support groups answer these complex questions every day. In the changing regulatory environment, such attention to detail and creative initiative are important to our continued success.
THE I N CREASI ~ GL Y CO_M ETIT E ENERGY BUS IN ESS FRAG M ~N TS CU STOMERS I N 0 DIY_ERS E SEGMENTS ~ I TH DIF ER ENT N~EDS
. To meet customer needs, each business group focuses on specific markets and extends services out from our core energy business. Each group holds in com-mon an emphasis on strong customer rela-tionships and solutions tailored to specifi c customer needs.
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CONNECTING... =:J-SERVICE ro CUSTOMERS WE'RE REACHING OUT TO CUSTOMERS, ON THE PHONES, IN THE FIELD, AND IN PEOPLE'S HOMES. THROUGH THESE LONG - TERM, BROAD RELATIONSHIPS, WE STAY IN TUNE WITH CUSTOMER NEEDS AS THEY CHANGE. WHEN CHOICE COMES, THOSE WE'VE SERVED WILL KNOW US AS FRI END LY, HELPFUL, AND INFORMATIVE-THE RIGHT CHOICE FOR THEIR ENERGY COMPANY.
OUR CUSTOMER SERVICE REPRESENTATIVES KEEP OUR PRESENT CUSTOMERS WELL INFORMED AND ARE POISED TO HANDLE MORE CUSTOMERS. Our most common contact with our customers occurs through our customer service representatives. These employees must remain knowledgeable about our expanding programs, services, and products to support our growth efforts.
As we gain more customers with diverse needs, how can we keep the process respon-sive, friendly, and efficient? We're already staffed seven days a week. And on-line information about our offerings enables each of our representatives to respond quickly to customer requests. To meet the increasing needs of our customers for infor-mation and support, we've begun a process of customer service redesign. We will soon begin consolidating customer service func-tions for even greater efficiencies that will help us satisfy the increased number of customers who want and expect more from us every day.
AS CHOLCE HAS EE!'J INT~O~UCED INTO OTl::LEB AREAS OF THE COUNTRY, WE HA~~
BEEN WATCHING ATTEJ'JTIYELY We've discovered that people want more informa-tion so they can make rational choices. For our customers and people we see as future customers, we're becoming an information source about choice and change. We're keeping customers involved in the deregula-tion process in Maryland and Delaware and we've kept Delmarva Power in the public eye. Our corporate World Wide Web site (http://www.delmarva.com) takes our story into homes and businesses everywhere and will expand our reach through interactive service and payment pages for even more customer convenience. When the time comes to choose, we believe customers will buy from the people they've been talking to and getting services from all along-us.
THE MORE CONYENI£NC WE OF.FER CUSTOMERS, T~E MOR E BECOM INTEGRAL PART OF THELH LIVES. Our customers already look to us for electricity and natural gas, as well as other products and services, such as surge suppressors and lighting installation. We've streamlined the payment process for our energy and related services. Our HVAC subsidiary companies keep homes and businesses comfortably heated and cooled. When deregulation comes, all these customers will look to us for more convenience. We're ready to serve them.
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CONNECTING...
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l'RA01r10NAL SrRENGrHs ro FuruRE SuccEss WE'RE PREPARING FOR CONTINUED SUCCESS IN THE COMPETITIVE FUTURE. THAT SUCCESS BUILDS ON OUR TRADITIONAL STRENGTHS, INCLUDING RELIABLE SERVICE AND CUSTOMER TRUST AND FAVORABILITY. THESE IN TURN RELY ON ANOTHER OF OUR TRADITIONAL STRENGTHS-OUR EMPLOYEES.
LIKE UTILITY CUSTOMERS EVERYWHERE, OURS DEPEND ON RELIABLE ELECTRICITY AND NATURAL GAS SERVICE AT HOME AND AT WORK. More than 90% of our cus-tomers consider our service reliable. We maintain reliability through consistent monitoring of and improvements in our system operations, continual inspection of our electric and gas lines to ensure their safety and integrity, and safe operation of our power plants. Even the best power companies suffer outages occasionally, a we did in the southern half of our territory in May of 1996. We acted on the outage immediately, alerting media, police, and emergency personnel throughout the affected area. We restored power and kept people informed over the course of the day. By 6:00 p.m., everyone's power was back on.
We determined the cause of the outage and continued our straightforward approach, explaining its cause and thanking customers for their patience. Customers appreciated our candor. We not only had restored their power, we had reaffirmed their trust.
CUSTOMERS TRUST US TO BE CONCERNED FOR THEIR SAFETY. When surveyed in mid 1996, more than eight in 10 customers rated Delmarva Power positively in its regard for customer safety. We attribute this continued high percentage in part to our ongoing, multi-media customer safety campaign. In 1996, this campaign featured free videos, brochures, cooperative pro-grams with local police, commercials on radio and television, and dramatic in-school safety presentations. We also emphasize company-wide safety relent-les ly. In 1996, we saw a continued decline in our already low number of on-the-job injuries-more than 98% of our employees remained injury-free last year.
For 1997, we've committed ourselves to higher standards, shooting for a 98.5%
injury-free rate.
13
14 TRUST IS CAR RIED PERSO N-TO-PERSO N THROUG H EMPLOYEES. Our employees have a strong commitment to our customers and our communities. An example we're particularly proud of is Meals on Wheels.
In 1996, the friendly people delivering a hot lunch from Meals on Wheels to elderly, homebound people in Wilmington were most likely Delmarva Power volunteers. In 1997, more people will be seeing more meals delivered by more Delmarva Power volunteers as we expand our Meals on Wheels involvement. During the next school year, we'll also beef up our success-ful volunteer tutoring th rough the HOSTS (Help One Student To Succeed) program.
Overall, in 1997 more people will see more of us walking with them, talking with them, and helping them keep our communities good places to live.
OUR EMPLOYEES PLAY A KEY ROLE IN ENVIRONME NTAL STEWARDSHIP EFFORTS.
In September of 1996, 2,500 Delmarva Power volunteers and other peninsula citi-zens gathered for Coastal Cleanup, one of our most popular Serving and Conserving Delmarva events. The group netted almost 70,000 pounds of debris from 193 miles of Delmarva Peninsula beaches and rivers.
And the fish in those ri vers are thriving, in large part because of our volunteers who run our power plant fis h hatcheries.
These volunteers have raised thousands of shad and largemouth bass for release and have helped to tag and trac k these fish. Delmarva Power and its volunteers helped usher in spring at Earth Day events, di stributing thousand s of free dogwood and Douglas fir seedlings. And, in late 1996, with the Boy Scouts of America's "Exploring" Program for young men and women ages 14 through 21, we formed an Environmental Explorer Post to help participants learn about environ-mental careers.
CUSTOMERS FI ND DELMARVA PO WER RELIABLE, FI NANCIALLY SOU ND, WELL MANAGED, AND EASY TO DEAL WIJH.
Who are those customers thinking of when they think of Delmarva Power? "That won-derful woman who straightened out my bill," or " those polite, professional line-men, who fixed the power so fas t." Our mailboxes are full of congratulatory and thankful letters from people whose experi-ences with employees, on and off the job, have been wholly positive. We're gratified by their efforts, but not surprised. After all, our employees have always been more than equal to the complex tasks presented to them every working day. They're solving
problems in the most cost-effective and efficient manner. And they are dedicated to keeping all of our customers satisfied.
OUR EMPLOYEES ARE THE VI TAL CON -
NECTION TO SUCCESS' Our employees build customer loyalty, provide reliable service, and provide a broad range of products and services that make our cus-tomers' lives easier. The customer loyalty we've built through these efforts will make it more difficult for future competitors to encroach on our territory. As we take our strong service attitudes and innovative solutions to new customers in other areas, we pave the way for expansion throughout the region. When competition exerts greater pressures, Delmarva Power em-ployees will find more opportunities for advancement and fin ancial rewards.
Having proven themselves every day as volunteers representing the Company off the job, or on the job as customer service representatives, marketers, media relations people, accountants, vice presidents, linemen, or managers, they're ready for the challenges of competition.
Strong, dedicated employees are essential to our winning more customers when com-petition and choice begin in earnest.
CUSTOMER FAVORAB IL ITY 100 83%
83%
84%
80 60 40 20 0
1992 1993 1994 1995 1996 Our customer favorability ratings position us well f or the transition to customer choice.
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0 N N E C T I N G. _*_ * -~
VALUE TO SHAREHOLDERS OUR STRATEGIC PLAN EXTENDS OUR CORE ENERGY BUSINESS OUTWARD TO A VARIETY OF CUSTOMER SEGMENTS AND BUILDS STRONG RELATIONSHIPS THAT KEEP THE NAME OF THE COMPANY FOREMOST IN CUSTOMERS' MINDS. AS WE SEIZE OPPORTUNITIES FOR GROWTH THROUGH MERGERS, ACQUISITIONS, ALLIANCES, AND ENERGY-RELATED SUPPORT OF OUR CUSTOMERS' BUSINESSES, WE WILL MAXIMIZE VALUE TO OUR SHAREHOLDERS.
THE FINANCIAL STRENGTH OF THE NEW COMPANY, (ONECT V WILL POSITION US TO TAKE ADVANTAGE OF COMPETI IVE OPPORTUNITIES AND PROVIDE YOU WIJH AN ABOVE-AVERAGE RETURN ON YOU INVESTMENT. In the near term, this return will come primarily from an above-average dividend. Over the long term, we expect our growth strategies to result in a rise in the value of our stock. Delmarva Power is entering competition in a strong financial position with excellent cash flow. Our Company promotes cost-effective and pro-ductive operations, encouraging and realizing company-wide cost savings.
OUR STRATEGIC PLAN FOR GROWTH DISTINGUISHES US FROM COMPETITORS.
It builds rationally and logically on a num-ber of givens. Over the next year, we'll complete our merger with Atlantic Energy and form Conectiv, a new company serving a million people. We'll continue to capi-talize on our location within 200 miles of one third of the nation's population. We'll reach out to that larger group offering them not only convenien t energy and related services, but also excellent customer sup-port through our service representatives and fi eld personnel. As we fully execute our plan, we will build our business to build value for our shareholders.
IN 1997, WE WILL MERGE WITH ATLANTIC ENERG Y, A STRONG COMP8NY WITH ATTRIBUTES AND CORE VALUES THAT COMPLEMENT OURS. The resulting new company will become Conecti v, whose focus will be to maximi ze value to our shareholders.
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l CONN E CTING..
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PROMISE l'O l'H E FUTURE DELMARVA POWER I S BECOM IN G CONECTI V. TH I S NE W NAME CAPTUR ES OUR BUSINESS STRATEGY FOR A CHANGING INDUSTRY. TH ROUG H IT, WE WI LL MA INTAIN TRADITIO NAL CONNECTION S AN D CREATE NEW ONES.
18 WITH THE COMPLETION OF THE MERGER OF DELMARVA POWER AND ATLANTIC ENERGY, A NEW COMPA NY WILL BE CREATED, CON ECTIV. Conectiv will serve a million customers in a service territory twice the size of the Delmarva Peninsula. This increase to our territory also increases the number of customers we serve and our opportunity for greater revenue gains. We plan to maximize Conecti v's growth possi-bilities and optimize shareholder value.
CONECTIV WILL BUILD ON OUR CUS -
TOMERS ' POSITIVE PERCEPTION OF OUR COMPA NY. Delmarva Power has been actively enhancing our traditional reputa-tion for service with broader offerings.
Our aim is to turn satisfi ed customers into loyal customers.
OUR CUSTOM ERS AND PEOPLE OUTSIDE OUR TERRITORY KNOW THAT WE ' LL GO FARTHER FOR THEM. They'll expect us to find the right mix of energy and services to make their lives easier, at home and at work. We won't disappoint them. As we become Conectiv, we'll ensure that people will au tomatically associate our new com-pany with the reliable energy and respon-sive service they are accustomed to getting from Delmarva Power. Through innovation, we'll create solutions to provide customers with comfort, convenience, and efficiency.
CONECTIV WILL LIN K THE PAST TO TH E FUTURE. New customers to new products and services. Our traditional service territory to a larger region. Employees to greater opportunity. Strategic plans to opportunities and growth. And shareholders to increased value.
CONNECTED.
8 0 A
- D 0, D I. E c r 0. s As of December 31, 1996 Seated left to right HO WARD E. CO SGR OVE, Chairman of the Board, President, and Chief Executive Officer of the Company; member since 1986; serves on executive, investment, and nuclear oversight committees; term expires in 1998.
WES TO N E. NELLIU S, President, Nellius Management Associates (a financial, management, and government relations consulting firm), Dover, Delaware; member since 1995; serves on investment and nominating committees; term ex pires in 1998.
JAMES C. JOH NS ON, Reti red, former President and Ch ief Executive Officer of Loyola Federal Savings Bank, Baltimore, Maryland; member since 1992; serves on audit, compensation, and executive commit-tees; term expires in 1998.
Director, Executive Vice President, and General Counsel of the Beneficial Corporation (a fin ancial services company),
Wilmington, Delaware; member since 1993; serves on compensation and investment comm ittees; term ex pires in 1999.
Standing left to right AUDRY K. DOBERSTEIN, PresidentofWilmington College, New Castle, Delaware; member since 1992; serves on audit, investment, and nominating commit-tee ; term expires in 1998.
20 R. FR ANK LI N BALO TTL Memberofthelawfirm of Richards Layton & F inger, Wilmington, Delaware; member since 1995; serves on audit and executive commillees; term expires in 1997.
ROB ER T D. BURRI S, President of Burris Foods Inc.
(a refri gerated food distribution company); Milford, Delaware; member since 1993; serves on audit and nuclea r oversight committees; term expires in 1999.
MICHAEL B. EMERY, Retired, former Senior Vice President of E.I. duPont de Nemour & Company (a diversifi ed chemical, energy, and specialty products company), Wilmington, Delaware; member since 1994; serves on compensation and executive commit-tees; term ex pi res in 1997.
SARAH I. GORE, Human Resource Associate, W.L.
Gore & Associates, Inc. (a high technology manufac-turing company), Newark, Delaware; member since 1990; serves on compensation and executive commit-tees; term ex pires in 1997.
MI CHAEL G. ABERCROMBI E, President of Cato Inc.
(a petroleum distributorship), Salisbury, Maryland; member since 1993; serves on nominating and nuclear oversight committees; term ex pires in 1999.
22 SELECTED FINANCIAL DATA YEAR ENDED DEC EM BEH 31, (Dollars in Thousands, Except Per Share Amoirnts)
OPERATING RESULTS AND DATA Operating Revenues Operating Income Net Income Earnings Applicable to Common Stock Electric Sales (kWh OOO)Pl Gas Sold and Transported (mcf 000)
COMMON STOCK I FORMATION Earning Per Share of Common Stock Dividends Declared Per hare of Common Stock Average Shares Outstanding (000)
Year-End Common Stock Price Book Value Per Common hare Return on Average Common Equity CAPITALIZATION Variable Rate Demand Bonds (VRDB)l"1 Long-Term Debt Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Debentures Preferred Stock Common Stockholders' Equity Total Capitalization with VRDB OTHER INFORMATION Total Assets Long-Term Capital Lease Obligation Construction Expenditures<51 Internall y Generated Fund (lGF)161 IGF as a Percent of Construction Expenditures 1996
$1,094,961
$179,380
$116,187
$107,251 12,925,716 24,157
$1.77
$ 1.54 60,698
$20%
$15.41 11.4%
$85,000 904,033 70,000 89,703 934,913
$ 2,083,649
$2,979,153
$20,552
$ 151,728
$ 120,260 79%
1995 1994
$995,103
$991,021
$178,406
$163,156<11
$117,488
$108,310(1)
$107,546
$98,940(1) 12,310,921 12,505,082 21,371 20,342
$1.79
$1.67°1
$1.54
$1.54 60,217 59,377
$22'Y.
$18%1
$15.20
$14.85 ll.7%
11.1%
$86,500
$71,500 853,904 774,558 168,085 168,085 923,440 884,169
$2,031,929
$1,898,312
$2,866,685
$2,669,785
$20,768
$19,660
$135,614
$154,119
$137,394
$123,948 101%
80%
{l ) An earl y retirement offer decreased net income and earnings per share by 10.7 million and 0.18. respectively.
(2) The settlement of a lawsuit increased net income and earnings per share by SJ 1.4 million anfl S0.2 1. respectively.
(3) Exc lud<"s intNrhange deliveries.
1993 1992
$970,607
$864,044
$164,139
$143,711121
$111,076
$98,5261'1
$101,074
$90,177121 12,280,230 11,520,811 19,605 20,168
$1.76
$1.69121
$1.54
$1.54 57,557 53,456
$23':1.
$23'/i
$14.66
$13.77 12.0%
12.2%
$41,500
$41,500 736,368 787,387 168,085 176,365 862,195 745,789
$1,808,148 $1,751,041
$2,592,479 $2,374,793
$23,335
$26,081
$159,991
$207,439
$108,693
$130,275 68%
63%
(4) Although Variable Hate Demand Bonds are classified as r urrent liabiliti e~. the Company intends to use the bonds a:, a source of long-term financing as disC'ussed in Nole 12, " Deli1. to the Consolidated Financial Slatpments.
(.5) Excludes Allowance for Funds Used During Construction.
(6) Nel cash provided by operating uctivilies less common and preferred dividends.
DELMARVA POWER & LIGHT COMPANY
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS EARNJKG~S-~S~U~MJ\\l_ARY~
Earnings per share for 1996 were $1.77, a $0.02 decrease from 1995. In 1996 and 1995, the outages of the two units at the Salem Nuclear Generating Station (Salem), which began in May and June 1995, caused increases in operation and maintenance expenses and fuel-related costs, including replacement power. The Salem outages decreased earnings per share by approximately $0.19 in 1996 and $.09 in 1995. See "Salem Outages" for additional information. Excluding the Salem outages, earnings rose $0.08 per share in 1996, primarily due to additional revenues from customer growth, partly offset by higher depreciation and other expenses. The Company held operation and maintenance expenses within $1.3 million (0.6%) of 1995 expenses after excluding the effects of the Salem outages and the Company's acquisition of the Conowingo Power Company (COPCO) in June 1995, as discussed in Note 4, "Mergers and Acquisitions," to the Consolidated Financial Statements. The Conowingo District's operating results continued in 1996 to have a minimal impact on earnings, as expected. Earnings from nonutility businesses were relatively flat as higher earnings from operations of nonutility subsidiaries were offset by start-up costs of new, nonutility businesses incurred by the parent company.
Earnings per share for 1995 were $1.79, a $0.12 increase from 1994. Excluding an $0.18 per share charge in 1994 for an early retirement offer (ERO), earnings per share decreased $0.06 in 1995 due to a $0.09 decrease attributed to utility operations, partly offset by a $0.03 increase for nonutility subsidiaries. The $0.09 per share decrease for utility operations resulted from additional costs expensed for the Salem outages. Excluding the Salem outages and the 1994 charge for the ERO, earnings per share from utility operations in 1995 were unchanged from 1994, reflecting the Company's success in offsetting lower wholesale (resale) revenues with a combination of cost reductions, retail sales growth, and modest price increases.
__ DIVIUE NUS".
On December 12, 1996, the Board of Directors declared a common stock dividend of $0.38~ per share for the fourth quarter or $1.54 on an annualized basis. As discussed under "Strategic Plans For Competition," on August 9, 1996, the Company announced plans to merge with Atlantic Energy, Inc. (Atlantic). The merger agreement restricts the Company's common stock dividend through the merger's effective date to an amount which cannot exceed $1.54 per share. The merger is part of the Company's growth strategy, which will require increased reinvestment of earnings into new busi-nesses. The business growth from these investments and the payment of dividends on common stock are expected to maximize stockholder value on a long-term basis.
The Company owns 7.41 % of Salem, which consists of two pressurized water nuclear reactors and is operated by Public Service Electric & Gas Company (PSE&G). Salem Units 1 and 2 were removed from operation by PSE&G in May and June 1995, respectively, due to operational problems and maintenance concerns. Due to degradation of a significant number of tubes in the Unit 1 steam generators, PSE&G is replacing the Unit 1 steam generators and expects Unit 1 to return to service in the fall of 1997. The Company's share of the costs to be capitalized for the steam generators, includ-ing installation, will range from approximately $11 million to $13 million. PSE&G has advised the Company that Unit 2 is expected to return to service in the second quarter of 1997. The units' return dates are subject to completion of the requirements of their respective restart plans to the satisfaction of PSE&G and the Nuclear Regulatory Commission (NRC), which encompasses a substantial review and improvement of personnel, process, and equipment issues.
In 1996 and 1995, the Company incurred higher than expected operation and maintenance costs at Salem of approxi-mately $9 million and $5 million, respectively, which were expensed as incurred.
The Company incurs replacement power costs while the units are out of service of approximately $750,000 per month, per unit. Such amounts vary based on the cost and availability of other Company-owned generation and the cost of purchased energy. Replacement power costs typically are not incurred for routine refueling and maintenance outages, and the recovery of replacement power costs is subject to approval by the regulatory commissions having jurisdiction over the Company. From the inception of the Salem unit outages through December 31, 1996, approximately one-half of DELMARVA POWER & LIGHT COMPANY 23
24 estimated replacement power costs of $20.4 million has been expensed ($6.1 million expensed in 1996 and $4.1 million expensed in 1995) and the remaining $10.2 million has been deferred on the Company's Consolidated Balance Sheet in expectation of future recovery. The unavailability of the Salem units also resulted in a $4 million charge to 1996 fuel expense for capacity deficiency charges owed to the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM Interconnection).
The actual costs ultimately incurred by the Company may differ from the foregoing estimates, since the periods projected by PSE&G during which the Salem units will be out of service, the extent of the maintenance that will be required, and the costs of replacement power and the extent of its recovery may be different from those set forth above.
The Company began recovering one-half of the replacement power costs associated with the Salem outages on an interim basis, subject to refund, from retail electric customers in Virginia and Maryland in July and August 1996, respectively. The Company expects the Virginia State Corporation Commission (VSCC) and Maryland Public Service Commission (MPSC) to conduct full reviews of the outages before making final determinations concerning replacement power cost recovery.
On December 10, 1996, the Delaware Public Service Commission (DPSC) suspended the portion of interim rates related to the Salem replacement power costs until the earlier of June 1, 1997, or the end of the case concerning fuel rates charged to customers. If the suspended interim rates go into effect prior to the conclusion of the case, they would go into effect subject to refund pending the final decision by the DPSC.
Since the 1995 shutdown of the units, the Company's objective has been to reduce the negative financial impact on its stockholders and customers. As discussed in Note 17 to the Consolidated Financial Statements, "Contingencies, the legal actions initiated in the first quarter of 1996 by the Company against PSE&G and Westinghouse Electric Corporation, which manufactured the steam generators originally installed at Salem, are still pending.
CDMRE:&l.;I',l~OJ~*=A-N.D=TRE=C H.AN~G"I N~G=RRG~ULAl'~nRX=E.NX.lRO-NM-EN T~
As a result of federal legislation, electric resale customers can choose their electric suppliers, resulting in a highly-competitive electric resale market. Many states are considering, and a number of states have introduced, electric retail wheeling, which results in retail customers purchasing electricity from the suppliers of their choice at market-based prices. In addition, federal legislation has been introduced and other bills are being drafted which could lead to retail wheeling for the entire nation on varying dates. As subsequently discussed under "Business Units, although prices charged to customers for the production (or supply) of electricity may become deregulated, the transmission and distri-bution (or delivery) of electricity is expected to remain subject to regulation.
The transition to a competitive market could result in "stranded costs" for a utility. Stranded costs generally are con-sidered to be costs which may not be recoverable in a competitive market due to market-based pricing or customers choosing different energy suppliers. The states in which retail wheeling is planned have allowed, or are considering allowing, utilities to recover some or all of their stranded costs. Potential stranded costs could include (i) above-market costs associated with generation facilities or long-term power purchase agreements and (ii) regulatory assets, which are deferred expenses expected to be recovered from customers in the future. Changes in the regulatory environment poten-tially could require the Company to write down asset values, and such write-downs could be material. However, given the uncertainty with respect to the timing of regulatory changes, the resulting deregulated market prices for capacity and energy, and the extent to which the Company's regulatory commissions will allow for recovery of any previously incurred costs, it is not possible to predict the level of unrecovered stranded costs, if any, which would result. Potential write-offs of stranded costs or reductions in profit margins due to competition would reduce the Company's common equity and could result in lower credit ratings and higher financing costs. To the extent that additional equity capital is required, issuance of common stock may be necessary and earnings per share would decrease.
DELMARVA POWER & LIGHT COMPANY
Based on the Company's initiative, a formal process has been established in Delaware and an informal forum has been established in Maryland through which the commissions and other interested parties are addressing changes in the regu-lation of the electric utility industry. During 1996, Delaware and Maryland forum meetings addressed issues such as retail wheeling, stranded costs, environmental matters, social programs, rate redesign, and alternative forms of regulation.
In October 1996, the MPSC issued an order instituting a proceeding to continue its review of regulatory and competitive issues affecting the electric industry in Maryland. In consultation with Maryland's electric utilities and other stakeholders, the MPSC staff has been directed to evaluate regulatory and competitive issues facing the electric utility industry, including electric retail competition, developments in federal and state regulation, and the interests of Maryland's cus-tomers and utilities. The MPSC instructed its staff to submit their recommendations by May 31, 1997.
In December 1996, the forum participants issued to the DPSC and MPSC reports which discussed the issues and the positions of stakeholders, but did not reach any conclusions. While there was consensus on some issues, such as the need for unbundled costs and tariffs, there were many issues where consensus was not reached, such as the need for and benefits of retail wheeling, recovery of stranded costs, environmental and social program issues, franchise and property rights, rate design, and performance-based ratemaking.
The issues mentioned above continue to be discussed by the Company, the DPSC Staff, and other interested parties. The Company expects to develop formal proposals on deregulation which are expected to be filed in mid-1997 with the DPSC.
In Maryland, the participants decided in January 1997 to suspend the collaborative process until the MPSC Staff files its report.
In response to a directive from the VSC.C, the VSCC Staff issued in July 1996 a report on restructuring the electric industry, which included, among other recommendations, a recommendation for a "go slow" approach to restructuring.
In November 1996, the VSCC issued an order indicating that more evaluation is necessary to determine what, if any, restructuring may best serve the public interest in Virginia. The VSCC established a new docket and directed its Staff to monitor and file separate studies in 1997 regarding the development of a competitive wholesale market in Virginia, ser-vice quality standards, and the results of retail wheeling experiments in other states. Also, several utilities, excluding the Company, were directed to file unbundled cost studies and tariffs.
~STJlATE.GI-~PLANcS=E-0-K-:CJ)_Mf-EXl.TIQN=
The Company intends to grow its businesses by building long-term customer relationships, offering new products and services that complement the Company's core.energy business and are targeted to individual customer needs, and serving more customers in a larger geographical area. The Company plans to develop new distribution channels throughout the region for its products and services. To retain existing customers and attract new customers, the Company plans to differ-entiate itself from its competitors by providing exceptional service, maintaining quality and competitive prices, and expanding connections with customers through new services. The Company believes that its growth strategy will maxi-1 mize long-term stockholder value. In the short term, implementation of this strategy may result in moderate downward pressure on earnings due to costs for the start-up of new businesses, building a regional distribution platform, expanding the Company's marketing and sales organization, and upgrading information technology systems.
The Company plans to sell energy and related premium products and services to existing customers and to new customers who may be outside the Company's current service territory. Current developments in the adjoining states of Pennsylvania and New Jersey indicate future opportunities for the Company to serve more electric cuslomers.
In Pennsylvania, electric retail wheeling is scheduled to be phased-in over a three year period beginning in 1999.
The New Jersey Board of Public Utilities has recommended that retail electric competition be fully phased-in by April 2001.
DEL~.ARVA POWER & LIGHT COMPANY 25
Business Units In 1996, the Company reorganized into three separate business units (Energy Supply, Regulated Delivery, and Energy Services) which strengthen the Company's ability to meet customers' needs and also reflect the anticipated future struc-ture of the utility industry. Although the products and services of each business unit are different and each business unit has a separate strategy, the business units' plans complement and support each other.
Energy Supply produces, buys, and sells energy in a multi-regional marketplace that is expected eventually to be com-petitive and have deregulated, market-based prices. Energy Supply's mission is to provide new and existing customers with a complete and competitive portfolio of merchant energy products and services, while maximizing the value of the Company's generation assets.
Regulated Delivery delivers energy over the Company's transmission and distribution systems at prices which are expect-ed to continue to be regulated by the public utility commissions. Regulated Delivery's mission is to provide high-value utility delivery services to customers in the region. By continuing to maintain a high level of customer satisfaction through high-quality customer service, Regulated Delivery will help the Company retain existing customers who may become eligible to choose alternative energy suppliers in the future.
Energy Services packages and sells energy and related premium products and services to customers within the competitive regional marketplace. Energy Services is starting new businesses which include heating, ventilation, and air conditioning (HVAC) services, telecommunications, and other products and services which complement the Company's core energy business. In telecommunications, Energy Services provides fiber optic construction and engineering services to customers and plans to provide retail telephone services and carrier service for long-distance phone companies.
Pending Merger with Atlantic On August 9, 1996, the Company announced plans to merge with Atlantic, an investor-owned holding company, which owns Atlantic City Electric Company, an electric utility, and nonutility businesses. Atlantic is located in southern New Jersey. Atlantic's 1996 operating revenues and net income were $980.3 million and $58.8 million, respectively, and its total assets were $2,670.8 million as of December 31, 1996. The merger is expected to facilitate success in the com-petitive marketplace and is part of the Company's integrated strategy to build a regional delivery platform over which a portfolio of products and services can be distributed. Other anticipated benefits of the merger include increased scale, cost savings, competitive prices and services, a more balanced customer base, and increased financial flexibility. On January 30, 1997, the stockholders of the Company and Atlantic approved the merger. Various federal and state regula-tory approvals are also required for the merger to become effective. The regulatory approval process is expected to be completed during late 1997 to early 1998. Refer to Note 4, "Mergers and Acquisitions," to the Consolidated Financial Statements for additional information on the merger.
--ELKC,TRLC=RESALLB~USJNESS=
26 The Company's total electric resale revenues as a percent of total billed electric sales revenues were 7.4% in 1996, 7.0% in 1995, and 13.0% in 1994. Resale non-fuel revenues decreased $24.2 million in 1995, primarily because Old Dominion Electric Cooperative (ODEC), the Company's largest resale customer, began purchasing about one-half of its capacity and energy requirements from other suppliers. The reduction in 1995 resale non-fuel revenues was offset through cost reductions, retail sales growth, and modest price increases.
DELMARVA POWER & LIGHT COMPANY
The Company has substantially reduced the financial risk related to its resale business. In 1994 and 1995, the Company entered into long-term contracts with all of its municipal customers. In addition, the Company negotiated extended notice provisions on the remaining portion of ODEC's capacity and energy requirements served by the Company. The notice provisions require ODEC to provide the Company with two years' notice for up to a 30% load reduction and five years' notice for load reductions greater than 30%.
The Company currently provides approximately 200 megawatts (MW) of load to ODEC, which represented 3.8% of the Company's 1996 total billed electric sales revenues, including about $24 million of non-fuel (base rate) revenues. On August 16, 1996, ODEC notified the Company that it will reduce its load by 60 MW effective September 1, 1998, and will further reduce its load to zero effective September 1, 2001.
ODEC had issued a request for proposals in March 1996 to replace eventually ODEC's capacity and energy agreements with its current suppliers. On July 1, 1996, the Company submitted its proposal to ODEC to continue to serve all of the load currently supplied by the Company. ODEC expects to select a supplier by March 1997 for the 60 MW it will cease purchasing under its existing contract with the Company, effective September 1, 1998.
If ODEC selects a new electric supplier for some or all of the load currently supplied by the Company, the decrease in non-fuel revenues would be offset partially by avoided purchased capacity costs. Also, the Company would continue to receive transmission wheeling revenues from ODEC. The Company estimates that earnings per share would decrease by
$0.06 to $0.08, on an annualized basis, after September 1, 1998 if _ODEC reduces its load by 60 MW. Earnings per share would decrease by an additional $0.10 to $0.12, on an annualized basis, after September 1, 2001, if ODEC further reduces its load to zero. Any such earnings decrease would be mitigated by natural load growth in the Company's service territory and by any of ODEC's load that the Company may obtain through the bidding process.
_C QMP~ONENTS=QE.-UTJLJ.T_Y _REY,ENUES~
Fuel and energy costs billed to customers (fuel revenues) generally are based on rates in effect in fuel adjustment claus-es which are adjusted periodically to reflect cost changes and are subject to regulatory approval. Rates for non-fuel costs billed to customers are dependent on rates determined in base rate proceedings before regulatory commissions. Changes in non-fuel (base rate) revenues can affect directly the earnings of the Company. Fuel revenues, or fuel costs billed to customers, generally do not affect net income since the expense recognized as fuel costs is adjusted to match the fuel revenues. The amount of under-or over-recovered fuel costs generally is deferred until it is subsequently recovered from or returned to utility customers.
Electric revenues also include interchange delivery revenues, which result primarily from the sale of electric power to utilities in the PJM Interconnection. The PJM Interconnection is an electric power pool comprised of eight utilities in the region, including the Company. The power pool provides both capital and operating economies to member utilities.
Interchange delivery revenues are reflected in the calculation of rates charged to customers under fuel adjustment claus-es. Due to this ratemaking treatment, interchange delivery revenues generally do not affect net income.
~ ELKC,T.RlC_-REY.EN,UES.-AN,D~SALES, In 1996, the percentages of total billed electric sales revenues contributed by the various customer classes were as follows: residential-42.3%; commercial-32.0%; industrial-17.5%; resale-7.4%; and other-0.8%.
DELMARVA POWER & LIGHT COMPANY 27
28 Details of the changes in the various components of electric revenues are shown below.
Comparative Increase (Decrease) from Prior Year in Electric Revenues (Dollars in Millions)
Non-fuel (Base Rate) Revenues Retail Sales Volume Resale Sales Volume Increased Rates Fuel Revenues Interchange Delivery Revenues Other Operating Revenues Total 1996
$21.6 1.8 26.8 28.0 2.8
$81.0 1995
$54.9 (24.2) 3.3 (6.9)
(15.1) 4.5
$16.5 For 1996 compared to 1995, Non-fuel Revenues increased $21.6 million from "Retail Sales Volume" due to a 4.5%
increase in total retail kilowatt-hour (kWh) sales, which reflects Conowingo District sales for all of 1996, versus about one-half of 1995, and other sales growth. Excluding the Conowingo District, retail sales increased 0.7% mainly due to 1.3% growth in the number of retail customers, partly offset by lower sales to industrial customers.
For 1995 compared to 1994, Non-fuel Revenues increased $54.9 million from "Retail Sales Volume" due to a 7.3%
increase in total kWh sales, which resulted primarily from Conowingo District sales beginning June 19, 1995. Excluding the Conowingo District, retail sales increased 2.9% mainly due to a 1.4% increase in the number of retail customers and 4.5% commercial sales growth.
Changes in Non-fuel Revenues from "Resale Sales Volume" were insignificant for 1996 compared to 1995. Non-fuel resale revenues decreased $24.2 million in 1995 because ODEC changed electric suppliers on January 1, 1995 for one-half of its electricity requirements.
The increases in Non-fuel Revenues from "Increased Rates" of $1.8 million in 1996 and $3.3 million in 1995 resulted from an increase in Delaware retail electric rates that became effective May 1, 1995. The rate increase was designed to recover the costs of "limited issues," which primarily were costs imposed by government.
In 1996, Fuel Revenues increased $26.8 million due to increased kWh sales and higher average fuel rates. In 1995, Fuel Revenues decreased $6.9 million mainly due to lower kWh sales to resale customers.
In 1996, Interchange Delivery Revenues increased $28.0 million principally due to increased energy purchases which enabled the Company to sell more of its higher-cost peaking unit output to utilities in the PJM Interconnection. In 1995, Interchange Delivery Revenues decreased $15.1 million mainly due to lower sales and billing rates to the PJM Interconnection.
_GA s_ R~Y..EN_lLKS_,~.S.A_L_E S=A__NJ)=TJlANS P~Q.llTAXW lY, The Company earns gas revenues from the sale and transportation of gas for customers. Transportation customers may purchase gas from the Company or other suppliers. The total number of gas customers served by the Company increased by 2.5% in 1996 and 2.9% in 1995.
In 1996, total gas revenues increased $18.8 million due to a $5.5 million increase in non-fuel revenues and a $13.3 *mil-lion increase in fuel revenues. Non-fuel revenues increased $5.5 million mainly due to customer growth and a colder heat-ing season which resulted in a 4.9% increase in total gas sold and transported on the Company's system. Including off-system sales which began in 1996, total gas sold and transported increased 13.0%. Fuel revenues increased $13.3 million due to a prior year $6.8 million refund of over-recovered fuel costs, higher sales, and higher average rates.
DELMARVA POWER & LIGHT COMPANY
In 1995, total gas revenues decreased $12.5 million from 1994 because of a $16.5 million decrease in fuel revenues, partly offset by a $4.0 million increase in non-fuel revenues. The $4.0 million increase in non-fuel revenues was due to
$2.7 million of additional revenue from a base rate increase which became effective November 1, 1994, and a $1.3 mil-lion increase in sales volume. Fuel revenues decreased $16.5 million in 1995 due to lower average fuel rates charged to customers and a $6.8 million refund in 1995 of over-recovered fuel costs.
J<:LE.CTJllC _ _F_UEL_.ANO~P.UllCJIA..S.E.Po-EN_EB._GX=EXRENS~E_S~
In 1996, electric fuel and purchased energy expenses increased $59.6 million compared to 1995. The increase was due to a $32.2 million increase for higher kWh output; a $21.4 million increase, net of amounts deferred pursuant to fuel adjustment clauses, due to higher oil, gas, and purchased energy prices; and a $6.0 million increase in replacement power and PJM capacity charges expensed due to the Salem outages.
In 1995, electric fuel and purchased energy expenses decreased $14.7 million from 1994 primarily due to lower kWh output and lower purchased energy prices, which were partly offset by $4.1 million of replacement power costs expensed due to the Salem outages.
The kWh output required to serve load within the, Company's service territory is substantially equivalent to total output less interchange deliveries. In 1996, the Company's output for load within its service territory was provided by 37.6% coal generation, 28.6% oil and gas generation, 24.5% net purchased power, and 9.3% nuclear generation.
GAS. PURCHASED-,
Gas purchased increased $12.6 million in 1996 compared to 1995, due primarily to higher average prices paid for gas and a prior year $6.8 million customer refund of over-recovered fuel costs. The $6.8 million customer refund reduced 1995 gas purchased expense because fuel expense is adjusted to match fuel revenues as explained under "Components of Utility Revenues."
For 1995 compared to 1994, gas purchased decreased $15.2 million primarily due to the $6.8 million customer refund in 1995 and due to variances in fuel costs deferred and subsequently amortized under the Company's fuel adjustment clause.
£URCHASED.ELEC-TRIC.CAPACII.Y.
Purchased electric capacity increased from $3.4 million in 1994 to $29.1 million in 1995 due to an interim purchased power contract with PECO, effective from June 19, 1995 to February 1, 1996, that was associated with the Company's purchase of COPCO. Pursuant to agreements made in conjunction with the COPCO purchase, in February 1996, a long-term contract with lower-priced capacity replaced the interim contract. In 1996, purchased electric capacity increased
$3.0 million since electric capacity associated with COPCO was purchased during the entire year. The increase was mit-igated substantially by lower-priced capacity purchased under the long-term contract.
OJrnRATWN,FMAINTENAN_CEFAND-DERRKCIAT-10-N"-EXPENS-ES-,
In 1996, operation and maintenance expenses increased $7.3 million due to a $3.7 million increase associated with the Salem outages, a $2.3 million increase from a full year's operation of the Conowingo District, and $1.3 million of miscellaneous increases.
In 1995, operation and maintenance expenses decreased $17.8 million in comparison to 1994, principally due to the
$17.5 million expense recorded in 1994 for the ERO. Higher than expected costs of approximately $5 million due to Salem's operational problems were largely offset by lower payroll costs attributed to reduced staff levels.
Depreciation expense increased in 1996 and 1995 due to completion of on-going utility construction projects and the addition of the Conowingo District in June 1995.
DELMARVA POWER & LIGHT COMPANY 29
,,UTILl1W=F.lNANCIN.G_-_c_o_s"TS_,
For information concerning the 1996 issuance of $70 million of mandatorily redeemable preferred securities by the Company's subsidiary trust and related redemptions of preferred stock, see "Liquidity and Capital Resources" and Note 10 to the Consolidated Financial Statements, "Company Obligated Mandatorily Redeemable Preferred Securities*
of Subsidiary Trust Holding Solely Company Debentures."
Interest expense increased $3.6 million in 1996 and $6.3 million in 1995, primarily due to debt issued in 1995 to finance the acquisition of COPCO.
Allowance for equity and borrowed funds used during construction (AFUDC) increased $2.2 million in 1996, primarily due to higher average construction work-in-progress balances, including the cost of software to support the reporting of financial results by business units beginning in 1997. AFUDC decreased $2.4 million in 1995, mainly due to a lower AFUDC rate.
Due to common equity financing, the average number of shares of common stock increased in 1996 and 1995, which lowered earnings per share by $0.01 and $0.03, respectively.
The Company's energy supply plan reflects its strategy to provide an adequate, reliable supply of electricity to customers and keep prices competitive, while minimizing adverse impacts on the environment. The Company's plan, which is updated annually, is based on forecasts of demand for electricity in the service territory and reserve require-ments of the PJM Interconnection. The Company's plan emphasizes balance and flexibility, and may be accelerated, slowed, or altered in response to changing energy demands, fluctuating fuel prices, and emerging technologies. The plan combines customer-oriented load management and strategic conservation programs with short-term power purchases, long-term power contracts, and renovated power plants.
The Company's current plan would enable the Company to meet customers' energy requirements without making large investments for new resources. The Company must balance the potential risks of providing too much or insufficient capacity. The main risks of excess capacity are that the Company's prices may become uncompetitive or that regulators may not allow the associated costs to be recovered through customer rates. The principal risks of inadequate capacity are unreliable service or the payment of capacity deficiency charges to the PJM Interconnection. The PJM Interconnection requires the Company to plan for and to provide an adequate capacity level.
During the past three years, the Company's plan has reduced customers' demand for electricity by an additional 39 MW, and has provided 205 MW of capacity from a long-term purchased power contract with PECO Energy Company, which began in 1996. Under an amendment to a long-term purchased power contract, the Company's purchase of 48 MW of peaking capacity from Star Enterprise has been suspended from October 1, 1996 until June 1, 2000, due to the availability of lower cost power.
Beginning in 1997 and continuing through 2001, the Company expects it may purchase up to 200 MW of power under short-term agreements in addition to the currently existing long-term purchases mentioned above. The Company plans to keep peak load reductions achieved through customer-oriented load management programs at existing levels.
L tQJIUltTY=AND-CAP.tT.AL=lLE.S..O~UJLC ES
30 The Company's primary capital resources are internally generated funds (net cash provided by operating activities less common and preferred dividends) and external financings. These resources provide capital for utility construction expenditures, expansion into new business lines and other capital requirements, such as repayment of maturing debt and capital lease obligations. Utility construction expenditures are the Company's largest on-going capital requirement and are affected by many factors including growth in demand for electricity, compliance with environmental regulations, and the periodic need for upgrading or replacing information systems.
DELMARVA POWER & LIGHT COMPANY
Operating activities provided net cash inflows of $222.7 million in 1996, $239.4 million in 1995, and $224.6 million in 1994. The $16.7 million decrease in 1996 net cash flow from operating activities reflects electric fuel revenues which were less than electric fuel and energy costs. See "Salem Outages" for a discussion of the Company's recent electric fuel rate changes and filings.
After deducting common and preferred dividend payments of $102.4 million in 1996, $102.0 million in 1995, and
$100.6 million in 1994, internally generated funds were $120.3 million in 1996, $137.4 million in 1995, and $124.0 million in 1994. Internally generated funds provided 79%, 101 %, and 80% of the cash required for utility construction in 1996, 1995, and 1994, respectively.
Utility construction expenditures, excluding AFUDC, were $151.7 million in 1996, $135.6 million in 1995, and $154.1 million in 1994. Construction expenditures in 1996, 1995, and 1994 included $4.4 million, $16.4 million, and $20.7 million, respectively, for projects attributed to environmental compliance. In 1995, the Company acquired COPCO for $158.2 million ($157.0 million net of cash acquired) with $125.8 million oflong-term debt and the balance with short-term debt.
The amount of cash used to purchase or construct nonutility assets was $15.0 million in 1996, $3.6 million in 1995, and $11.0 million in 1994. Nonutility assets purchased or constructed during 1994-1996 included construction expenditures at the Pine Grove Landfill during all three years, assets related to the start-up of new businesses including HVAC services in 1996, and purchase of an office building in 1994.
Long-term financings during 1994-1996, net of long-term refinancings and redemptions, raised $159.2 million of capital. Sources of cash, net of refinancings and redemptions, included the following: $32.6 million of common stock;
$91.5 million of long-term debt; $43.5 million of variable rate demand bonds; and $70.0 million of Company obligated mandatorily redeemable preferred securities issued by the Company's subsidiary trust (as discussed below). Preferred stock outstanding was reduced by $78.4 million.
In 1994 and 1995, cash was raised from common stock primarily through the Dividend Reinvestment and Common Share Purchase Plan (DRIP). Depending on the financing needs of the Company, shares issued through the DRIP may be either newly issued shares or shares purchased in the open market. In 1996, shares for the DRIP were purchased in the open market until December 31 when the Company began raising cash again by issuing new common shares.
In October 1996, a subsidiary trust of the Company issued $70 million of 8.125% Company obligated mandatorily redeemable preferred securities and loaned the proceeds to the Company. On a consolidated basis, this financing vehicle results in a tax benefit which is equivalent to the tax effect of a deduction for distributions on the preferred securities. The proceeds from the issuance of the preferred securities and additional short-term debt were used to retire $63.4 million of the Company's preferred stock, which had an average dividend rate of 6.73%, and the Company's $15.0 million, 7.52% series preferred stock in October and December 1996, respectively. On an after-tax basis, the refinancing will save approximately $1.5 million annually.
From February 4, 1997 to February 7, 1997, the Company issued $77.0 million of unsecured Medium Term Notes with maturities of 10 to 30 years and interest rates of 7.06% to 7.72%. The proceeds were used to repay short-term borrowings which were outstanding as of December 31, 1996. In recognition of this refinancing, $77.0 million of short-term debt has been reclassified to long-term debt on the consolidated balance sheet as of December 31, 1996.
DELMARVA POWER & LIGHT COMPANY 31
32 Long-term debt due within one year increased from $1.5 million as of December 31, 1995 to $27.7 million as of December 31, 1996 primarily due to the scheduled maturity of the Company's 6%% Series First Mortgage Bond on September 1, 1997.
The Company's capital structure as of December 31, 1996 and 1995, expressed as a percentage of total capitalization, is shown below.
Long-term debt and variable rate demand bonds Mandatorily redeemable preferred securities Preferred stock Common stockholders' equity 1996 47.5%
3.3%
4.3%
44.9%
1995 46.3%
8.3%
45.4%
Capital requir~ments for the period 1997-1998 are estimated to be $453 million, including $230 million for utility construction (excluding AFUDC), $64 million for payment of long-term debt maturities, and $159 million of other requirements primarily for investments in new business lines.
The Company anticipates that $282 million will be generated internally during 1997-1998, net of power purchase commitments. This represents 62% of estimated capital requirements and 123% of estimated utility construction expenditures for 1997-1998. During 1997-1998, long-term external financings are presently estimated at $216 million, including $160 million of long-term debt and $56 million of common stock.
Information on the Company's nonutility subsidiaries, in addition to the following discussion, can be found in Notes 1, "Significant Accounting Policies," and 18, "Nonutility Subsidiaries," to the Consolidated Financial Statements.
Earnings per share resulting from nonutility subsidiaries were $0.10 in 1996, $0.07 in 1995, and $0.04 in 1994.
Start-up costs for new nonutility businesses incurred in 1996 by the parent company (reflected in "Other income, net of income taxes") offset the $0.03 increase in 1996 earnings per share of nonutility subsidiaries. During 1996, 1995, and 1994, nonutility earnings were generated primarily from the recovery of previously written-off joint venture assets, the operation of power plants for other parties, gains from the sale of real estate, and leveraged lease operations.
Earnings per share contributed by nonutility subsidiaries increased in 1996 primarily due to higher recoveries of previously written-off joint venture assets. Partial year 1996 operating results for the Company's new HVAC and telecommunication business lines had a minimal effect on earnings.
Nonutility subsidiary earnings in 1994 were reduced by a write-down of oil and gas wells.
The subsidiaries' solid waste businesses, including the Pine Grove Landfill, contributed earnings in 1994, but incurred an operating loss in 1995 and 1996. A permit for expansion of the Pine Grove Landfill is currently pending before the Pennsylvania Department of Environmental Protection (PADEP). In August 1996, the Governor of Pennsylvania issued an executive order suspending consideration of landfill expansion applications until new regulations were written. The Company is revising its landfill expansion permit application to comply with the new PADEP guidelines issued in January 1997. The Company will comply with all new regulations and expects to receive permit approval to avoid any interruption in landfill services.
DELMARVA POWER & LIGHT COMPANY
Management is responsible for the information and representations contained in the Company's financial statements.
Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.
Delmarva Power & Light Company maintains a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified personnel.
Coopers & Lybrand L.L.P., independent accountants, are engaged to audit the financial statements and express their opinion thereon. Their audits are conducted in accordance with generally accepted auditing standards which include a review of selected internal controls to determine the nature, timing, and extent of audit tests to be applied.
The Audit Committee of the Board of Directors, composed of outside directors only, meets with management, internal auditors, and independent accountants to review accounting, auditing, and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the Audit Committee, subject to stockholder approval.
ZL./~
Howard E. Cosgrove Chairman of the Board, President and Chief Executive Officer
__ REP O,RT=Q_)!' __ lNJl_EREJYJ) ENT-A C_C~O-UNTAN_TS, To the Board of Directors and Stockholders Delmarva Power & Light Company Wilmington, Delaware Barbara S. Graham Senior Vice President and Chief Financial Officer We have audited the accompanying consolidated balance sheets of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1996 and 1995, and the related consolidated statements of income, changes in common stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. These finan-cial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated finan-cial position of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles.
~.~~/£ 2400 Eleven Penn Center Philadelphia, Pennsylvania February 7, 1997 DELMARVA POWER & LIGHT COMPANY 33
c ONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)
OPERATING REVENUES 34 Electric Gas OPERATING EXPENSES Electric fuel and purchased energy Gas purchased Purchased electric capacity Operation and maintenance Depreciation Taxes other than income taxes Income taxes OPERATING INCOME OTHER INCOME Nonutility Subsidiaries Revenues and gains Expenses including interest and income taxes Net earnings of nonutility subsidiaries Allowance for equity funds used during construction Other income, net of income taxes INCOME BEFORE UTILITY INTEREST CHARGES AND DIVIDENDS ON PREFERRED SECURITIES UTILITY INTEREST CHARGES Interest expense Allowance for borrowed funds used during construction DIVIDENDS ON PREFERRED SECURITIES OF A SUBSIDIARY TRUST EARNINGS Net income Dividends on preferred stock Earnings applicable to common stock COMMON STOCK Average shares of common stock outstanding (000)
Earnings per average share of common stock Dividends declared per share of common stock See accompanying Notes to Consolidated Financial Statements.
YEAR ENDED DECEMBER 31, 1996 1995 1994
$980,677
$899,662
$883,115 114,284 95,441 107,906 1,094,961 995,103 991,021 327,464 267,885 282,570 61,208 48,615 63,814 32,126 29,116 3,370 253,367 246,049 263,837 123,174 113,022 109,523 42,386 38,449 38,585 75,856 73,561 66,166 915,581 816,697 827,865 179,380 178,406 163,156 65,390 52,042 43,142 (59,192)
(47,896)
(40,790) 6,198 4,146 2,352 1,338 708 3,389 (928) 557 (285) 6,608 5,411 5,456 185,988 183,817 168,612 72,026 68,395 62,076 (3,615)
(2,066)
(1,774)_
68,411 66,329 60,302 1,390 116,187 117,488 108,310 8,936 9,942 9,370
, __ ~-- -~$~01
- ~-~~:~=1 1~z~~~- :=~ ~t?~~j~ =
60,698
$1.77
$1.54 60,217
$1.79
$1.54 59,377
$1.67
$1.54 I
I DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS YEAR ENDED DECEMBER 31, (Dollars in Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES Net income Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization Deferred income taxes, net Provision for early retirement offer Net change in:
Accounts receivable Inventories Accounts payable Other current assets & liabilitiesl1l Other, net Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Construction expenditures, excluding AFUDC Allowance for borrowed funds used during construction Change in working capital for construction Acquisition of COPCO, net of cash acquired Sales of nonutility assets Nonutility assets purchased or constructed Net (increase)/decrease in bond proceeds held in trust funds Deposits to nuclear decommissioning trust funds Other, net Net cash used by investing activities CASH FLOWS FROM FINANCING ACTIVITIES Dividends:
Common Preferred Issuances:
Long-term debtl2l Variable rate demand bonds Common stock Preferred securitiesl3J Redemptions:
Long-term debtl2l Variable rate demand bonds Common stock Preferred stock Principal portion of capital lease payments Net change in term loanl*l Net change in short-term debt Cost of issuances and refinancings Net cash provided/( used) by financing activities Net change in cash and cash equivalents Beginning of year cash and cash equivalents 1996 1995
$116,187
$117,488 128,712 120,897 33,218 15,992 (5,030)
(14,022)
(4,489) 18,590 18,418 3,269 (48,383)
(14,349)
(15,981)
(8,437) 222,652 239,428 (151,728)
(135,614)
(3,615)
(2,066)
(4,880) 1,102 (157,014) 693 4,970 (15,036)
(3,645) 7,163 2,658 (4,238)
(3,612)
(2,222)
(1,859)
(173,863)
(295,080)
(93,290)
(92,221)
(9,102)
(9,813) 125,800 15,000 486 24,693 70,000 (1,504)
(1,388)
(l,500)
(5,466)
(1,253)
(78,383)
(5,538)
(7,875)
(45,000) 86,498 53,154 (3,408)
(1,523)
(41,207) 59,574 7,582 3,922 28,951 25,029 End of year cash and cash equivalents
- = ---. -~ -~~~!~=3~~ ----=~~~,951~- = =
(1) Other than debt and deferred income taxes classified as current.
(2) Excluding net change in term loan.
(3) Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures.
(4) As of December 31, 1994, the Company had a $45.0 million term loan which was classified as long-term debt.
See accompanying Notes to Consolidated Financial Statements.
DELMARVA POWER & LIGHT COMPANY 1994
$108,310 120,803 4,829 17,500 7,980 (21,409) 5,811 (10,668)
(8,569) 224,587 (154,119)
(1,774)
(439) 4,596 (11,045)
(11,816)
(2,438)
(744)
(177,779)
(91,175)
(9,464) 4,640 30,000 14,974 (26,096)
(794)
(11,280) 35,000 10,000 (601)
(44,796) 2,012 23,017
$25,029 35
36 CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
ASSETS UTILITY PLANT-AT ORIGINAL COST Electric Gas Common Less: Accumulated depreciation Net utility plant in service Construction work-in-progress Leased nuclear fuel, at amortized cost OTHER PROPERTY AND INVESTMENTS Nonutility property, net Investment in leveraged leases Funds held by trustee Other investments CURRENT ASSETS Cash and cash equivalents Accounts receivable Inventories, at average cost Fuel (coal, oil, and gas)
Materials and supplies Prepayments Deferred energy costs Deferred income taxes, net DEFERRED CHARGES AND OTHER ASSETS Prepaid employee benefit costs Unamortized debt expense Deferred debt refinancing costs Deferred recoverable income taxes Other Total See accompanying Notes to Consolidated Financial Statements.
AS OF DECEMBER 31, 1996 1995
$3,037,830
$2,942,969 229,362 208,245 136,897 130,949 3,404,089 3,282,163 1,292,325 1,189,269 2,111,764 2,092,894 118,208 105,588 31,513 31,661 2,261,485 2,230,143 63,023 50,011 46,961 48,367 34,735 36,275 4,155 4,770 148,874 139,423 36,533 28,951 142,431 131,236 36,584 30,076 41,292 36,823 20,233 12,969 31,127 5,400 308,200 245,455 35,146 16,899 13,858 12,256 21,366 23,972 137,561 151,250 52,663 47,287 260,594 251,664
$2,979,153
$2,866,685
- --=-"""'"'""' ___ --=
==--:::.--=-=---- -- -::...--=-==-
=--=-~---=----- =-=-
~- -=-*
DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
CAPITALIZATION AND LIABILITIES CAPITALIZATION Common stock, $2.25 par value; 90,000,000 shares authorized; shares outstanding: 1996-60,682,719, 1995-60,759,365 Additional paid-in capital Retained earnings Treasury shares, at cost:
1996-101,831 shares, 1995-1,320 shares Unearned compensation Total common stockholders' equity Cumulative preferred stock Company obligated mandatorily redeemable preferred securities of subsidiary trust holding solely Company debentures Long-term debt CURRENT LIABILITIES Short-term debt Long-term debt due within one year Variable rate demand bonds Accounts payable Interest accrued Dividends declared Current capital lease obligation Deferred income taxes, net Other
' DEFERRED CREDITS AND OTHER LIABILITIES Deferred income taxes, net Deferred investment tax credits Long-term capital lease obligation Other Commitments and Contingencies (Notes 14 and 17)
Total See accompanying Noles to Consolidated Financial Statements.
DELMARVA POWER & LIGHT COMPANY AS OF DECEMBER 31, 1996 1995
$136,765
$136,713 508,300 506,328 293,604 281,862 938,669 924,903 (2,138)
(30)
(1,618)
(1,433) 934,913 923,440 89,703 168,085 70,000 904,033 853,904 1,998,649 1,945,429 74,355 63,154 27,676 1,485 85,000 86,500 81,628 64,056 16,193 16,355 23,265 23,426 12,598 12,604 7,276 31,489 36,773 359,480 304,353 526,449 519,597 42,501 45,061 20,552 20,768 31,522 31,477 621,024 616,903 37
38 CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY Common Shares Par (Dollars in 1'ho1isands)
Outstanding Value <1>
Additional Paid-in Retained Capital Earnings Unearned Treasury Compen-Stock sation Total Balance as of January 1, 1994 Net income 58,829,283 $132,366 $470,997 $259,507
$(675)
$862,195 108,310 Cash dividends declared Common stock ($1.54 per share)
Preferred stock Issuance of common stock DRIP121 Other issuance Reacquired common stock Common shares granted(3i Amortization of unearned compensation Other Balance as of December 31, 1994 Net income Cash dividends declared Common stock ($1.54 per share)
Preferred stock Issuance of common stock DRIPl21 Stock options Other issuance Reacquired common stock Common shares granted(3I Amortization of unearned compensation Balance as of December 31, 1995 Net income Cash dividends declared Common stock ($1.54 per share)
Preferred stock Issuance of common stock Business acquisitions DRiri21 Stock options Expenses Reacquired common stock Amortization of unearned compensation Refinancing of preferred stock Balance. as of December 31, 1996 703,726 8,997 (36,840) 36,840 1,584 20 13,199 171 10 108,310 (91,436)
(9,370)
(9) 59,542,006 133,970 484,377 267,002 1,210,048 3,900 4,731 (63,370) 62,050 2,723 9
11 60,759,365 136,713 212,350 21,465 2,400 (312,861) 47 5
21,806 63 82 117,488 (92,686)
(9,942) 506,328 281,862 388 45 (72) 532 687 392 116,187 (93,294)
(8,936)
(2,215)
(794) 794 (794) 289 (1,180)
(1,253) 19 1,223 (1,223) 951 (30)
(1,433) 4,396 (6,504) 363 (548)
(91,436)
(9,370) 14,783 191 (794) 289 1
884,169 117,488 (92,686)
(9,942) 24,529 72 93 (1,234) 951 923,440 116,187 (93,294)
(8,936) 4,396 435 50 (72)
(5,609) 139 (1,823) 60,682,719 $136,765
$508,300 $293,604 $(2,138) $(1,618)
$934,913 t_-=----==- -=-=----=---=--=*=-==--=-
-==- =-- -=-=---=-=- =-=------==-=--=--=--=-=---==-- --=--=--=.=-- =-=-=--=--=-
(1) The Company's common stock has a par value of $2.25 per share and 90,000,000 shares are authorized.
(2) Dividend Reinvestment and Common Share Purchase Plan (DRIP)-As of December 31, 1996, 4,979,971 shares remained available under the Company's registration statement filed with the Securities and Exchange Commission for issuance of shares through the DRIP.
(3) Shares of restricted common stock granted under the Company's Long Term Incentive Plan.
See accompanying Notes to Consolidated Financial Statements.
DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED ;FIN~NCIAL STATEMENTS Nature of Business The Company is predominately a public utility that provides electric and gas service. The Company provides electric service to retail (residential, commercial, and industrial) and wholesale (resale) customers in Delaware, ten primarily Eastern Shore counties in Maryland, and the Eastern Shore area of Virginia in an area consisting of about 6,000 square miles with a population of approximately 1.2 million. In 1996, 90% of the Company's operating revenues were derived from the sale of electricity. The Company provides gas service to retail and transportation customers in an area consisting of about 275 square miles with a population of approximately 475,000 in northern Delaware, including the City of Wilmington.
In addition, the Company and its wholly owned subsidiaries are engaged in nonutility activities. The Company is developing and marketing energy-related products and services primarily targeted to customers in retail markets. The Company's primary nonutility activities are heating, ventilation, and air-conditioning (HVAC) services; telecommunica-tion services; landfill and wastehauling operations; operation and maintenance of energy-related projects; real estate sales and developments; and leveraged equipment leases.
Regulation of Utility Operations The Company is subject to regulation with respect to its retail utility sales by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively) and the Virginia State Corporation Corii.mission (VSCC), which have powers over rate matters, accounting, and terms of service. Gas sales are subject to regulation by the DPSC. The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting sys-tems and policies, the transmission of electricity, the wholesale sale of electricity, and interchange and other purchases and sales of electricity involving other utilities. The FERC also regulates the price and other terms of transportation of natural gas purchased by the Company. The percentage of electric and gas utility operating revenues regulated by each Commission for the year ended December 31, 1996, was as follows: DPSC, 61.9%; MPSC, 28.8%; VSCC, 2.8%; and FERC, 6.5%.
Refer to Note 8, "Regulatory Assets," to the Consolidated Financial Statements for a discussion of regulatory assets arising from the financial effects of rate regulation.
Reporting of Subsidiaries The consolidated financial statements include the accounts of the Company's wholly owned subsidiaries. All significant intercompany accounts and transactions are eliminated in consolidation. The results of operations of the Company's nonutility subsidiaries are reported in the Consolidated Statements of Income as "Other Income." Refer to Note 18, "Nonutility Subsidiaries, to the Consolidated Financial Statements for financial information about the Company's nonutility subsidiaries.
Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires manage-ment to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclo-sure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period~ Actual results could differ from those estimates.
Utility Revenues At the end of each month, there is an amount of electric and gas service rendered from the last meter reading to the month-end which has not yet been billed to customers. The non-fuel (base rate) revenues associated with such unbilled services are accrued by the Company.
When interim rates are placed in effect subject to refund, the Company recognizes revenues based on expected final rates.
DELMARVA POWER & LIGHT COMPANY 39
40 Fuel Expense Fuel costs charged to the Company's results of operations generally are adjusted to match fuel costs included in customer billings (fuel revenues). The difference between fuel revenues and actual fuel costs incurred is reported on the Consolidated Balance Sheets as "Deferred energy costs." The deferred balance is subsequently recovered from or returned to utility customers.
The Company's share of nuclear fuel at the Peach Bottom Atomic Power Station (Peach Bottom) and the Salem Nuclear Generating Station (Salem) is financed through a contract which is accounted for as a capital lease. Nuclear fuel costs, including a provision for the future disposal of spent nuclear fuel, are charged to fuel expense on a unit-of-production basis.
Depreciation Expense The annual provision for depreciation on utility property is computed on the straight-line basis using composite rates by classes of depreciable property. The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.6% for 1996, 1995 and 1994. Depreciation expense includes a provi-sion for the Company's share of the estimated cost of decommissioning nuclear power plant reactors based on amounts billed to customers for such costs. Refer to Note 6, "Nuclear Decommissioning," to the Consolidated Financial Statements for additional information on nuclear decommissioning.
Income Taxes Refer to Note 3, "Income Taxes," for the Company's accounting policy on income taxes and investment tax credits.
Debt Refinancing Costs Costs of refinancing debt are deferred and amortized over the period during which the refinancing costs are recovered in utility rates.
Interest Expense The amortization of debt discount, premium, and expense, including refinancing expenses, is included in interest expense.
Allowance for Funds Used During Construction Allowance for Funds Used During Construction (AFUDC) is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance construction of new utility facilities. In the Consolidated Statements of Income, the borrowed funds component of AFUDC is reported under "Utility Interest Charges" as a reduction of inter-est expense and the equity funds component of AFUDC is reported as "Other Income." AFUDC was capitalized on utility plant construction at the rates of 6.7% in 1996, 7.1 % in 1995, and 9.3% in 1994.
Stock-based Employee Compensation Refer to Note 9, "Common Stock," for the Company's accounting policy on stock-based employee compensation.
Capitalized Software Costs The Company capitalizes software projects which exceed $1 million. Capitalized software costs net of accumulated depreciation were $31.6 million as of December 31, 1996 and $8.2 million as of December 31, 1995. Capitalized soft-ware GOSts are amortized over periods of 5 to 10 years.
Leveraged Leases As of December 31, 1996, the Company's portfolio of leveraged leases, held by a nonutility subsidiary, consists of five aircraft which are leased to three separate airlines. The Company's investment in leveraged leases includes the aggregate of rentals receivable (net of principal and interest on nonrecourse indebtedness) and estimated residual values of the leased equipment less unearned and deferred income (including investment tax credits). Unearned and deferred income is recognized at a level rate of return during the periods in which the net investment is positive.
DELMARVA POWER & LIGHT COMPANY
Funds Held By Trustee Funds held by trustee generally include deposits in the Company's external nuclear decommissioning trusts and unexpended, restricted, tax-exempt bond proceeds. Earnings on such trust funds are also reflected in the balance.
Cash Equivalents In the consolidated financial statements, the Company considers highly liquid marketable securities and debt instruments purchased with a maturity of three months or less to be cash equivalents.
Cash Paid During the Year (Dollars in Thousands)
Interest, net of capitalized amount Income taxes, net of refunds 1996
$67,596
$56,582 1995
$62,660
$66,764 1994
$57,837
$67,922 The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the Company's utility business and subsidiaries based upon their respective taxable incomes, tax credits, and effects of the alternative minimum tax, if any.
Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial state-ment and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of the Company's deferred tax liability applicable to utility operations that has not been reflected in current customer rates represents income taxes recoverable through future rates and is reflected on the Consolidated Balance Sheets as "Deferred recoverable income taxes." Deferred recoverable income taxes were $137.6 million and $151.3 million as of December 31, 1996 and 1995, respectively.
Deferred income tax expense represents the net change during the reporting period in the net deferred tax liability and deferred recoverable income taxes.
Investment tax credits (ITC) from regulated operations are being amortized over the useful lives of the related utility plant. ITC associated with leveraged leases are being amortized over the lives of the related leases during the periods in which the net investment is positive.
Components of Consolidated Income Tax Expense (Dollars in Thousands) 1996 1995 1994 Operation Federal:
Current
$32,937
$46,517
$50,276 Deferred 31,670 16,452 5,592 State:
Current 6,536 9,851 11,268 Deferred 7,273 3,257 928 Investment tax credit adjustments, net (2,560)
(2,516)
(1,898)
Total Operation 75,856 73,561 66,166 Other income Federal:
Current 8,016 5,263 2,789 Deferred (5,539)
(3,686)
(2,008)
State:
Current 193 433 349 Deferred (186)
(31) 317 Total Other Income 2,484 1,979 1,447 Total income tax expense
$78,340
$75,540
$67,613 DELMARVA POWER & LIGHT COMPANY 41
42 Reconciliation of Effective Income Tax Rate The amount computed by multiplying income before tax by the'federal statutbry rate is recon'ciled 'below to the total* 1 income tax expense.
(Dollars in Thousands)
Statutory federal income tax expense Increase (decrease) due to State income taxes, net of federal tax benefit Other, net Total income tax expense Amount
$68,084 8,980 1,276
=- - -~7~-1~~~
Components of Deferred Income Taxes 1996 1995 Rate Amount 35%
$67,560 5
8,792 (812) 40%
$75,540
- -_::.... --= --==--==== ---
1994 Rate Amount Rate 35%
$61,574 35%
5 8,361 4
(1)
(2,322)
(1) 39%
$67,613 38%
--=-= -----=--- - ---====-
-::..-=-- -=--=
The tax effect of temporary differences that give rise to the Company's net deferred tax liability are shown below.
(Dollars in Thousands)
Deferred Tax Liabilities Utility plant basis differences Accelerated depreciation Other Leveraged leases Deferred recoverable income taxes Deferred energy costs Other Total deferred tax liabilities Deferred Tax Assets Deferred ITC Other Total deferred tax assets Total deferred taxes, net AS OF DECEMBER 31, 1996 1995
$310,343 107,186 41,604 58,747 13,240 75,005 606,125 14,876
$307,346 99,941 44,662 64,376 54,507 570,832 15,719 57,524 40,916 72,400 56,635
$533,725
$514,197
--~~-~=-
-"--=--"-~~-
Valuation allowances for deferred tax assets were not material as of December 31, 1996 and 1995.
Pending Merger with Atlantic Energy, Inc.
On August 9, 1996, the Company and Atlantic Energy, Inc. (Atlantic) announced plans for a business combination of the Company and Atlantic in a merger of equals. Conectiv, Inc., a Delaware corporation, was newly formed to accomplish the merger and its outstanding capital stock is owned 50% by the Company and 50% by Atlantic. After the merger, Conectiv, Inc. will become the parent company of the Company and its direct and indirect subsidiaries and of the direct and indirect subsidiaries of Atlantic. Conectiv, Inc., whose name will be changed to Conectiv at the time of the merger, will be a holding company registered under the Public Utility Holding Company Act of 1935, as amended.
Atlantic is a public utility holding company with three wholly owned subsidiaries, Atlantic City Electric Company (ACE), Atlantic Energy Enterprises, Inc., and Atlantic Energy International, Inc. ACE, which is Atlantic's regulated utility subsidiary, is primarily engaged in the generation, transmission, distribution, and sale of electric energy to about 4 78,000 customers in an area consisting of 2, 700 square.miles in southern New Jersey. Atlantic's 1996 operating revenues and net income were $980.3 million and $58.8 million, respectively, and its total assets were $2,670.8 million as of December 31, 1996.
DELMARVA POWER & LIGHT COMPANY
On January 30, 1997 the merger was approved by the stockholders of the Company and Atlantic. The merger is expected to close shortly, after all relI!a~nj11g conditions.to the consummation of the merger, including obtaining applicable regulatory approvals, are met or waived. The regulatory approval process is expected to be completed in late 1997 or early 1998.
As a result of the merger, each outstanding share of the Company's common stock, par value $2.25 per share, will be exchanged for one share of Conectiv's common stock, par value $0.01 per share. Each share of Atlantic's common stock, no par value per share, will be exchanged for 0.75 of one share of Conectiv's common stock and 0.125 of one share of Conectiv's Class A common stock, par value $0.01 per share. The preferred stock of the Company will remain outstanding and unchanged. The purchase method of accounting will be used to account for the merger.
The total consideration to be paid to Atlantic's common stockholders, measured by the average daily closing market price of Atlantic's common stock for the ten trading days following the public announcement of the merger, is $948.6 million. The consideration paid plus estimated acquisition costs and liabilities assumed in connection with the merger are expected to exceed the net book value of Atlantic's net assets by approximately $204.5 million, which will be recorded as goodwill. The goodwill will be amortized over 40 years.
Acquisition of Conowingo Power Company On June 19, 1995, the Company acquired Conowingo Power Company (COPCO), the Maryland retail electric subsidiary of PECO Energy Company (PECO), for $158.2 million ($157.0 million net of cash acquired). The Company financed the acquisition with $125.8 million of long-term debt and the balance with short-term debt. COPCO was merged into the Company and is now being operated as the Conowingo District. Approximately 37,500 electric retail customers were added to the Company's customer base.
The acquisition was accounted for as a purchase and, accordingly, the operating results of the Conowingo District are included in the Consolidated Statements of Income starting June 19, 1995. The purchase price included $76 million of goodwill which is being amortized on a straight-line basis over 40 years.
Assuming that the COPCO acquisition had occurred at the beginning of 1995 and 1994, the Company's pro forma operating results for these years would not have been materially different from the operating results reported.
~5_. EARL Y--_REJ'IRE.M-EN'.f~ ~OEEER, In the third quarter of 1994, the Company completed a voluntary early retirement offer (ERO) for all management and union employees at least 55 years old with at least 10 years of continuous service by December 31, 1994. The ERO was accepted by 10.5% of the Company's workforce (296 people), which represented an 82% participation rate among eligible employees. In accordance with Statement of Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the Company expensed $17.5 million of costs associated with the ERO ($10.7 million after taxes or $0.18 per share).
_6_._N_UCLEAR~D_KCO_MMIS_SIONING, The Company records a liability for its share of the estimated cost of decommissioning the Peach Bottom and Salem nuclear reactors over the remaining lives of the plants based on amounts collected in rates charged to electric cus-tomers. For utility rate-setting purposes, the Company estimates its share of future nuclear decommissioning costs based on NRC regulations concerning the minimum financial assurance amount for nuclear decommissioning. The Company is presently recovering, through electric rates in the Delaware and Virginia jurisdictions, nuclear-decommis-sioning costs based on the current NRC minimum financial assurance amount of approximately $130 million. In the Maryland and FERC jurisdictions, the Company is presently recovering nuclear decommissioning costs based on the 1990 NRC minimum financial assurance amount of approximately $50 million.
The Company's accrued nuclear decommissioning liability, which is reflected in the accumulated reserve for deprecia-tion, was $42.9 million as of December 31, 1996. The provision reflected in depreciation expense for nuclear decommis-sioning was $4.2 million in 1996, $3.6 million in 1995, and $2.4 million in 1994. External trust funds established by the Company for the purpose of funding nuclear decommissioning costs had an aggregate book balance of $31.1 million (fair value of $35.3 million) as of December 31, 1996. Earnings on the trust funds are recorded as an increase to the accrued nuclear decommissioning liability, which, in effect, reduces the expense recorded for nuclear decommissioning.
DELMARVA POWER. & LIGHT COMPANY 43
44 The ultimate cost of nuclear decommissioning for the Peach Bottom and Salem reactors may exceed "the NRC minimum financial assurance amount, which is updat~d annually under:! a*,NRC prescribed formula...
The staff of the Securities and Exchange Commission has questioned certain of the current accounting practices of the electric utility industry, including the Company, regarding the recognition, measurement and classificatio.n of decom-missioning costs for nuclear generating stations in the financial statements of electric utilities. In February 1996, the Financial Accounting Standards Board (FASB) issued the Exposure Draft, "Accounting for Certain Liabilities Related to Closure or Removal of Long-Lived Assets," which proposes changes in the accounting for closure and removal costs of long-lived assets, including the recognition, measurement, and classification of decommissioning costs for nuclear generating stations. If the proposed changes are adopted: (1) annual provisions for decommissioning would increase, (2) the estimated cost for decommissioning would be recorded as a liability rather than as accumulated depreciation, and (3) trust fund income from the external decommissioning trusts would be reported as investment income rather than as a reduction to decommissioning expense.
7~-=J~QIN-T~LX=O~WN E.D~P=1..AN~T~
The Company's Consolidated Balance Sheets include its proportionate share of assets and liabilities related to jointly owned plant. The Company's share of operating and maintenance expenses of the jointly owned plant is included in the corresponding expenses in the Consolidated Statements of Income. The Company is responsible for providing its share of financing for the jointly owned facilities. Information with respect to the Company's share of jointly owned plant as of December 31, 1996 was as follows:
(Dollars in Thortsands)
Nuclear Peach Bottom Salem Coal-Fired Keystone Conemaugh Transmission Facilities Other Facilities Total Megawatt Ownership Capability Share Owned 7.51%
164MW 7.41%
164MW 3.70%
63MW 3.72%
63MW Various Various Construction Plant in Accumulated Work in Service Depreciation Progress
$130,196
$76,251
$12,426 216,788 102,568 24,548 19,943 8,236 307 33,274 9,821 342 4,564 2,205 1,746 179 1,633
$406,511 -= = $19_?!260 -=~~~*2_56 -~
In conformity with generally accepted accounting principles, the Company's accounting policies reflect the financial effects of rate regulation and decisions issued by regulatory commissions having jurisdiction over the Company's utility business. In accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company defers expense recognition of certain costs and records an asset, a result of the effects of rate regulation. Except for Deferred Energy Costs which is classified as a current asset, these "regulatory assets" are included on the Company's Consolidated Balance Sheets under "Deferred Charges and Other Assets." As of December 31, 1996, the Company had $219.7 million of regulatory assets, which included the following: Deferred Energy Costs-
$31.1 million; Deferred debt refinancing costs-$21.4 million; Deferred recoverable income taxes-$137.6 million (refer to Note 3, "Income Taxes," to the Consolidated Financial Statements); Deferred recoverable plant costs-$7.9 million; Deferred costs for decontamination and decommissioning of United States Department of Energy gaseous diffu-sion enrichment facilities-$6.8 million; Deferred demand-side management costs-$6,1 million; and other regulatory assets. -$8.8 million. The costs of _these assets either are being recovered or are probable of being recovered through customer rates. Generally, the costs of these assets are recognized in operating expenses over the period the cost is recovered from customers.. _
DELMARVA POWER & LIGHT COMPANY
--9~*=-CcQMMHN=S~T~O~CK, Refer to the Consolidated Statements *bf :Changes in' C~mrrion Stockholders" Equity for information concerning issuances and redemptions of common stock during 1994-1996.
The merger agreement with Atlantic (discussed in Note 4, "Mergers and Acquisitions") contains a restriction on the payment of dividends on common stock. Under the merger agreemerit, the Company's annual per share common stock dividend cannot exceed $1.54 through the effective date of the merger.
The Company's Long Term Incentive Plan (LTIP) provides long-term incentives to key employees through awards of stock-based compensation. Up to 1,500,000 shares of common stock may be issued under the LTIP during the ten-year period from May 31, 1996 through May 30, 2006. Currently, awards granted under the LTIP consist entirely of shares of performance-based restricted stock which are contingently granted and earned over a four-year period to the extent that performance targets are satisfied. Restrictions on shares contingently granted in 1994-1996 will lapse upon the earlier of the effective date of the pending merger with Atlantic or the end of the four year vesting period. Restrictions will not lapse due to consummation of the merger on shares contingently granted in 1997 through the effective date of the pending merger with Atlantic. During 1996, 1995, and 1994, the number of restricted shares contingently granted and their fair value as of grant date was as follows: 1996-48,750 shares, $22% per share fair value; 1995-62,050 shares, $18%4 per share fair value; 1994-36,840 shares, $23% per share fair value. Formerly, the LTIP also provided for stock options and dividend rights; some of the stock options are still outstanding. Changes in stock options are summarized below.
Beginning-of-year balance Options exercised Options forfeited End-of-year balance Exercisable 1996 Number of Shares 46,350 2,400 43,950
- ~--~?_,950 Weighted Average Price
$20.16
$19.69
$20.19
$20.19 Number of Shares 53,050 3,900 2,800 46,350 1995 Weighted Average Price
$20.03
$17.85
$20.98
$20.16 Number of Shares 53,050 53,050 1994 Weighted Average Price
$20.03
$20.03 For options outstanding as of December 31, 1996, the range of exercise prices was $17Yi to $211,; and the weighted average remaining contractual life was 3.5 years.
The Company recognizes compensation costs for its stock-based employee compensation plans based on the accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees."
Stock-based employee compensation costs charged to expense were $0.3 million in 1996, $1.3 million in 1995, and
$0.6 million in 1994. Pro forma net income and earnings per share for 1996, 1995, and 1994, based on application of SFAS No. 123, "Accounting for Stock-Based Compensation" are not materially different from net income and earnings per share as reported.
-=rn. =CHMRANX--0$L I.GA'T~E D=MAN,DA'T~O:RI LX~R ED"EEMA RL E=RRE RE.RR ED=SKC~URtTJE S.=QK,
,S~UB.SJ.D:IARX='I:RU S:T~KO:LD:I.NoG=S~O,LELX~=CD:MRANX=nE REN~T"URE.S=
A wholly owned subsidiary trust (Delmarva Power Financing I) was established in 1996 as a financing subsidiary of the Company for the purposes of issuing common and preferred trust securities and holding 8.125% Junior Subordinated Debentures (the Debentures). The Debentures held by the trust are its only assets. The trust will use interest payments received on the Debentures it holds to.make cash distributions on the trust securities.
The combination of the obligations of the Company pursuant to the Debentures, agreements to pay the expenses of the trust and the Company's guarantee of distributions with respect to trust securities, to the extent the trust has funds available therefor, constitute a full and unconditional guarantee by the Company of the obligations of the trust under DELMARVA POWER & LIGHT C'OMPANV 45
46 the trust securities the trust has issued. The Company is the owner of all of the common securities of the trust, which constitute approximately 3% of the liquidation amount of all qf the trust securities issued by the trust.
In October 1996, the trust issued $70 million in aggregate liquidation amount of 8.125% Cumulative Trust Preferred Capital Securities (representing 2,800,000 preferred securities at $25 per security). At the same time, $72,165,000 in aggregate principal amount of 8.125% Junior Subordinated D~bentures, Series I, due 2036 were issued to the trust.
For consolidated financial reporting purposes, the Debentures are eliminated in consolidation against the trust's invest-ment in the Debentures. The preferred trust securities are subject to mandatory redemption upon payment of the Debentures at maturity or upon redemption. The Debentures are subject to redemption, in whole or in part at the option of the Company, at 100% of their principal amount plus accrued interest, after an initial period during which they may not be redeemed and at any time upon the occurrence of certain events.
In October 1996, the Company used part of the proceeds from the trust to purchase and retire $63,382,700 (par value) of its preferred stock as follows: $1,013,400 of the 3.70% series ($100 par value); $2,012,600 of the 4% series ($100 par value); $2,459,600 of the 4.2% series ($100 par value); $2,154,000 of the 4.28% series ($100 par value);
$3,042,900 of the 4.56% series ($100 par value); $3,147,700 of the 5% series ($100 par value); $16,500,000 of the 6.75% series ($100 par value); $32,087,500 of the 7.75% series ($25 par value), and $965,000 of the Adjustable Rate series ($100 par value). In December 1996, the Company used the balance of the proceeds and cash from short-term debt to fund the redemption of its entire 7.52% preferred stock series which had a total par value of $15,000,000.
11._CcUM.ULAT.lVE !!REFERRED S.TOCK, The Company has $1, $25, and $100 par value per share preferred stock for which 10,000,000; 3,000,000; and 1,800,000 shares are authorized, respectively. No shares of the $1 par value per share preferred stock are outstanding.
Shares outstanding for each series of the $25 and $100 par value per share preferred stock are listed below.
Redemptions of preferred stock in 1996 are discussed in Note 10 to the Consolidated Financial Statements, "Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Debentures."
Series
$25 per share par value 7%%
$100 per share par value 3.70%-5%
6%%
7.52%
Adjustable rate'3l Auction rate(*)
Current Redemption Price (1)
$103.00-$105.00 (2)
$100
$100 (1) Redeemable beginning September 30, 2002, at $25 per share.
(2) Redeemable beginning November 1, 2003, at $100 per share.
(3) Average rates during 1996 and 1995 were 5.5% and 5.6%, respectively.
(4) Average rates during 1996 and 1995 were 4.1 % and 4.5%, respectively.
Shares Outstanding 1996 1995 316,500 181,698 35,000 151,200 450,000 1,600,000 320,000 200,000 150,000 160,850 450,000 Amount (Dollars in Thousands) 1996 1995
$7,913 18,170 3,500 15,120
$40,000 32,000 20,000 15,000 16,085 45,000 45,000 DELMARVA POWER & LIGHT COMPANY
1,2.. =oDcE B=T
Substantially all utility plant of the Com{i'any is subjec:i'tothe lien of the Mortgage and Deed of Trust collateralizing the Company's First Mortgage Bonds.
As of December 31, 1996, the Company had $150 million of unused bank lines of credit. The Company generally is required to pay annual commitment fees of 0.10% for its credit lines. The lines of credit are reviewed periodically by the Company, at which time they may be renewed or cancelled. The weighted average interest rates on short-term debt out-standing as of December 31, 1996 and 1995 were 5.6% and 5.3%, respectively.
Maturities of long-term debt and sinking fund requirements during the next five years are as follows:
1997-$29.4 million; 1998-$35.l million; 1999-$37.5 million; 2000-$4.2 million; 2001-$5.2 million.
From February 4, 1997 to February 7, 1997, the Company issued $77.0 million of unsecured Medium Term Notes with maturities of 10 to 30 years and interest rates of 7.06% to 7.72%. The proceeds were used to repay short-term borrow-ings which were outstanding as of December 31, 1996. In recognition of this refinancing, $77.0 million of short-term debt has been reclassified to long-term debt on the consolidated balance sheet as of December 31, 1996. Long.-term debt outstanding as of December 31, 1996 and 1995 is presented below:
(Dollars in Thousands)
First Mortgage Bonds:
Amortizing First Mortgage Bonds Total First Mortgage Bonds Other Bonds Pollution Control Notes:
Series 1973 Series 1976 Medium Term Notes:
Other Obligations:
Unamortized premium and discount, net Current maturities of long-term debt Total long-term debt Variable Rate Demand Bondsl31 Total long-term debt and Variable Rate Demand Bonds Interest Rates Due 6%%
1997 6.40%-6.95%
2002-2003 7.30%-8.15%
2014-2015 5.90%-8.50%
2018-2022 7.71%
2025 6.05%
2032 6.95%
1997-2008 7.15%-7.50%
2011-2017 5%%
1997-1998 7Ys%-7li%
1997-2006 5.69%
1998 7Yz%
1999 8.30%-9.29%
2002-2004 7.06%-8Ys%
2007 7.55%-7.62%
2017 7.61 %-9.95%
2020-2021 7.72%
2027 8.09%
1997-2002 8.00%
1999(!)
9.65%
2002(21 1996 1995
$25,000
$25,000 120,000 120,000 31,000 81,000 203,200 208,200 100,000 100,000 15,000 15,000 25,300 25,800 575,000 575,000 54,500 54,500 6,125 6,250 3,000 3,100 25,000 25,000 30,000 30,000 39,000 39,000 31,000 50,000 10,000 67,000 61,000 30,000 1,502 940 3,970 4,279 6,134 6,938 (572)
(618)
(27,676)
(1,485) 904,033 853,904 35,000 86,500
$939,033
$940,404 c..=:.....~~=-~ - ---- --
- "". - --- ~--=- ~--- - --=--=----=--=-=--~ =-=-
_:::::.......:~-=-=--=-- --=..::........=..::
(1) Repaid through monthly payments of principal and interest using a 15-year principal amortization, with the unpaid balance due in September 1999.
(2) Repaid through monthly payments of principal and interest over 15 years ending November 2002.
(3) The Company's debt obligations included Variable Rate Demand Bonds (VRDB) in the amounts of $85.0 million as of December 31, 1996 and $86.5 million as of December 31, 1995. The VRDB are classified as current liabilities because the VRDB are due on demand by the bondholder. However, bonds submitted to Delmarva for purchase are remarketed by a remarketing agent on a best efforts basis. Delmarva expects that bonds submitted for purchase will continue to be remarketed successfully due to Delmarva's credit worthiness and the bonds' interest rates being set at market. The Company also may utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, the Company considers the VRDB to be a source of long-term financing. The $85.0 million balance of VRDB outstanding as of December 31, 1996, matures in 2017 ($26 mil-lion), 2019 ($13.5 million), 2028 ($15.5 million), and 2029 ($30 million). Average annual interest rates on the VRDB were 3.6% in 1996 and 4.0% in 1995.
DELMARVA POWER & LIGHT COMPANY 47
48 13.=EAI R=Y-AL~U~E.~OF-EI NAN,CI<U=1-N~S~TllUl\\'.lEJ~~.T~S=
The year-end fair values of certain financial*insfruments* are listed befow. The'. fair values were based on quoted market prices of the Company's securities or securities with similar characteristics.
(Dollars in Thousands)
Funds held by trustee Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Company Debentures Long-Term Debt Vl.=C.OMMITME NTS~
Carrying Amount
$34,735
$70,000
$904,033 1996 Fair Value
$38,908
$71,064
$944,670 Carrying Amount
$36,275
$853,904 1995 Fair Value
$37,060
$936,480 The Company currently estimates its commitments for construction of utility plant, excluding AFUDC, and purchases under fuel supply contracts, excluding nuclear fuel, to be approximately $183 million in 1997 and $198 million in 1998.
The Company has a 26-year agreement with Star Enterprise effective through May 2018, to purchase 48 MW of capacity supplied by the Delaware City Power Plant. By mutual agreement, the capacity portion of the contract has been suspended from October 1, 1996 until June 1, 2000. In conjunction with the COPCO acquisition, the Company agreed to purchase capacity and energy from PECO effective June 19, 1995, through May 31, 2006. The base amount of the capacity purchase, which is subject to certain possible adjustments, starts at 205 megawatts (MW) and increases annually to 279 MW in 2006. Under the terms of the agreements with Star Enterprise and PECO, the Company's expected commitments for capacity and energy charges are as follows: 1997-$57.7 million; 1998-$61.1 million; 1999-$68.6 million; 2000-$76.3 million; 2001-$79.4 million; after 2001-$431.5 million; total-$774.6 million.
The Company's share of nuclear fuel at Peach Bottom and Salem is financed through a nuclear fuel energy contract, which is accounted for as a capital lease. Payments under the contract are based on the quantity of nuclear fuel burned by the plants. The Company's obligation under the contract is generally the net book value of the nuclear fuel financed, which was $31.5 million as of December 31, 1996.
The Company leases an 11.9% interest in the Merrill Creek Reservoir. The lease is considered an operating lease and payments over the remaining lease term, which ends in 2032, are $154.3 million in aggregate. The Company also has long-term leases for certain other facilities and equipment. Minimum commitments as of December 31, 1996 under the Merrill Creek Reservoir lease and all other noncancelable lease agreements (excluding payments under the nuclear fuel energy contract which cannot be reasonably estimated) are as follows: 1997-$6.5 million; 1998-$6.4 million; 1999-$6.2 million; 2000-$5.0 million; 2001-$4.9 million; after 2001-$137.0 million; total-$166.0 million~
Approximately 93% of the minimum lease commitments shown above are payments due under the Merrill Creek Reservoir lease.
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) 1996 1995 1994 Interest on capital leases
$1,628
$1;773
$1,560 Amortization of capital leases 5,653' 8,044 11,456 Operating leases 13,795 13,619 14,552
$21,076
$23,436
$27,568 DELMARVA POWER & LIGHT COMPANY
LS""=RElYSJ.O~N=RLAN=
The Company has a defined benefit pension plan c'overin'g all regular erl:iployees. The benefits are based on years of service and the employee's compensation. The Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum required contribu-tion nor greater than the maximum tax deductible contribution.
Based on fair values as of December 31, 1996, pension plan assets were comprised of the following: publicly traded equity securities ($472.5 million or 70%), U.S. government obligations ($101.2 million or 15%), and primarily invest-ment grade corporate and other fixed income obligations ($102.5 million or 15%).
The following schedules show the funded status of the plan, the components of pension cost, and assumptions.
Reconciliation of Funded Status of the Plan (Dollars in Thousands)
Accumulated benefit obligation Vested Nonvested Effect of estimated future compensation increases Projected benefit obligation Plan assets at fair value Excess of plan assets over projected benefit obligation Unrecognized prior service cost Unrecognized net gain Unrecognized net transition asset Prepaid pension cost AS OF DECEMBER 31, 1996 1995
$330,639
$338,485 24,869 26,024 355,508 364,509 95,132 109,706 450,640 474,215 676,189 616,600 225,549 142,385 28,980 29,191 (196,496)
(124,850)
(26,513)
(29,827)
$31,520
$16,899
= - -
- -=--=====-=-~--==-~
~-;-=-=-~-=~-,=---=--------=---=
Components of Net Pension Cost (Dollars in Thousands)
Service cost-benefits earned during period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and deferral Net pension cost Assumptions Discount rates used to determine projected benefit obligation as of December 31 Rates of increase in compensation levels Expected long-term rates of return on assets
=
1996
$13,172 32,531 (82,488) 22,164
$(14,621) 1996 7.50%
5.00%
9.00%
1995 1994
$9,719
$10,939 30,654 26,574 (135,850) 3,349 83,981 (52,601)
$(11,496)
$(11,739) 1995 1994 7.00%
8.25%
5.00%
5.50%
8.75%
8.25%
i::==------~-=-==-- ---===-
The net pension cost excludes the expense recorded in 1994 under SFAS No. 88 for the Company's ERO. Prepaid pension cost as of December 31, 1994, was reduced by the ERO. Refer to Note 5, "Early Retirement Offer," to the Consolidated Financial Statements for additional information on the ERO.
The Company maintains a 40l(k) savings plan for its employees. The plan provides for employee contributions up to 15% of pay and for $0.50 in matching contributions by the Company for each dollar contributed up to 5% of employee pay. The Company's matching contributions charged to expense were $2.4 million in 1996, and $2.3 million in 1995 and 1994.
DELMARVA POWER & LIGHT COMPANY 49
--,16_.~P-O S_TRETI REMENT=RE.NEELTS_~O=TH ER_ THAN= REN S_LOJYS~
50 The Company provides health-care and life insurance benefits to its retired employees and substantially all of the Company's employees may become eligible for these benefits upon retirement. The Company's policy is to fund its obligation to the extent that costs are reflected in customer rates, including amounts which are capitalized. Based on fair values as of December 31, 1996, the plan's assets consisted of $24.3 million (67%) of equity securities, including mutual funds and directly owned publicly traded securities, and $11.8 million (33%) of intermediate term investment grade bond mutual funds.
The following schedules show the funded status of the plan, the components of the cost of postretirement benefits other than pensions, and assumptions.
Reconciliation of Funded Status of the Plan (Dollars in Thousands)
Accumulated postretirement benefit obligation (APBO)
Active employees fully eligible for benefits Other active employees Current retirees Plan assets at fair value APBO in excess of plan assets Unrecognized prior service cost Unrecognized net (gain)/loss Unrecognized transition obligation Prepaid/(accrued) postretirement benefit cost Annual Cost of Postretirement Benefits Other than Pensions (Dollars in Thousands)
Service cost-benefits earned during period Interest cost on projected benefit obligation Actual return on plan assets Amortization of the unrecognized transition obligation Other, net Net postretirement benefit cost Assumptions Discount rates used to determine APBO as of December 31 Rates of increase in compensation levels Expected long-term rates of return on assets Health-care cost trend rate 1996
$4,568 23,900 45,373 73,841 36,075 (37,766) 370 (16,855) 57,876 1996
$2,512 5,213 (4,241) 3,617 AS OF DECEMBER 31, 1995
$2,152 6,601 (1,008) 3,617 1995
$6,019 23,990 63,629 93,638 24,900 (68,738) 423 5,212 61,493 1994
$2,127 5,520 100 3,617 2,072 149 (481)
$9,173
$11,511
$10,883
- ------ -=---==---=-=--=---:. -== "'""-
1996 1995 1994 7.50%
7.00%
8.25%
5.00%
5.00%
5.50%
9.00%
8.75%
8.25%
8.00%
10.50%
11.00%
....::...-...::...:-..:.:: -- -=---=-=- =-=--=----=::..:..=--- -
-=-==--- -=.....:..::.=--=--==-
The health-care cost trend rate, or the expected rate of increase in health-care costs, is assumed to decrease to 7.5%
in 1997 and gradually decrease to 5.0% by 2002. Increasing the health-care cost trend rates of future years by one per-centage point would increase the accumulated postretirement benefit obligation by $4.2 million and would increase annual aggregate service and interest costs by $0.4 million.
Salem Outages The Company owns 7.41 % of Salem Nuclear Generating Station (Salem), which consists of two pressurized water nuclear reactors and is operated by Public Service Electric & Gas Company (PSE&G). As of December 31, 1996, the Company's net investment in plant i~ service for Salem was approximately $56 million for Unit 1 and $60 million for Unit 2, including common plant allocated between the two units. Each unit represents approximately 2% of the Company's total assets and approximately 2.6% of the Company's installed electric generating capacity.
DELMARVA POWER & LIGHT COMPANY
Salem Units 1 and 2 were removed from operation by PSE&G on May 16, 1995, and June 7, 1995, respectively, due to operational problems and maintenanc~
1 and safety concerns. Their return dates are subject to completion of the require-ments of their respective restart plans to the satisfaction of PSE&G and the NRC, which encompasses a substantial review and improvement of personnel, process, and equipment issues.
With respect to Unit 1, PSE&G informed the Company in early 1996 that inspections of the steam generators using a new testing technology indicated degradation in a significant number of tubes. After evaluating several options, in May 1996, replacement steam generators from the unfinished Seabrook Unit 2 nuclear power plant in New Hampshire were purchased from Northeast Utilities Service Company for installation in Salem Unit 1. The replacement steam genera-tors arrived on site in October 1996. PSE&G expects Unit 1 to return to service in the fall of 1997, after replacement of the unit's steam generators. The Company's share of the costs to be capitalized for the steam generators, including installation, will range from approximately $11 million to $13 million.
With respect to Unit 2, PSE&G also informed the Company in early 1996, that inspections of the steam generators using the new testing technology confirmed that the condition of the generators was within current repair limits. In January 1997, PSE&G advised the Company that Unit 2 is expected to return to service in the second quarter of 1997.
In 1996 and 1995, the Company incurred higher than expected operation and maintenance costs at Salem of approxi-mately $9 million and $5 million, respectively, which were expensed as incurred.
The Company incurs replacement power costs while the units are out of service of approximately $750,000 per month, per unit. Such amounts vary based on the cost and availability of other Company-owned generation and the cost of pur-chased energy. Replacement power costs typically are not incurred for routine refueling and maintenance outages, and the recovery of replacement power costs is subject to approval by the regulatory commissions having jurisdiction over the Company. From the inception of the Salem unit outages through December 31, 1996, approximately one-half of the estimated replacement power costs of $20.4 million has been expensed ($6.1 million in 1996 and $4.1 million in 1995) and the remaining $10.2 million has been deferred on the Company's Consolidated Balance Sheet in expectation of future recovery. The unavailability of the Salem units also resulted in a $4 million charge to 1996 fuel expense for capacity deficiency charges owed to the PJM Interconnection.
The actual costs ultimately incurred by the Company may differ from the foregoing estimates, since the periods project-ed by PSE&G during which the Salem units will be out of service, the extent of the maintenance that will be required, and the costs of replacement power and the extent of its recovery may be different from those set forth above.
The Company began recovering one-half of the replacement power costs associated with the Salem outages on an interim basis, subject to refund, from retail customers in Virginia and Maryland in July and August 1996, respectively. The Company expects the VSCC and MPSC to conduct full reviews of the outages before making final determinations con-cerning replacement power cost recovery.
On December 10, 1996, the DPSC suspended the portion of interim rates related to the Salem replacement power costs until the earlier of June 1, 1997, or the end of the case concerning fuel rates charged to customers. If the suspended interim rates go into effect prior to the conclusion of the case, they would go into effect subject to refund pending the final decision by the DPSC.
Notwithstanding current discussions with regulators concerning deregulation of the electric generation portion of the utility business, the Company believes it is reasonable to assume that rates will be set al levels that will recover the current and anticipated costs, including the costs needed to return the Salem units to operating status, of the Company's investment in the Salem plant, and such rates can be charged to and collected from customers.
On February 27, 1996, the co-owners of Salem, including the Company, filed a complaint in the United States District Court for the District of New Jersey against Westinghouse Electric Corporation (Westinghouse), the designer and manu-facturer of the Salem steam generators. The complaint seeks to recover from Westinghouse the costs associated with and resulting from the cracks discovered in Salem's steam generators and with replacing such steam generators. The esti-mated replacement cost of such generators is between $150 million and $170 million. The Company cannot predict the outcome of this lawsuit.
DELMARVA POWER & LIGHT COMPANY 51
On March 5, 1996, the Company and PECO filed a complaint in the United States District Court for the Eastern District of Pennsylvania against Public Service Enterprise Group, Inc. '(Enterprise) and PSE&G. The lawsuit alleges that the defendants failed to heed numerous citations, warnings, notices of violations, and fines by the NRC as well as repeated warnings from the Institute of Nuclear Power Operations about performance, safety, and management problems at Salem and to take appropriate corrective action. The suit contends that as a result of these actions and omissions, the Salem units were forced to shut down in 1995. The suit asks for compensatory damages for breach of contract, negligence, and punitive damages, in amounts to be specified. The Company cannot predict the outcome of this lawsuit.
Environmental Matters The Company is subject to regulation with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and limitation on land use by various federal, regional, state, and local authorities. The Company has incurred, and expects to continue to incur, capital expenditures and operating costs because of environmental considerations and requirements. The disposal of Company-generated hazardous sub-stances can result in costs to clean up facilities found to be contaminated due to past disposal practices. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncon-trolled hazardous waste sites. The Company is currently a potentially responsible party (PRP) at three federal super-fund sites and is alleged to be a third-party contributor at three other federal superfund sites. The Company also has two former coal gasification sites in Delaware and one former coal gasification site in Maryland, each of which is a state superfund site. The Company is currently participating with the States of Delaware and Maryland in evaluating the coal gasification sites to assess the extent of contamination and risk to the environment. The Company has accrued a liability of $2 million for clean-up and other potential costs related to the federal and state superfund sites. The Company does not expect such future costs to have a material effect on the Company's financial position or results of operations.
Nuclear Insurance In the event of an incident at any commercial nuclear power plant in the United States, the Company could be assessed for a portion of any third-party claims associated with the incident. Under the provisions of the Price Anderson Act, if third-party claims relating to such an incident exceed $200 million (the amount of primary insurance), the Company could be assessed up to $23.7 million for such third-party claims. In addition, Congress could impose a revenue-rais-ing measure on the nuclear industry to pay such claims.
The co-owners of Peach Bottom and Salem maintain property insurance coverage in the aggregate amount of $2.8 bil-lion for each unit for loss or damage to the units, including coverage for decontamination expense and premature decommissioning. The Company is self-insured, to the extent of its ownership interest, for its share of property losses in excess of insurance coverages. Under the terms of the various insurance agreements, the Company could be assessed up to $3.7 million in any policy year for losses incurred at nuclear plants insured by the insurance companies.
The Company is a member of an industry mutual insurance company, which provides replacement po'A'.er cost coverage in the event of a major accidental outage at a nuclear power plant. The premium for this coverage is subject to retro-spective assessment for adverse loss experience. The Company's present maximum share of any assessment is $1.3 million per year.
Other On February 6, 1997, a major customer of the Company filed a lawsuit in the Delaware Superior Court alleging negli-gence and breach of contract against the Company in relation to electric system outages that occurred on March 28, 1996, and May 14, 1996. The complaint asks for actual damages in excess of $41 million and for special and punitive damages in unspecified amounts. The Company believes that its insurance will cover any amounts awarded in this law-suit in excess of $1 million for each outage. There is $2 million included in the Company's current liabilities as of December 31, 1996 for claims related to the outages. The Company cannot predict the outcome of this lawsuit.
52 DELMARVA POWER & LIGHT COMPANY
l1L=l~J1N~U:T.ILJXY
~S.UJlS"llllA RJ~KS~
The following presents condensed finartcial information 'of the Company's nonutility wholly owned subsidiaries.
Common general and administrative costs are allocated to the Company's nonutility subsidiaries on the basis of cost causative factors. The Company's management believes the cost allocations are reasonable.
CONDENSED SUBSIDIARY STATEMENTS OF INCOME (Dollars in Thousands) 1996 1995 1994 Revenues and Gains Landfill and waste hauling
$14,144
$13,505
$14,186 Operating services 21,457 26,564 22,468 Real estate 13,079 5,820 4,450 HVAC services 7,000 Recoveries of written-off joint venture assets 6,911 2,812 572 Other revenue 2,799 3,341 1,466 65,390 52,042 43,142 Costs and Expenses Operating expenses 54,793 45,594 38,499 Interest expense, net 1,000 492 370 Income tax expense 3,394 1,810 1,921 59,192 47,896 40,790 Net income
-- $6,193 --------
$4,146
$2,352
-~~--.::---- -* -----
CONDENSED SUBSIDIARY BALANCE SHEETS (Dollars in Thousands)
AS OF DECEMBER 31, Liabilities and AS OF DECEMBER 31, Assets 1996 1995 Stockholder's Eqnity 1996 1995 Current assets Current liabilities Cash and cash equivalents
$17,315
$19,483 Debt due within one year
$4,524
$506 Other 16,306 6,633 Variable rate demand bonds 13,500 15,000 34,121 26,116 Other 13,543 7,801 Noncurrent assets 31,572 23,307 Investment in Leveraged leases 46,961 48,367 Noncurrent liabilities Other 4,550 9,925 Long-term debt 4,543 4,713 Landfill & waste hauling Deferred income taxes 44,974 50,064 property, plant & equipment 24,339 24,177 Other 3,344 2,389 Other 13,505 9,778 52,366 57,166 94,405 92,247 Stockholder's Equity 44,033 37,890 Total
$123,526
$118,363 Total
$123,526
$118,363
=
=
Pine Grove Landfill, Inc.
One of the Company's indirect subsidiaries, Pine Grove Landfill, Inc. ("Pine Grove"), which owns and operates a solid waste disposal facility in Pennsylvania, currently has pending before the Pennsylvania Department of Environmental Protection (PADEP) an application for expansion of the facility. In August 1996, the Governor of Pennsylvania issued an executive order suspending consideration of landfill expansion applications until new regulations were written. The Company is revising its landfill expansion permit application to comply with the new PADEP guidelines issued in January 1997. The Company will comply with all new regulations and expects to receive permit approval to avoid any interruption in landfill services.
DELMARVA POWER & LIGHT COMPANY 53
-L9~-=SRGME NT=-lNKO_RMATLnN~
54 Segment information with respect to electric and gas operations was as follows:
(Dollars in Thousands) 1996 1995 1994 Operating Revenues Electric
$980,677
$899,662
$883,115 Gas 114,284 95,441 107,906 Total
$1,094,961
$995,103
$991,021 Operating Income Electric
$164,300
$165,914
$153,409 Gas 15,080 12,492 9,747 Total
$179,380
$178,406
$163,156 Depreciation Expense Electric
$115,448
$105,780
$102,746 Gas 7,726 7,242 6,777 Total
$123,174
$113,022
$109,523 Construction Expenditures Electric
$131,122
$118,655
$133,884 Gas 20,606 16,959 20,235 Total
$151,728
$135,614
$154,119 Identifiable assets, net
- Electric
$2,536,287
$2,493,797
$2,314,448 Gas 218,809 189,339 188,813 Assets not allocated 224,057 183,549 166,524 Total
- ~~- -~~-'-~~?-,_!_~~- - -!~*~~6,~?~---- -~-2~6~:!~~~
- 20. QUARTERLY FINANCIAL INFORMATION (Unandited)
The quarterly data presented below reflect all adjustments necessary in the opinion of the Company for a fair presentation of the interim results. Quarterly data normally vary seasonally because of temperature variations, differ-ences between summer and winter rates, the timing of rate orders, and the scheduled downtime and maintenance of electric generating units.
Quarter Ended 1996 March 31 June 30 September 30 December 31 1995 March 31 June 30 September 30 December 31 Operating Operating Revenue Income (Dollars in Thousands)
$292,630
$50,560 Net Income
$35,143 Earnings Applicable to Common Stock
$32,703 Average Shares Outstanding (In Thousands) 60,759 Earnings per Average Share
$0.54 250,593 38,523
\\
22,325 19,902 60,703 0.33 291,356 54,263 37,035 34,605 60,667 0.57 260,382 36,034 21,684 20,041 60,665 0.33
$257,600
$48,252
$35,408
$32,889 59,738
$0.55 213,228 34,178 19,444 16,962 60,109 0.28 283,065 60,960 42,714 40,238 60,372 0.67 241,210 35,016 19,922 17,457 60,651 0.29
$995,103
$178,406
$117,488
$107,546 60,217
$1.79 c- ": -
-- -=
.;;=....=.:::....:-=-=-=----~ --=.=---==- -=-=--=---=-...:--=--*-=-=-:. ---=-=-- --=--=--=--=- --=-=-= -==--=----=------==-==-- -- - --
DELMARVA POWER & LIGHT COMPANY
~.
I CONSOLIDATED STATISTICS
- f
- .*.:::15 1996 1995 1994 1993 1992 ELECTRIC REVENUES (Thousands)
Residential
$378,520
$344,351
$312,224
$305,446
$273,463 Commercial 286,438 267,239 242,506 237,785 220,659 Industrial 156,329 155,108
~
145,594 150,178 144,094 Resale 65,989 58,680 105,350 104,983 96,491 Other sales revenues(l) 2,503 14,211 6,816 9,716 7,142 Sales revenues 889,779 839,589 812,490 808,108 741,849 Interchange deliveries 75,301 47,271 62,388 61,437 30,606 Miscellaneous revenues 15,597 12,802 8,237 6,118 7,720 Total electric revenues
$980,677
$899,662
$883,115
$875,663
$780,175
--= ------=-- ---
.-_::::._ - -= ----
ELECTRIC SALES (1,000 Kilowatt-Hours)
Residential 4,262,710 3,829,807 3,578,743 3,499,387 3,228,237 Commercial 4,018,120 3,744,879 3,461,058 3,336,847 3,140,149 Industrial 3,331,175 3,351,834 3,248,131 3,232,233 3,115,677 Resale 1,333,268 1,213,459 2,166,154 2,131,920 1,987,393 Other sales(2)
(19,557) 170,942 50,996 79,843 49,355 Total electric sales 12,925,716 12,310,921 12,505,082 12,280,230 11,520,811
.,...._ - -- --=-= - - -= --
ELECTRIC CUSTOMERS (End of Period)
Residential 391,611 386,948 347,997 342,710 336,076 Commercial 49,165 48,345 44,060 43,324 42,427 Industrial 683 704 699 715 726 Resale 12 12 12 12 12 Other 645 641 604 593 578 Total electric customers 442,116 436,650 393,372 387,354 379,819 GAS REVENUES (Thousands)
Residential
$60,017
$47,135
$55,091
$47,022
$43,147 Commercial 32,191 24,458 28,088 23,065 20,175 Industrial 12,349 14,588 17,589 17,586 15,365 Interruptible, transportation and other(l) 9,727 9,260 7,138 7,271 5,182 Total gas revenues
$114,284
$95,441
$107,906
$94,944
$83,869 I:-
-=-==-= -....::..._
GAS SALES AND GAS TRANSPORTED Residential 8,692 7,328 7,717 7,311 7,264 (Million Cubic Feet)
Commercial 5,724 4,809 4,746 4,423 4,286 c
Industrial 2,696 3,935 3,858 4,348 4,358
~
Off-system sales 1,733 Interruptible, transportation and other(2) 5,312 5,299 4,021 3,523 4,260 Total gas sales and gas transported 24,157 21,371 20,342 19,605 20,168
=-.....=
- = -
-=-=-- ---=--
GAS CUSTOMERS (End of Period)
Residential 93,149 90,890 88,518 86,027 82,996 Commercial 7,615 7,369 6,982 6,751 6,500 Industrial 139 146 150 150 152 Interruptible. and.other 1
12 12 12 11 Total gas customers 100,904 98,417 95,662 92,940 89,659 C" - =- -.:-=-= - ---=-- - -==-=
- --=-::... *- - -=---= --== -- -=- -
---=--
===--= ---
(1) Includes unbilled revenues.
(2) Includes unbilled sales.
DELMARVA POWER & LIGHT COMPANY 55
... ~
l-~QUARTERLLC.OMMQN_S_TO_CIUU~IDENRAND=RRICE=RAN_GES=
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 52,644 holders of common stock as of December 31, 1996.
Dividend 1996 Declared High First Quarter
$.381/2
$23s/s Second Quarter
$.381'2
$21th Third Quarter
$.381/2
$211/4 Fourth Quarter
$.381'2
$211'2
-- SHAREHQLDER-SERYICES~
Carol C. Conrad, Assistant Secretary Delmarva Power & Light Company 800 King Street, P.O. Box 231 Wilmington, Delaware 19899 or The Bank of New York Shareholder Services-llE Church Street Station P.O. Box 11258 New York, NY 10286 Telephone toll-free (800) 365-6495
=STOCK-SYMB_OL, Price Low
$21
$191/s
$20
$193/4 Common Stock, DEW-listed on the New York and Philadelphia Stock Exchanges
~-ANN_U:AL=MEE'.I'IN£.
The Annpal Meeting will be held on May 29, 1997, at 11:00 a'..m. in the Clayton Hall, University of Delaware, Newark, Delaware.
~DIXIDEND-REINYES~TMENT=AND~
--C.OMMON~S_HARE=P~URCHASE=£LAN, 56 More than 40% of the Company's common stockholders of record are now participating in the Dividend Reinvestment and Common Share Purchase Plan. If you are not participating, you may want to consider the ben-efits 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 c/o The Bank of New York Divid~nd Reinvestment Church Street Station P.O. Box 11258 New York, NY 10286 Dividend 1995 Declared First Quarter
$.381/2 Second Quarter
$.381'2 Third Quarter
$.381/2 Fourth Quarter
$.381'2 First Mortgage Bond Trustee The Chase Manhattan Bank 450 West 33rd Street New York, New York 10001 High
$20
$2l1!.
$23
$23s/s Common and Preferred Stock The Bank of New York Shareholder Services-11 E Church Street Station P.O. Box 11258 New York, NY 10286 E-mail address:
Shareowner-SVCS @ Email.bony.com
-~ADDU'IQNAL~REP=ORTS~
Price Low
$177/s
$191/s
$191/2
$217/s To supplement information in this Annual Report, a Financial and Statistical Review (1986-1996) and the Annual Report on Form 10-K are available upon request.
Please write to:
Delmarva Power & Light Company c/o The Bank of New York Shareholder Services-11 E Church Street Station P.O. Box 11258 New York, NY 10286
-D~U£LlCATE=MAILINGS, You may be receiving more than one copy of the Annual Report because of multiple accounts within your house-hold. The Company is required to mail an Annual Report to each name on the stockholder list unless the stock-holder requests that duplicate mailings be eliminated. To eliminate duplicate mailings, please send a written request to The Bank of New York at the above address and enclose the mailing labels from the extra copies.
-MORE=INKQRMATIQN, For more information about Delmarva Power, visit our Internet site: http://www.delrnarva.com DELMARVA POWER & LIGHT COMPANY
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OFFICERS AS OF JANUARY 31. 1997 Howard E. Cosgrove, Chairman of the Board, President, and Chief Executive Officer Joseph W. Ford, Senior Vice President, Marketing/President, Delmarva Capital Investments, Inc.
Barbara S. Graham, Senior Vice President and Chief Financial Officer Ralph E. Klesius, Senior Vice President Thomas S. Shaw, Senior Vice President Donald E. Cain, Vice President, Administration Paul S. Gerritsen, Vice President Wayne A. Lyons, Vice President Frank J. Perry Jr., Vice President, Production Dale G. Stoodley, Vice President and General Counsel W. Douglas Boyce, Vice President Larry J. Bainter, Treasurer Donald P. Connelly, Secretary Hudson P. Hoen III, Vice President, Southern Division James P. Lavin, Comptroller and Chief Accounting Officer Dennis R. McDowell, Comptroller-Operating Philip S. Reese, Vice President Duane C. Taylor, Vice President, Electric Systems Engineering Jack Urban, Vice President, Gas Division D. Wayne Yerkes, Vice President BOARD OF DIRECTORS COMMITTEES Audit Committee James C. Johnson, Chairperson; R. Franklin Balotti; Robert D. Burris; Audrey K. Doberstein Compensation Committee Sarah I. Gore, Chairperson; Michael B. Emery; James H. Gilliam Jr.; James C. Johnson Executive Committee Howard E. Cosgrove, Chairperson; Sarah I. Gore, Vice Chairperson; R. Franklin Balotti; Michael B. Emery; James C. Johnson Investment Committee Howard E. Cosgrove, Chairperson; Audrey K. Doberstein; James H. Gilliam Jr.; Weston E. Nellius Nominating Committee Audrey K. Doberstein, Chairperson; Michael G. Abercrombie; Weston E. Nellius Nuclear Oversight Committee Michael G. Abercrombie, Chairperson; Robert D. Burris; Howard E. Cosgrove Entire report printed on recycled paper.
DELMARVA POWER 800 KING STREET P.O. Box 231 WILMINGTON, DE 19899 BULK RATE U.S. POSTAGE PAID SECAUCUS, NJ PERMIT No.1