ML18100B015

1993 Delmarva Power Annual Rept.

ML18100B015
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Site:	Salem, Hope Creek
Issue date:	12/31/1993
From:	Cosgrove H DELMARVA POWER & LIGHT CO.
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ML18100B011	List: ML18100B010 ML18100B013 ML18100B014 ML18100B015
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1eeaDelmarva Power Annual Report 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 RE-CORDS & ARCHIVES SERVICES SEC-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 RE-FERRED TO FILE PERSONNEL.

-NOTICE-Marking A Good Year With An Eye On Tomorrow's Opportunities 9404210196 940413 PDR ADOCK 05000272 I PDR

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.

Percent Increase HNANCIAL HIGHLIGHTS 1993 1992 (Decrease)

Revenues $970.6 million $864.0 million 12.3 Net Income $111.1 million $98.5 million 12.7 Earnings Per Share of Common Srock $1.76 $1.69(l) 4.1 Dividends Declared Per Share of Common Srock $1.54 $1.54 Average Shares of Common Srock Outstanding (000) 57,557 53,456 7.7 Common Srock Book Value Per Share $14.66 $13.77 6.5 Construction Expenditures (2) $160.0 million $207.4 million (22.9)

Internally Generated Funds (3) $108.7 million $130.3 million (16.6)

Electric Sales 12,280,230 mWh 11 ,520,811 mWh 6.6 Interchange Deliveries 2,225,384 mWh 998,679 mWh 122.8 Electric Customers (year end) 387,354 379,819 2.0 Average Annual Residential Usage 10,336 kWh 9,680 kWh 6.8 Gas Sales 18.07 million mcf 17.01 million mcf 6.2 Gas Transported 1.54 million mcf 3. 16 million mcf (51.2)

T oral Gas Sold and Transported 19.61 million mcf 20.1 7 million mcf (2.8)

Gas Customers (year end) 92,940 89,659 3.7 Average Annual Residential Usage 86.85 mcf 88.71 mcf (2 .1)

(I ) Includes $0.21 per share from senlcmcnt of di e Peac h Bo n o m lawsuir.

(2) Excludes AJlowan ce Fo r runds Used During Const ructi o n.

(3) Ne r cas h provided by opera ti ng act ivi ti es less co mmo n an<l preferred di vidends.

Table of CONTENTS CHAIRMAN'S LETIIR 2 Delmarva Power marked a good year in 1993.

The Company surpassed performance expec-tations, acted to improve irs position in the increasingly competitive utility industry, and added value to shareholder 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 con-trolling costs and using resources efficiently.

llPLIYHI HI TIAlllll 11 Customer satisfaction and competitive prices are the strategies we'll use 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 cus-tomers and the communities we serve.

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

Dear Stockholder,

Delmarva Power's 1993 performance surpassed expectations. These accomplishments reflect the hard work of our Warmer-than-normal summer weather, customer growth, employees. They deserve thanks and congratulations for higher prices, and effective cost control produced earnings of their efforts. More details about our 1993 performance are

$1.76 per share, a 7¢ increase compared to 1992. However, in the Financial section of this report. Now let's turn to what after excluding the 21 ¢ one-time gain in '92 for the Peach is ahead for you as a stockholder and for Delmarva Power.

Bottom lawsuit settlement, earnings rose by 28¢ per share.

Industry Change and Comp etition These financial results were supported by a strong oper- As a result of the Energy Policy Act of 1992, Delmarva ating performance across the Company. For example, the Power and other electric utilities compete against each other 175-megawatt Hay Road Unit #4 was placed in service on and independent power producers to supply energy to schedule and on budget. This unit, which increased the municipalities, cooperatives, and other large wholesale Company's reserve margin to 22.6%, uses exhaust heat from customers. These customers can now shop for the best price, three existing combustion turbines to generate electricity. and they are doing so in our service territory. For example, This makes the Hay Road complex economically and one of our wholesale customers, Old Dominion Electric environmentally efficient. Cooperative {ODEC) , will buy part of its electricity from Power plants ran at 89.7% equivalent availability, well above another uti lity beginning in 1995. In response to this the industry average of 80.6%. Our customer favorability industry change, we will seek to sign long-term energy-rating of 81 % still ranked us among industry leaders. We supply contracts with wholesale customers. Within three gained rate case approvals through a collaborative approach to five years, utilities may vie for retail customers, such as with regulators and customers, which accelerated the process manufacturing plants, office complexes, and shopping and avoided costly litigation. We reduced expenses by malls, as well.

nearly 3% below budget, and we retained our position as Delmarva Power's continued success relies on satisfying the region's low-cost energy producer. customers who will have more flexibility in choosing their 2

energy suppliers, products, and services. The Company With our commitment to financial strength in mind, the anticipated this industry change and has already focused on Board of Directors recently declared a quarterly dividend of strategies that will help us thrive. These strategies include 381/2¢ per share for an indicated annual rate of $1.54. At the Challenge 2000, a flexible and balanced energy supply plan; end of]anuary, our dividend yield of7.1% was above the Serving & Conserving Delmarva, an environmental steward- average of 6.4% for the electric utility industry. And, market ship program that goes beyond legal compliance; and the price is in line with the industry average as measured by the Participative Skills Process, which fosters a culture built around ratio of market price per share to shareholder equity per share.

teamwork and continuous improvement. Along with these, Given these factors, along with our relatively high dividend we're working to increase sales, especially in retail markets payout ratio and increasing industry uncertainty, the Board where we excel, and expand our energy products and services. concluded that the level of the dividend is appropriate. The We're also rethinking our critical business processes to look current dividend reflects the Company's prospects during a for better ways to offer our customers lower prices, increased period of increasing competition, represents a competitive yield qualiry, and quicker response. when compared to alternative utility investments of similar quality, and supports a fair price for the Company's stock.

Although we need to do better to succeed in the '90s, industry analysts already acknowledge Delmarva Power as While more than 30 major investor-owned U.S . electric a strong player in an increasingly competitive environment. utilities cut their dividend by as much as 100% in the last According to the Merrill Lynch "Competitive Damage decade, Delmarva Power's dividend is secure and sustainable Index," Delmarva Power ranks in the top half of U.S. power at its current level. Over the long term, the dividend will be companies with a competitive advantage. W .H. Reaves & a function of earnings and our ability to compete successfully Company named Delmarva Power among a select group of in a rapidly changing energy services marketplace.

electric utilities that will be able to face increased competition, We' re excited about the next 12 months. This period will and Duff & Phelps stated the Company is "well positioned" lay a foundation for the way we do business in the future. We'll for the increasing rivalry in the electric utility industry. In continue to stress the competencies that have provided us with addition, a management audit sponsored by the Maryland an initial edge-financial strength, customer satisfaction, Public Service Commission concluded that Delmarva Power competitive prices, and teamwork-and we will replace tra-is well managed and ready to meet competition.

ditional approaches in our business in an effort to remain a Financial Strength and Dividends preferred supplier in an increasingly competitive marketplace.

Keeping Delmarva Power financially strong in this competitive Thank you for your confidence and continuing support.

environment remains a top priority. Higher-than-expected earnings in 1993, combined with additional shareholder investment, lower capital expenditures, and reduced capital Sincerely, 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 Howard E. Cosgrove future earnings for shareholders. However, as industry change Chairman of the Board, President, and Chief Executive Officer continues to bring increased risk to our business, we expect earnings to be more volatile than in the past.

3

We're working to increase sales, especially in the retail market where we excel. Remaining A 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 Preparing For A New Era and small to medium-sized commercial and industrial cus-Competitive prices, teamwork, and customer satisfaction- tomers that make up 85% of our retail market segment.

the principles that guided us to success in the 1980s-are Through teamwork, Delmarva Power has begun to study the strengths we are building on to stay a preferred energy and rethink critical business processes. The traditional way supplier in a new era of competition and deregulation.

we serve customers may not work in the new era of com-Pages 6 to 15 describe the general strategies, plans, programs, petition. Company teams are looking for ways beyond cost and projects that support these principles. This section cutting to maintain competitive prices and high quality highlights actions we rook in 1993 to take advantage of products and services. We are also forming a more cooper-our strengths in the changing uriliry industry.

ative relationship with regulatory agencies. During the past Adapting To A Changing Market year, we continued our history of achieving reasonable rate Competitive prices enabled Delmarva Power to reduce relief from commissions that regulate the Company. We some uncertainty in our wholesale electricity business. obtained these results through a collaborative approach with Under agreements negotiated in '93, wholesale customers both regulators and customers that accelerated the process must provide the Company with a two-year notice period and reduced costs. In addition, Delaware Governor Thomas to reduce up to 30% of their electricity requirements and Carper convened a task force to review the regulatory a five-year notice to reduce above this level. This will give process in that state. The task force consists of representatives us more stability while we work to secure long-term energy from the Public Service Commission; utilities, including supply contracts with these and other customers. Delmarva Power; industrial customers; government; and the public. Its purpose is to recommend reforms to the existing With our ability to satisfy customers, we acted on oppor-regulatory process, structure, and organization that will tunities to grow in the retail market. An example of this is improve utility efficiency and encourage utility innovation Delmarva Power's offer to buy the Dover, Delaware, electric while assuring continued availability of utility services at system. The Company recently presented a $103.5 million affordable prices.

purchase proposal to the Utility Committee of the City Council. We believe that the proposal benefits Dover and Delmarva Power will continue to take advantage of strategies Delmarva Power. For Dover and its residents, it means that keep prices competitive, encourage teamwork, and lower rates to businesses and many residential customers, heighten customer satisfaction. These strategies will help us a source of steady income to the city without the risks of to thrive in a competitive industry, and enable us to con-running a power plant and operating an electric system , tinue to provide a fair return to investors.

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Delmarva Power intends to grow the retail part of its business by devel.oping energy-related products and services that offer customized satisfaction.

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Keeping Our Competitive Limiting Costs Through Balance And Fkxibility Our energy prices are among the lowest in the Mid-Atlantic generates up to 175 megawatts of elecrriciry by using the region and provide Delmarva Power with a competitive exhaust heat from three adjoining generating units. The edge. Challenge 2000, a balanced and flexible energy sup- Hay Road complex, including Unit# 4, was built in four ply plan devised in 1987, helped the Company gain its increments to closely match energy supply with growing price advantage. customer needs. Through this incremental approach, the complex has a total cost of $470 per kilowatt, 20% below Challenge 2000 uses balance and flexibiliry to deal with the typical costs. To preserve an energy supply option, the changing demand for elecrriciry. Demand rose dramatically Company is getting licenses for a new 300-megawatt power in the early 1970s, slowed in the latter part of the decade, plant near Vienna, Maryland. If needed, Delmarva Power and then grew sharply in the 1980s.

would build this clean-coal technology unit in Dorchester Flexibiliry and balance allow the plan to be accelerated, Counry toward the end of the century. The Company is also slowed, or modified to respond to changing energy demands, exploring new ways to generate electriciry. At our Northern fluctuating fuel prices, and emerging technologies. Challenge Division operations center in Christiana, Delaware, we are 2000's three-pronged strategy includes saving energy, buying testing photovoltaic technology that uses solar cells to gen-energy from other suppliers, and building and owning power erate clean, reliable electriciry directly from sunlight.

plants, or "Save Some, Buy Some, Build Some." This plan Price will key our future success in a competitve environ-is designed to provide reliable energy at the lowest reason-ment. We intend to keep our prices low. A balanced and able cost. So far, the plan has supplied the energy needed flexible approach to energy supply will enable us to retain by customers on the Delmarva Peninsula while helping to our price competitiveness.

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 cus-tomers who install energy-efficient central cooling systems Regional Inergy Prices Hectric Gas in their new or existing homes. Delmarva Power expects to New York 13.18 76.10 offer similar programs in Delaware and Virginia in 1994.

Newark, N.J. 9.11 51.82 For "Buy Some," we opted, under a power purchase agree- Philadelphia 8.46 60.50 Baltimore 6.90 82.16 ment, to delay the in-service date of the Delaware Clean Norfolk, Va. 6.27 66.85 Energy Project from June 1996 to June 1998 or later. The Delmarva Peninsula 6.09 50.94 delay of this 165-megawatt power plant that will burn The chart states electric prices in cents per kilowatt-hour gasified coke resulted from the expected loss of part of our and natural gas prices in cents per I 00 cubic feet for the I 2 months ended September 30, I 993.

resale business and moderate overall load growth.

Under "Build Some," the Company completed Hay Road Unit #4. This combined cycle unit cleanly and efficiently 6

~"ofU\l f*~ * *

~ iJ

.,;.u: I "*-~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.

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Across the Company, employee efforts have held the line on oper-ating and maintenance expenses. In 1993, the Company cut these costs by $6.5 million below budget.

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. 0¢ National Average 25

2. 00¢~erage 1.50¢ D elmarva Power 1.00¢ 1988 1993 O&MCOSTS The growth rate of the Company s 0 & M costs per kWh ofel.ectric sal.es has stayed relativery flat and well below Using Etticiently industry standards.

Controlling Our Costs Cost-effective operation has also contributed to our low determine the daily amount of natural gas the Hay Road energy prices. Delmarva Power has kept the growth of and Edge Moor power plants needed to generate electricity operating and maintenance costs under control. This is the and to find the lowest possible natural gas prices. When result of hard work and creativity. In 1993, the Company cheaper fuel was available in September, the Company issued a corporate-wide challenge to reduce operation and saved $67,000.

maintenance costs by $5 million or 2% below budget.

A more exotic effort to reduce costs is the ash management Employees responded to the challenge and cut costs by $6.5 program. Since the program began five years ago, 52% of million or nearly 3% below budget.

the fly ash generated by Delmarva Power's power plants has Here are several examples. Company power plants kept been recycled instead of placed in expensive, specially con-expenses down by achieving 89.7% equivalent availability, structed landfills. This has resulted in a net savings of over the highest in 10 years and significantly above the industry $4 million. The Company hopes to expand the markets for average of 80.6%. Staffing levels across the Company were fly ash to eliminate the need for future landfill construction held steady. Delmarva Power reduced capital costs by nearly and to lower the cost of handling and disposing of the coal

$2 million through an aggressive refinancing program. More combustion by-product. Since the program's inception, fly than 98% of employees remained injury-free, and the num~er ash has been used in a variety of markets from highway of absences due to illness fell for the sixth straight year. construction to asphalt shingle manufacturing to oyster farming to playground surfacing. At present, ash is being Our cost-contol efforts also included simpler ideas that provide used in a highway embankment project near Centreville, smaller, but significant, savings. For example, the treasury Maryland, and in a cooperative project with the University group expanded its regular review of bank statements to of Delaware to investigate agricultural applications for fly ash.

include intensive error and fee checking. These techniques uncovered various bank errors and have led to lower bank Although we have done a good job controlling costs, we fees and more services for the Company. By projecting will continue to seek improvement. We plan to further our plastic pipe requirements and ordering a two-year supply ongoing cost control efforrs in 1994 to find more savings.

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 division was assigned to the electric system operations department.

The analyst worked with a power supply supervisor to 9

fostering To Gain An Edge Safety Always For Everyone (SAFE) will position us as an industry leader in safety through teamwork among employees, contrac-tors, and customers.

Teamwork at Delmarva Power didn 't just happen. More than 10 years ago, Delmarva Power introduced the Parti-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.

Empowering Our People As PSP began to work, new ideas began ro emerge. New Through several of the most severe storms on record for the methods of solving problems and reducing costs were Delmarva Peninsula, Delmarva Power crews received high discovered. More projects began coming in ahead of schedule marks from customers for the restoration of power under and under budget. This process has developed a true sense difficult weather conditions. Why? ... teamwork. Effective of teamwork among employees throughout the Company.

teamwork helps us ro keep prices and costs down and to Since PSP's inception, in periodic surveys, almost 100%

provide high quality service, such as quick responses ro storm of employees have rared rhe Company a good or excellent outages. These, in turn, increase customer satisfaction. place to work.

At the peak of a winter squall in March 1993, about 20,000 Employee empowerment is now a fundamental part of our customers were without power across the peninsula. Fasr- culture. T earn skills, interdepartmental brainstorming, active working Delmarva Power crews restored service ro most of listening, and grass-roots problem solving have evolved from these customers within a couple of hours, despite downed a collection of techniques to the way we do business at wires, driving rain and sleet, gale-force winds, and snow- Delmarva Power. We will continue to foster our participa-covered roads. As always, many employees worked long tive culture to maintain favorable customer relations, stay hours during the storm routing electricity, repairing damaged price competitive, and manage industry change.

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.

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

& ~ackfll 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.

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TTll 1981 1983 1987 1993 CUSTOMER FAVORABIL/1Y Delmarva Power has steadily improved its positive customer ratings. The Company now ranks among the best in the nation. furthering Dur 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 peninsula will continue gradually through 1996. For the Building On Favorabk Results 20-year period ending in 2013, we forecast that electricity As we head into a more competitive utility industry sales will grow at an annual rate of 1.6% per year. We expect environment, our ability to please customers will become similar growth for gas sales. During the next 10 years, the even more important. Delmarva Power has earned one of Company projects total gas volume to rise by 1.3% per year.

the highest customer favorability ratings in the nation, Despite high customer favorability, Delmarva Power according to an independent market research firm. Currently, cannot stand still. To ensure high quality service in the more than eight out of ten customers give us an overall future, we plan to make some changes. These plans include favorable rating, third highest among 70 electric and gas consolidating telephone and dispatch operations into three companies surveyed. Positive ratings for our efforts to pro-divisional centers and extending the hours of our normal tect the environment place the Company near the top in operations to provide customer service coverage throughout industry comparisons. Customers also cite honesty and our service area. Along with these plans, the Company is concern, reasonable rates, and reliable service as key reasons also studying pricing and payment options. To continue for their satisfaction with Delmarva Power.

to satisfy customers, we will find ways to offer more value-Sometimes improving customer satisfaction means crossing added products and services that meet their individual and new waters-literally. A recent project, Canal West, is taking varied needs.

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 12

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

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

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caring About The We Serve Improving Life On The Peninsula Our ability to please customers is linked to our involve- date, many employee volunteers have helped people in a ment with the people and places we serve. The Delmarva variety of emergency situations from house fires, to car Peninsula is our home. The combination of scenic meadows, accidents, to snowbound motorists, to lost children, to crimes tranquil tidal lands, bustling urban commerce centers, and in progress. Radio Watch has gained local and national attractive resort areas makes the peninsula an interesting recognition and has received two White House Awards.

place to live, work, and play. In addition, the blend of This year the pond at the Company's Vienna power plant industries-chemicals, food processing, agriculture, finance, produced nearly 100,000 striped bass (rockfish) to help plastics, auto manufacturing, pharmaceuticals, aerospace, replenish the fish population in the Chesapeake Bay and and recreation-makes the demand for electricity and natural its tributaries. Since 1985, more than 320,000 rockfish have gas less affected by fluctuations in the national economy been raised at Delmarva Power's Vienna and Edge Moor than in most other areas of the U.S.

hatcheries. These hatcheries are part of Delmarva Power's The Company has provided electric and natural gas service environmental stewardship program called Serving &

here for the past 100 years. We're proud of that record. Conserving Delmarva and are additional examples of our Today, our 2,810 employees serve 387,354 electric cus- efforts to improve the quality of life on the peninsula. Under tomers and 92,940 natural gas customers. Delmarva Power Serving & Conserving Delmarva, the Company conducts provides electric service throughout most of the 5,700- several other activities that save energy, use and recycle square-mile peninsula. In addition, we distribute natural waste, enhance wildlife, and protect the environment.

gas service in a 275-square-mile area in northern Delaware.

Delmarva Power will continue ro meet the energy needs of We have worked hard to understand the needs of the people our customers on the Delmarva Peninsula in a safe, reliable, on the Delmarva Peninsula to find ways to better serve competitively priced, and customer-focused manner. Along them. This includes looking beyond the typical business with that, we will continue to strive to make our part of the relationship with our customers. world a better place.

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 15

I \/ t I tJ ( 011 I I \

20 15 10 5

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 share-holder investments by nearly 400% during the past 10 years through a combination ofdividends and stock price appreciation.

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fllllClll Table of Contents SEUCTED FINANCIAL DATA 18 MANAGEMINT'S DISCUSSION AND ANALYSIS Of FINANCIAL CONDITION AND RESULTS Of OPERATIONS 19 REPORTS Of MANAGEMENT AND 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 17

SELECTED FINANCIAL DATA (Dollars in Thousands, Excepr Per Share Amounrs)

Year Ended December 31, 1993 1992 1991 1990 1989 Operating Data Operaring Revenues $970,607 $864,044 $855,821 $812,217 $796,614 Operating Income $164,139 $143,711 $136,410 $144,473 $137,650 Income Before Cumulative Effect of a Change in Accounting Principle $111,076 $98,526 $80,506 $37,311 $91,308 Cumulative Effecr of a Change in Accounting for Unbilled Revenues $12,730 Net Income $111,076 $98,526 $93,236 $37,311 $91,308 Electric Sales (kWh 000) 12,280,230 11,520,811 11,460,280 11,081,211 10,828,839 Interchange Deliveries (kWh 000) 2,225,384 998,679 1,113,423 726,090 894,402 Gas Sales (mcf 000) 18,066 17,013 15,574 16,069 16,645 Gas Transported (mcf 000) 1,539 3,155 2,610 2,194 677 Common Stock Data Earnings Per Share of Common Srock:

Before Cumularive Effect of a Change in Accounting Principle $1.76 $1.69 $1.44 $0.60 $1.80 Cumularive Effecr of a Change in Accounting for Unbilled Revenues $0.25 Total Earnings Per Share $1.76 $1.69 $1.69 $0.60 $1.80 Dividends Declared Per Share of Common Srock $1.54 $1.54 $1.54 $1.54 $1.51 Average Shares Oursranding (000) 57,557 53,456 50,581 47,534 46,687 Year-End Common Srock Price $23 5/s $23 l/4 $21 l/4 $18 1/s $20 7/s Book Value Per Common Share $14.66 $13.77 $13.42 $12.84 $13.67 Return on Average Common Equity 12.0% 12.2% 12.4% 4.3% 13.2%

Capitaliza.tion Variable Rate Demand Bonds (VRDB) Ol $ 41,500 $ 41,500 $ 41,500 $ 41,500 $ 41,500 Long-Term Debr 736,368 787,387 770,146 741,032 662,544 Preferred Srock 168,085 176,365 136,365 136,365 136,442 Common Stockholders' Equity 862,195 745,789 706,583 614,692 642,641 Tora! Capitalizarion with VRDB $1,808,148 $1,751,041 $1,654,594 $1,533,589 $1,483,127 Other Information T oral Assets $2,593,529 $2,374,793 $2,263,718 $2,125,715 $2,028,661 Long-Term Capiral Lease Obligation $23,335 $26,081 $29,337 $32,354 $2,071 Consrrucrion Expenditures (2) $159,991 $207,439 $181,820 $187,823 $175,843 Internally Generared Funds (IGF) (3) $108,693 $130,275 $96,081 $112,551 $106,698 IGF as a Percent of Consrruction Expenditures 68% 63% 53% 60% 61%

(I) Although Variable Rate Demand Bonds arc classified as current liabilities, the Company intends to use the 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 dividends.

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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.

1993 1992 1991 Core Utility Operations $1.73 $1.47 $1.41 Peach Bottom lawsuit settlement 0.21 Cumulative effect of a change in accounting for unbilled revenues 0.25 1.73 1.68 1.66 Nonurility subsidiaries 0.03 0.01 0.03 Total $1.76 $1.69 $1.69 Dividends On December 30, 1993, the Board of Directors declared a com- utility investments of similar quality and is reflecrive of rhe mon stock dividend of $0.38 1/ 2 per share for rhe fourth quarter. Company's future financial prospects during a period of increasing For 1993, dividends declared per share of common stock were competition. Ar the current yield, the dividend supporrs rhe price

$ J .54. The Board believes that the current dividend level is of the Company's stock at a level which is competitive wirh rhe appropriate, secure and sustainable. The current dividend level industry average as measured by the ratio of marker price per represents an above average yield in comparison to alrernarive share ro book value per share.

Core Utility Earnings The components of change from the prior year in core utility Earnings per share from core utility operations increased by $0.26 earnings per share are shown below. in 1993 compared to 1992 primarily due to growth in electric revenues attributed to higher customer base rares and a 6.6%

1993 vs. 1992 1992 vs. 1991 increase in kilowatt-hour (kWh) sales. Electric sales benefited Operations from horrer summer weather and a 2.0% increase in the number Electric revenues, of customers. Electric customer base rates were raised in 1993 to ner of fuel expense recover higher costs, including the costs of adding electric gen-Ra re in creases $0.31 $0.33 erating capacity to meer the demand for electricity within the Sales volume and other 0.37 (O. l O) Company's service territory. (Refer to Note 2 to the Consolidated Gas revenues, Financial Statements for additional information concerning ner of fuel expense 0.01 0.09 changes in customer base rates.) The earnings growth from higher Operation and electric revenues was partially offset by increased non-fuel expenses, maintenance expense (0.17) (0.08) including operation and depreciation expenses, and also by the Depreciation (0.07) (0.08) dilutive effect on earnings per share of more common shares out-Effect of increased number of standing. Financing requjrements associated with utility plant average common shares (0.13) (0.09) were principally satisfied by issuing common sto:::k in order to Orher (0.06) (0.01) strengthen the Company's capitalization and reduce the level of 0.26 0.06 financial risk.

Peach Bottom lawsuit settlement (0.21) 0.21 Cumulative effect of a change in accounting for unbilled revenues (0.25)

$0.05 $0.02 19

In 1992, earnings per share from core utility operations increased Consolidated Financial Statements, a change in accounting for by $0.06 in comparison to 1991 , primarily due to additional unbilled revenues increased net income and earnings per share by electric and gas revenues from higher customer base rates. The $12,730,000 and $0.25, respectively.

additional base revenues from higher customer rates were partially As a regulated public utility, the Company may file applications offset by unfavorable effects of cooler summer weather on electric for customer rate increases with regulatory commissions having revenues, increased non-fuel expenses, and an increase in the jurisdiction over the Company's utility business in order to re-number of common shares outstanding.

cover cost increases associated with supplying electricity and gas.

Core utility earnings for 1992 and 1991 include earnings from The process of raising customer rates has certain risks, including one-time, unusual items, not related to ongoing utility operations. the possibility that protracted hearings may result in a lag between As discussed in Note 4 to the Consolidated Financial Statements, the time when costs rise and when prices can be adjusted. During in 1992, net income and earnings per share were increased by 1992 and 1993, the Company increased cusromer rates in a time-

$11,397,000 and $0.21, respectively, due to settlement of a law- ly manner by amounts sufficient to recover higher costs. Even suit filed by the Company concerning the 1987-1989 shutdown after these rate increases, the Company's electric rates are com-of the Peach Bottom Atomic Power Station by the Nuclear parable to 1983 levels and lower than the average of utilities in Regulatory Commission. In 1991, as discussed in Note 1 to the the region.

Competition In October 1992, the Energy Policy Act of 1992 (the Energy Act) continued availability of utility services at affordable and com-was enacted. The Energy Act enabled the Federal Energy petitive prices." The task force includes representatives from the Regulatory Commission (FERC) to order the provision of trans- Delaware Public Service Commission, utilities (including the mission service (wheeling of electricity) for wholesale (resale) Company) , industrial customers, government, and the public.

electricity producers and also provided for the creation of a new In the resale market, the Company seeks to reduce the risk as-category of electric power producers called exempt wholesale sociated with a customer switching energy suppliers on short generators (EWGs). These provisions of the Energy Act have notice because providing electricity service requires investments in enhanced the ability of utilities and non-utility generators to com-capital-intensive facilities which have long lives and require long pete to serve resale customers currently served by a particular lead-times for construction. In the Company's most recent resale utility. Partly as a result of the Energy Act, industry-wide resale base rate case, the resale customers agreed to provide a two-year markets are experiencing increased competition. In 1993, gross notice for load reductions up to 30% and a five-year notice for electric revenues from the Company's resale business were $105.0 load reductions greater than 30%.

million or 13.0% of billed electric sales revenues.

Prior to this agreement, Old Dominion Electric Cooperative In response to the changing environment in the electric utility (ODEC), a resale customer, advised the Company that it would industry, the Company has modified existing strategies and also purchase up to 150 megawarrs (MW) from another utility, begin-developed new strategies. From a customer or market perspective, ning January 1, 1995. The Company is continuing to negotiate a the Company has concluded that focusing on growing the retail partial-requirements service agreement (to serve the balance of portion of the business provides the best opportunity to meet ODEC's load) and a transmission service agreement (to transport the twin objectives of satisfying customers' needs while providing the electricity ODEC plans to purchase) with ODEC to become a fair return to shareholders. In order to maintain acceptable effective January 1, 1995. The maximum reduction in annual profitability levels while keeping customer prices competitive, the non-fuel revenues that could result from ODEC's purchase of Company is stepping up efforrs to find ways of reducing costs.

150 MW from another utility is estimated to be about $24 mil-To facilitate implementation of this plan, the Company has lion or $0.24 per share based on projected shares outstanding in developed market specific strategies intended to grow retail sales. 1995. To mitigate the potential impact of this loss of business, The Company's retail prices are among the lowest in the region the Company is pursuing off-system sales of capacity and energy, and the Company continues to maintain high customer favor- intensifying cost control efforrs, and if necessary, may apply for ability ratings. The Company believes it should have the ability to increases in customer rates. The Company expects that these offer flexible pricing in order to compete to serve large retail cus- strategies will reduce to approximately $0.08 or less, or possibly tomers. Such changes in pricing methods could require modifica- eliminate, the adverse earnings per share effect; however, the ulti-tion to the existing regulatory process. In Delaware, the Governor mate effect on future earnings depends on the degree of success has convened a task force "to recommend reforms ro the existing experienced by the Company in implementing its strategies.

regulatory process, structure, and organization that will improve utility efficiency and encourage utility innovation, while assuring 20

Other Utility Customer Matters The Company is exploring various opportunities for increasing In December 1992, General Motors announced plans to close power sales. As part of the Company's efforts to grow its retail its Delaware manufacturing plant in 1996. The plant's closing business, in December 1993, the Company offered $103.5 mil- could increase Delaware's unemployment rate by one to two lion to purchase the electrical system of the City of Dover, percentage points. The direct impact on the Company's revenues Delaware. The City of Dover has approximately 18,500 electric from the loss of General Motors as a utility customer would be a customers and annual revenues from electricity sales of abour decrease in non-fuel revenues of approximately $4 million or

$37 million. Although the Company expects that the impact on $0.04 per share.

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 Electric revenues also include interchange delivery revenues which on rates in effect in fuel adjustment clauses which are adjusted result from the sale of electric power to the Pennsylvania-New periodically to reflect cost changes and are subject to regulatory Jersey-Maryland Interconnection Association (PJM Interconnection) approval. Rates for non-fuel costs billed to customers are depen- and certain utilities. The PJM Interconnection is an electric dent on rates determined in base rate proceedings before regulatory power pool comprised of a number of utilities in the region, commissions. Changes in non-fuel (base rate) revenues can di- including the Company. The power pool provides both capital rectly affect the earnings of the Company. Fuel revenues, or fuel and operating economies to member utilities. Interchange de-costs billed to customers, generally do not affect net income since livery revenues are reflected in the calculation .o f rates charged the expense recognized as fuel costs is adjusted to match the fuel to customers under fuel adjustment clauses. Due to this rate-revenues. The amount of under- or over-recovered fuel costs is making treatment, interchange delivery revenues do not affect generally deferred until it is subsequently recovered from or net income.

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.

21

Electric Revenues and Sales In 1993, rhe percenrages of roral billed sales revenues conrributed on a hisrorical 21-year average) and much hotter than 1992.

by rhe various cusromer classes were as follows: residenrial- Residenrial and commercial sales also benefited from increases in 37 .9%; commercial-29.5%; industrial-18.7%; resale-13.0%; the number of customers served of 2.0% and 2.1 %, respectively.

and other-0.9%. Industrial sales increased 3.7% due ro increased production levels of cerrain large cusromers and more kWh sales ro a major cus-Details of the changes in the various components of electric romer which provides some of its own power.

revenues are shown below.

Despite a 0.5% increase in rota! kWh sold during 1992 in com-Comparative Increase (Decrease) from parison ro 1991, "Sales Volume and Other" variances resulred in Prior Year in Electric Revenues a $5.1 million decrease in 1992 non-fuel revenues due ro adverse effecrs of unusually cool summer wearher on revenues. Charges (Dollars in Millions) 1993 1992 billed ro resale and other large cusromers for peak demand usage Non-fuel (Base Rare) Revenue decreased, and a disproporrionarely lower volume of residenrial Increased Rates $26.6 $27.4 sales occurred during the summer when customer rates are higher.

Sales Volume and Other 32.2 (5.1) For 1992 sales compared ro 1991, residenrial sales were relatively Fuel Revenue 5.9 (23.8) flat, but commercial and resale sales, which were not as strongly Inrerchange Delivery Revenue 30.8 (2.9) affected by the cool summer weather, increased by 1.3% and Total $95.5 $(4.4) 1.8%, respectively, primarily due ro cusromer growth. Industrial sales in 1992 remained at about the 1991 level due ro the slow economic recovery.

The increases in non-fuel revenues shown above as "Increased Rates" of$26.6 million for 1993, and $27.4 million for 1992, Electric fuel revenues increased $5.9 million in 1993 due ro higher resulred from the increases in electric cusromer base rates dis- kWh sales parrially offset by lower rares charged to customers cussed in Nore 2 ro the Consolidated Financial Statements. under the fuel adjustment clauses. In 1992, electric fuel revenues decreased $23.8 million due to lower fuel adjusrmenr clause rates.

The non-fuel revenue variances shown in the above table as "Sales Volume and Other" are attributable ro changes in sales volume, Inrerchange delivery revenues increased $30.8 million in 1993 sales mix, and orher facrors. "Sales Volume and Orher" variances mainly due ro higher sales ro the PJM Inrerconnection which for 1993 compared to 1992 were principally due to a 6.6% resulred from increased demand for electricity in the region and increase in rota! kWh sold. Sales ro residenrial, commercial, and greater availabiliry of the Company's generating units. In 1992, resale cusromers increased by 8.4%, 6.3%, and 7.3%, respec- inrerchange delivery revenues decreased $2.9 million due to rively, mainly due ro increased kWh usage during the 1993 extended maintenance outages at the Company's generating units, summer cooling season, which was hotter than normal (based which reduced potencial sales to the PJM Interconnection.

Gas Revenues, Sales, and Transportation The Company earns gas revenues from the sale of gas ro cus- In 1992, rota! gas revenues increased $12.6 million in comparison romers and also from transporring gas through the Company's to 1991 due to a $7.0 million increase in non-fuel revenues and a sysrem for some cusromers who purchase gas directly from gas $5.6 million increase in fuel revenues. Non-fuel revenues producers and pipelines. increased due ro $3.2 million of additional revenue from higher cusromer base rates, as discussed in Note 2 to the Consolidated Total 1993 gas revenues increased $11.1 million from 1992 due Financial Statements, and due to a $3.8 million increase in sales ro a $1.2 million increase in non-fuel revenues and a $9.9 million volume. Total cubic feet of gas sold and transported in 1992 increase in fuel revenues. Non-fuel revenues increased despire a increased 10.9% over 1991 due to colder winrer weather and 2.8% decrease in total cubic feet of gas sold and transporred new customers. Gas fuel revenues increased $5.6 million in 1992 mainly due to increased sales ro firm cusromers which are billed ar primarily due ro higher sales and bill-credits made to customers higher rares than sales ro non-firm (inrerruprible) and transporra-during 1991 for previously over-collected fuel costs.

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.

22

Electric Fuel and Purchased Power Expenses The components of the changes in electric fuel and purchased The $39.2 million increase in 1993 shown as "Increased power expenses are shown in the table below. (Decreased) kWh Output" was due to higher aggregate output from electric generating units and purchased power. Output rose Comparative Increase (Decrease) from Prior Year in 1993 due to greater electric sales demand in the Company's in Electric Fuel and Purchased Power Expenses service territory and increased interchange deliveries. In 1992, the (Dollars in Millions) 1993 1992 $1.9 million decrease in kWh output was due to extended main-tenance outages at certain generating units.

Average Cost of Electric Fuel and Purchased Power $ (6.9) $ (9.9) The kWh output required to serve load within the Company's Increased (Decreased) kWh Output 39.2 (1.9) service territory is equivalent to total output less interchange Deferral of Energy Costs 4.2 (12.0) deliveries. In 1993, the Company's output for load within its ser-Total $36.5 $(23.8) vice territory was provided by 46.7% coal generation, 14.6%

nuclear generation, 26.0% oil and gas generation, and 12.7% net In 1993, the "Average Cost of Electric Fuel and Purchased purchased power, which consisted primarily of purchases under Power" decreased $6.9 million from 1992 primarily due to addi-an agreement with PECO Energy Company (PECO).

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 The variances shown in the table as "Deferral of Energy Costs" three existing Hay Road combustion turbine units as its energy were due to varying levels of under- and/or over-collections of source. Lower oil prices also contributed to the decrease. The fuel costs which are subsequenrly recovered from or returned to 1992 "Average Cost of Electric Fuel and Purchased Power" utility customers.

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 Depreciation expense increased $5.6 million in 1993 and $6.7 million from 1992 largely due to higher administrative and gen- million in 1992 principally due to additions to the electric sys-eral expenses, including increases for salaries and wages, and post- tem, which included Hay Road Unit 4 in 1993 and a new stack retirement benefos other than pensions due to adoption of the for the Indian River power plant in 1992. The 1992 increase also accounting required by Statement of Financial Accounting reflects a full year's depreciation for Hay Road Unit 3 which was Standards (SFAS) No. 106. (Refer to Note 11 to the Con- completed on June 1, 1991. Depreciation expense is expected to solidated Financial Statements for information on SFAS No. continue to increase as new electric plant is added and capital pro-106.) Although future increases in operation and maintenance jects for environmental compliance are completed.

expenses are expected due to additions of new utility plant, aging Income tax expense on operations increased $18.7 million in of existing utility plant, and normal inflationary pressures, the 1993 and $3.5 million in 1992 primarily due to higher pre-tax Company is actively working to minimize any such increases. income. The 1993 increase also includes $1.6 million due to the Operation and maintenance expenses increased by $6.8 million in increase in the federal income tax rate from 34% to 35%, effec-1992 in comparison to 1991 primarily due to higher maintenance tive January 1, 1993. Due to adoption in 1993 ofSFAS No. 109, outage costs for electric generating units and due to charges for "Accounting for Income Taxes," deferred charges and deferred the purchase of 48 MW of capacity which began June 1, 1992. income tax liabilities increased $144.5 million. Cash flow and These increases were partially offset by decreases in administrative earnings were not materially affected and are nor expected to be and general expenses, including pension cost, and lower costs of materially affected in the future due to anticipated recovery of the operating and maintaining the electric transmission and distribu- deferred tax liability through customer rates. Refer to Note 3 to the tion systems. Consolidated Financial Statements for additional information on SFAS No. 109.

1993 Sources ofElectricity Electric Operation & Maintenance Expenses perk Wb sold 2.75¢ 2.50¢

_____ .Coal 46.7%

12.7%

_____ .Oil and Gas 26.0%

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

Utility Financing Costs Interest charges on debt of the core utility decreased $5.2 million Allowance for equity and borrowed funds used during construc-in 1993 and $1.3 million in 1992 primarily due to lower interest tion (AFUDC) decreased $1.0 million in 1993 mainly because rares which enabled the Company to reduce the average cost of its construction of Hay Road Unit 4 was completed on May 31 ,

outstanding long-term debt through refinancings. The 1993 1993, resulting in lower average construction work-in-progress decrease in interest expense also reflects the effect of redeeming balances. AFUDC as a percentage of net income decreased from

$50 million of 10% First Mortgage Bonds on June 1, 1993 with 8.3% in 1992 to 6.6% in 1993. In 1992, AFUDC increased $2. l proceeds from a public offering of common stock. The Company million from 1991, principally due to higher average construction refinanced $133.2 million, $255.5 million, and $85.5 million work-in-progress balances attributable to construction of Hay ofirs long-term debt in 1993, 1992, and 1991, respectively, re- Road Unit4.

sulting in annualized interest savings of $7.5 million in total. The Due to increased common equity financing, the average number interest savings are ultimately reflected in rates charged to utility of shares of common stock outstanding increased in 1993 and customers.

1992. Rates charged to customers are designed to result in suffi-Dividends on preferred stock increased $1.7 million in 1993 cient revenues to offset the dilution of earnings per share due to mainly because $40 million of? 3/40/o preferred stock issued in increased common equity financing. The adverse effect on earnings August 1992 was outstanding for all of 1993 compared to part of per share of$0.13 in 1993 and $0.09 in 1992 from additional 1992. In 1992, the increase in preferred dividends due to issuance common shares outstanding was largely offset by revenues from of the 7 3/4% preferred stock was largely offset by lower dividend base rate increases.

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 strategy for providing During the past three years, the Challenge 2000 Plan has included an adequate, reliable supply of electricity to customers at reasonable 95 MW of additional load reduction from energy management rates, while minimizing adverse impacts on the environment. The programs, a 48 MW capacity purchase which began in 1992, and Company's plan, which is updated periodically, is based on fore- 297 MW of capacity from two new power plants, Hay Road Unit casts of demand for electricity in the service territory and PJM 3 and Unit 4, which were completed in 1991and1993, respec-Interconnection reserve requirements. The Company's plan tively. Looking forward through 2003, the Company's current combines customer energy conservation and load management plans for meeting the demand for energy include the following:

programs ("Save Some"), power purchases ("Buy Some"), and (1) "Save Some'~Approximately 140 MW of additional load new power plants ("Build Some"). The plan is flexible and bal-reduction from various customer-oriented energy management anced. The plan's flexibility was recently demonstrated when programs.

the Company delayed the planned date of a power purchase by two years due to the decision of a resale customer (ODEC) to (2) "Buy Some'~205 MW of capacity purchases, including purchase 150 MW of its load from another utility beginning 165 MW beginning in 1998 or later, and 40 MW in 1999 January l, 1995. or later.

As an electric utility, the Company must balance the potential (3) "Build Some'~The Company has filed for a Certificate risks of providing too much or not enough capacity. The main of Public Convenience and Necessity to preserve the option of risks of excess capacity are that customer rates may become constructing by the year 2000 or later a 300 MW pulverized coal-uncompetitive and regulators may not allow the associated costs fired baseload unit in Dorchester County, Maryland. The power to be recovered from ratepayers. The principal risks of inadequate plant, as currently planned, has an estimated construction cost of capacity are reliability of service and that capacity deficiency $695 million, including AFUDC.

charges would be owed to the PJM Interconnection which requires the Company to plan for and provide a certain capacity level.

24

Liquidity and Capital Resources The Company's primary capital resources are internally generated Sales of various equity interests in leveraged leases by the funds (nee cash provided by operating activities less common and Company's nonutility subsidiaries resulted in a $21.5 million preferred dividends) and external financings. These resources pro- cash inflow during 1993.

vide capital for investments in utility plant and other capital The Company issued $158.2 million oflong-term debt in 1993 requirements, such as repayment of maturing debt and capital at an average interest race of 6.0% and redeemed $184.2 million lease obligations.

of long-term debt which had an average interest race of 8.1 %.

Operating activities provided net cash inflows of $206.7 million Debt refinancings in 1993 also included $15.5 million of variable in 1993, $220.8 million in 1992, and $181.1 million in 1991. In rate demand bonds which were refinanced with similar bonds chat 1992, operating cash flow was increased by $11.4 million, net of have more favorable terms and an additional 14 years until matu-income taxes, from receipt of a payment for settlement of the rity. The Company also refinanced its 7.88% and 7.84% series of Peach Bottom lawsuit. Common dividends paid during 1993, preferred stock, $28.28 million in total, with $20 million of 6 3/4%

1992, and 1991 were $88.0 million, $82.0 million, and $77.l preferred stock, and cash. The Company issued $109.5 million of million, respectively. These amounts represented 43%, 37%, and common stock in 1993, including $77.l million from a public 43% of net cash provided by operating activities in 1993, 1992, offering of 3,300,000 shares in March 1993. Book value per share and 1991, respectively. The ratio of common dividends paid per of common stock increased from $13.77 as of December 31, share ro earnings per share was 88% in 1993, and 91 % in 1992 1992, to $14.66 as of December 31, 1993. Approximately 70ct of and 1991. the 89ct increase resulted from the sale of common stock at prices exceeding book value. The Company's capital structure as of Utility construction expenditures, the Company's largest capital December 31, 1993 and 1992 expressed as a percentage of total requirement, are affected by many factors, including growth in capitalization is shown below.

demand for electricity, compliance with environmental regula-tions, and the need for improvement and replacement of existing 1993 1992 facilities. Utility construction expenditures were $160.0 million Long-term debt and variable in 1993, $207.4 million in 1992, and $181.8 million in 1991. rate demand bonds 43.0% 47.3%

Construction expenditures decreased $47.4 million in 1993 pri- Preferred stock 9.3% 10.1%

marily because construction of Hay Road Unit 4 was completed Common stockholders' equity 47.7% 42.6%

in May 1993. Construction expenditures in 1993 included $9.2 Capital requirements for the period 1994-1995 are estimated to million for projects attributed to environmental compliance.

be $395 million, including $25 million for maturity of First Internally generated funds provided 68%, 63%, and 53% of the cash Mortgage Bonds in 1994 and $334 million for utility construc-required for construction in 1993, 1992, and 1991, respectively.

tion, excludingAFUDC. The estimate of 1994-1995 utility Capital raised from financial markets during 1991-1993, net of construction requirements includes $44 million of environmental

$557 million of refinancings and redemptions, consisted of $229 construction expenditures primarily related to plans for com-million of common stock, $32 million of preferred stock, and $20 pliance with provisions of the Clean Air Act. During 1996-1998, million of long-term debt. After considering the costs associated an additional $65 million of construction expenditures (excluding with issuing and refinancing debt and equity securities during AFUDC) related to compliance with environmental regulations 1991-1993 of approximately $37 million, the net amount of are planned.

capital raised from external financings during this period was The Company anticipates that $250 million will be generated

$244 million.

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 esti-mated utility construction expenditures. The balance is expected InternaDy Generated Funds & Constntcti.on Expenditu1*es to be externally financed. During 1994-1995, long-term external (in millions) financings are presently estimated at $140 million, including $90

$210 million oflong-term debt and $50 million (market value) of common stock.

180 After a recent review of the electric utility industry, bond rating 150 agencies adopted more stringent rating guidelines for electric utili-120 ties due to increased risk associated with competition and ocher 90 factors. The higher standards could potentially result in increased borrowing costs for the industry in general. Moody's and Duff &

60 Phelps maintained their ratings of the Company's senior secured 30 debt as "A2" and "A+," respectively. Standard & Poor's lowered its rating of the Company's senior secured debt to "A" from "A+."

0 1991 1992 1993 1994* 1995* The Company views positively the relatively minimal movement in racings of its senior secured debt afrer considering the higher

- lntemally Generated Funds Constru.ctio11 Expenditures standards adopted by the racing agencies.

• forecast 25

Nonutility Subsidiaries Informarion on die Company's nonuriliry subsidiaries, in addi- rribured $0.07 ro 1991 earnings per share, were parrly offser by an rion ro rhe following discussion, can be found in Nores 1 and 16 operating loss for landfill and wasre hauling acriviries, accruals for ro die Consolidared Financial Srarements. potential serrlements oflirigarion, and adminisrrarive and general expenses.

Nonuriliry subsidiaries earned $0.03 per share in 1993 primarily due ro afrer-rax gains on sales of equiry and residual value inreresrs One of die nonuriliry subsidiaries leases five aircraft, in roral, ro in leveraged leases. Earnings also reflecr income from ongoing Norrhwesr Airlines, Inc.; Singapore Airlines Limired; and Express leveraged leasing operations, operating services (management and Airlines I, Inc. as parr of irs leveraged leasing business. The airline operation of power planrs), and landfill and wasre hauling activities. industry continues ro be intensely comperirive and cerrain air-Such income was offser by adminisrrarive and general expenses. lines, which are nor lessees of die Company's subsidiary, have filed for prorecrion under rhe bankruptcy laws. The Company's Nonuriliry subsidiaries earned $0.01 per share in 1992 primarily aircraft lessees are current on rheir lease payments.

due ro earnings from leveraged leases, operaring services, and ocher businesses. These earnings were largely offser by an operat- In 1993, roral subsidiary revenues, including gains, were $37.6 ing loss for landfill and wasre hauling acriviries and by adminisrra- million compared ro $14.4 million in 1992. The revenue rive and general expenses. increase was mainly due ro rhe transfer of rhe contract for opera-tion and maintenance of die Delaware Ciry Power Planr (owned In 1991, rhe nonuriliry subsidiaries earned $0.03 per share. Gains by Srar Enterprise) from rhe parent company ro a nonutiliry from sales of purchase options on leveraged leases, which con-subsidiary.

26

Report ofManagement Report of Independent Accountants Management is responsible for che information and representa- To the Board of Directors and Stockholders tions contained in che Company's financial statements. Our Delmarva Power & Light Company financial statements have been prepared in conformiry with Wilmington, Delaware generally accepted accounti ng principles, based upon currendy We have audited the accompanying consolidated balance sheets available faces and circumstances and management's best esti-and statements of capitalization of Delmarva Power & Light mates and judgments of the expected effects of events and Company and Subsidiary Companies as of December 31, 1993 transactions.

and 1992, and the related consolidated statements of income, Delmarva Power & Light Company maintains a system of inter- changes in common stockholders' equiry, and cash flows for each nal controls designed co provide reasonable, but not absolute, of the three years in the period ended December 31, 1993. These assurance of the reliabiliry of che financial records and the protec- financial statements are the responsibiliry of the Company's tion of assets. The internal control system is supported by written management. Our responsibiliry is co express an opinion on these administrative policies, a program of internal audits, and proce- financial statements based on our audits.

dures co assure the selection and training of qualified personnel.

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

and independent accountants co review accounting, auditing, and financial reporting matters. The independent accountants are In our opinion, the financial statements referred co above present appointed by the Board on recommendation of the Audit fairly, in all material respects, the consolidated financial position Committee, subject co stockholder approval. of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1993 and 1992, and the consolidated results of their operations 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 consolidat-Howard E. Cosgrove ed financial statements, in 1991 the Company changed its Chairman of the Board, President and method of accounting for unbilled revenues and in 1993 changed Chief Execurive Officer its method of accounting for income taxes and postrerirement benefits ocher than pensions.

~1~

Barbara S. Graham Vice President and 2400 Eleven Penn Center Chief Financial Officer 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 unbilled 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 cumulative 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) Year Ended December 31, 1993 1992 1991 Ca.sh Flows from Operating Activities Nee income $111,076 $98,526 $93 ,236 Adjustments co reconcile nee income co nee cash provided by operating activities

• Depreciation and amortization 112,926 105,624 99,313 Allowance for equity funds used during construction (5,309) (5,631) (4,199)

Investment tax credit adjustments, nee (2,515) (2,417) (2,844)

Deferred income taxes, nee (I ,171) 10,749 12,870 Nee change in:

Accounts receivable (15,851) (4,384) (26,528)

Inventories 5,314 9,696 (171)

Accounts payable (3,749) 8,779 (12,428)

Other current assets & liabiliciesO> 11,441 (680) 22,338 Ocher, net (5,438) 491 (462)

Nee cash provided by operating activities 206,724 220,753 181,125 Cash Flows from Investing Activities Construction expenditures, excluding AFUDC (159,991) (207,439) (181,820)

Allowance for borrowed funds used during construction (3,404) (4,077) (3,436)

Change in working capital for construction 3,123 (9,823) 14,538 Cash flows from leveraged leases Sale of interests in leveraged leases 21,542 5,375 Insurance proceeds from casualty loss 4,115 Ocher 1,511 1,858 4,750 Investment in subsidiary projects and operations (2,827) (7,013) (4,504)

Net (increase)/decrease in bond proceeds held in cruse funds 1,152 6,076 (205)

Deposits co nuclear decommissioning cruse funds (2,657) (3,770) (1,831)

Sale of urility plane and inventory 4,733 Ocher, net (389) (2,677) (1,332)

Net cash used by investing activities (141,940) (222,750) (163,732)

Cash Flows from Financing Activities Dividends: Common (87,989) (81 ,986) (77,097)

Preferred (10,042) (8,492) (7,947)

Issuances: Long-term debc(2) 148,200 273,335 11 7,000 Variable rare demand bonds 15,500 Common stock 109,463 32,200 87,900 Preferred stock 20,000 40,000 Redemptions: Long-term debt (184,206) (257,178) (86,794)

Variable rare demand bonds (15,500)

Common stock (748) (259)

Preferred stock (28,280)

Principal portion of capital lease payments (9,956) (10,339) (10,593)

Nee change in term loan 10,000 Nee change in shore-term debt (17,000) 5,950 (12,250)

Cose of issuances and refinancings (13,097) (16,187) (7,900)

Nee cash provided/(used) by financing activities (63,655) (22,956) 2,319 Net change in cash and cash equivalents 1,129 (24,953) 19,712 Beginning of year cash and cash equivalents 21,888 46,841 27,129 End of year cash and cash equivalents $23,017 $21,888 $46,841 (I) Other than debc and deferred income caxes classified as currenc.

(2) Excluding nee change in cerm loan.

See accompanying Notes co Consolidated Financial Statements.

29

CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) As of December 31, 1993 1992 ASSETS Utility Plant-At Original Cost Electric $2,561,507 $2,345,869 Gas 176,167 163,139 Common 122,182 127,852 2,859,856 2,636,860 Less: Accumulated depreciation 989,351 929,869 Net utility plant in service 1,870,505 1,706,991 Construction work-in-progress 91,001 187,844 Leased nuclear fuel, at amortized cost 33,905 36,782 1,995,411 1,931,617 Investments and Nonutility Property Investment in leveraged leases 50,914 72,858 Funds held by trustee 17,577 15,274 Other investments and nonutility property, net 55,248 59,163 123,739 147,295 Current Assets Cash and cash equivalents 23,017 21,888 Accounts receivable Customers 98,472 88,499 Other 18,405 12,527 Inventories, at average cost Fuel (coal, oil, and gas) 27,335 32,624 Materials and supplies 37,687 39,055 Prepayments 9,534 7,907 Deferred income taxes, net 10,713 8,236 225,163 210,736 Deferred Charges and Other Assets Unamortized debt expense 11,222 11,219 Deferred debt refinancing costs 28,794 22,510 Deferred recoverable plant costs 15,613 15,019 Deferred recoverable income taxes 144,463 Other 49,124 36,397 249,216 85,145 Total $2,593,529 $2,374,793 See accompanying Notes to Consolidated Financial Statements.

30

CONSOLIDATED BALANCE SHEETS (Dollars in Thousands) As of December 31 ,

1993 1992 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 $ 132,366 $ 121,824 Additional paid-in capital 470,997 374,976 Retained earnings 259,507 249,176 Unearned compensation (675) (187)

Total common stock.holders' equity 862,195 745 ,789 Preferred stock 168,085 176,365 Long-term debt 736,368 787,387 1,766,648 1,709,541 Current Liabilities Shorr-term debt 17,000 Long-term debt due within one year 25,986 946 Variable rare demand bonds 41,500 41,500 Accounts payable 55,175 56,389 Taxes accrued 10,987 11,593 Interest accrued 15,522 15, 190 Dividends declared 22,664 20,900 Current capital lease obligation 12,684 12,709 Deferred energy costs 14,229 7,933 Other 32,681 25,265 231,428 209,425 Deferred Credits and Other Liabilities Deferred income taxes, net 497,457 352,474 Deferred investment tax credits 49,475 51 ,990 Long-term capital lease obligation 23,335 26,081 Other 25,186 25 ,282 595,453 455 ,827 Commitments and Contingencies (Notes 12, 13, and 14)

Total $2,593,529 $2,374,793 See accompanying Notes to Consolidated Financial Statements.

31

CONSOLIDATED STATEMENTS Of CAPITALIZATION (Dollars in Thousands) A5 of December 31, 1993 1992 Common Stockholders' Equity Total common stockholders' equity (I) $ 862,195 $ 745,789 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) 40,000 40,000 Par value $100 per share, 1,800,000 shares authorized:

Current call Series Shares outstanding price per share (1993 and 1992) 3.70%-5% 320,000 and 320,000 $103.00-$105.00 32,000 32,000 6 3/4% 200,000 and 0 (3) 20,000 7.52% 150,000 and 150,000 $103.50 15,000 15,000 7.84%-7.88% 0 and 282,800 28,280 Adjustable-5.54%, 5.83% (4) 160,850 and 160,850 $103.00 16,085 16,085 Auction rate-2.71 %, 3.05% (4) 450,000 and 450,000 $100.00 45,000 45,000 168,085 176,365 Long-Term Debt First Mortgage Bonds:

12/31/93 12/31/92 Maturity Interest Rates Interest Rates 1994 4 5/s% 4 5/s% 25,000 25,000 1997 6 3/s% 6 3/s% 25,000 25,000 1998 7% 25,000 2002-2003 6.40%-6.95% 6.95%-8% 120,000 120,000 2004 6.60% 18,200 2014-2015 7.30%-8.15% 7.30%-8.15% 81,000 81,000 2018-2022 5.90%-8.50% 6.75%-10% 208,200 240,000 2032 6.05% 15,000 474,200 534,200 Other Bonds, due 2011-2017, 7.15%-7.50% 54,500 54,500 Pollution Control Notes:

Series 1973, due 1994-1998, 5.75% 6,500 6,650 Series 1976, due 1994-2006, 7 l/s%-7 l/4% 3,300 3,400 Medium Term Notes, due 1998, 5.69% 25,000 Medium Term Notes, due 1999, 7 lf2% 30,000 30,000 Medium Term Notes, due 2002-2004, 8.30%-9.29% 39,000 39,000 Medium Term Notes, due 2007, 8 l/s% 50,000 50,000 Medium Term Notes, due 2020-2021, 8.96%-9.95% 61,000 61,000 First Mortgage Notes, 9.65% (5) 8,244 8,809 Term Loan, due 1996, 3.27% (6) 10,000 Other Obligations, due 1994-2000, 8.5% 1,307 1,497 Unamortized premium and discount, net (697) (723)

Current maturities of long-term debt (25,986) (946)

Total long-term debt 736,368 787,387 T oral capitalization 1,766,648 1,709,541 Variable Rate Demand Bonds (7) 41,500 41,500 Total capitalization with Variable Rate Demand Bonds $1,808,148 $1,751,041 (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.

32

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 ofJanuary 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 1,126,802 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 ofDecember 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 ofDecember 31, 1992 54,143,853 121,824 374,976 249,176 (187) 745,789 Net income 111,076 111,076 Cash dividends declared Common stock ($1.54) (89,792) (89,792)

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

Issuance of common stock Public offering 3,300,000 7,425 69,713 77,138 DRIP C2l 1,246,380 2,804 26,519 29,323 Stock options 139,050 313 2,689 3,002 Expenses (2,627) (2,627)

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

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

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

Balance as ofDecember 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 shares are aurhorized.

(2) Dividend Reinvestment and Common Share Purchase Plan (DRIP)-As of December 31, 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

1. SIGNIFICANT ACCOUNTING POUCllS Nature ofBusiness Fuel Expense The Company is predominantly a public uriliry that provides Fuel costs charged to the Company's results of operations are electric service on the Delmarva Peninsula in an area consisting generally adjusted to match fuel costs included in cusromer of about 5,700 square miles with a population of approximately billings (fuel revenues). The difference between fuel revenues 1.0 million . The Company also provides gas service in an area and actual fuel coses incurred is reported on rhe balance sheet consisting of about 275 square miles with a population of ap- as "deferred energy costs." The deferred balance is subsequently proximately 457,000 in northern Delaware, including rhe Ciry recovered from or returned to uriliry customers.

of Wilmington. In addition, the Company has wholly owned The Company's share of nuclear fuel at the Peach Bottom Atomic subsidiaries engaged in nonuriliry activities.

Power Station (Peach Bottom) and the Salem Nuclear Generating Regulation of Utility Operations Station (Salem) is financed through a contract which is accounted The Company is subject to regulation with respect to its retail for as a capital lease. Nuclear fuel costs, including a provision for uriliry sales by the Delaware and Maryland Public Service the future disposal of spent nuclear fuel, are charged to fuel Commissions (DPSC and MPSC, respectively) and the Virginia expense on a unit of production basis.

Scare Corporation Commission (VSCC), which have broad powers over rare matters, accounting, and terms of service. Gas Depreciation Expense The annual provision for depreciation on utiliry properry is com-sales are subject to regulation by the DPSC. The Federal Energy puted on the straight-line basis using composite rates by classes of Regulatory Commission (FERC) exercises jurisdiction with depreciable properry. The relationship of the annual provision for respect to the Company's accounting systems and policies, and depreciation for financial accounting purposes ro average depre-the wholesale (resale) transmission and sale of electric energy.

ciable properry was 3.7% for 1993, 3.6% for 1992, and 3.7% for FERC also regulates the price and other terms of transportation 1991. Depreciation expense includes a provision for the of natural gas purchased by the Company. The percentage of Company's share of the estimated cost of decommissioning utiliry operating revenues regulated by each Commission for the (decontaminating and removing) nuclear power plant reactors year ended December 31, 1993 was as follows: DPSC 64%,

based on amounts billed to customers for such costs. Refer ro MPSC 22%, VSCC 3%, and FERC 11 %.

Nore 6 ro the Consolidated Financial Statements for information In conformiry with generally accepted accounting principles, the on nuclear decommissioning.

Company's accounting policies reflect the financial effects of rate regulation and decisions issued by regulatory commissions having Interest Expense jurisdiction over the Company's utiliry business. In accordance The amortization of debt discount, premium, and expense, with the provisions of Statement of Financial Accounting including refinancing expenses, is included in other interest Standards No. 71, "Accounting for the Effects of Certain Types charges. On a consolidated basis, total interest charges incurred of Regulation," rhe Company defers expense recognition of cer- were $65,421,000 in 1993, $70,156,000 in 1992, tain costs ("deferred charges"). Deferred charges are subsequently and $72,456,000 in 1991.

amortized to expense over the period that the cost is recovered Allowance for Funds Used during Construction through cusromer rates.

Allowance for funds used during construction (AFUDC) is Reponing of Subsidiaries included in the cost of utiliry plant and represents the cost of The consolidated financial statements include the accounts of the borrowed and equiry funds used ro finance construction of new Company and its wholly owned subsidiaries-Delmarva Energy utiliry facilities. The amount of AFUDC capitalized is also re-Company; Delmarva Industries, Inc. ; Delmarva Services ported in the Consolidated Statements oflncome as a reduction Company; and Delmarva Capital Investments, Inc. and its sub- of interest charges for the borrowed funds component and as sidiaries. The results of operations of the Company's nonutiliry other income for the equiry funds component. AFUDC was subsidiaries are reported in the consolidated statements of income capitalized on uciliry plant construction at the rates of9.6% in as "Other income." Refer to Nore 16 ro the Consolidated 1993 and 1992, and 9.9% in 1991.

Financial Statements for financial information about the Leveraged Leases Company's subsidiaries.

The Company's investment in leveraged leases includes the Utility Revenues aggregate of rentals receivable (net of principal and interest on Prior to 1991, the Company recorded revenues as billed to its nonrecourse indebtedness) and estimated residual values of the customers on a monthly cycle billing basis. At the end of each leased equipment less unearned and deferred income (including month, there was an amount of unbilled electric and gas service investment tax credits). Unearned and deferred income is recog-that had been rendered from the last meter reading to the month- nized at a level rare of return during the periods in which the net end. Effective January 1, 1991, the Company began recording investment is positive.

non-fuel (base rate) revenues for services provided but not yet Funds Held by Trustee billed to more closely match revenues with expenses. The cumu-Funds held by trustee generally includes deposits in the Company's lative effect of the one-time change in accounting for unbilled external nuclear decommissioning rrusrs and unexpended, revenues increased 1991 net income by $12,730,000 ($0.25 restricted or tax exempt bond proceeds. Earnings on such trust per share).

funds are also reflected in rhe balance.

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

34

2. BASE RATE MATTERS Electric base rate increases were filed with regulatory commissions Changes in base rates which became effective in 1992 are summa-beginning in October 1992 to recover higher costs associated with rized below.

Hay Road Unit 4 which was placed in service on June 1, 1993, Annualized Base Effective postretiremenr benefit costs under SPAS No. 106, and other Jurisdiction Revenue Increase Date items including general inflation. Base rate increases which Retail electric became effective in 1993 are summarized below.

Delaware 0) $18.5 million or 4.3% 01101/92 Annualized Base Effective Maryland (2) $ 5.5 million or 3.3% 01101/92 Jurisdiction Revenue Increase Date Virginia (3) $ 1.15 million or 5.1 o/o 07101192 Retail electric Resale (FERC) <4l $ 4.125 million or 4.4% 02/19/92 Delaware(!) $24.9 million or 5.8% 06/01/93 Delaware Gas (5) $ 4.1 million or 5.6% 02102192 Maryland <2> $ 7.8 million or 4.3% 04/01193 (I) Included a 12.5% return on equity.

Virginia (3) $ 1.3 million or 7 .2% 10/05/93 (2) A specific return on equity was not staced in the settlement agreement approved Resale (FERC) (4l $ 1.5 million or 1.5% 06103193 by the MPSC.

(3) Included an 11.5% return on equity.

(I) Based on a serclement agreement approved by the DPSC on October 5, 1993, (4) A specific return on equity was not stated in the settlement agreement approved which included an 11.5% return on equity. Net of fuel savings from Hay Road by the FERC.

Unic 4, customer races increased 3.7%.

(5) Included a 12.5% return on equity.

(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.

35

3. INCOME TAXES The Company and its wholly owned subsidiaries file a consolidated a $144.5 million increase in net deferred tax liabilities and a federal income tax return. Income taxes are allocated to the $144.5 million increase in "deferred recoverable income taxes,"

Company's utility business and subsidiaries based upon their which is an asset representing future recovery of the deferred taxes respective taxable incomes, tax credits, and effects of the alterna- over the lives of the related assets through rates charged to utility tive minimum tax, if any. customers. These amounts include $17.4 million of adjustments to recognize the effect of the increase in the federal income tax Prior to January 1, 1993, deferred income taxes were provided on rate from 34% to 35% during 1993. Deferred income tax expense timing differences between the tax and financial accounting under SPAS No. 109 represents the net change during the report-recognition of certain income and expenses. Effective January 1, ing period in the net deferred tax liability and deferred recoverable 1993, the Company adopted SPAS No. 109, "Accounting for income taxes.

Income Taxes," which replaced the deferred method of income tax accounting with the liability method. Under the liabiliry Investment tax credits from regulated operations are being amor-method, deferred income tax assets and liabilities represent the tax tized over the useful lives of the related utility plant. Investment effects of temporary differences between the financial statement tax credits associated with leveraged leases are being amortized and tax bases of existing assets and liabilities and are measured over the lives of the related leases during the periods in which the using presently enacted tax rates. The principal effects on the net investment is positive.

Company's financial statements of adopting SPAS No. 109 were 36

Components of Consolidated Income Tax Expense (Dollars in Thousands) 1993 1992 1991 Operation Federal: Current $50,264 $30,819 $31,777 Deferred 7,710 11,597 8,924 State: Current 10,839 6,755 6,596 Deferred 1,832 2,638 1,455 Investment tax credit adjustments, net (2,515) (2,417) (2,844)

Other income Federal: Current 9,398 7,559 (4,773)

Deferred (9,398) (3,482) 2,336 State: Current 287 1,369 (34)

Deferred (1,315) (4) (188)

Income taxes on cumulative effect of a change in accounting for unbilled revenues 8,520 T oral income tax expense $67,102 $54,834 $51,769 Reconciliation ofEffective 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 1992 1991 (Dollars in Thousands) Amount Rate Amount Rare Amount Rate Statutory federal income tax expense $62,362 35% $52,142 34% $49,302 34%

Increase (decrease) due to Depreciation not normalized 1,676 1 1,959 1 2,103 1 ITC amortization (2,832) (2) (2,780) (2) (3,456) (2)

State income taxes, net of federal tax benefit 7,567 4 7,099 5 6,120 4 Other, net (1,671) (3,586) (2) (2,300) (1)

Total income tax expense $67,102 38% $54,834 36% $51,769 36%

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

As of (Dollars in Thousands) 12/31193 Deferred Tax Liabilities Utility plant basis differences Accelerated depreciation $292,655 Other 97,530 Leveraged leases 49,339 Deferred recoverable income taxes 62,124 Other 30,630 Total deferred tax liabilities 532,278 Deferred Tax Assets Deferred investment tax credits 17,316 Other 28,218 T oral deferred tax assets 45,534 T oral deferred taxes, net $486,744 Valuation allowances for deferred tax assets were not material as of December 31, 1993.

37

4. OTHER INCOME The components of "Other income, net of income taxes" as pre- nonutiliry subsidiary. The 1993 revenues and expenses associated sented in the Consolidated Statements ofincome are shown in with the contract are included in the operating results of the the table below. Effective January l , 1993, the contract for opera- Company's nonutiliry subsidiaries as reported in Note 16 to the tion and maintenance of the Delaware City Power Plant (owned Consolidated Financial Statements.

by Star Enterprise) was transferred from the parent company ro a (Dollars in Thousands) 1993 1992 1991 Revenues and Income Revenues $2,413 $14,837 $22,509 Peach Bottom lawsuit settlement 18,538 Interest, dividends, other income 2,457 2,424 3,966 Expenses Operating and other expenses 4,793 15,326 22,192 Income tax expense (benefit) (434) 7,618 241 Net $ 511 $12,855 $ 4,042 On July 27, 1988, the Company, Atlantic City Electric charged against earnings during the period of the shurdown Company, and Public Service Electric and Gas Company filed (March 1987 through November 1989). On March 31, 1992, the lawsuits against PECO to recover replacement power and other Peach Bottom co-owners reached a settlement agreement under costs incurred as a result of the shutdown of Peach Bottom by the which PECO paid $18,538,000 to the Company. The settlement Nuclear Regulatory Commission (NRC) on March 31, 1987. increased 1992 net income by $11,397,000 ($0.21 per share).

The Company's share of costs resulting from the shutdown were

5. JOINTLY OWNED PlANT The Company's balance sheet includes its proportionate share the Consolidated Statements ofincome. The Company is respon-of assets and liabilities related to jointly owned plant. The sible for providing its share of financing for the jointly owned Company's share of operating and maintenance expenses of the facilities. Information with respect to the Company's share of joinrly owned plant is included in the corresponding expenses in joinrly owned plant as of December 31, 1993 was as follows:

Megawatt Construction Ownership Capability Plant in Accumulated Work in (Dollars in Thousands) Share Owned Service Depreciation Progress Nuclear Peach Bottom 7.51% 157MW $122,955 $ 57,881 $ 6,386 Salem 7.41% 164MW 199,737 85,077 10,584 Coal-Fired Keystone 3.70% 63MW 16,020 6,823 695 Conemaugh 3.72% 63MW 17,236 7,723 8,388 Transmission Facilities Various 4,563 1,932 Total $360,511 $159,436 $26,053 38

6. NUCUAR DECOMMISSIONING The Company is funding its share of the estimated future cost sioning liability, which is reflected in the accumulated reserve for of decommissioning (decontaminating and removing) the Peach depreciation, was $29.1 million as of December 31, 1993.

Bottom and Salem nuclear reactors over the remaining lives of External trust funds established by the Company for the purpose the plants. The Company estimates its share of future decommis- of funding decommissioning costs had an aggregate balance of sioning costs based on NRC regulations concerning the minimum $17.3 million and a fair market value of $18.6 million as of nuclear decommissioning financial assurance amount. The December 31, 1993. The Company is recovering, through rates ultimate cost of decommissioning the Peach Bottom and Salem charged to electric customers, nuclear decommissioning costs nuclear reactors may exceed the NRC minimum nuclear decom- based on an amount approximating the Company's previous lia-missioning financial assurance amount. This amount is updated bility estimate of $53.7 million. Based on prior decisions by regu-annually for inflation and increased in 1993 to approximately latory commissions, the Company expects that customer rates will

$117 million from the Company's previous estimate of$53.7 be adjusted to provide for recovery of the Company's 1993 esti-million primarily due to higher estimated costs for disposing of mate of future decommissioning costs of $117 million.

low level radioactive waste. The Company's accrued decommis-

1. COMMON STOCK

1) The Company's Restated Certificate and Articles of 2) Prior to January 1, 1993, the Company had a nonqualified Incorporation and the Mortgage and Deed of Trust securing the stock option plan for certain employees. Options were priced at Company's outstanding bonds contain restrictions on the pay- the actual market value on the grant date. Effective January 1, ment of dividends on common stock. Such restrictions would 1993, the Company's Board of Directors declared that no new become applicable if the Company's capital and retained earnings stock options will be granted and that the performance-based full below certain specific levels or if preferred dividends are in restricted stock program will be the program under the Long arrears. Under the most restrictive of these provisions, as of Term Incentive Plan which is in effect. Changes in stock options December 31, 1993, approximately $223.8 million was available are summarized below.

for payment of common dividends.

1993 1992 1991 Number Option Number Option Number Option of Shares Price of Shares Price of Shares Price Beginning-of-year balance 192,100 $17 1'2-$21 l/4 270,200 $17 l/2-$21 1/4 302,900 $17 l/2-$21 1/4 Options granted 59,900 $20 1'2 117,750 $18 1/s Options exercised 139,050 $17 lf2-$21 l/4 129,500 $17 l/2-$21 l/4 150,450 $17 1/2-$17 3/4 Options forfeited 8,500 $21 1/4 End-of-year balance 53,050 $17 1'2-$21 l/4 192, 100 $17 1'2-$21 1/4 270,200 $17 l/2-$21 l/4 Exercisable 53,050 $17 1'2-$211/4 132,200 $17 lh-$21 l/4 152,450 $17 l/2-$21 l/4

8. PREFERRED STOCK

1) On November 4, 1993, the Company issued 200,000 shares of proceeds and cash on-hand to redeem $18.28 million of the 6 3/4%, cumulative preferred stock, $100 per share par value, for Company's 7.88% preferred stock and $10.0 million of the

$20 million. The dividend is cumulative and is payable quarterly. Company's 7.84% preferred stock.

Beginning on November 1, 2003, the 6 3/4% preferred stock

2) On August 4, 1992, the Company issued 1,600,000 shares of will be redeemable, at any time at the option of the Company, 7 3/4%, cumulative preferred stock, $25 per share par value, for in whole or in part, at $100 per share plus unpaid accumulated

$40 million.

dividends, if any. On December 1, 1993, the Company used the 39

9. DEBT

1) Substantially all utility plant of the Company now or hereafter The fair marker value of the Company's long-term debt was esti-owned is subject to the lien of the Mortgage and Deed of Trust. mated using discounted cash flow calculations, based on interest rates available to the Company for debt with similar terms, matu-

2) On June 1, 1993, $50 million of 10% First Mortgage Bonds, rities, and credit worthiness.

due December 1, 2018, were redeemed with a portion of the pro-ceeds received from a public offering of common stock. 7) As of December 31, 1993, the Company had $125 million of bank lines of credit, including $50 million of such credit lines

3) On June 7, 1993, the Delaware Economic Development under which the Company may convert short-term borrowings to Authority issued on behalf of the Company $15 million of 6.05%

a term loan maturing on July 31, 1996 (or earlier at the discretion Gas Facilities Revenue Bonds (Series A) , due June 1, 2032, and of the Company) . As of December 31, 1993, $10 million of also issued $18.2 million of5.90% Pollution Control Refunding short-term borrowings by the Company were classified as long-Revenue Bonds (Series B) , due June 1, 2021. The proceeds from term debt ("Term Loan") in recognition of the long-term financ-the Series A Bonds are being used to finance additions to the ing capability provided by the credit lines. The Company is Company's gas system. The proceeds from the Series B Bonds generally required to pay commitment fees for its credit lines.

were used on July 8, 1993 to redeem $18.2 million of 6.6%

The lines of credit are periodically reviewed by the Company, at Pollution Control Revenue Bonds, due July l, 2004. Both the which time they may be renewed or cancelled.

Series A and B Bonds are collareralized by First Mortgage Bonds and are insured. 8) Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 1994-$26,486,000;

4) On June 23, 1993, the Company issued $25 million of unse-1995-$1,346,000; 1996-$11 ,422,000; 1997-$26,510,000; cured, 5.69% Medium Term Notes, due June 24, 1998. The 1998-$32,239,000.

proceeds were used on July 23, 1993 to redeem $25 million of 7% First Mortgage Bonds, due November 1, 1998. 9) A total of$41.5 million of Variable Rate Demand Bonds were outstanding as of December 31, 1993 and 1992, respectively.

5) On July 1, 1993, the Company issued $90 million of 6.40%

Although Variable Rate Demand Bonds are classified as current First Mortgage Bonds, due July 1, 2003. The proceeds were used liabilities, the Company intends to use the Variable Rate Demand on August 2, 1993 to redeem $90 million of First Mortgage Bonds as a source oflong-term financing by setting the bonds' Bonds comprised of rhe following series: $35 million, 7 5/so/o interest rates at market rates and, if advantageous, by utilizing one Series due 2001; $30 million, 7 112% Series due 2002; and $25 of the fixed rare/fixed term conversion options of the bonds. The million, 8% Series due 2003 .

bonds are due on demand or at maturity in the years 2017 and

6) As of December 31 , 1993, rhe fair marker value of rhe 2028 for principal amounts of$26.0 million and $15.5 million, Company's long-term debt was $833,502,000 in comparison to respectively. During 1993, $15.5 million of Variable Rare the book value of $736,368,000. As of December 31 , 1992, the Demand Bonds due in 2014 were refinanced with like bonds due fair market value of rhe Company's long-term debt was in 2028. Average annual interest rates on the Variable Rare

$822,494,000 in comparison to the book value of $787,387,000. Demand Bonds were 2.5% in 1993.

40

10. PINSION PLAN The Company has a defined benefit pension plan covering all tax deductible contribution. There were no pension contributions regular employees. The benefits are based on years of service and in 1993, 1992, or 1991. Pension plan assets consist primarily of rhe employee's compensation. The Company's funding policy is equity securities and public bond securities.

to contribute each year rhe net periodic pension cost for that year.

The following schedules show rhe funded status of rhe plan, the However, rhe contribution for any year will not be less than the components of pension cost, and assumptions.

minimum required contribution nor greater rhan the maximum Reconciliation ofFunded Status of the Plan As of December 31, (Dollars in Thousands) 1993 1992 Accumulated benefit obligation Vested $236,209 $218,776 Nonvested 25,721 22,699 261,930 241,475 Effect of estimated future compensation increases 123,562 112,941 Projected benefit obligation 385,492 354,416 Plan assets at fair value 521,897 475,690 Excess of plan assets over projected benefit obligation 136,405 121,274 Unrecognized prior service cost 19,255 18,988 Unrecognized net gain (108,183) (93,407)

Unrecognized net transition asset (36,455) (39,769)

Prepaid pension cost $ 11,022 $ 7,086 Year Ended December 31, Components ofNet Pension Cost 1993 1992 1991 (Dollars in Thousands)

Service cost-benefits earned during period $13,152 $12,606 $ 9,815 Interest cost on projected benefit obligation 26,411 24,261 21,909 Actual return on plan assets (58,247) (39,104) (96,302)

Net amortization and deferral 14,748 (1,715) 64,438 Net pension cost $ (3,936) $(3,952) $ (140)

Assump_tions 1993 1992 1991 Discount rares used to determine projected benefit obligation as of December 31 7.25% 7.25% 7.00%

Rates of increase in compensation levels 6.50% 6.50% 6.50%

Expected long-term rates of return on assets 8.25% 8.25% 8.00%

41

11. PDSTRITIREMENT BINHITS OTHER THAN PENSIONS Effective January 1, 1993, the Company adopted SFAS No. 106, 2011. Increasing the health-care cost trend rates of future years "Employers' Accounting for Poscrecirement Benefits Ocher Than by one percentage point would increase the accumulated post-Pensions," which requires accrual accounting for poscrecirement retirement benefit obligation by $3.3 million and would increase benefits ocher than pensions. The Company provides health-care annual aggregate service and interest costs by $0.3 million.

and life insurance benefits for its retired employees and substan-In December 1993, the Company contributed $5.8 million to tially all of the Company's employees may become eligible for external trust funds in order to begin to fund the SFAS No. 106 these benefits upon retirement. Prior to adoption of SFAS No.

obligation. The assets in the trusts consist primarily of short-term 106, the Company recognized the coses of these benefits by taxable and tax-exempt marketable securities. The Company's expensing the benefits as paid. The amounts expensed in 1992 policy is to fund the obligation to the extent chat SFAS No. 106 and 1991 were $4,496,000 and $4,176,000, respectively.

costs are reflected in customer races, including amounts which are The Company has elected to recognize the cost of its transition capitalized.

obligation (the accumulated poscretirement benefit obligation as The following schedules show the funded status of the plan and of January 1, 1993) by amonizing it on a straight-line basis over the components of the cost of postretirement benefits ocher than 20 years. The Company's SFAS No. 106 obligation and cost are pensions.

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 ofFunded Status of the Plan As of (Dollars in thousands) 12/31193 Accumulated poscretirement benefit obligation (APBO) :

Active employees fully eligible for benefits $17,380 Ocher active employees 20,351 Current retirees 43,118 80,849 Plan assets at fair value 5,825 APBO in excess of plan assets 75,024 Unrecognized transition obligation (68,728)

Unrecognized net loss (4,939)

Accrued postretiremenr benefit cost $ 1,357 Annual Cost ofPostretirement Benefits Other Than Pensions Year ended (Dollars in thousands) 12/31193 Service cost-benefits earned during period $ 2,206 Interest cost on projected benefit obligation 5,613 Amortization of the unrecognized transition obligation 3,617 Net SFAS No. 106 cost $11,436 42

12. COMMITMENTS The Company estimates char approximately $155.3 million, Excluding nuclear fuel discussed below, che Company's commit-excluding AFUDC, will be expended for construction purposes ments under its long-term fuel supply contracts are $76 million in in 1994. 1994, $62 million in 1995, $57 million in 1996, $45 million in 1997, and $38 million in 1998.

The Company has a 26-year agreement wich Scar Enterprise effective chrough May 31, 2018 co purchase 48 MW of capacity The Company's share of nuclear fuel at Peach Bottom and Salem supplied by che Delaware City Power Plane, which che Company is financed chrough a nuclear fuel energy contract which is sold co Scar Enterprise in December 1991. Under che terms of accounted for as a capital lease. Payments under che contract are che agreement, che maximum capacity charge for a year is $3.4 based on the quantity of nuclear fuel burned by che planes. The million, if che unit's availability exceeds 85 percent. Company's obligation under che contract is generally che nee book value of the nuclear fuel financed, which was $33.9 million The Company has an agreement for the future purchase of 165 as of December 31, 1993.

MW of power over a 30-year period from a cogeneracion facility co be constructed by che Delaware Clean Energy Project (DCEP) The Company leases an 11.9% interest in the Merrill Creek and located in Delaware. On April 20, 1993, che DPSC issued Reservoir. The lease is considered an operating lease and pay-an order which neither approved nor disapproved the DCEP ments over che remaining lease term, which ends in 2032, are agreement. The agreement, as amended, provides che Company $165.6 million in aggregate. The Company also has long-term and DCEP the right, until November l, 1994, co terminate che leases for certain ocher facilities and equipment. Minimum com-agreement. The dace for che scare of commercial operations of the mitments as of December 31, 1993 under all noncancelable lease facility remains co be determined, bur in any event will not be agreements (excluding payments under the nuclear fuel energy prior co June l, 1998. Assuming 93% availability, capacity charges contract which cannot be reasonably estimated) are as follows:

under che agreement are currencly expected co be approximately 1994-$6,716,000; 1995-$6,691,000; 1996-$6,639,000;

$44.5 million per year for che first 16 years and $31.2 million per 1997-$5,552,000; 1998-$5,345,000; afrer 1998-$150,296,000; year for che remaining 14 years. cocal-$181 ,239,000. Approximately 91 % of che minimum lease commitments shown above are payments due under che Company's In order co ensure adequate supplies of fuel, che Company has lease of an 11.9% interest in che Merrill Creek Reservoir.

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) 1993 1992 1991 Interest on nuclear fuel capital lease $ 1,014 $ 1,111 $ 1,633 Interest on ocher capital leases 282 321 345 Amorcizacion of nuclear fuel capital lease 9,956 10,231 10,242 Amorcizacion of ocher capital leases 287 323 351 Operating leases 15,176 14,063 14,507

$26,715 $26,049 $27,078 43

13. ENVIRONMENTAL MATTERS The Company is subject to regulation with respect to the envi- uncontrolled hazardous waste sites. The Company is currently a ronmental effects of its operations, including air and water potentially responsible party (PRP) at one such site and is alleged quality control, solid waste disposal and limitation on land use to be a third party contributor at two other such sites. The by various federal, regional, state, and local authorities. The Company also has three former coal gasification sites and is cur-Company has incurred, and expects to continue to incur, capital rently conducting a study of one of the three sites to assess the expenditures and operating costs because of environmental extent of contamination and risk to the environment. The considerations and requirements. The disposal of Company- Company does not expect clean-up and other potential costs generated hazardous substances can result in costs to clean up related to the PRP and coal gasification sites, either separately or facilities found to be contaminated due to past disposal practices. cumulatively, to have a material effect on the Company's financial Federal and state statutes authorize governmental agencies to position or results of operations.

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 The premium for this coverage is subject to retrospective in the United States, the Company could be assessed for a portion assessment for adverse loss experience. The Company's present of any third party claims associated with the incident. Under the maximum share of any assessment is $1.4 million per year.

provisions of the Price Anderson Act, if third party claims relating to such an incident exceed $200 million (the amount of primary 2) Other insurance), the Company could be assessed up to $23.7 million On December 14, 1993, Star Enterprise (Star) filed a lawsuit for third party claims. In addition, Congress could impose a against the Company seeking an accounting, a refund, and revenue raising measure on the nuclear power industry to pay damages totalling $9.3 million. Star alleges that the Company such claims. overcharged Star for pension and tax-related costs under a con-tract entered into by the parties' predecessors in 1955 (the "1955 The co-owners of Peach Bottom and Salem maintain nuclear Agreement"). The Company believes it acted properly under the property damage and decontamination insurance in the aggregate 1955 Agreement and that it does not owe Star any amounts amount of $2. 7 billion for each station. The Company is self- claimed in this lawsuit. The Company cannot predict the out-insured, to the extent of its ownership interest, for its share of come of the lawsuit.

property losses in excess of insurance coverages. Under the terms of the various insurance agreements, the Company could be The Company is involved in certain other legal and administra-assessed up to $3.5 million in any policy year for losses incurred tive proceedings before various courts and governmental agencies at nuclear plants insured by the insurance companies. concerning rates, fuel contracts, tax filings, and other matters.

The Company expects that the ultimate disposition of these The Company is a member of an industry mutual insurance com- proceedings will not have a material effect on the Company's pany, which provides replacement power cost coverage in the financial position or results of operations.

event of a major accidental outage at a nuclear power plant.

15. SUPPLEMENTAL CASH FLOW INFORMATION In the consolidated financial statements, the Company considers chased with a maturity of three months or less to be cash highly liquid marketable securities and debt instruments pur- equivalents.

Cash Paid during the Year for Year Ended December 31, (Dollars In Thousands) 1993 1992 1991 Interest, net of capitalized amount $58,154 $62,127 $65,788 Income taxes, net of refunds $72,384 $46,310 $37,397 44

16. NONUTILITY SUBSIDIARIES The following presents condensed financial information of the to the Company's utility business, Delmarva Services Company, Company's nonregulated wholly owned subsidiaries: Delmarva is excluded from these statements since its income is derived from Energy Company; Delmarva Industries, Inc.; and Delmarva intercompany transactions which are eliminated in consolidation.

Capital Investments, Inc. A subsidiary which leases real estate Condensed Subsidiary Statements ofIncome (Dollars In Thousands) 1993 1992 1991 Revenues and Gains Landfill and waste hauling $11,745 $9,021 $6,154 Operating services 22,118 3,038 2,939 Other revenues 2,117 998 1,129 Leveraged leases<!) 835 61 5,044 Other investment income 821 1,279 182 37,636 14,397 15,448 Costs and Expenses Operating expenses 36,424 15,765 15,509 Interest expense 246 550 1,704 Capitalized interest (246) (231) (143)

Income tax (benefit) (596) (2, 176) (2,900) 35,828 13,908 14,170 Net income $ 1,808 $ 489 $1,278 Earnings per share of common stock attributed to subsidiaries $ 0.03 $ 0.01 $ 0.03 (I) On an after-tax basis, leveraged 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)

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

17. SEGMENT INFORMATION Segment informarion with respecr ro elecrric and gas operarions was as follows:

(Dollars In Thousands) 1993 1992 1991 Electric Operations Operaring revenues $ 875,663 $ 780,175 $ 784,599 Operaring income 154,412 134,260 129,295 Depreciarion 94,549 89,421 83,363 Consrrucrion expendirures 142,238 192,493 163,399 Gas Operations Operaring revenues 94,944 83,869 71,222 Operaring income 9,727 9,451 7,115 Depreciarion 6,380 5,864 5,247 Consrrucrion expenclirures 17,753 14,888 18,302 Identifiable Assets, Net Elecrric 2,268,100 2,042,496 1,895,124 Gas 160,618 142,740 130,875 Assers nor allocared 164,811 189,557 237,719

18. QUARTERLY FINANCIAL INFORMATION The quarrerly dara presenred below reflecr all adjusrmenrs neces- perarure variarions, differences berween summer and winrer rares, sary in the opinion of the Company for a fair presenrarion of the rhe riming of rare orders, and the scheduled downrime and main-inrerim resulrs. Quarrerly dara normally vary seasonally with rem- renance of elecrric generaring unirs.

Earnings Earnings Applicable Average per Quarrer Operaring Operaring Ner roCommon Shares Average Ended Revenue Income Income Srock Oursranding Share (Dollars in Thousands) (In Thousands) 1993 March 31 $248,007 $ 46,278 $ 34,414 $ 31,911 55,135 $0.58 June 30 214,638 31,239 18,758 16,279 58,036 $0.27 Seprember 30 275,385 59,015 44,279 41 ,789 58,372 $0.72 December 31 232,577 27,607 13,625 11,095 58,687 $0.19

$970,607 $164,139 $111 ,076 $101 ,074 57,557 $1.76 1992 March 31 $225,130 $ 38,058 $34,789 $32,988 52,876 $0.62 June 30 193,797 29,279 14,259 12,464 53,285 $0.24 Seprember 30 237,7 17 48,080 34,056 31 ,810 53,685 $0.59 December 31 207,400 28,294 15,422 12,915 53,980 $0 .24

$864,044 $143,711 $98,526 $90,177 53,456 $1.69 In the firsr quarrer of 1992, rhe Company recorded rhe resulrs of Financial Sraremenrs) which increased 1992 ner income by the Peach Borrom lawsuir sertlemenr (Nore 4 ro the Consolidared $11 ,397,000 ($0.21 per share).

46

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 Unbilled 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

OHICIRS a.s ofJanuary I, 1994 OIVIDIND RHNVISTMINT AND COMMON STOCK PURCHASI PlAN Howard E. Cosgrove, Chairman of rhe Board, President and More rhan 30 percent of rhe Company's common shareholders of Chief Executive Officer record are now participating in rhe Dividend Reinvestment and H. Ray Landon, Executive Vice President Common Share Purchase Plan. If you are not participating, you may want to consider rhe benefits of joining this plan. Under rhe Ralph E. Klesius, Senior Vice President plan, you can invest your cash dividends and also invest additional Thomas S. Shaw, Senior Vice President/President, Delmarva cash, up ro $100,000 per calendar year, ro purchase additional Capital Investments, Inc. shares of common srock wirhour a service fee. Shares of common srock ro be purchased under rhe plan may be eirher newly issued Barbara S. Graham, Vice President and Chief Financial Officer shares or shares purchased in rhe open marker, depending on rhe financing needs of rhe Company.

Donald E. Cain, Vice President, Administration You may obtain a prospectus wirh rhe plan description and an Paul S. Gerritsen, Vice President, Strategic Energy Markers, enrollment aurhorizarion card by writing to:

Pricing and Regulation Delmarva Power & Light Company Kenneth K. Jones, Vice President, Planning Shareholder Services Wayne A. Lyons, Vice President, Division Operations P.O. Box 231 Wilmington, DE 19899 Frank J. Perry, Vice President, Production Dale G. Stoodley, Vice President and General Counsel DUPUCAU MAIUNGS Jack Urban, Vice President, Gas Division You may be receiving more rhan one copy of rhe Annual Report because of multiple accounts wirhin your household. The W. Douglas Boyce, Vice President, Central Division Company is required ro mail an Annual Report to each name on Donald P. Connelly, Secretary rhe shareholder list unless rhe shareholder requests rhar duplicate mailings be eliminated. To eliminate duplicate mailings, please Richard H. Evans, Vice President, Corporate Communications send a written request ro Shareholder Services and enclose rhe mailing labels from rhe extra copies.

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 48

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 Price Dividend Price 1993 Declared High Low 1992 Declared High Low First Quarter $.38 1/2 $24 $22 1 /s First Quarter $.38 l/z $21 l/z $20 Second Quarter $.38 1/2 $24 1 /s $21 1'2 Second Quarter $.38 1h $22 7/ g $20 1/2 Third Quarter $.38 1/i $25 7/g $23 l/g Third Quarter $.38 l/z $23 3/4 $22 l/z Fourth Quarter $.38 1/i $25 5/g $21 1/4 Fourth Quarter $.38 l/z $23 7/s $22 l/g SHAREHOLDER SERVICES TRANSHR AGENTS AND REGISTRARS Carol C. Conrad, Assistant Secretary First Mortgage Bond Trustee Delmarva Power & Light Company Chemical Bank 800 King Street, P.O. Box 231 450 West 33rd Street Wilmington, Delaware 19899 New York, New York 10001 Telephone (302) 429-3355 or toll-free (800) 365-6495 Preferred Stock STOCK SYMBOL Wilmington Trust Company Common Stock, DEW-listed on the New York and Corporate Trust Division Philadelphia Stock Exchanges Rodney Square North ANNUAL MEETING Wilmington, Delaware 19890 The Annual Meeting will be held on May 26, 1994, at 11 :00 Common Stock a.m. in the Clayton Hall, University of Delaware, Newark, Wilmington Trust Company Delaware.

Corporate Trust Division REGULATORY COMMISSIONS Rodney Square North Wilmington, Delaware 19890 Federal Energy Regul.atory Commission Elizabeth A. Moler-Chairperson Chemical Bank 825 North Capitol Street, N.E. Stock Transfer Department Washington, D.C. 20426 P.O. Box 24935 Church Street Station Del.aware Public Service Commission New York, New York 10249 Nancy M. Norling-Chairperson 1560 S. duPonr Highway P.O. Box 457 ADDITIONAL Rf PORTS Dover, Delaware 19903-0457 To supplement information in this Annual Report, a Financial and Statistical Review (1983-1993) and the Form 10-K are Maryl.and Public Service Commission available upon request. Please write to:

Frank 0. Heintz-Chairperson 6 St. Paul Street Delmarva Power & Light Company Baltimore, Maryland 21202 Shareholder Services 800 King Street Virginia State Corporation Commission P.O. Box 231 Theodore V. Morrison Jr.-Chairperson Wilmington, Delaware 19899 P.O. Box 1197 Richmond, Virginia 23209 49

as of December 31, 1993 Howard E. Cosgrove Chairman of the Board, President, and Chief 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.

Audrey K. Doberstein President of Wilmington College, du Pont de Nemours & Company (a diversified chemical, energy, Wilmington, Delaware; member since 1992; serves on audit and specialty produces company) , Wilmington, Delaware; and and nominating committees; term expires in 1995. Chairman of the Board of Du Pont Canada Inc., Mississauga, Ontario, Canada; member since 1988; serves on compensarion, Michael G. Abercrombie President of Caro Inc. (a petroleum executive, and investment committees; term expires in 1994.

distributorship) , Salisbury, Maryland; member since 1993; serves on nominating and nuclear oversight committees; term expires Sarah L Gore Human Resources Associate, W. L. Gore &

in 1996. Associates Inc., (a high technology manufacturing company) ,

Newark, Delaware; member since 1990; serves on compensarion James T. McKinstry Parmer and Director of the law firm of and executive committees; term expires in 1994.

Richards Layton & Finger, Wilmingron, Delaware; member since 1987; serves on executive, investment, and nuclear oversight James H. Gilliam Jr. Direcror, Executive Vice President, and committees; term expires in 1995. General Counsel of the Beneficial Corporation (a financial ser-vices company), Wilmington, Delaware; member since 1993; serves Robert D. Burris President of Burris Foods Inc. (a refrigerated on compensation and investment committees; term expires 1996.

food distribution company), Milford, Delaware; member since 1993; serves on audit committee; term expires in 1996. James C. Johnson President and member of the Board of Directors of Loyola Capital Corporation and President of its H. Ray Landon Executive Vice President of the Company; primary subsidiary, Loyola Federal Savings & Loan Bank, member since 1988; serves on executive and investment commit- Baltimore, Maryland; member since 1992; serves on audit and tees; term expires in 1994. compensation committees; term expires in 1995.

Audit Committee Investment Committee James C. Johnson, Chairperson; Robert D. Burris; Elwood P. Blanchard Jr., Chairperson; Howard E. Cosgrove; Audrey K. Doberstein James H. Gilliam Jr.; H. Ray Landon; James T. McKinstry Compensation Committee Nominating Committee Elwood P. Blanchard Jr., Chairperson; Sarah I. Gore, Audrey K. Doberstein, Chairperson; Michael G . Abercrombie; Vice Chairperson; James H. Gilliam Jr.; James C. Johnson Howard E. Cosgrove Executive Committee Nuclear Oversight Committee Howard E. Cosgrove, Chairperson; James T . McKinstry, James T. McKinstry, Chairperson; Michael G . Abercrombie; Vice Chairperson; Elwood P. Blanchard Jr.; Sarah I. Gore; Howard E. Cosgrove H. Ray Landon 50

Pictured left to right:

Audrey K. Doberstein (standing), Michael G.

Abercrombie, James T.

McKinstry (standing),

Robert D. Burris, and H. Ray Landon Pictured left to right:

Howard E. Cosgrove, Elwood P. Blanchard Jr.

(standing), Sarah L Gore, James H. Gilliam Jr.

(standing), and James C.

Johnson

DELMARVA POWER 800 King Street BULK RATE US POSTAGE P.O. Box231 PAID Wilmington, DE 19899 Permit No 68 Printed on recycled paper