ML18100B015

1993 Delmarva Power Annual Rept.

ML18100B015
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Site:	Salem, Hope Creek
Issue date:	12/31/1993
From:	COSGROVE H E DELMARVA POWER & LIGHT CO.
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ML18100B011	List: ML18100B010 ML18100B013 ML18100B014 ML18100B015
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1eea Delmarva Power Annual Report 9404210196 940413 PDR ADOCK 05000272 I PDR J -NOTICE-THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE INFORMATION

& REPORTS MANAGEMENT BRANCH. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND MUST BE RETURNED TO THE CORDS & ARCHIVES SERVICES TION P1-22 WHITE FLINT. PLEASE DO NOT SEND DOCUMENTS CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST BE FERRED TO FILE PERSONNEL. -NOTICE-Marking A Good Year With An Eye On Tomorrow's Opportunities The of Delmarva Power is to provide gas, electricity, and energy-related services to our customers in a safe, reliable, and customer-focused manner at competitive prices with an adequate return to investors. HNANCIAL HIGHLIGHTS Revenues Net Income Earnings Per Share of Common Srock Dividends Declared Per Share of Common Srock Average Shares of Common Srock Outstanding (000) Common Srock Book Value Per Share Construction Expenditures (2) Internally Generated Funds (3) Electric Sales Interchange Deliverie s Electric Customers (year end) Average Annual Residential Usage Gas Sales G a s Transported T oral Gas Sold a nd Transported Gas Customers (year end) Average Annual Residential Usage 1993 $970.6 million $111.1 million $1.76 $1.54 5 7 ,55 7 $14.66 $160.0 million $108.7 million 12 , 280 , 230 mWh 2 , 225,384 mWh 387,354 10,336 kWh 18.0 7 million mcf 1.54 million mcf 19.61 million mcf 92,940 86.85 mcf (I) Include s $0.21 p e r s h a r e from se nl c m c nt of di e P eac h B o n o m l aws uir. (2) E x clud es AJlowan ce F o r rund s U se d During C on st ru c ti o n. (3) Ne r cas h pro v id e d b y o p era ti ng act i vi ti es le ss co mm o n a n<l pr e f e r re d di v id e nd s. 1992 $864.0 million $98.5 million $1.69 (l) $1.54 53,456 $13.77 $207.4 million $130.3 million 11 , 520,811 mWh 998,6 7 9 mWh 379 , 819 9,680 kWh 17.01 million mcf 3. 16 million mcf 20.1 7 million mcf 89,659 88.71 mcf Percent Increase (Decrease) 12.3 12.7 4.1 7.7 6.5 (22.9) (16.6) 6.6 122.8 2.0 6.8 6.2 (51.2) (2.8) 3.7 (2.1)

• Table of CONTENTS CHAIRMAN'S LETIIR 2 Delmarva Power marked a good year in 1993. The Company surpassed performance tations, acted to improve irs position in the increas i ngly competitive utility industry, and added value to sharehold er investments.

CllPnlTIH AH llllHLITlll

• We are acknowledged as a strong player in today's energy marketplace.

By building on our strengths , we plan to remain a preferred energy supplier.

PRICES AIB RISIURCIS Our prices rank among the lowest in the region. We intend to keep prices low by trolling costs and using resources efficiently.

llPLIYHI HI TIAlllll 11 Customer satisfaction and competitive prices are the strategies we'll u se to respond to change in our business.

People working together in teams will make these things happen. CHTlllH HI COMIHITlll 12 Delmarva Power's continued success relies on satisfying customers.

We rank among the best in the nation for our ability to please tomers and t h e communities we serve.

Marking a Good .Year with an 111 on 2 Tomorrow's Opportunities

Dear Stockholder,

Delmarva Power's 1993 performance surpassed expectations.

Warmer-than-normal summer weather, customer growth, higher prices, and effective cost control produced earnings of $1.76 per share, a 7¢ increase compared to 1992. However, after excluding the 21 ¢ one-time gain in '92 for the Peach Bottom lawsuit settlement, earnings rose by 28¢ per share. These financial resu l ts were supported by a strong ating performance across the Company. For example, the 1 7 5-megawatt Hay Road Unit #4 was placed in service on schedule and on budget. This unit, which increased the Company's reserve margin to 22.6%, uses exhaust heat from three existing comb u stion turbines to generate electricity. This makes the Hay Road complex economically and environmentally efficient.

Power plants ran at 89.7% equivalent availability, well above the industry average of 80.6%. Our customer favorability rating of 81 % still ranked us among industry leaders. We gained rate case approvals through a collaborative approach with regulators and customers, which accelerated the process and avoided costly litigation.

We reduced expenses by nearly 3% below budget, and we retained our position as the region's low-cost energy producer.

These accomplishments reflect the hard work of our employees.

They deserve thanks and congratulations for th eir efforts. More detai l s about our 1993 performance are in the Financial section of this report. Now let's turn to what is ahead for you as a stockholder and for Delmarva Power. Ind ustry Ch an ge an d Co m p e titio n As a resu l t of t h e Energy Po l icy Act of 1992, Delmarva Power and other electric utilities compete against each other and independent power producers to supply energy to municipalities, cooperatives , and other large who l esale customers.

These customers can now shop for the best price , and they are doing so in our service territory.

For example, one of our wholesale customers, Old Dominion Electric Cooperative

{ODEC), will buy part of its electricity from another uti l ity beginning in 1995. In response to this industry change , we will seek to sign long-term s u pply contracts with who l esale customers. Within three to five years , utilit i es may vie for retail customers , such as manufacturing p l ants , office complexes, and shopping malls, as well. Delmarva Power's continued success relies on satisfying customers who will have more flexibility in choosing their energy suppliers, products, and services.

The Company anticipated this industry change and has already focused on strategies that will help us thrive. These strategies include Challenge 2000 , a flexible and balanced energy supply plan; Serving & Conserving Delmarva, an environmental ship program that goes beyond legal compliance; and the Participative Skills Process, which fosters a culture built around teamwork and continuous improvement.

Along with these, we're working to increase sales, especially in retail markets where we excel, and expand our energy products and services. We're also rethinking our critical business processes to look for better ways to offer our customers lower prices , increased qualiry , and quicker response.

Although we need to do better to succeed in the '90s, industry analysts already acknowledge Delmarva Power as a strong player in an increasingly competitive environment. According to the Merrill Lynch " Competitive Damage Index ," Delmarva Power ranks in the top half of U.S. power companies with a competitive advantage.

W.H. Reaves & Company named Delmarva Power among a select group of electric utilities that will be able to face increased competition , and Duff & Phelps stated the Company is "well positioned" for the increasing rivalry in the electric utility industry.

In addition, a management audit sponsored by the Maryland Public Service Commission concluded that Delmarva Power i s well managed and ready to meet competition.

Financial Strength and Dividends Keeping Delmarva Power financially strong in this competitive environment remains a top priority.

Higher-than-expected earnings in 1993 , combined with additional shareholder investment, lower capital expenditures, and reduced capital costs obtained through debt refinancings, have improved the Company's financial condition.

For example, book value, which grew in 1993 by 89¢ per share or 6.5%, reflects this improvement and represents an increased basis for allowable future earnings for shareholders.

However, as industry change continues to bring increased risk to our business , we expect earnings to be more volatile than in the past. With our commitment to financial strength in mind, the Board of Directors recently declared a quarterly dividend of 381/2¢ per sh a re for an indicated annual rate of $1.54. At the end of]anuary, our dividend yield of7.1% was above the average of 6.4% for the electric utility industry.

And, market price is in line with the industry average as measured by the ratio of market price per share to shareholder equity per share. Given these factors, along with our relatively high dividend payout ratio and increasing industry uncertainty, the Board concluded that the level of the dividend is appropriate.

The current dividend reflects the Company's prospects during a period of increasing competition, represents a competitive yield when compared to alternative utility investments of similar quality, and supports a fair price for the Company's stock. While more than 30 major investor-owned U.S. electric utilities cut their dividend by as much as 100% in the last decade, Delmarva Power's dividend is secure and sustainable at its current level. Over the long term, the dividend will be a function of earnings and our ability to compete successfully in a rapidly changing energy services marketplace. We're e x cited about the next 12 months. This period will lay a foundation for the way we do business in the future. We'll continue to stress the competencies that have provided us with an initial edge-financial strength, customer satisfaction, competitive prices, and teamwork-and we will replace ditional approaches in our business in an effort to remain a preferred supplier in an increasingly competitive marketplace.

Thank you for your confidence and continuing support. Sincerely, Howard E. Cosgrove Chairman of the Board, President, and Chief Executive Officer 3 4 We're working to increase sales, especially in the retail market where we excel. Preparing For A New Era Remaining A Competitive prices, teamwork, and customer the principles that guided us to success in the 1980s-are the strengths we are building on to stay a preferred energy supplier in a new era of competition and deregulation.

Pages 6 to 15 describe the general strategies, plans, programs, and projects that support these principles.

This section highlights actions we rook in 1993 to take advantage of our strengths in the changing uriliry industry.

Adapting To A Changing Market Competitive prices enabled Delmarva Power to reduce some uncertainty in our wholesale electricity business.

Under agreements negotiated in '93, wholesale customers must provide the Company with a two-year notice period to reduce up to 30% of their electricity requirements and a five-year notice to reduce above this level. This will give u s more stability whi l e we work to secure l ong-term energy supply contracts with these and other customers.

With our ability to satisfy customers, we acted on tunities to grow in the retail market. An example of this is Delmarva Power's offer to buy the Dover, Delaware, electric system. The Company recently presented a $103.5 million purchase proposal to the Utility Committee of the City Council. We believe that the proposal benefits Dover and Delmarva Power. For Dover and its residents, it means lower rates to businesses and many residential customers, a source of steady income to the city without the risks of running a power plant and operating an electric system , Supplier and job offers for the city's electric department employees.

For the Company, it means an expanded service area with 18,500 new retail customers and a positive impact on earnings.

Delmarva Power is also investigating similar offers for other electric systems in the region. We believe we can be the energy provider of choice , especially among residential and small to medium-sized commercial and industrial tomers that make up 85% of our retail market segment. Through teamwork, Delmarva Power has begun to study and rethink critical business processes. The traditional way we serve customers may not work in the new era of petition.

Company teams are looking for ways beyond cost cutting to maintain competitive prices and high quality products and services.

We are also forming a more ative relationship with regulatory agencies.

During the past year , we continued our history of achieving reasonable rate relief from commissions that regulate the Company. We obtained these results through a collaborative approach with both regulators and customers that accelerated the process and reduced costs. In addition, Delaware Governor Thomas Carper convened a task force to review the regulatory process in that state. The task force consists of representatives from the Public Service Commission; utilities, including Delmarva Power; industrial customers; government; and the public. Its purpose is to recommend reforms to the existing regulatory process, structure, and organization that will improve utility efficiency and enco ur age utility innovation while assuring continued availability of utility services at affordable prices. Delmarva Power will continue to take advantage of strategies that keep prices competitive, encourage teamwork, and heighten customer satisfaction.

These strategies will help us to thrive in a competitive industry, and enable us to tinue to provide a fair return to investors. ... _

Delmarva Power intends to grow the retail part of its business by devel.oping related products and s ervices that offer customized satisfaction. 5 Keeping Our 6 Limiting Costs Through Balance And Fkxibility Our energy prices are among the lowest in the Mid-Atlantic region and provide Delmarva Power with a competitive edge. Challenge 2000, a balanced and flexible energy ply plan devised in 1987, helped the Company gain its price advantage. Challenge 2000 uses balance and flexibiliry to deal with the changing demand for elecrriciry.

Demand rose dramatically in the early 19 7 0s, slowed in the latter part of the decade , and then grew sharply in the 1980s. Flexibiliry and balance allow the plan to be accelerated, slowed, or modified to respond to changing energy demands , fluctuating fuel prices, and emerging techno l ogies. Challenge 2000's three-pronged strategy includes saving energy, buying energy from other suppliers , and building and owning power plants, or "Save Some, Buy Some, Build Some." This plan is designed to provide reliable energy at the lowest able cost. So far, the plan has supplied the energy needed by customers on the Delmarva Peninsula while helping to keep prices for elecrriciry at about 1983 levels. "Save Some" consists of energy conservation and load management programs for all rypes of customers.

In '93, the Company introduced eight new energy conservation programs to Maryland residential and commercial customers. Among them, EPlus and Super EPlus offer rebates to tomers who install energy-efficient central cooling systems in their new or existing homes. Delmarva Power expects to offer similar programs in Delaware and Virginia in 1994. For "Buy Some," we opted, under a power purchase ment, to delay the in-service date of the Delaware Clean Energy Project from June 1996 to June 1998 or later. The delay of this 165-megawatt power plant that will burn gasified coke resulted from the expected loss of part of our resale business and moderate overall load growth. Under "Build Some," the Company completed Hay Road Unit #4. This combined cycle unit cleanly and efficiently Competitive generates up to 175 megawatts of elecrriciry b y using the exhaust heat from three adjoining generating units. The Hay Road complex, including Unit# 4, was built in four increments to closely match energy supply with growing customer needs. Through this incremental approach, the complex has a total cost of $470 per kilowatt, 20% below typical costs. To preserve an energy supply option, the Company is getting licenses for a new 300-megawatt power plant near Vienna, Maryland.

If needed, Delmarva Power would build this clean-coal technology unit in Dorchester Counry toward the end of the century. The Company is also exploring new ways to generate electriciry. At our Northern Division operations center in Christiana, Delaware , we are testing photovoltaic technology that uses solar cells to erate clean , reliable electriciry directly from sunlight. Price will key our future success in a competitve ment. We intend to keep our prices low. A balanced and flexible approach to energy supply will enable us to retain our price competitiveness.

Regional Inergy Prices Hectric Gas New York 13.18 76.10 Newark , N.J. 9.11 51.82 Philadelph i a 8.46 60.50 Baltimore 6.90 82.16 Norfolk , Va. 6.27 66.85 Delmarva Peninsula 6.09 50.94 The chart s t ates electric pr i ces in cents per kilowatt-hour and natural gas prices in cents per I 00 cubic feet for the I 2 months ended September 30, I 993.

.,;.u: I A balanced and flexible mix of energy conservation programs, energy purchases from other suppliers, and new power plants have kept prices for electricity at about 1983 levels. 7 8 Across the Company , employee efforts have held the line on ating and maintenance expenses.

In 1993, the Company cut these costs by $6.5 million below budget. ..

Using Controlling Our Costs Cost-effective operation has also contributed to our low energy prices. Delmarva Power has kept the growth of operating and maintenance costs under control. This is the result of hard work and creativity. In 1993, the Company issued a corporate-wide challenge to reduce operation and maintenance costs by $5 million or 2% below budget. Employees responded to the challenge and cut costs by $6.5 million or nearl y 3% below budget. Here are several examples.

Company power plants kept expenses down by achieving 89.7% equivalent availability, the highest in 10 years and significantly above the industry average of 80.6%. Staffing levels across the Company were held steady. Delmarva Power reduced capital costs by nearly $2 million through an aggressive refinancing program. More than 98% of employees remained injury-free, and the of absences due to illness fell for the sixth straight year. Our cost-contol efforts also included simpler ideas that provide smaller, but significant , savings. For example, the treasury group expanded its regular review of bank statements to include intensive error and fee checking.

These techniques uncovered various bank errors and have l ed to lower bank fees and more services for the Company. By projecting plastic pipe requirements and ordering a two-year supply in advance , our gas distribution and purchasing groups will save the Company about $500 , 000 by the end of 1994. In a crial program, a gas supply analyst from our gas divi s ion was assigned to the electric system operations department.

The analyst worked with a power supply supervisor to 2.5 0¢ National Average 1.50¢ 1.00¢ 1988 D e lmarva Power O&MCOSTS The growth rate 1993 Etticiently of the Company s 0 & M costs per kWh of el.ectric sal.es has stayed relativery flat and well below industry standards.

determine the daily amount of natural gas the Hay Road and Edge Moor power plants needed to generate electricity and to find the lowest possible natural gas prices. When cheaper fuel was available in September, the Company saved $67,000. A more exotic effort to reduce costs is the ash management program. Since the program began five years ago, 52% of the fly ash generated by Delmarva Power's power plants has been recycled instead of placed in expensive, specially structed landfills.

This has resulted in a net savings of over $4 million. The Company hopes to expand the markets for fly ash to eliminate the need for future landfill construction and to lower the cost of handling and disposing of the coal combustion by-product.

Since the program's inception, fly ash has been used in a variety of markets from highway construction to asphalt shingle manufacturing to oyster farming to playground surfacing.

At present, ash is being used in a highway embankment project near Centreville, Maryland, and in a cooperative project with the University of Delaware to investigate agricultural applications for fly ash. Although we have done a good job controlling costs , we will continue to seek improvement.

We plan to further our ongoing cost control efforrs in 1994 to find more savings. 9 fostering Safety Always For Everyone (SAFE) will position us as an industry leader in safety through teamwork among employees, tors, and customers.

10 Empowering O ur People Through several of the most severe storms on record for the Delmarva Peninsula, Delmarva Power crews received high marks from customers for the restoration of power under difficult weather conditions.

Why? ... teamwork.

Effective teamwork helps us ro keep prices and costs down and to provide high quality service, such as quick responses ro storm outages. These, in turn, increase customer satisfaction. At the peak of a winter squall in March 1993, about 20,000 customers were without power across the peninsula. working Delmarva Power crews restored service ro most of these customers within a couple of hours , despite downed wires, driving rain and sleet, gale-force winds, and covered roads. As always, many employees worked long hours during the storm routing electricity , repairing damaged equipment, coordinating efforts, and answering customer calls. This ream spirit was again evident in employee efforts to restore service to thousands of customers during ice storms in January and February 1994. To Gain An Edge Teamwork at Delmarva Power didn't just happen. More than 10 years ago, Delmarva Power introduced the cipative Skills Process (PSP). The Company was committed ro developing a culture that encourages respect for individuals , values their viewpoints, and empowers them as partners in the decision-making process. This participative process was considered a radical departure from the utility industry's traditional top-down decision management style. However, Company managers realized that new perspectives were needed to improve efficiency, reduce costs, and ro keep the Company healthy in the face of increasing competition.

As PSP began to work, new ideas began ro emerge. New methods of solving problems and reducing costs were discovered.

More projects began coming in ahead of schedule and under budget. This process has developed a true sense of teamwork among employees throughout the Company. Since PSP's inception, in periodic surveys, almost 100% of employees have rared rhe Company a good or excellent place to work. Employee empowerment is now a fundamental part of our culture. T earn skills, interdepartmental brainstorming, active listening, and grass-roots problem solving have evolved from a collection of techniques to the way we do business at Delmarva Power. We will continue to foster our tive culture to maintain favorable customer relations, stay price competitive, and manage industry change.

I Whe" C "1ple l N1 1 t1f1ed th r Contmui Wo k Ftepa md. Gas u** v a dad M It .Jlt ! In Hole &

During the past decade, teamwork and the participative process at Delmarva Power has led to productivity gains, cost savings, service improvements, and increased employee commitment.

11 TTll 1981 1983 198 7 199 3 CUSTOMER FAVORABIL/1Y Delmarva Power has steadily improved its positive customer ratings. The Company now ranks among the best in the nation. furthering Dur 12 B u ild ing O n Fav o ra b k R e s u l ts As we head into a more competitive utility industry environment, our ability to please customers will become eve n more important. Delmarva Power has earned one of the highest c u stomer favorability ratings in the nation, according to an independent market research firm. Currently, more than eight out of ten customers give us an overall favorab l e rating, third highest among 70 electric and gas companies surveyed.

Positive ratings for our efforts to tect the environment place the Company near the top in industry comparisons.

Customers also cite honesty and concern, reasonab l e rates, and reliable service as key reasons for their sat i sfaction with Delmarva Power. Sometimes improving c u stomer satisfaction means crossing new waters-literally.

A recent project , Canal West, is taking our natural gas service to several new residential developments below the Chesapeake and Delaware Canal in Delaware.

Many new home buyers in the Canal West area are existing Delmarva Power gas customers seeking to migrate south of customers the canal. These customers are pleased with their current gas service and want to have the same satisfaction in their new homes. This project allows us to make 4,000 new home-owners happy and to increase residential gas sales. The growth we see in Canal West and other areas of the peninsu l a will continue gradually through 1996. For the 20-year period ending in 2013, we forecast that electricity sales will grow at an annual rate of 1.6% per year. We expect similar growth for gas sales. During the next 10 years, the Company projects total gas vo l ume to rise by 1.3% per year. Despite high customer favorability, Delmarva Power cannot stand still. To ensure high quality service in the future , we plan to make some changes. These plans include consolidating telephone and dispatch operations into three divisional centers and extending the hours of our normal operations to provide customer service coverage throughout our service area. Along with these plans, the Company is also studying pricing and payment options. To continue to satisfy customers, we will find ways to offer more added products and services that meet their individual and varied needs.

,* As competition and deregulation provide customers with increased energy choices, the ability to satisfy our customers will become more valuable.

13 0 14 Remote enough to have its own unique identity, the Delmarva Peninsula is close to many East Coast cities and benefits from their markets and financial centers. *-

caring About The Improving Life On The Peninsula Our ability to please customers is linked to our ment with the people and places we serve. The Delmarva Peninsula is our home. The combination of scenic meadows, tranquil tidal lands, bustling urban commerce centers, and attractive resort areas makes the peninsula an interesting place to live, work, and play. In addition, the blend of industries-chemicals, food processing, agriculture, finance, plastics, auto manufacturing, pharmaceuticals, aerospace, and recreation-makes the demand for electricity and natural gas less affected by fluctuations in the national economy than in most other areas of the U.S. The Company has provided electric and natural gas service here for the past 100 years. We're proud of that record. Today, our 2,810 employees serve 387,354 electric tomers and 92,940 natural gas customers.

Delmarva Power provides electric service throughout most of the 5,700-square-mile peninsula.

In addition, we distribute natural gas service in a 275-square-mile area in northern Delaware.

We have worked hard to understand the needs of the people on the Delmarva Peninsula to find ways to better serve them. This includes looking beyond the typical business relationship with our customers.

An example of this began 10 years ago-Radio Watch. Delmarva Power employees who participate in Radio Watch use two-way radios in their vehicles to report emergencies and hazardous situations to help public safety officials.

To We Serve date, many employee volunteers have helped people in a variety of emergency situations from house fires, to car accidents, to snowbound motorists, to lost children, to crimes in progress.

Radio Watch has gained local and national recognition and has received two White House Awards. This year the pond at the Company's Vienna power plant produced nearly 100,000 striped bass (rockfish) to help replenish the fish population in the Chesapeake Bay and its tributaries.

Since 1985, more than 320,000 rockfish have been raised at Delmarva Power's Vienna and Edge Moor hatcheries.

These hatcheries are part of Delmarva Power's environmental stewardship program called Serving & Conserving Delmarva and are additional examples of our efforts to improve the quality of life on the peninsula.

Under Serving & Conserving Delmarva, the Company conducts several other activities that save energy, use and recycle waste, enhance wildlife, and protect the environment.

Delmarva Power will continue ro meet the energy needs of our customers on the Delmarva Peninsula in a safe, reliable, competitively priced, and customer-focused manner. Along with that, we will continue to strive to make our part of the world a better place. 15 20 15 10 5 16 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Awng with an initial edge in a changing industry, our strategies have also increased the value of holder investments by nearly 400% during the past 10 years through a combination of dividends and stock price appreciation.

I \/ t I tJ ( 011 I I \

fllllClll Table of Contents SEUCTED FINANCIAL DATA MANAGEMINT'S DISCUSSION AND ANALYSIS Of FINANCIAL CONDITION AND RESULTS Of OPERATIONS REPORTS Of MANAGEMENT AND 18 19 INDEPENDENT ACCOUNTANTS 27 CONSOLIDATED FINANCIAL STATEMINTS 28 NOTES TD CONSOLIDATED FINANCIAL STATEMINTS 34 CONSOLIDATED STATISTICS 47 OFFICERS AND INVESTMENT INFORMATION 48 STOCKHOLDER INFORMATION 49 BOARD Of DIRECTORS AND COMMlnHS 50 1 7 18 SELECTED FINANCIAL DATA (Dollars in Thousands, Excepr Per Share Amounrs) Operating Data Operaring Revenues Operating Income Income Before Cumulative Effect of a Change in Accounting Principle Cumulative Effecr of a Change in Accounting for Unbilled Revenues Net Income Electric Sales (kWh 000) Interchange Deliveries (kWh 000) Gas Sales (mcf 000) Gas Transported (mcf 000) Common Stock Data Earnings Per Share of Common Srock: Before Cumularive Effect of a Change in Accounting Principle Cumularive Effecr of a Change in Accounting for Unbilled Revenues Total Earnings Per Share Dividends Declared Per Share of Common Srock Average Shares Oursranding (000) Year-End Common Srock Price Book Value Per Common Share Return on Average Common Equity Capitaliza.tion Variable Rate Demand Bonds (VRDB)Ol Long-Term Debr Preferred Srock Common Stockholders

' Equity Tora! Capitalizarion with VRDB Other Information T oral Assets Long-Term Capiral Lease Obligation Consrrucrion Expenditures (2) Internally Generared Funds (IGF) (3) IGF as a Percent of Consrruction Expenditures 1993 $970,607 $164,139 $111,076 $111,076 12,280,230 2,225,384 18,066 1,539 $1.76 $1.76 $1.54 57,557 $23 5/s $14.66 12.0% $ 41,500 736,368 168,085 862,195 $1,808,148

$2,593,529

$23,335 $159,991 $108,693 68% Year Ended December 31, 1992 1991 1990 $864,044 $143,711 $98,526 $98,526 11,520,811 998,679 17,013 3,155 $1.69 $1.69 $1.54 53,456 $23 l/4 $13.77 12.2% $ 41,500 787,387 176,365 745,789 $1,751,041

$2,374,793

$26,081 $207,439 $130,275 63% $855,821 $136,410 $80,506 $12,730 $93,236 11,460,280 1,113,423 15,574 2,610 $1.44 $0.25 $1.69 $1.54 50,581 $21 l/4 $13.42 12.4% $ 41,500 770,146 136,365 706,583 $1,654,594

$2,263,718

$29,337 $181,820 $96,081 53% $812,217 $144,473 $37,311 $37,311 11,081,211 726,090 16,069 2,194 $0.60 $0.60 $1.54 47,534 $18 1/s $12.84 4.3% $ 41,500 741,032 136,365 614 , 692 $1,533,589

$2,125,715

$32,354 $187,823 $112,551 60% 1989 $796,614 $137,650 $91,308 $91,308 10,828,839 894,402 16,645 677 $1.80 $1.80 $1.51 46,687 $20 7/s $13.67 13.2% $ 41,500 662,544 136,442 642,641 $1,483,127

$2,028,661

$2,071 $175,843 $106,698 61% (I) Although Variable Rate Demand Bonds arc classified as current liabilities, the Company intend s to use th e bonds as a source oflong-term financing as discussed in Note 9 to the Consolidated Financial Statements.

(2) Excludes Allowance for Funds Used During Construction.

(3) Net cash provided by operating activities less common and preferred dividend s.

MANAGEMENT'S DISCUSSION AND ANALYSIS Of flNANCIAl CONDITION AND RESULTS Of OPERATIONS Earnings The earnings per average share of common stock attributed to the core utility business and nonurility subsidiaries are shown below. Core Utility Operations Peach Bottom lawsuit settlement Cumulative effect of a change in accounting for unbilled revenues Nonurility subsidiaries Total Dividends On December 30, 1993, the Board of Directors declared a mon stock dividend of $0.38 1/2 per share for rhe fourth quarter. For 1993, dividends declared per share of common stock were $ J .54. The Board believes that the current dividend level is appropriate, secure and sustainable.

The current dividend level represents an above average yield in comparison to alrernarive Core Utility Earnings The components of change from the prior year in core utility earnings per share are shown below. 1993 vs. 1992 1992 vs. 1991 Operations Electric revenues, ner of fuel expense Ra re in creases $0.31 $0.33 Sales volume and other 0.37 (O. l O) Gas revenues, ner of fuel expense 0.01 0.09 Operation and maintenance expense (0.17) (0.08) Depreciation (0.07) (0.08) Effect of increased number of average common shares (0.13) (0.09) Orher (0.06) (0.01) 0.26 0.06 Peach Bottom lawsuit settlement (0.21) 0.21 Cumulative effect of a change in accounting for unbilled revenues (0.25) $0.05 $0.02 1993 1992 1991 $1.73 $1.47 $1.41 0.21 0.25 1.73 1.68 1.66 0.03 0.01 0.03 $1.76 $1.69 $1.69 utility investments of similar quality and is reflecrive of rhe Company's future financial prospects during a period of increasing competition.

Ar the current yield, the dividend supporrs rhe price of the Company's stock at a level which is competitive wirh rhe industry average as measured by the ratio of marker price per share ro book value per share. Earnings per share from core utility operations increased by $0.26 in 1993 compared to 1992 primarily due to growth in electric revenues attributed to higher customer base rares and a 6.6% increase in kilowatt-hour (kWh) sales. Electric sales benefited from horrer summer weather and a 2.0% increase in the number of customers.

Electric customer base rates were raised in 1993 to recover higher costs, including the costs of adding electric erating capacity to meer the demand for electricity within the Company's service territory. (Refer to Note 2 to the Consolidated Financial Statements for additional information concerning changes in customer base rates.) The earnings growth from higher electric revenues was partially offset by increased non-fuel expenses, including operation and depreciation expenses, and also by the dilutive effect on earnings per share of more common shares standing.

Financing requjrements associated with utility plant were principally satisfied by issuing common sto:::k in order to strengthen the Company's capitalization and reduce the level of financial risk. 19 20 In 1992, earnings per share from core utility operations increased by $0.06 in comparison to 1991 , primarily due to additional electric and gas revenues from higher customer base rates. The additional base revenues from higher customer rates were partially offset by unfavorable effects of cooler summer weather on electric revenues, increased non-fuel expenses , and an increase in the number of common shares outstanding.

Core utility earnings for 1992 and 1991 include earnings from one-time, unusual items, not related to ongoing utility operations.

As discussed in Note 4 to the Consolidated Financial Statements, in 1992, net income and earnings per share were increased by $11,397,000 and $0.21, respectively , due to settlement of a suit filed by the Company concerning the 1987-1989 shutdown of the Peach Bottom Atomic Power Station by the Nuclear Regulatory Commission. In 1991, as discussed in Note 1 to the Competition In October 1992 , the Energy Policy Act of 1992 (the Energy Act) was enacted. The Energy Act enabled the Federal Energy Regulatory Commission (FERC) to order the provision of mission service (wheeling of electricity) for wholesale (resale) electricity producers and also provided for the creation of a new category of electric power producers called exempt wholesale generators (EWGs). These provisions of the Energy Act have enhanced the ability of utilities and non-utility generators to pete to serve resale customers currently served by a particular utility. Partly as a result of the Energy Act, industry-wide resale markets are experiencing increased competition.

In 1993, gross electric revenues from the Company's resale business were $105.0 million or 13.0% of billed electric sales revenues.

In response to the changing environment in the electric utility industry, the Company has modified existing strategies and also developed new strategies.

From a customer or market perspective, the Company has concluded that focusing on growing the retail portion of the business provides the best opportunity to meet the twin objectives of satisfying customers' needs while providing a fair return to shareholders.

In order to maintain acceptable profitability levels while keeping customer prices competitive , the Company is stepping up efforrs to find ways of reducing costs. To facilitate implementation of this plan, the Company has developed market specific strategies intended to grow retail sales. The Company's retail prices are among the lowest in the region and the Company continues to maintain high customer ability ratings. The Company believes it should have the ability to offer flexible pricing in order to compete to serve large retail tomers. Such changes in pricing methods could require tion to the existing regulatory process. In Delaware, the Governor has convened a task force "to recommend reforms ro the existing regulatory process, structure, and organization that will improve utility efficiency and encourage utility innovation, while assuring Consolidated Financial Statements, a change in accounting for unbilled revenues increased net income and earnings per share by $12,730,000 and $0.25, respectively.

As a regulated public utility, the Company may file applications for customer rate increases with regulatory commissions having jurisdiction over the Company's utility business in order to cover cost increases associated with supplying electricity and gas. The process of raising customer rates has certain risks, including the possibility that protracted hearings may result in a lag between the time when costs rise and when prices can be adjusted.

During 1992 and 1993, the Company increased cusromer rates in a ly manner by amounts sufficient to recover higher costs. Even after these rate increases, the Company's electric rates are parable to 1983 levels and lower than the average of utilities in the region. continued availability of utility services at affordable and petitive prices." The task force includes representatives from the Delaware Public Service Commission, uti l ities (including the Company), industrial customers, government, and the public. In the resale market, the Company seeks to reduce the risk sociated with a customer switching energy suppliers on short notice because providing electricity service requires investments in capital-intensive facilities which have long lives and require long lead-times for construction.

In the Company's most recent resale base rate case, the resale customers agreed to provide a two-year notice for load reductions up to 30% and a five-year notice for load reductions greater than 30%. Prior to this agreement, Old Dominion Electric Cooperative (ODEC), a resale customer, advised the Company that it would purchase up to 150 megawarrs (MW) from another utility, ning January 1, 1995. The Company is continuing to negotiate a partial-requirements service agreement (to serve the balance of ODEC's load) and a transmission service agreement (to transport the electricity ODEC plans to purchase) with ODEC to become effective January 1, 1995. The maximum reduction in annual non-fuel revenues that could result from ODEC's purchase of 150 MW from another utility is estimated to be about $24 lion or $0.24 per share based on projected shares outstanding in 1995. To mitigate the potential impact of this loss of business, the Company is pursuing off-system sales of capacity and energy, intensifying cost control efforrs, and if necessary, may apply for increases in customer rates. The Company expects that these strategies will reduce to approximately

$0.08 or less, or possibly eliminate, the adverse earnings per share effect; however, the mate effect on future earnings depends on the degree of success experienced by the Company in implementing its strategies.

Other Utility Customer Matters The Company is exploring various opportunities for increasing power sales. As part of the Company's efforts to grow its retail business, in December 1993, the Company offered $103.5 lion to purchase the electrical system of the City of Dover, Delaware.

The City of Dover has approximately 18,500 electric customers and annual revenues from electricity sales of abour $37 million. Although the Company expects that the impact on earnings from the potential purchase would be minimal over the first year or two, incremental earnings are expected once economies of scale are achieved.

Components of Utility Revenues Fuel and energy costs billed to customers (fuel revenues) are based on rates in effect in fuel adjustment clauses which are a djusted periodically to reflect cost changes and are subject to regulatory approval.

Rates for non-fuel costs billed to customers are dent on rates determined in base rate proceedings before regulatory commissions.

Changes in non-fuel (base rate) revenues can rectly affect the earnings of the Company. Fuel revenues, or fuel costs billed to customers, generally do not affect net income since the expense recognized as fuel costs is adjusted to match the fuel revenues.

The amount of under-or over-recovered fuel costs is generally deferred until it is subsequently recovered from or returned to utility customers.

Regional Electric Price Comparison*

10¢ 8¢ 6¢ 4¢ 2¢ 0¢ Residential Commercial Industrial

-Delmarva Power Regional Average *Based on 1992 daca for average eleccric prices per kilowacr-hour.

In December 1992, General Motors announced plans to close its Delaware manufacturing plant in 1996. The plant's closing could increase Delaware's unemployment rate by one to two percentage points. The direct impact on the Company's revenues from the loss of General Motors as a utility customer would be a decrease in non-fuel revenues of approximately

$4 million or $0.04 per share. E lectric revenues also include interchange delivery revenues which result from the sale of electric power to the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM Interconnection) and certain utilities.

The PJM Interconnection is an electric power pool comprised of a number of utilities in the region, including the Company. The power pool provides both capital and operating economies to member utilities.

Interchange livery revenues are reflected in the calculation

.of rates charged to customers under fuel adjustment clauses. Due to this making treatment, interchange delivery revenues do not affect net income. 21 22 Electric Revenues and Sales In 1993, rhe percenrages of roral billed sales revenues conrributed by rhe various cusromer classes were as follows: residenrial-37 .9%; commercial-29.5%;

industrial-18.7%;

resale-13.0%;

and other-0.9%.

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) 1993 Non-fuel (Base Rare) Revenue Increased Rates $26.6 Sales Volume and Other 32.2 Fuel Revenue 5.9 Inrerchange Delivery Revenue 30.8 Total $95.5 1992 $27.4 (5.1) (23.8) (2.9) $(4.4) The increases in non-fuel revenues shown above as "Increased Rates" of$26.6 million for 1993, and $27.4 million for 1992, resulred from the increases in electric cusromer base rates cussed in Nore 2 ro the Consolidated Financial Statements.

The non-fuel revenue variances shown in the above table as "Sales Volume and Other" are attributable ro changes in sales volume, sales mix, and orher facrors. "Sales Volume and Orher" variances for 1993 compared to 1992 were principally due to a 6.6% increase in rota! kWh sold. Sales ro residenrial, commercial, and resale cusromers increased by 8.4%, 6.3%, and 7.3%, rively, mainly due ro increased kWh usage during the 1993 summer cooling season, which was hotter than normal (based Gas Revenues, Sales, and Transportation The Company earns gas revenues from the sale of gas ro romers and also from transporring gas through the Company's sysrem for some cusromers who purchase gas directly from gas producers and pipelines.

Total 1993 gas revenues increased

$11.1 million from 1992 due ro a $1.2 million increase in non-fuel revenues and a $9.9 million increase in fuel revenues.

Non-fuel revenues increased despire a 2.8% decrease in total cubic feet of gas sold and transporred mainly due to increased sales ro firm cusromers which are billed ar higher rares than sales ro non-firm (inrerruprible) and tion cusromers.

Firm sales increased 1.8% due ro growth in the number of residenrial space-hearing and commercial cusromers.

The $9.9 million increase in gas fuel revenues was principally attributed ro higher average fuel rates. on a hisrorical 21-year average) and much hotter than 1992. Residenrial and commercial sales also benefited from increases in the number of customers served of 2.0% and 2.1 %, respectively.

Industrial sales increased 3.7% due ro increased production levels of cerrain large cusromers and more kWh sales ro a major romer which provides some of its own power. Despite a 0.5% increase in rota! kWh sold during 1992 in parison ro 1991, "Sales Volume and Other" variances resulred in a $5.1 million decrease in 1992 non-fuel revenues due ro adverse effecrs of unusually cool summer wearher on revenues.

Charges billed ro resale and other large cusromers for peak demand usage decreased, and a disproporrionarely lower volume of residenrial sales occurred during the summer when customer rates are higher. For 1992 sales compared ro 1991, residenrial sales were relatively flat, but commercial and resale sales, which were not as strongly affected by the cool summer weather, increased by 1.3% and 1.8%, respectively, primarily due ro cusromer growth. Industrial sales in 1992 remained at about the 1991 level due ro the slow economic recovery.

Electric fuel revenues increased

$5.9 million in 1993 due ro higher kWh sales parrially offset by lower rares charged to customers under the fuel adjustment clauses. In 1992, electric fuel revenues decreased

$23.8 million due to lower fuel adjusrmenr clause rates. Inrerchange delivery revenues increased

$30.8 million in 1993 mainly due ro higher sales ro the PJM Inrerconnection which resulred from increased demand for electricity in the region and greater availabiliry of the Company's generating units. In 1992, inrerchange delivery revenues decreased

$2.9 million due to extended maintenance outages at the Company's generating units, which reduced potencial sales to the PJM Interconnection.

In 1992, rota! gas revenues increased

$12.6 million in comparison to 1991 due to a $7.0 million increase in non-fuel revenues and a $5.6 million increase in fuel revenues.

Non-fuel revenues increased due ro $3.2 million of additional revenue from higher cusromer base rates, as discussed in Note 2 to the Consolidated Financial Statements, and due to a $3.8 million increase in sales volume. Total cubic feet of gas sold and transported in 1992 increased 10.9% over 1991 due to colder winrer weather and new customers.

Gas fuel revenues increased

$5.6 million in 1992 primarily due ro higher sales and bill-credits made to customers during 1991 for previously over-collected fuel costs.

Electric Fuel and Purchased Power Expenses The components of the changes in electric fuel and purchased power expenses are shown in the table below. Comparative Increase (Decrease) from Prior Year in Electric Fuel and Purchased Power Expenses (Dollars in Millions) 1993 1992 Average Cost of Electric Fuel and Purchased Power $ (6.9) $ (9.9) Increased (Decreased) kWh Output 39.2 (1.9) Deferral of Energy Costs 4.2 (12.0) Total $36.5 $(23.8) In 1993 , the "Av erage Cost of Electric Fuel and Purchased Power" decreased

$6.9 million from 1992 primarily due to tion to the electric system on June 1, 1993 of Hay Road Unit 4, a 175 MW combined cycle unit which uses exhaust heat from the three existing Hay Road combustion turbine units as its energy source. Lower oil prices also contributed to the decrease.

The 1992 "Average Cost of Electric Fuel and Purchased Power" decreased

$9.9 million from 1991 mainly due to lower coal and oil prices and increased power purchases at lower prices. Operation, Maintenance, Depreciation, and Income Tax Expenses In 1993, operation and maintenance expenses increased by $15.0 million from 1992 largely due to higher administrative and eral expenses, including increases for salaries and wages, and retirement benefos other than pensions due to adoption of the accounting required by Statement of Financial Accounting Standards (SFAS) No. 106. (Refer to Note 11 to the solidated Financial Statements for information on SFAS No. 106.) Although future increases in operation and maintenance expenses are expected due to additions of new utility plant, aging of existing utility plant, and normal inflationary pressures, the Company is actively working to minimize any such increases.

Operation and maintenance expenses increased by $6.8 million in 1992 in comparison to 1991 primarily due to higher maintenance outage costs for electric generating units an d due to charges for the purchase of 48 MW of capacity which began June 1, 1992. These increases were partially offset b y decreases in administrative and general expenses, including pension cost, and lower costs of operating a nd maintaining the electric transmission a nd tion systems. 1993 Sources of Electricity 12.7% _____ .Coal 46.7% _____ .Oil and Gas 26.0% The $39.2 million increase in 1993 shown as "I ncreased (Decreased) kWh Output" was due to higher aggregate output from electric generating units and purchased power. Output rose in 1993 due to greater electric sales demand in the Company's service territory and increased interchange deliveries.

In 1992, the $1.9 million decrease in kWh output was due to extended tenance outages at certain generating units. The kWh output required to serve load within the Company's service territory is equivalent to total output les s interchang e deliveries.

In 1993 , the Company's output for load within its vice territory was provided by 46.7% coal generation, 14.6% nuclear generation, 26.0% oil and gas generation, and 12.7% net purchased power, which consisted primarily of purchases under an agreement with PECO Energy Company (PECO). The variances shown in the table as "Deferral of Energy Costs" were due to varying levels of under-and/or over-collections of fuel costs which are subsequenrly recovered from or returned to utility customers. Depreciation expense incre ase d $5.6 million in 1993 and $6.7 million in 1992 principally due to additions to the electric tem, which included Hay Road Unit 4 in 1993 and a new stack for the Indian River power plant in 1992. The 1992 increase also reflects a full year's depreciation for Hay Road Unit 3 which was completed on June 1, 1991. Depreciation expense is expected to continue to increase as new electric plant is added and capital jects for environmental compliance are completed.

Income tax expense on operations increased

$18.7 million in 1993 and $3.5 million in 1992 primarily due to higher pre-tax income. The 1993 increase also includes $1.6 million due to the increase in the federal income tax rate from 34% to 35%, tive January 1, 1993. Due to adoption in 1993 ofSFAS No. 109 , "Acco unting for Income Taxes," deferred charges and deferred income tax liabilities increased

$144.5 million. Cash flow and earnings were not materially affected and are nor expected to be materially affected in the future due to anticipated recovery of the deferred tax liability through customer rates. Refer to Note 3 to the Consolidated Financial Statements for additional information on SFAS No. 109. Electric Operation

& Maintenance Expenses perk Wb sold 2.75¢ 2.50¢ 2.25¢ ----2.00¢ =================

1.75¢ __________________

_ 1.50¢ 1.25¢ 1.00¢ 1988 1989 1990 1991 1992 1993 -Delmarva Power c::==:::::J Regional Average -National Average 23 24 Utility Financing Costs Interest charges on debt of the core utility decreased

$5.2 million in 1993 and $1.3 million in 1992 prim a rily due to lower interest rares which enabled the Company to reduce the average cost of its outstanding long-term debt through refinancings.

The 1993 decrease in interest expense also reflects the effect of redeeming

$50 million of 10% First Mortgage Bonds on June 1, 1993 with proceeds from a public offering of common stock. The Company refinanced

$133.2 million, $255.5 million , and $85.5 million ofirs long-term debt in 1993, 1992 , and 1991, respectively, sulting in annualized interest savings of $7.5 million in total. The interest savings are ultimately reflected in rates charged to utility customers.

Dividends on preferred stock increased

$1.7 million in 1993 mainly because $40 million of? 3/40/o preferred stock issued in August 1992 was outstanding for all of 1993 compared to part of 1992. In 1992, the increase in preferred dividends due to issuance of the 7 3/4% preferred stock was largely offset by lower dividend payments on $61.1 million of the Company's preferred stock which has marker-based dividend rates. Energy Supply The Challenge 2000 Plan is the Company's st rategy for providing an adequate, reliable supply of electricity to customers at reasonable rates, while minimizing adverse impacts on the environment.

The Company's plan, which is updated periodically, is based on casts of demand for electricity in the service territory and PJM Interconnection reserve requirements.

The Company's plan combines customer energy conservation and load management programs ("Save Some"), power purcha ses ("Buy Some"), and new power plants ("Build Some"). The plan is flexible and anced. The plan's flexibility was recently demonstrated when the Company delayed the planned date of a power purchase by two years due to the decision of a resale customer (ODEC) to purchase 150 MW of its load from another utility beginning January l, 1995. As an electric utility , the Company must balance the potential risks of providing too much or not enough capacity.

The main risks of excess capacity are that customer rates may become uncompetitive and regulators may not allow the associated costs to be recovered from ratepayers.

The principal risks of inadequate capacity are reliability of service and that capacity deficiency charges would be owed to the PJM Interconnection which requires the Company to plan for and provide a certain capacity level. Allowance for equity and borrowed funds used during tion (AFUDC) decreased

$1.0 million in 1993 mainly because construction of Hay Road Unit 4 was completed on May 31 , 1993, resulting in lower average construction work-in-progress balances.

AFUDC as a percentage of net income decreased from 8.3% in 1992 to 6.6% in 1993. In 1992, AFUDC increased

$2. l million from 1991, principally due to higher average construction work-in-progress balances attributable to construction of Hay Road Unit4. Due to increased common equity financing, the average number of shares of common stock outstanding increased in 1993 and 1992. Rates charged to customers are designed to result in cient revenues to offset the dilution of earnings per share due to increased common equity financing.

The adverse effect on earnings per share of$0.13 in 1993 and $0.09 in 1992 from additional common shares outstanding was largely offset by revenues from base rate increases.

During the past three years, the Challenge 2000 Plan has included 95 MW of additional load reduction from energy management programs , a 48 MW capacity purchase which began in 1992, and 297 MW of capacity from two new power plants, Hay Road Unit 3 and Unit 4, which were completed in 1991and1993, tivel y. Looking forward through 2003, the Company's current plans for meeting the demand for energy include the following:

(1) "Save 140 MW of additional load reduction from various customer-oriented energy management programs.

(2) "Buy MW of capacity purchases, including 165 MW beginning in 1998 or later , and 40 MW in 1999 or later. (3) "Build The Company has filed for a Certificate of Public Convenience and Necessity to preserve the option of constructing by the year 2000 or later a 300 MW pulverized fired baseload unit in Dorchester County, Maryland.

The power plant, as currently planned, has an estimated cons truction cost of $695 million, including AFUDC.

Liquidity and Capital Resources The Company's primary capital resources are internally generated funds (nee cash provided by operating activities less common and preferred dividends) and external financings.

These resources vide capital for investments in utility plant and other capital requirements , such as repayment of maturing debt and capital lease obligations.

Operating activities provided net cash inflows of $206.7 million in 1993, $220.8 million in 1992, and $181.1 million in 1991. In 1992 , operating cash flow was increased by $11.4 million, net of income taxes, from receipt of a payment for settlement of the Peach Bottom lawsuit. Common dividends paid during 1993, 1992 , and 1991 were $88.0 million , $82.0 million, and $77.l million, respectively.

These amounts represented 43%, 37%, and 43% of net cash provided by operating activities in 1993 , 1992 , and 1991, respectively.

The ratio of common dividends paid per share ro earnings per share was 88% in 1993, and 91 % in 1992 and 1991. Utility construction expenditures, the Company's largest capital requirement, are affected by many factors, including growth in demand for electricity, compliance with environmental tions, and the need for improvement and replacement of existing facilities.

Utility construction expenditures were $160.0 million in 1993 , $207.4 million in 1992, and $181.8 million in 1991. Construction expenditures decreased

$47.4 million in 1993 marily because construction of Hay Road Unit 4 was completed in May 1993. Construction expenditures in 1993 included $9.2 million for projects attributed to environmental compliance.

Internally generated funds provided 68%, 63%, and 53% of the cash required for construction in 1993 , 1992, and 1991, respectively.

Capital raised from financial markets during 1991-1993, net of $55 7 million of refinancings and redemptions , consisted of $229 million of common stock , $32 million of preferred s tock, and $20 million of long-term debt. After considering the costs associated with issuing and refinancing debt and equity securities during 1991-1993 of approximately

$3 7 million, the net amount of capital raised from external financings during this period was $244 million. InternaDy Generated Funds & Constntcti.on Expenditu1*es (in millions)

$210 180 150 120 90 60 30 0 1991 1992 1993 -lntemally Generated Funds *forecast 1994* 1995* Constru.ctio11 Expenditures Sales of various equity interests in leveraged leases by the Company's nonutility subsidiarie s resulted in a $21.5 million cash inflow during 1993. The Company issued $158.2 million oflong-term debt in 1993 at an average interest race of 6.0% and redeemed $184.2 million of long-term debt which had an average interest race of 8.1 %. Debt refinancings in 1993 also included $15.5 million of variable rate demand bonds which were refinanced with similar bonds chat have more favorable terms and an additional 14 years until rity. The Company also refinanced its 7.88% and 7.84% series of preferred stock , $28.28 million in total, with $20 million of 6 3/4% preferred stock, and cash. The Company issued $109.5 million of common stock in 1993, including

$77.l million from a public offering of 3,300 , 000 shares in March 1993. Book value per share of common stock increased from $13.77 as of December 31, 1992, to $14.66 as of December 31, 1993. Approximately 70ct of the 89ct increase resulted from the sale of common stock at prices exceeding book value. The Compan y's capital structure as of December 31, 1993 and 1992 e x pressed as a percentage of total capitalization is shown below. 1993 1992 Long-term debt and variable rate demand bonds 43.0% 47.3% Preferred stock 9.3% 10.1% Common stockholders

' equity 47.7% 42.6% Capital requirements for the period 1994-1995 are estimated to be $395 million, including

$25 million for maturity of First Mortgage Bonds in 1994 and $334 million for utility tion, excludingAFUDC.

The estimate of 1994-1995 utility construction requirements includes $44 million of environmental construction expenditures primarily related to plans for pliance with provisions of the Clean Air Act. During 1996-1998 , an additional

$65 million of construction expenditures (excluding AFUDC) related to compliance with environmental regulations are planned. The Company anticipates that $250 million will be generated internally (net of common and preferred dividends) during 1994-1995.

Forecasted internally generated funds for 1994-1995 represent 63% of estimated capital requirements and 75% of mated utility construction expenditures.

The balance is e x pected to be externally financed.

During 1994-1995 , long-term e x ternal financings are presently estimated at $140 million, including

$90 million oflong-term debt and $50 million (market value) of common stock. After a recent review of the electric utility industry, bond rating agencies adopted more stringent rating guidelines for electric ties due to increased risk associated with competition and ocher factors. The higher standards could potentially result in increased borrowing costs for the industry in general. Mood y's and Duff & Phelps maintained their rating s of the Company's senior s ecured debt as "A2" and " A+," respectively.

Standard & Poor's lowered its rating of the Company's senior secured debt to "A" from " A+." The Company views positively the relatively minimal movement in racings of its senior secured debt afrer considering the higher standards adopted by the racing agencies.

25 26 Nonutility Subsidiaries Informarion on die Company's nonuriliry subsidiaries, in rion ro rhe following discussion, can be found in Nores 1 and 16 ro die Consolidared Financial Srarements.

Nonuriliry subsidiaries earned $0.03 per share in 1993 primarily due ro afrer-rax gains on sales of equiry and residual value inreresrs in leveraged leases. Earnings also reflecr income from ongoing leveraged leasing operations, operating services (management and operation of power planrs), and landfill and wasre hauling activities.

Such income was offser by adminisrrarive and general expenses.

Nonuriliry subsidiaries earned $0.01 per share in 1992 primarily due ro earnings from leveraged leases , operaring services, and ocher businesses.

These earnings were largely offser by an ing loss for landfill and wasre hauling acriviries and by rive and general expenses. In 1991, rhe nonuriliry subsidiaries earned $0.03 per share. Gains from sales of purchase options on leveraged leases, which con-rribured $0.07 ro 1991 earnings per share, were parrly offser by an operating loss for landfill and wasre hauling acriviries, accruals for potential serrlements oflirigarion, and adminisrrarive and general expenses.

One of die nonuriliry subsidiaries leases five aircraft, in roral, ro Norrhwesr Airlines, Inc.; Singapore Airlines Limired; and Express Airlines I, Inc. as parr of irs leveraged leasing business.

The airline industry continues ro be intensely comperirive and cerrain lines , which are nor lessees of die Company's subsidiary, have filed for prorecrion under rhe bankruptcy laws. The Company's aircraft lessees are current on rheir lease payments.

In 1993, roral subsidiary revenues, including gains, were $37.6 million compared ro $14.4 million in 1992. The revenue increase was mainly due ro rhe transfer of rhe contract for tion and maintenance of die Delaware Ciry Power Planr (owned by Srar Enterprise) from rhe parent company ro a nonutiliry subsidiary.

Report of Management Management is responsib l e for che information and tions contained in che Company's financial statements.

Our financial statements have been prepared in conformiry with generally accepted accounti n g principles, based upon currendy available faces and c i rcumstances and management's best mates and judgments of the expected effects of events and transactions.

Delmarva Power & Light Company maintains a system of nal controls designed co provide reasonable, but not absolute, assurance of the reliabiliry of che financial records and the tion of assets. The internal control system is supported by written administrative policies, a program of internal audits, and dures co assure the selection and training of q u alified personnel.

Coopers & Lybrand, indepe n dent accountants, are engaged co audit che 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 co be applied. The Audit Committee of the Board of Directors, composed of outside directors only , meets with management, internal auditors, and independent accountants co review accounting, auditing, and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the Audit Comm i ttee, subject co stockho l der approval.

Howard E. Cosgrove Chairman of the Board, President and Chief Execurive Officer Barbara S. Graham Vice President and Chief Financial Officer Report of Independent Accountants To the Board of Directors and Stockholders Delmarva Power & Light Company Wilmington, Delaware We have audited the accompanying consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1993 and 1992, and the re l ated consolidated statements of income, changes in common stockholders

' equiry, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibiliry of the Company's management.

Our responsibiliry is co express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards.

Those standa r ds require that we plan and form the audit co 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 assess i ng the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits vide a reasonable basis for our opinion. In our opinion, the financial statements referred co above present fairly, in al l material respects, the consolidated financial position of De l marva Power & Light Company and Subsidiary Companies as of December 31, 1993 and 1992, and the consolidated results of their opera t ions and their cash flows for each of the three years in the period ended December 31 , 1993 in conformiry with generally accepted accounting principles.

As discussed in Notes l , 3 and 11, respectively, co the ed financial statements , in 1991 the Company changed its method of accounting for unbilled revenues and in 1993 changed its method of accounting for income taxes and postrerirement benefits ocher than pensions.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 4, 1994 27 CONSOLIDATED STATEMENTS Of INCOME (Dollars in Thousands)

Year Ended December 31, 1993 1992 1991 Operating Revenues Electric $875,663 $780,175 $784,599 Gas 94,944 83,869 71,222 970,607 864,044 855,821 Operatmg Expenses Electric fuel and purchased power 298,307 261,784 285,595 Gas purchased 53,631 43,797 38,140 Operation and maintenance 248,052 233,038 226,240 Depreciation 100,929 95,285 88,610 Taxes other than income taxes 37,419 37,037 34,918 Income taxes 68,130 49,392 45,908 806,468 720,333 719,411 Operating Income 164,139 143,711 136,410 Other Income Nonutility Subsidiaries Revenues and gains 37,636 14 , 397 15,448 Expenses including interest and income taxes (35,828) (13,908) (14,170) Net earnings of nonutility subsidiaries 1,808 489 1,278 Allowance for equity funds used during construction 5,309 5,631 4,199 Other income, net of income raxes 511 12,855 4,042 7,628 18,975 9,519 Income Before Utility Interest Charges 171,767 162,686 145,929 Utility Interest Charges Debt 60,431 65,667 66,952 Other 3,664 2,570 1,907 Allowance for borrowed funds used during construction (3,404) (4,077) (3,436) 60,691 64,160 65,423 Earnings Income before cumulative effect of a change in accounting principle 111,076 98,526 80,506 Cumulative effect of a change in accounting for unbi ll ed revenues 12,730 Net income 111,076 98,526 93,236 Dividends on preferred stock 10,002 8,349 7,977 Earnings applicable to common stock $101,074 $ 90,177 $ 85,259 Average Shares of Common Stock Outstanding (000) 57,557 53,456 50,581 Earnings Per Average Share of Common Stock Before c u mulative effect of a change in accounting principle

$1.76 $1.69 $1.44 Cumulative effect of a change in accounting for unbilled revenues 0.25 Total earnings per share $1.76 $1.69 $1.69 Dividends Declared Per Share of Common Stock $1.54 $1.54 $1.54 See accompanying Notes to Consolidated Financial Statements.

28 CONSOUOATED STATEMENTS Of CASH FLOWS (Dollars in Thousands)

Ca.sh Flows from Operating Activities Nee income Adjustments co reconcile nee income co nee cash provided by operating activities

• Depreciation and amortization Allowance for equity funds used during construction Investment tax credit adjustments, nee Deferred income taxes, nee Nee change in: Accounts receivable Inventories Accounts payable Other current assets & liabiliciesO

> Ocher, net Nee 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 Cash flows from leveraged leases Sale of interests in leveraged leases Insurance proceeds from casualty loss Ocher Investment in subsidiary projects and operations Net (increase)/decrease in bond proceeds held in cruse funds Deposits co nuclear decommissioning cruse funds Sale of urility plane and inventory Ocher , net Net cash used b y investing activities Cash Flows from Financing Activities Dividends:

Common Preferred Issuances:

Long-term debc (2) Variable rare demand bonds Common stock Preferred stock Redemptions:

Long-term debt Variable rare demand bonds Common stock Preferred stock Principal portion of capital lease payments Nee change in term loan Nee change in shore-term debt Cose of issuances and refinancings Nee cash provided/(used) by financing activities Net change in cash and cash equivalents Beginning of year cash and cash equivalents End of year cash and cash equivalents (I) Other th an d e bc a nd d e f e rr e d in co m e caxes cl ass ifi e d as curr enc. (2) E x cludin g n e e c h a n ge in c e rm lo a n. See accompanying Notes co Consolidated Financial Statements.

Year Ended December 31, 1993 1992 1991 $111,076 $98,526 $93 , 236 112,926 105 , 624 99 , 313 (5,309) (5,631) (4,199) (2,515) (2,417) (2,844) (I ,171) 10,749 12,870 (15,851) (4 , 384) (26 , 528) 5,314 9,696 (171) (3,749) 8,779 (12,428) 11,441 (680) 22 , 338 (5,438) 491 (462) 206,724 220 , 753 181,125 (159,991)

(20 7 ,439) (181,820)

(3,404) (4,077) (3,436) 3,123 (9,823) 14,538 21,542 5,375 4,115 1,511 1,858 4,750 (2,827) (7,013) (4,504) 1,152 6,076 (205) (2,657) (3,770) (1,831) 4, 7 33 (389) (2,6 77) (1,332) (141,940)

(222 ,7 50) (163, 7 32) (87,989) (81 , 986) (77,097) (10,042) (8,492) (7,947) 148,200 2 7 3 , 335 11 7 ,000 15,500 109,463 32,200 87,900 20,000 40,000 (184,206)

(257,178)

(86 ,7 94) (15,500) (748) (259) (28,280) (9,956) (10 , 339) (10 , 593) 10,000 (17,000) 5,950 (12,250) (13,097) (16,187) (7 ,900) (63,655) (22,956) 2 , 319 1,129 (24 , 953) 19,712 21,888 46,841 27,129 $23,017 $21,888 $46,841 29 30 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 Investments and Nonutility Property Investment in leveraged leases Funds held by trustee Other investments and nonutility property, net Current Assets Cash and cash equivalents Accounts receivable Customers Other Inventories, at average cost Fuel (coal, oil, and gas) Materials and supplies Prepayments Deferred income taxes , net Deferred Charges and Other Assets Unamortized debt expense Deferred debt refinancing costs Deferred recoverable plant costs Deferred recoverab l e income taxes Other Total See accompanying Notes to Consolidated Financial Statements.

As of December 31, 1993 1992 $2,561,507

$2,345,869 176,167 163,139 122,182 127,852 2,859,856 2 ,636, 860 989,351 929,869 1,870,505 1,706,991 91,001 187,844 33,905 36, 782 1,995,411 1,931,617 50,914 72,858 17,577 15,274 55,248 59,163 123,739 147,295 23,017 21,888 98,472 88,499 18,405 12,527 27,335 32,624 37,687 39,055 9,534 7,907 10,713 8,236 225,163 210,736 11,222 11,219 28,794 22,510 15,613 15,019 144,463 49,124 36,397 249,216 85,145 $2,593,529

$2,374,793 CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

CAPITALIZATION AND LIABILITIES Capitalization (See Statements of Capitalization)

Common stock, $2.25 par value; 90,000,000 shares authorized; shares outstanding:

1993-58,829,283, 1992-54,143,853 Additional paid-in capital Retained earnings Unearned compensation Total common stock.holders

' equity Preferred stock Long-term debt Current Liabilities Shorr-term debt Long-term debt due within one year Variable rare demand bonds Accounts payable Taxes accrued Interest accrued Dividends declared Current capital lease obligation Deferred energy costs Other Deferred Credits and Other Liabilities Deferred income taxes, net Deferred investment tax credits Long-term capital lease obligation Other Commitments and Contingencies (Notes 12, 13, and 14) Total See accompanying Notes to Consolidated Financial Statements.

1993 $ 132,366 470,997 259,507 (675) 862,195 168,085 736,368 1,766,648 25,986 41,500 55,175 10,987 15,522 22,664 12,684 14,229 32,681 231,428 497,457 49,475 23,335 25,186 595,453 $2,593,529 As of December 31 , 1992 $ 121,824 374,976 249,176 (18 7) 745 ,7 89 176,365 78 7 ,38 7 1,709,541 17 , 000 946 41,500 56,389 11,593 15, 190 20 , 900 12 ,7 09 7 , 933 25 , 265 209,425 352,4 7 4 51 , 990 26 , 081 25 , 282 455 , 82 7 $2,374,793 31 32 CONSOLIDATED STATEMENTS Of CAPITALIZATION (Dollars in Thousands)

Common Stockholders' Equity Total common stockholders' equity (I) Cumulative Preferred Stock Par value $1 per share, 10,000,000 shares authorized, none issued Par value $25 per share, 3,000,000 shares authorized, 7 3/4% Series, 1,600,000 shares issued (2) Par value $100 per share, 1,800,000 shares authorized:

Series 3.70%-5% 6 3/4% 7.52% 7.84%-7.88%

Adjustable-5.54%, 5.83% (4) Auction rate-2.71

%, 3.05% (4) Long-Term Debt First Mortgage Bonds: Maturity 1994 1997 1998 2002-2003

2004 2014-2015 2018-2022 2032 Shares outstanding (1993 and 1992) 320,000 and 320,000 200,000 and 0 150,000 and 150,000 0 and 282,800 160,850 and 160,850 450,000 and 450,000 12/31/93 Interest Rates 4 5/s% 6 3/s% 6.40%-6.95%

7.30%-8.15%

5.90%-8.50%

6.05% Other Bonds, due 2011-2017, 7.15%-7.50%

Pollution Control Notes: Series 1973, due 1994-1998, 5.75% Series 1976, due 1994-2006, 7 l/s%-7 l/4% Medium Term Notes, due 1998, 5.69% Medium Term Notes, due 1999, 7 lf2% Medium Term Notes, due 2002-2004, 8.30%-9.29%

Medium Term Notes, due 2007, 8 l/s% Medium Term Notes, due 2020-2021, 8.96%-9.95%

First Mortgage Notes, 9.65% (5) Term Loan, due 1996, 3.27% (6) Other Obligations, due 1994-2000, 8.5% Unamortized premium and discount, net Current maturities of long-term debt Total long-term debt T oral capitalization Variable Rate Demand Bonds (7) Total capitalization with Variable Rate Demand Bonds Current call price per share $103.00-$105.00 (3) $103.50 $103.00 $100.00 12/31/92 Interest Rates 4 5/s% 6 3/s% 7% 6.95%-8% 6.60% 7.30%-8.15%

6.75%-10% (I) Refer to Consolidated Statemenrs of Changes in Common Stockholders' Equity for additional information.

(2) Redeemable beginning September 30, 2002, at $25 per share. (3) Redeemable beginning November 1 , 2003, at $100 per share. (4) Average rates during 1993 and 1992 , respectively.

(5) Repaid through monthly paymenrs of principal and interest over 15 years ending November 2002. (6) Refer to item 7 of Note 9 to the Consolidated Financial Statements.

(7) Classified under current liabilities as discussed in item 9 of Note 9 to the Consolidated Financial Statements. See accompanying Notes to Consolidated Financial Statements.

A5 of December 31, 1993 1992 $ 862,195 $ 745,789 40,000 40,000 32,000 32,000 20,000 15,000 15,000 28,280 16,085 16,085 45,000 45,000 168,085 176,365 25,000 25,000 25,000 25,000 25,000 120,000 120,000 18,200 81,000 81,000 208,200 240,000 15,000 474,200 534,200 54,500 54,500 6,500 6,650 3,300 3,400 25,000 30,000 30,000 39,000 39,000 50,000 50,000 61,000 61,000 8,244 8,809 10,000 1,307 1,497 (697) (723) (25,986) (946) 736,368 787,387 1,766,648 1,709,541 41,500 41,500 $1,808,148

$1,751,041 CONSOUDATED STATEMENTS Of CHANGES IN COMMON STOCKHOlDERS' EQUITY (Dollars in Thousands)

Common Additional Unearned Shares Par Paid-in Retained Treasury Com pen-Outstanding Value OJ Capital Earnings Stock sacion Total Balance as of January 1, 1991 47,889,358

$107,751 $271,694 $235,247 $614,692 Nee income 93,236 93,236 Cash dividends declared Common stock ($1.54) (78,937) (78,937) Preferred stock (7,977) (7,977) Issuance of common stock Public offering 3,500,000 7,875 56,000 63,875 DRIP c2J 1,126 ,8 02 2,535 18,640 21,175 Stock options 150,450 339 2,471 2,810 Other issuance 2,354 5 35 40 Expenses (2,331) (2,331) Balance as of December 31, 1991 52 ,668,964 118 , 505 346,509 241,569 706,583 Net income 98,526 98,526 Cash dividends declared Common stock ($1.54) (82,570) (82,570) Preferred stock (8,349) (8,349) Issuance of common stock DRIP c2J 1 ,336,871 3,008 26,471 29,479 Stock options 129,500 292 2 , 256 2,548 Other issuance 8 ,5 18 19 154 173 Expenses of common and preferred stock issuances (414) (414) Reacquired shares (12,490) (259) (259) Shares granted (3) 12,490 259 (259) Amortization of unearned compensation 72 72 Balance as of December 31, 1992 54,143,853 121,824 374,976 249,176 (187) 745,789 Net income 111,076 111,0 76 Cash dividends declared Common stock ($1.54) (89,792) (89,792) Preferred stock (10,002) (10,002) Issuance of common stock Public offering 3,300,000 7,425 69,713 77,138 DRIP C2l 1,246,380 2,804 26,519 29,323 Stock options 139 ,0 50 313 2,689 3,002 Expenses (2,627) (2,627) Reacquired shares (31,490) (748) (748) Shares granted (3) 31,490 748 (748) Amortization of unearned compensation 260 260 Refinancing of preferred stock (273) (951)

(1,224) Balance as of December 31, 1993 58,829,283

$132,366 $470,997 $259,507 $ (675) $862,195 (l) The Company's common stock has a par value of$2.25 per share and 90,000,000 s h ares are aurhorized.

(2) Dividend Reinvestment and Common Share Purchase Plan (DRIP)-As of December 3 1, 1993, 2,818 , 536 shares were reserved for issuance through the DRIP. (3) Shares of restricted common stock granted under the Company's Long Term Incentive Plan. See accompanying Notes co Consolidated Financial Statements.

33 34 1. SIGNIFICANT ACCOUNTING POUCllS Nature of Business The Company is predominantly a public uriliry that provides electric service on the Delmarva Peninsula in an area consisting of about 5,700 square miles with a population of approximately 1.0 million. The Company also provides gas service in an area consisting of about 275 square miles with a population of proximately 457,000 in northern Delaware, including rhe Ciry of Wilmington.

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

Regulation of Utility Operations The Company is subject to regulation with respect to its retail uriliry sales by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively) and the Virginia Scare Corporation Commission (VSCC), which have broad powers over rare 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, and the wholesale (resale) transmission and sale of electric energy. FERC also regulates the price and other terms of transportation of natural gas purchased by the Company. The percentage of utiliry operating revenues regulated by each Commission for the year ended December 31, 1993 was as follows: DPSC 64%, MPSC 22%, VSCC 3%, and FERC 11 %. In conformiry 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 utiliry business.

In accordance with the provisions of Statement of Financial Accounting Standards No. 71, "Acco unting for the Effects of Certain Types of Regulation," rhe Company defers expense recognition of tain costs (" deferred charges"). Deferred charges are subsequently amortized to expense over the period that the cost is recovered through cusromer rates. Reponing of Subsidiaries The consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries-Delmarva Energy Company; Delmarva Industries, Inc.; Delmarva Services Company; and Delmarva Capital Investments , Inc. and its sidiaries.

The results of operations of the Company's nonutiliry subsidiaries are reported in the consolidated statements of income as "O ther income." Ref e r to Nore 16 ro the Consolidated Financial Statements for financial information about the Company's subsidiaries.

Utility Revenues Prior to 1991, the Company recorded revenues as billed to its customers on a monthly cycle billing basis. At the end of each month, there was an amount of unbilled electric and gas service that had been rendered from the last meter reading to the end. Effective January 1, 1991, the Company began recording non-fuel (base rate) revenues for services provided but not yet billed to more closely match revenues with expenses.

The lative effect of the one-time change in accounting for unbilled revenues increased 1991 net income by $12,730,000

($0.25 per share). When interim rates are placed in effect subject to refund, the Company recognizes revenues based on expected final rares. Fuel Expense Fuel costs charged to the Company's results of operations are generally adjusted to match fuel costs included in cusromer billings (fuel revenues).

The difference between fuel revenues and actual fuel coses incurred is reported on rhe balance sheet as "deferred energy costs." The deferred balance is subsequently recovered from or returned to uriliry 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 utiliry properry is puted on the straight-line basis using composite rates by classes of depreciable properry.

The relationship of the annual provision for depreciation for financial accounting purposes ro average ciable properry was 3.7% for 1993, 3.6% for 1992 , and 3.7% for 1991. Depreciation expense includes a provision for the Company's share of the estimated cost of decommissioning (decontaminating and removing) nuclear power plant reactors based on amounts billed to customers for such costs. Refer ro Nore 6 ro the Consolidated Financial Statements for information on nuclear decommissioning.

Interest Expense The amortization of debt discount, premium, and expense, including refinancing expenses, is included in other interest charges. On a consolidated basis , total interest charges incurred were $65,421,000 in 1993, $70,156,000 in 1992, and $72,456,000 in 1991. Allowance for Funds Used during Construction Allowance for funds used during construction (AFUDC) is included in the cost of utiliry plant and represents the cost of borrowed and equiry funds used ro finance construction of new utiliry facilities.

The amount of AFUDC capitalized is also ported in the Consolidated Statements oflncome as a reduction of interest charges for the borrowed funds component and as other income for the equiry funds component.

AFUDC was capitalized on uciliry plant construction at the rates of9.6% in 199 3 and 1992 , and 9.9% in 1991. Leveraged Leases 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 nized at a level rare of return during the periods in which the net investment is positive.

Funds Held by Trustee Funds held by trustee generally includes deposits in the Company's external nuclear decommissioning rrusrs and unexpended, restricted or tax exempt bond proceeds.

Earnings on such trust funds are also reflected in rhe balance.

2. BASE RATE MATTERS Electric base rate increases were filed with regulatory commissions beginning in October 1992 to recover higher costs associated with Hay Road Unit 4 which was placed in service on June 1, 1993, postretiremenr benefit costs under SPAS No. 106, and other items including general inflation.

Base rate increases which became effective in 1993 are summarized below. Annualized Base Effective Jurisdiction Revenue Increase Date Retail electric Delaware(!)

$24.9 million or 5.8% 06/01/93 Maryland <2> $ 7.8 million or 4.3% 04/01193 Virginia (3) $ 1.3 million or 7 .2% 10/05/93 Resale (FERC) (4 l $ 1.5 million or 1.5% 06103193 (I) Based on a serclement agreement approved by the DPSC on October 5, 1993, which included an 11.5% return on equity. Net of fuel savings from Hay Road Unic 4 , customer races increased 3.7%. (2) Based on a settlement agreement approved by the MPSC on March 26, 1993. Although a return on equity was not specified in the settlement agreement, the Company believes that the implied return on equity approaches 12%. Net of fuel savings from Hay Road Unir 4 , customer rates increased 2.3%. (3) Based on a pending settlement agreement which is subject to approval by the VSCC. The agreement reflects an I 1.05% return on equity. (4) Based on a settlement agreement which is subject ro approval by the FERC. Changes in base rates which became effective in 1992 are rized below. Annualized Base Effective Jurisdiction Revenue Increase Date Retail electric Delaware 0) $18.5 million or 4.3% 01101/92 Maryland (2) $ 5.5 million or 3.3% 01101/92 Virginia (3) $ 1.15 million or 5.1 o/o 07101192 Resale (FERC) <4l $ 4.125 million or 4.4% 02/19/92 Delaware Gas (5) $ 4.1 million or 5.6% 02102192 (I) Included a 12.5% return on equity. (2) A specific return on equity was not staced in the settlement agreement approved by the MPSC. (3) Included an 11.5% return on equity. (4) A specific return on equity was not stated in the settlement agreement approved by the FERC. (5) Included a 12.5% return on equity. 3 5 36 3. INCOME TAXES 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 tive minimum tax , if any. Prior to January 1 , 1993, deferred income taxes were provided on timing differences between the tax and financial accounting recognition of certain income and expenses. Effective January 1, 1993, the Company adopted SPAS No. 109, "Accounting for Income Taxes," which replaced the deferred method of income tax accounting with the liability method. Under the liabiliry method, deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial statement and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The principal effects on the Company's financial statements of adopting SPAS No. 109 were a $144.5 million increase in net deferred tax liabilities and a $144.5 million increase in "deferred recoverable income taxes," which is an asset representing future recovery of the deferred taxes over the lives of the related assets through rates charged to utility customers.

These amounts include $17.4 million of adjustments to recognize the effect of the increase in the federal income tax rate from 34% to 35% during 1993. Deferred income tax expense under SPAS No. 109 represents the net change during the ing period in the net deferred tax liability and deferred recoverable income taxes. Investment tax credits from regulated operations are being tized over the useful lives of the related utility plant. Investment tax credits 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)

Operation Federal: Current Deferred State: Current Deferred Investment tax credit adjustments, net Other income Federal: Current Deferred State: Current Deferred Income taxes on cumulative effect of a change in accounting for unbilled revenues T oral income tax expense Reconciliation of Effective Income Tax Rate The amount computed by multiplying income before tax by the federal statutory rate is reconciled below to the total income tax expense. 1993 (Dollars in Thousands)

Amount Statutory federal income tax expense $62,362 Increase (decrease) due to Depreciation not normalized 1,676 ITC amortization (2,832) State income taxes, net of federal tax benefit 7,567 Other , net (1,671) Total income tax expense $67,102 Components of Deferred Income Taxes The tax effect of temporary differences which 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 Other Total deferred tax liabilities Deferred Tax Assets Deferred investment tax credits Other T oral deferred tax assets T oral deferred taxes , net Rate 35% 1 (2) 4 38% Amount $52,142 1,959 (2,780) 7,099 (3,586) $54,834 As of 12/31193 $292,655 97,530 49,339 62,124 30,630 532,278 17,316 28,218 45,534 $486,744 Valuation allowances for deferred tax assets were not material as of December 31, 1993. 1993 1992 1991 $50,264 $30,819 $31,777 7,710 11,597 8,924 10,839 6,755 6,596 1,832 2,638 1,455 (2,515) (2,417) (2,844) 9,398 7,559 (4,773) (9,398) (3,482) 2,336 287 1,369 (34) (1,315) (4) (188) 8,520 $67,102 $54,834 $51,769 1992 1991 Rare Amount Rate 34% $49 , 302 34% 1 2,103 1 (2) (3,456) (2) 5 6,120 4 (2) (2 , 300) (1) 36% $51,769 36% 37 38 4. OTHER INCOME The components of "Other income, net of income taxes" as sented in the Consolidated Statements ofincome are shown in the table below. Effective January l , 1993, the contract for tion and maintenance of the Delaware City Power Plant (owned by Star Enterprise) was transferred from the parent company ro a (Dollars in Thousands)

Revenues and Income Revenues Peach Bottom lawsuit settlement Interest, dividends, other income Expenses Operating and other expenses Income tax expense (benefit)

Net On July 27, 1988, the Company, Atlantic City Electric Company, and Public Service Electric and Gas Company filed lawsuits against PECO to recover replacement power and other costs incurred as a result of the shutdown of Peach Bottom by the Nuclear Regulatory Commission (NRC) on March 31, 1987. The Company's share of costs resulting from the shutdown were 5. JOINTLY OWNED PlANT The Company's balance sheet includes its proportionate share of assets and liabilities related to jointly owned plant. The Company's share of operating and maintenance expenses of the joinrly owned plant is included in the corresponding expenses in Ownership (Dollars in Thousands)

Share Nuclear Peach Bottom 7.51% Salem 7.41% Coal-Fired Keystone 3.70% Conemaugh 3.72% Transmission Facilities Various Total nonutiliry subsidiary.

The 1993 revenues and expenses associated with the contract are included in the operating results of the Company's nonutiliry subsidiaries as reported in Note 16 to the Consolidated Financial Statements.

1993 1992 1991 $2,413 $14,837 $22,509 18,538 2,457 2,424 3,966 4,793 15,326 22,192 (434) 7,618 241 $ 511 $12,855 $ 4,042 charged against earnings during the period of the shurdown (March 1987 through November 1989). On March 31, 1992, the Peach Bottom co-owners reached a settlement agreement under which PECO paid $18,538,000 to the Company. The settlement increased 1992 net income by $11,397,000

($0.21 per share). the Consolidated Statements ofincome.

The Company is sible for providing its share of financing for the jointly owned facilities.

Information with respect to the Company's share of joinrly owned plant as of December 31, 1993 was as follows: Megawatt Construction Capability Plant in Accumulated Work in Owned Service Depreciation Progress 157MW $122,955 $ 57,881 $ 6,386 164MW 199,737 85,077 10,584 63MW 16,020 6,823 695 63MW 17,236 7,723 8,388 4,563 1,932 $360,511 $159,436 $26,053

6. NUCUAR DECOMMISSIONING The Company is funding its share of the estimated future cost of decommissioning (decontaminating and removing) the Peach Bottom and Salem nuclear reactors over the remaining lives of the plants. The Company estimates its share of future sioning costs based on NRC regulations concerning the minimum nuclear decommissioning financial assurance amount. The ultimate cost of decommissioning the Peach Bottom and Salem nuclear reactors may exceed the NRC minimum nuclear missioning financial assurance amount. This amount is updated annually for inflation and increased in 1993 to approximately

$117 million from the Company's previous estimate of$53.7 million primarily due to higher estimated costs for disposing of low level radioactive waste. The Company's accrued decommis-1. COMMON STOCK 1) The Company's Restated Certificate and Articles of Incorporation and the Mortgage and Deed of Trust securing the Company's outstanding bonds contain restrictions on the ment of dividends on common stock. Such restrictions would become applicable if the Company's capital and retained earnings full below certain specific levels or if preferred dividends are in arrears. Under the most restrictive of these provisions , as of December 31, 1993, approximately

$223.8 million was available for payment of common dividends.

Beginning-of-year balance Options granted Options exercised Options forfeited End-of-year balance Exercisable

8. PREFERRED STOCK 1993 Number of Shares 192,100 139,050 53,050 53,050 Option Price $17 1'2-$21 l/4 $17 lf2-$21 l/4 $17 1'2-$21 l/4 $17 1'2-$211/4

1) On November 4, 1993, the Company issued 200,000 shares of 6 3/4%, cumulative preferred stock, $100 per share par value, for $20 million. The dividend is cumulative and is payable quarterly.

Beginning on November 1, 2003, the 6 3/4% preferred stock will be redeemable, at any time at the option of the Company, in whole or in part, at $100 per share plus unpaid accumulated dividends, if any. On December 1, 1993, the Company used the sioning liability, which is reflected in the accumulated reserve for depreciation, was $29.1 million as of December 31, 1993. External trust funds established by the Company for the purpose of funding decommissioning costs had an aggregate balance of $17.3 million and a fair market value of $18.6 million as of December 31, 1993. The Company is recovering, through rates charged to electric customers, nuclear decommissioning costs based on an amount approximating the Company's previous bility estimate of $53.7 million. Based on prior decisions by latory commissions , the Company expects that customer rates will be adjusted to provide for recovery of the Company's 1993 mate of future decommissioning costs of $117 million. 2) Prior to January 1, 1993, the Company had a nonqualified stock option plan for certain employees.

Options were priced at the actual market value on the grant date. Effective January 1, 1993 , the Company's Board of Directors declared that no new stock options will be granted and that the performance-based restricted stock program will be the program under the Long Term Incentive Plan which is in effect. Changes in stock options are summarized below. 1992 1991 Number Option Number Option of Shares Price of Shares Price 2 7 0,200 $17 l/2-$21 1/4 302,900 $17 l/2-$21 1/4 59,900 $20 1'2 117,750 $18 1/s 129,500 $17 l/2-$21 l/4 150,450 $17 1/2-$17 3/4 8 , 500 $21 1/4 192 , 100 $17 1'2-$21 1/4 270,200 $17 l/2-$21 l/4 132,200 $17 lh-$21 l/4 152,450 $17 l/2-$21 l/4 proceeds and cash on-hand to redeem $18.28 million of the Company's 7.88% preferred stock and $10.0 million of the Company's 7.84% preferred stock. 2) On August 4, 1992, the Company issued 1,600,000 shares of 7 3/4%, cumulative preferred stock, $25 per share par value, for $40 million. 3 9 40 9. DEBT 1) Substantially all utility plant of the Company now or hereafter owned is subject to the lien of the Mortgage and Deed of Trust. 2) On June 1, 1993, $50 million of 10% First Mortgage Bonds , due December 1, 2018 , were redeemed with a portion of the ceeds received from a public offering of common stock. 3) On June 7, 1993 , the Delaware Economic Development Authority issued on behalf of the Compan y $15 million of 6.05% Gas Facilities Revenue Bonds (Series A), due June 1, 2032, and also issued $18.2 million of5.90% Pollution Control Refunding Revenue Bonds (Series B), due June 1 , 2021. The proceeds from the Series A Bonds are being used to finance additions to the Company's gas system. The proceeds from the Series B Bonds were used on July 8, 1993 to redeem $18.2 million of 6.6% Pollut i on Control Revenue Bonds, due July l, 2004. Both the Series A and B Bonds are co ll areralized by First Mortgage Bonds and are insured. 4) On June 23, 1993, the Company issued $25 million of cured, 5.69% Medium Term Notes , due June 24 , 1998. The proceeds were used on July 23, 1993 to redeem $25 million of 7% First Mortgage Bonds , due November 1 , 1998. 5) On July 1 , 1993 , the Company issued $90 million of 6.40% First Mortgage Bonds, due July 1, 2003. The proceeds were used on August 2, 1993 to redeem $90 million of First Mortgage Bonds comprised of rhe following series: $35 million, 7 5/so/o Series due 2001; $30 million, 7 1 12% Series due 2002; and $25 mil l ion, 8% Series due 2003. 6) As of December 31 , 1993 , rhe fair marker value of rhe Company's long-term debt was $833 , 502 , 000 in comparison to the book value of $736 , 368 , 000. As of December 31 , 1992, the fair market value of rhe Company's long-term debt was $822,494,000 in comparison to the book value of $787 , 387,000. The fair marker value of the Company's long-term debt was mated using discounted cash flow calculations , based on interest rates available to the Company for debt with similar terms, rities , and credit worthiness.

7) As of December 31, 1993 , the Company had $125 million of bank lines of credit, including

$50 million of such credit lines under which the Company may convert short-term borrowings to a term loan maturing on July 31, 1996 (or earlier at the discretion of the Company). As of December 31, 1993, $10 million of short-term borrowings by the Company were classified as term debt (" Term Loan") in recognition of the long-term ing capability provided by the credit lines. The Company is generally required to pay commitment fees for its credit lines. The lines of credit are periodically reviewed by the Company, at which time they may be renewed or cancelled. 8) Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 1994-$26,486

, 000; 1995-$1,346

, 000; 1996-$11 , 422,000; 199 7-$26 , 510,000; 1998-$32 , 239 , 000. 9) A total of$41.5 million of Variable Rate Demand Bonds were outstanding as of December 31, 1993 and 1992, respectively.

Although Variable Rate Demand Bonds are classified as current liabilities, the Company intends to use the Variable Rate Demand Bonds as a source oflong-term financing by setting the bonds' interest rates at market rates and, if advantageous, by utilizing one of the fixed rare/fixed term conversion options of the bonds. The bonds are due on demand or at maturity in the years 2017 and 2028 for principal amounts of$26.0 million and $15.5 million , respectively. During 1993, $15.5 million of Variable Rare Demand Bonds due in 2014 were refinanced with like bonds due in 2028. Average annual interest rates on the Variable Rare Demand Bonds were 2.5% in 1993.

10. PINSION PLAN The Company has a defined benefit pension plan covering all regular employees. The benefits are based on years of service and rhe employee's compensation.

The Company's funding policy is to contribute each year rhe net periodic pension cost for that year. However, rhe contribution for any year will not be less than the minimum required contribution nor greater rhan the maximum 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 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 Assump_tions Discount rares used to determine projected benefit obligation as of December 31 Rates of increase in compensation levels Expected long-term rates of return on assets tax deductible contribution.

There were no pension contributions in 1993 , 1992, or 1991. Pension plan assets consist primarily of equity securities and public bond securities. The following schedules show rhe funded status of rhe plan, the components of pension cost, and assumptions. 1993 $236,209 25,721 261,930 123,562 385,492 521,897 136,405 19,255 (108,183)

(36,455) $ 11,022 As of December 31, 1992 $218,776 22,699 241,475 112,941 354,416 475,690 121,274 18,988 (93,407) (39 , 769) $ 7,086 Year Ended December 31, 1993 1992 1991 $13,152 26,411 (58,247) 14,748 $ (3,936) 1993 7.25% 6.50% 8.25% $12,606 24,261 (39 , 104) (1,715) $(3 , 952) 1992 7.25% 6.50% 8.25% $ 9,815 21,909 (96,302) 64,438 $ (140) 1991 7.00% 6.50% 8.00% 41 42 11. PDSTRITIREMENT BINHITS OTHER THAN PENSIONS Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers' Accounting for Poscrecirement Benefits Ocher Than Pensions," which requires accrual accounting for poscrecirement benefits ocher than pensions. The Company provides health-care and life insurance benefits for its retired employees and tially all of the Company's employees may become eligible for these benefits upon retirement.

Prior to adoption of SFAS No. 106, the Company recognized the coses of these benefits by expensing the benefits as paid. The amounts expensed in 1992 and 1991 were $4,496,000 and $4,176,000 , respectively.

The Company has elected to recognize the cost of its transition obligation (the accumulated poscretirement benefit obligation as of January 1, 1993) by amonizing it on a straight-line basis over 20 years. The Company's SFAS No. 106 obligation and cost are based on a discount rate of7.75% as of]anuary 1, 1993 and 7.25% as of December 31, 1993. The assumed rate of increase in health-care coses (health-care cost trend rate) was 12% in 1993, decreasing to 11 % in 1994 and gradually decreasing to 5.5% by Reconciliation of Funded Status of the Plan (Dollars in thousands)

Accumulated poscretirement benefit obligation (APBO): Active employees full y eligible for benefits Ocher active employees Current retirees Plan assets at fair value APBO in excess of p l an assets Unrecognized transition obligation Unrecognized net loss Accrued postretiremenr 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 Amortization of the unrecognized transition obligation Net SFAS No. 106 cost 2011. Increasing the health-care co s t trend rates of future years by one percentage point would increase the accumulated retirement benefit obligation by $3.3 million and would increase annual aggregate service and interest costs by $0.3 million. In December 1993, the Company contributed

$5.8 million to external trust funds in order to begin to fund the SFAS No. 106 obligation.

The assets in the trusts consist primarily of short-term taxable and tax-exempt marketable securities.

The Company's policy is to fund the obligation to the extent chat SFAS No. 106 costs are reflected in customer races, including amounts which are capitalized. The following schedules show the funded status of the plan and the components of the cost of postretirement benefits ocher than pensions.

As of 12/31193 $17,380 20,351 43,118 80,849 5,825 75,024 (68,728) (4,939) $ 1,357 Year ended 12/31193 $ 2,206 5,613 3,617 $11,436

12. COMMITMENTS The Company estimates char approximately

$155.3 million, excluding AFUDC, will be expended for construction purposes in 1994. The Company has a 26-year agreement wich Scar Enterprise effective chrough May 31, 2018 co purchase 48 MW of capacity supplied by che Delaware City Power Plane, which che Company sold co Scar Enterprise in December 1991. Under che terms of che agreement, che maximum capacity charge for a year is $3.4 million, if che unit's availability exceeds 85 percent. The Company has an agreement for the future purchase of 165 MW of power over a 30-year period from a cogeneracion facility co be constructed by che Delaware Clean Energy Project (DCEP) and located in Delaware.

On April 20, 1993, che DPSC issued an order which neither approved nor disapproved the DCEP agreement.

The agreement, as amended, provides che Company and DCEP the right, until November l, 1994, co terminate che agreement.

The dace for che scare of commercial operations of the facility remains co be determined, bur in any event will not be prior co June l, 1998. Assuming 93% availability , capacity charges under che agreement are currencly expected co be approximately

$44.5 million per year for che first 16 years and $31.2 million per year for che remaining 14 years. In order co ensure adequate supplies of fuel, che Company has certain commitments under long-term fuel supply contracts.

Rentals Charged to Operating Expenses The following amounts were charged co operating expenses for rental payments under boch capital and operating leases: (Dollars in Thousands)

Interest on nuclear fuel capital lease Interest on ocher capital leases Amorcizacion of nuclear fuel capital lease Amorcizacion of ocher capital leases Operating leases Excluding nuclear fuel discussed below, che Company's ments under its long-term fuel supply contracts are $76 million in 1994, $62 million in 1995, $57 million in 1996, $45 million in 1997, and $38 million in 1998. The Company's share of nuclear fuel at Peach Bottom and Salem is financed chrough a nuclear fuel energy contract which is accounted for as a capital lease. Payments under che contract are based on the quantity of nuclear fuel burned by che planes. The Company's obligation under che contract is generally che nee book value of the nuclear fuel financed , which was $33.9 million as of December 31, 1993. The Company leases an 11.9% interest in the Merrill Creek Reservoir.

The lease is considered an operating lease and ments over che remaining lease term, which ends in 2032, are $165.6 million in aggregate.

The Company also has long-term leases for certain ocher facilities and equipment.

Minimum mitments as of December 31, 1993 under all noncancelable lease agreements (excluding payments under the nuclear fuel energy contract which cannot be reasonably estimated) are as follows: 1994-$6,716,000; 1995-$6,691,000; 1996-$6,639,000; 1997-$5,552,000; 1998-$5,345,000; afrer 1998-$150,296,000; cocal-$181

, 239,000. Approximately 91 % of che minimum lease commitments shown above are payments due under che Company's lease of an 11.9% interest in che Merrill Creek Reservoir.

1993 1992 1991 $ 1,014 $ 1,111 $ 1 , 633 282 321 345 9,956 10,231 10 , 242 287 323 351 15,176 14 , 063 14 , 507 $26,715 $26,049 $27,078 43 44 13. ENVIRONMENTAL MATTERS The Company is subject to regulation with respect to the ronmental effects of its operations, including air and water quality control, solid 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 generated hazardous substances 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 14. CONTINGENCIES J) 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 third party claims. In addition, Congress could impose a revenue raising measure on the nuclear power industry to pay such claims. The co-owners of Peach Bottom and Salem maintain nuclear property damage and decontamination insurance in the aggregate amount of $2. 7 billion for each station. The Company is 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 $3.5 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 power cost coverage in the event of a major accidental outage at a nuclear power plant. 15. SUPPLEMENTAL CASH FLOW INFORMATION In the consolidated financial statements, the Company considers highly liquid marketable securities and debt instruments pur-Cash Paid during the Year for (Dollars In Thousands)

Interest, net of capitalized amount Income taxes , net of refunds uncontrolled hazardous waste sites. The Company is currently a potentially responsible party (PRP) at one such site and is alleged to be a third party contributor at two other such sites. The Company also has three former coal gasification sites and is rently conducting a study of one of the three sites to assess the extent of contamination and risk to the environment.

The Company does not expect clean-up and other potential costs related to the PRP and coal gasification sites, either separately or cumulatively, to have a material effect on the Company's financial position or results of operations.

The premium for this coverage is subject to retrospective assessment for adverse loss experience.

The Company's present maximum share of any assessment is $1.4 million per year. 2) Other On December 14, 1993, Star Enterprise (Star) filed a lawsuit against the Company seeking an accounting, a refund, and damages totalling

$9.3 million. Star alleges that the Company overcharged Star for pension and tax-related costs under a tract entered into by the parties' predecessors in 1955 (the "1955 Agreement").

The Company believes it acted properly under the 1955 Agreement and that it does not owe Star any amounts claimed in this lawsuit. The Company cannot predict the come of the lawsuit. The Company is involved in certain other legal and tive proceedings before various courts and governmental agencies concerning rates, fuel contracts, tax filings, and other matters. The Company expects that the ultimate disposition of these proceedings will not have a material effect on the Company's financial position or results of operations.

chased with a maturity of three months or less to be cash equivalents.

Year Ended December 31, 1993 1992 1991 $58,154 $62,127 $72,384 $46,310 $65,788 $37,397

16. NONUTILITY SUBSIDIARIES The following presents condensed financial information of the Company's nonregulated wholly owned subsidiaries:

Delmarva Energy Company; Delmarva Industries, Inc.; and Delmarva Capital Investments, Inc. A subsidiary which leases real estate Condensed Subsidiary Statements of Income (Dollars In Thousands)

Revenues and Gains Landfill and waste hauling Operating services Other revenues Leveraged leases<!) Other investment income Costs and Expenses Operating expenses Interest expense Capitalized interest Income tax (benefit)

Net income Earnings per share of common stock attributed to subsidiaries 1993 $11,745 22,118 2,117 835 821 37,636 36,424 246 (246) (596) 35,828 $ 1,808 $ 0.03 to the Company's utility business, Delmarva Services Company, is excluded from these statements since its income is derived from intercompany transactions which are eliminated in consolidation.

1992 1991 $9,021 $6,154 3,038 2,939 998 1,129 61 5,044 1,279 182 14,397 15,448 15,765 15,509 550 1,704 (231) (143) (2, 176) (2,900) 13,908 14,170 $ 489 $1,278 $ 0.01 $ 0.03 (I) On an after-tax basis, l everaged leasing , including gains on sales of equity and residual value interesrs , contributed

$1,754 , 000, $1,813,000, and $4,663 , 000 to earnings in 1993, 1992 , and 199 I , respectively. Condensed Subsidiary Balance Sheets (Dollars In Thousands)

Assets Current assets Cash and cash equivalents Other Noncurrent assets Investment in Leveraged leases Other Property, plant & equipment Landfill & waste hauling Other Other Total As of December 31, 1993 1992 $15,929 7,489 23,418 50,914 4,623 27,420 3,512 698 $110,585 $ 6,033 2,477 8,510 72,858 5,481 28,488 2,089 1,225 $118,651 Liabilities and Stockho/der.'s Equity Current liabilities Debt due within one year Other Noncurrent liabilities Deferred income taxes Other Stockholder's Equity Total As of December 31, 1993 1992 $ 193 $ 181 11,903 9,689 12,096 9,870 55,008 65,604 3,089 3,196 58,097 68,800 40,392 39,981 $110,585 $118,651 45 46 17. SEGMENT INFORMATION Segment informarion with respecr ro elecrric and gas operarions was as follows: (Dollars In Thousands)

Electric Operations Operaring revenue s Operaring income Depreciarion Consrrucrion expendirures Gas Operations Operaring revenues Operaring income Depreciarion Consrrucrion expenclirures Identifiable Assets, Net Elecrric Gas Assers nor allocared

18. QUARTERLY FINANCIAL INFORMATION The quarrerly dara presenred below reflecr all adjusrmenrs sary in the opinion of the Company for a fair presenrarion of the inrerim resulrs. Quarrerl y dara normally vary seasonally with rem-Quarrer Operaring Operaring Ended Revenue Income 1993 1992 1991 $ 875,663 $ 780,175 $ 784 , 599 154,412 134 , 260 129 , 295 94,549 89 , 421 83,363 142,238 192,493 163,399 94,944 83,869 71,222 9,727 9,451 7 , 115 6,380 5,864 5,247 17,753 14,888 18,302 2,268,100 2,042 , 496 1 , 895,124 160,618 142,740 130,875 164,811 189,557 237,719 perarure variarions, differences berween summer and winrer rares, rhe riming of rare orders , and the scheduled downrime and renance of elecrric generaring unirs. Earnings Earnings Applicable Average per Ner roCommon Shares Average Income Srock Oursranding Share (Dollars in Thousands) (In Thousands) 1993 March 31 $248,007 $ 46,278 June 30 214,638 31,239 Seprember 30 275,385 59 , 015 December 31 232,577 2 7 ,607 $9 7 0,607 $164,139 1992 March 31 $225,130 $ 38,058 June 30 193 ,7 9 7 29,2 7 9 Seprember 30 23 7,7 1 7 48,080 December 31 20 7 ,400 28,294 $864 , 044 $143 , 711 In the firsr quarrer of 1992, rhe Company recorded rhe resulrs of the Peach Borrom lawsuir sertlemenr (Nore 4 ro the Consolidared

$ 34,414 $ 31,911 55,135 $0.58 18,758 16,2 7 9 58,036 $0.27 44,279 41 , 789 58,372 $0.72 13 , 625 11,095 58,687 $0.19 $111 , 076 $101 , 074 5 7, 557 $1.7 6 $34,789 $32,988 52,876 $0.62 14,259 12 , 464 53 , 285 $0.24 34 , 056 31 , 810 53 , 685 $0.59 15 , 422 12,915 53,980 $0.24 $98,526 $90 , 177 53,456 $1.69 Financial Sraremenrs) which increased 1992 ner income by $11 , 39 7, 000 ($0.21 per share).

CONSOLIDATED STATISTICS 1993 1992 1991 1990 1989 Electric Reventtes (Thousands)

Residential

$305,446 $273,463 $275,888 $259,113 $251,490 Commercial 237,785 220,659 218,558 209,174 197,362 Industrial 150,178 144,094 144 ,272 140,288 133,451 Resale, etc. 111,781 102,690 104 ,819 93,179 90,206 Unbilled revenues, net 2,918 943 (73) Sales revenues 808,108 741,849 743,464 701,754 672,509 Interchange deliveries 61,437 30,606 33,523 23,905 31,476 Miscellaneous revenues 6,118 7,720 7,612 6,722 5,887 T oral electric revenues $875,663 $780,175 $784,599 $732,381 $709,872 Electric Sales and Interchange Residen rial 3,499,387 3,228,237 3,236,616 3,081,943 3,049,882 Deliveries Commercial 3,336,847 3,140,149 3,098,599 2,979,738 2,875,681 (1,000 Kilowatt-Hours)

Industrial 3,232,233 3,115,677 3,105,338 3,142,439 3,025,653 Resale, etc. 2,185,006 2,038,844 2,000,913 1,877,091 1,877,623 Unbi ll ed sales, net 26,757 (2,096) 18,814 Total electric sales 12,280,230 11 ,520,81 1 11,460,280 11 ,081,21 1 10,828,839 Interchange deliveries 2,225,384 998,679 1,113,423 726,090 894,402 Electric Customers (End ofperiod)

Residential 342,710 336,076 330,632 326,175 319,696 Commercial 43,324 42,427 41,539 40,766 40,104 Industrial 715 726 753 774 798 Resale, etc. 605 590 578 562 562 T oral electric customers 387,354 379,819 373,502 368,277 361,160 Gas Reventtes (Thousands)

Residential

$47,022 $43,147 $35,636 $38,487 $42,908 Commercial 23,065 20,175 16,370 16,9.39 18,816 Industrial 17,586 15,365 14,395 16,498 17,546 Interruptible and other 6,011 3,520 3,552 6,819 6,806 Unbilled revenues, net 263 255 194 Gas transported 561 1,032 710 602 174 Miscellaneous revenues 436 375 365 491 492 T oral gas revenues $94,944 $83,869 $71,222 $79,836 $86,742 Gas Sales and Gas Transported Residential 7,311 7,264 6,410 6,484 6,795 (Million Cubic Feet) Commercial 4,423 4,286 3,653 3,452 3,562 Industrial 4,348 4,358 4,398 4,418 4,245 Interruptible and other 1,861 1,090 1,058 1,715 2,043 Unbilled sales, net 123 15 55 T oral gas sales 18,066 17,013 15,574 16,069 16,645 Gas transported 1,539 3,155 2,610 2,194 677 Total gas sales and gas transported 19,605 20,168 18,184 18,263 17 ,322 Gas Customers (End of Period) Residen rial 86,027 82,996 80,874 78,893 77,021 Commercial 6,751 6,500 6,313 5,983 5,689 Industrial 150 152 154 154 159 Interruptible and other 12 11 10 14 14 T oral gas customers 92,940 89,659 87,351 85,044 82,883 47 48 OHICIRS a.s of January I, 1994 Howard E. Cosgrove, Chairman of rhe Board, President and Chief Executive Officer H. Ray Landon , Executive Vice President Ralph E. Klesius, Senior Vice President Thomas S. Shaw , Senior Vice President/President, Delmarva Capital Investments , Inc. Barbara S. Graham, Vice President and Chief Financial Officer Donald E. Cain, Vice President , Administration Paul S. Gerritsen , Vice President, Strategic Energy Markers, Pricing and Regulation Kenneth K. Jones, Vice President, Planning Wayne A. Lyons, Vice President, Division Operations Frank J. Perry, Vice President , Production Dale G. Stoodley, Vice President and General Counsel Jack Urban, Vice President, Gas Division W. Douglas Boyce, Vice President, Central Division Donald P. Connelly , Secretary Richard H. Evans, Vice President , Corporate Communications Hudson P. Hoen III, Vice President, Sourhern Division James P. Lavin, Comptroller and Chief Accounting Officer Dennis R. McDowell, Comptroller-Operating Philip S. Reese , Treasurer Duane C. Taylor, Vice President, Information Systems D. Wayne Yerkes, Vice President, Norrhern Division OIVIDIND RHNVISTMINT AND COMMON STOCK PURCHASI PlAN More rhan 30 percent of rhe Company's common shareholders of record are now participating in rhe Dividend Reinvestment and Common Share Purchase Plan. If you are not participating, you may want to consider rhe benefits of joining this plan. Under rhe plan , you can invest your cash dividends and also invest additional cash , up ro $100,000 per calendar year, ro purchase additional shares of common srock wirhour a service fee. Shares of common srock ro be purchased under rhe plan may be eirher newly issued shares or shares purchased in rhe open marker, depending on rhe financing needs of rhe Company. You may obtain a prospectus wirh rhe plan description and an enrollment aurhorizarion card by writing to: Delmarva Power & Light Company Shareholder Services P.O. Box 231 Wilmington, DE 19899 DUPUCAU MAIUNGS You may be receiving more rhan one copy of rhe Annual Report because of multiple accounts wirhin your household.

The Company is required ro mail an Annual Report to each name on rhe shareholder list unless rhe shareholder requests rhar duplicate mailings be eliminated.

To eliminate duplicate mailings, please send a written request ro Shareholder Services and enclose rhe mailing labels from rhe extra copies.

QUARURLY COMMON STOCK DIVIDENDS AND PRICE RANGES The Company's common stock is listed on the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges.

The Company had 58,225 holders of common stock as of December 31, 1993. Dividend 1993 Declared First Quarter $.38 1/2 Second Quarter $.38 1/2 Third Quarter $.38 1/i Fourth Quarter $.38 1/i SHAREHOLDER SERVICES Carol C. Conrad, Assistant Secretary Delmarva Power & Light Company 800 King Street, P.O. Box 231 Wilmington, Delaware 19899 Price High $24 $24 1/s $25 7/g $25 5/g Telephone (302) 429-3355 or toll-free (800) 365-6495 STOCK SYMBOL Common Stock, DEW-listed on the New York and Philadelphia Stock Exchanges ANNUAL MEETING Low $22 1/s $21 1'2 $23 l/g $21 1/4 The Annual Meeting will be held on May 26, 1994, at 11 :00 a.m. in the Clayton Hall, University of Delaware, Newark, Delaware. REGULATORY COMMISSIONS Federal Energy Regul.atory Commission Elizabeth A. Moler-Chairperson 825 North Capitol Street, N.E. Washington, D.C. 20426 Del.aware Public Service Commission Nancy M. Norling-Chairperson 1560 S. duPonr Highwa y P.O. Box 457 Dover, Delaware 19903-0457 Maryl.and Public Service Commission Frank 0. Heintz-Chairperson 6 St. Paul Street Baltimore, Maryland 21202 Virginia State Corporation Commission Theodore V. Morrison Jr.-Chairperson P.O. Box 1197 Richmond, Virginia 23209 Dividend 1992 Declared High First Quarter $.38 l/z $21 l/z Second Quarter $.38 1 h $22 7/g Third Quarter $.38 l/z $23 3/4 Fourth Quarter $.38 l/z $23 7/s TRANSHR AGENTS AND REGISTRARS First Mortgage Bond Trustee Chemical Bank 450 West 33rd Street New York, New York 10001 Preferred Stock Wilmington Trust Company Corporate Trust Division Rodney Square North Wilmington, Delaware 19890 Common Stock Wilmington Trust Company Corporate Trust Division Rodney Square North Wilmington, Delaware 19890 Chemical Bank Stock Transfer Department P.O. Box 24935 Church Street Station New York, New York 10249 ADDITIONAL Rf PORTS Price Low $20 $20 1/2 $22 l/z $22 l/g To supplement information in this Annual Report, a Financial and Statistical Review (1983-1993) and the Form 10-K are available upon request. Please write to: Delmarva Power & Light Company Shareholder Services 800 King Street P.O. Box 231 Wilmington, Delaware 19899 49 50 as of December 31, 1993 Audrey K. Doberstein President of Wilmington College , Wilmington, Delaware; member since 1992; serves on audit and nominating committees; term expires in 1995. Michael G. Abercrombie President of Caro Inc. (a petroleum distributorship), Salisbury, Maryland; member since 1993; serves on nominating and nuclear oversight committees; term expires in 1996. James T. McKinstry Parmer and Director of the law firm of Richards Layton & Finger, Wilmingron, Delaware; member since 198 7; serves on executive, investment , and nuclear oversight committees; term expires in 1995. Robert D. Burris President of Burris Foods Inc. (a refrigerated food distribution company), Milford, Delaware; member since 1993; serves on audit committee; term expires in 1996. H. Ray Landon Executive Vice President of the Company; member since 1988; serves on executive and investment tees; term expires in 1994. Audit Committee James C. Johnson , Chairperson

Robert D. Burris; Audrey K. Doberstein Compensation Committee Elwood P. Blanchard Jr., Chairperson; Sarah I. Gore, Vice Chairperson; James H. Gilliam Jr.; James C. Johnson Executive Committee Howard E. Cosgrove , Chairperson; James T. McKinstry, Vice Chairperson

Elwood P. Blanchard Jr.; Sarah I. Gore; H. Ra y Landon Howard E. Cosgrove Chairman of the Board , President, and Ch i ef Executive Officer of the Company; member since 1986; serves on executive , investment, nominating, and nuclear oversight committees; term expires in 1995. Elwood P. Blanchard Jr. Former Vice Chairman of the Board of Directors and member of the Office of the Chairman of E. I. du Pont de Nemours & Company (a diversified chemical, energy, and specialty produces company), Wilmington, Delaware; and Chairman of the Board of Du Pont Canada Inc., Mississauga, Ontario, Canada; member since 1988; serves on compensarion , executive, and investment committees; term expires in 1994. Sarah L Gore Human Resources Associate, W. L. Gore & Associates Inc., (a high technology manufacturing company), Newark, Delaware; member since 1990; serves on compensarion and executive committees; term expires in 1994. James H. Gilliam Jr. Direcror , Executive Vice President , and General Coun s el of the Beneficial Corporation (a fin a ncial vices company), Wilmington, Delaware; member since 1993; serves on compensation and investment committees

term expires 1996. James C. Johnson President and member of the Board of Directors of Loyola Capital Corporation and President of its primary subsidiary, Loyola Federal Savings & Loan Bank , Baltimore , Maryland; member since 1992; serves on audit and compensation committees; term expires in 1995. Investment Committee Elwood P. Blanchard Jr., Chairperson

Howard E. Cosgrove; James H. Gilliam Jr.; H. Ray Landon; James T. McKinstry Nominating Committee Audrey K. Doberstein, Chairperson

Michael G. Abercrombie

Howard E. Cosgrove Nuclear Oversight Committee James T. McKinstry , Chairperson; Michael G. Abercrombie

Howard E. Cosgrove Pictured left to right

Howard E. Cosgrove, Elwood P. Blanchard Jr. (standing), Sarah L Gore, James H. Gilliam Jr. (standing), and James C. Johnson Pictured left to right: Audrey K. Doberstein (standing), Michael G. Abercrombie, James T. McKinstry (standing), Robert D. Burris, and H. Ray Landon DELMARVA POWER 800 King Street P.O. Box231 Wilmington, DE 19899 Printed on recycled paper BULK RATE US POSTAGE PAID Permit No 68