ML18101B328

Delmarva Power 1995 Annual Rept.

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

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Revenues Net Income Earnings per Share Dividends Declared per Share Electric Sales Gas Sales & Transportation Electric Customers Gas Customers 1995 $995, 103,000 $117,488,000

$1.79 $1.54 12,310,921 mWh 21.37 million mcf 436,650 98,417 (1) Reduced by an $0.18 per share charge for an early retirement offer. 1994 $991,021,000

$108,310,000

$1.67 (1) $1.54 12,505,082 mWh 20.34 million mcf 393,372 95,662 An expanded version of the Company*s financial hlghllghts can be found on pages 20 to 48. 0/o Increase (Decrease) 0.4°/o 8.5% 7.2% (1.6)% 5.1°/o 11.0%

r I . I j I

Dear Fellow Shareholder,

Our company is in the midst of an exciting industry transition.

Examples o e changing utility business are reported almost daily and include extensive bidding for wholesale contracts , regulatory changes, proposed state and federal tion, power pool restructuring , and planned mergers and acquisitions. The message is clear: As our industry moves from a regulated to a tive environment, electric utilities must change the way they do business. My message to you is that Delmarva Power is changing and prospering in this new competitive arena. Across the company, we are working to satisfy our customers, increase ciency, and deliver shareholder value. In the future, our success depends on our ability to retain and attract new customers, market new energy-related services and products, and continuously improve efficiency.

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

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

Our wholesale customers now have the option

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

Increasing Efficiency We serve 125,000 more customers today than we did ten years ago with fewer employees.

Our energy prices are less today than they were ten years ago. And today, our customer favorability ratings are higher than a decade ago and are among the highest in the country. More than eight out of ten customers tell us that we deliver quality service in a timely manner. I applaud our employees for their cost control activities, which continue to keep operating and maintenance expenses well below the regional average. Teams of Delmarva Power employees are improving the way we work throughout the company-from purchasing to fleet management-to increase efficiency and improve service to our customers. In addition, we are revamping our tion technology systems so that employees at all levels have immediate access to key information needed in a competitive business environment.

While we work to increase revenue and reduce expenses, we continue to be .at i vely affected by costs related to the outage of the Salem Nuclear Generating Station. As this report goes to press, Public Service Electric and Gas Company (PSE&G) has announced that the outage of Unit I will be extended for an indefinite period while they assess the condit i on of the unit's four steam generators.

Unit 2 is scheduled to return to service i n the third quarter of 1996. Last year , we were able to absorb Delmarva Power's share of the outage-related costs as a 7.41 % owner of Salem. I am concerned about the implications of the extended outage at Unit I, increasing costs , and the possibility of adverse tory treatment. We will pursue other avenues of recovery th i s year to mitigate the financial impact of the Salem situation. Changing to Meet Customer Needs Providing quality customer service has traditionally been a top priority and a strength for Delmarva Power. As customer needs evolve , we will continue to redefine our relationships with those we serve. The needs of our generation customers a re different today than in the past. Our transmission and distribution customers have increasing needs and expanded options. At the same time , we continue to extend our relationships with our customers by providing energy service beyond the meter. In order to meet these changing customer needs , we are functionally organizing

-bus i ness into three strategic business u nits-energy supply , regulated

• services , and energy services-focused on customers and supported by internal administrative services. Dividing our business functions into separate groups will allow us to strengthen our ability to deliver profitable, customized energy service to those we serve. Developing New Products and Services This past year we expanded and redirected our marketing team to enhance our ability to reach out to customers in our service territory and throughout the region. We now offer new energy products and services and will continue to build on our traditional values-reliable serv i ce , c u stomer satisfaction , and competitive prices. We are leveraging our core operating and engineering expertise by offering design, construction , operating , and maintenance consulting services to cipal , cooperative , commercial , and industrial customers.

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

• We are working closely with neighboring communities , governments, and nesses to attract new customers and new jobs to our area. We a r e also exploring exciting new opportunities to use our engineering expertise and energy delivery infrastructure to provide services to the tele-9 ommunications industry , whose infrastructure needs are similar to our own. We serve 125,000 more customers today than we did ten years ago with fewer employees.

Our energy prices are less today than they were ten years ago. And today, our customer favorability ratings are higher than a decade ago and are among the highest in the country.

Delmarva Power will face new challenges and exciting opportunities to build on our foundation of reliable service, customer satisfaction, and competitive prices. Focusing on the Future .a Our overall strategy to remain a top financial performer emphasizes the '9' retail side of our business, where face-to-face contact with individual customers adds value to our energy service. We will also take advantage of new growth opportunities and continue to grow earnings by aligning our business with others, and by working with communities to bring new businesses and jobs to our area. We will manage our wholesale portfolio by strengthening our ties with the customers who value the services we provide and by changing our ships with the customers who have a different emphasis or focus. In the meantime, we know that industrial and commercial customers will be the next groups to be able to choose their energy supplier.

We have already signed long-term agreements with several key industrial customers.

Our goal is to establish similar alliances with other commercial and industrial customers throughout our region. We support choice for all of our energy customers.

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

As we move forward through 1996 and beyond, Delmarva Power will face new challenges and exciting opportunities to build on our tradition of reliable service, customer satisfaction, and competitive prices. Our company will continue to take steps to exceed customer expectations and provide an above-average total return on your investment.

We are committed to directing industry change to your advantage. I am confident we are up to the task. As always, I appreciate your support. Sincerely, Howard E. Cosgrove Chairman, President , and Chief Executive Officer

I Building On I Tradi ion I Values From power plants to helpful customer service representatives, Delmarva Power provides the service our customers rely on. That bedrock of our success is the foundation for our future growth. 9 eping Our Energy Reliable.

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

Service When Our Customers Need It. When Donald Ferris's gas furnace broke down , he called us. "Your serviceman was at my door within an hour," Don reported.

Don's natural gas appliances are protected through the Gas Service Plan. He knows we'll fix them whenever they break down, day or night. All our customers trust us to restore their service as quickly as we can , no matter what the cause. When a fierce windstorm swept over Ocean City, Maryland, trouble-and-servicemen like Graison Wainwright , below , repaired the damage in record time. Delmarva Power's growth in the future is grounded in such consistent , dedicated service. Responsive To Customer Calls. Our customer service representatives fielded more than one million customer telephone calls last year and they did it with a smile. Our customers responded , writing letters of appreciation and calling with A ir thanks. We anticipate an increase in the number of calls each year as we How do we ensure they all get answered?

We consolidated our telephone centers and instituted an 800 number. Customers can a lso make inquiries and download the latest information on Delmarva Power products and services through our Internet site, http://www.delmarva.com. Simple solutions for our busy customers are also cost effective for Delmarva Power. FAVORABLE CUSTOMERS 100 80 ... ... --* 81°/o 80 40

• 47°/o 20 0 . . . 1980 1985 1990 1995 Over the past fifteen years, our favorabllity rating has almost doubled.

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

h We Tailor Our Agreements.

In the fall of 1995 , Al Williams , national accounts manager , asked Alan Levin , president of Happy Harry's , a growing regional r etailer , about his energy management policies.

Who oversees his energy costs? Are his buildings energy efficient?

How can we help? Levin is impressed that Delmarva Power has taken an interest in his business at this level. We're cementing a strat e gic relat i onship, sharing business resources with a longtime , growing customer. Our energy-related expertise can take Happy Harry's well into the next century. Strategic Alliances With Customers.

Our strategic alliances are built on our electrical service and equipment expertise. Fo r example , MBNA America , the world's second largest lender through bank credit cards, recently m o ved into an additional location in Delaware.

Through a fifteen-year agreement , Delmarva Power will operate , maintain, test , and repair outdoor electrical equipment there. Power Quality Keeps Industry Thriving.

Our commercial and industrial customers depend on our reliable service to power their electrical equipment. Most power-related operating problems , however , a r e caused by power disturbances within a building.

Our power quality services group assesses vulnerability to such disturb a nces, provides electrical diagnostics , and engineers solutions to help businesses eliminate and prevent i nternally generated problems. Power quality evaluations help keep our customers' equipment operating efficiently, consistently , and profitably. Energy Expertise.

From comfortable living rooms to corporate corridors , we are thinking and acting on our customers' behalf. In fact, since 1994, we've veloped eleven new business services, from power quality to substation maintenance. Our residential customers can also look forward to new beyond-the-meter ucts and services. We're tak i ng our energy expertise beyond the peninsula , talkin a to regional companies about establishing energy and business alliances. As t he utiliti ndustry changes , these a lliances will provide another growing source of r evenue for D elmar v a Powe r.

" In an Increasingly competitive business environment, we need to find ways to become more efficient.

Our alliance with Delmarva Power enables us to concentrate our efforts on our core retail business." -Alan Levin President, Happy Harry's

!Securing Ourl Economic Future In 1995, we stabilized all our municipal relationships through term energy sales agreements.

We're working to finalize facilities management and other energy-related alliances with other wholesale customers.

In addition, through our collaborative efforts with state and local governments and active business recruitment, we help keep businesses here and attract new ones to the area. Economic Development.

When PRS Guitars' owner Paul Reed Smith needed more concrete information to make a move to Maryland's Eastern Shore , the Queen Anne's County Development Office called us. We developed a rate sis that showed power costs on t he Eastern Shore to be 8% below those PRS was paying. We evaluated different heating and air-conditioning systems for energy efficiency. No detai l was too small , down to who was to own the transformer. By November 1995, PRS had purchased a building in Stevensville on Kent Island. We gained a new , growing industrial customer , one of a dozen we helped bring to the peninsula last year. And we're negotiating with more. Energy Sales And Management.

The lights on Lakeview Avenue go on one by one. Gradually the City of Milford, Delaware, is illuminated with power plied by us. In 1995, Milford signed an eight-year energy sales agreement with Delmarva Power. We had restructured its rate, saving the city a significant sum over the length of the contract. But Milford needed more from us-our energy facilities management expertise. When Milford's utility manager left , we stepped in to manage the facility under a one-year agreement.

We're working with municipalities to formulate energy-related options that meet their needs. other We work hard to secure energy sales agreements and to bring businesses and jobs to the areas we live in and serve. Armed with detailed power cost analyses, we helped bring a dozen new, growing businesses here in 1995. Bringing industry and nesses into the peninsula helps the people here who need jobs and increases revenues for the area and for Delmarva Power. Traditionally Based LOWER PRICES us*

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• 5 ., ftl * -j/. z :c Cl a. GI > ftl ftl li i 'ii li .:ti >-"Cl 0 ftl .. ftl .!! e.s :c ii 't -c GI GI 0 GI GI z z a. Ill z QQ. 0 Our energy prices rank among the lowest on the Eastern Seaboard.

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F u t u re !Based On l Trad it

• ion Our dedicated employees will make our growth in the future a reality. Their ability to act quickly and safely as a team is vital to our success. They're ready for the challenge.

Taking Action For Change. Our employees have learned to make important decisions quickly. In the early 1980s , we began to streamline our making process with the introduction of PSP , the participative skills process. PSP is based on the premise that the people closest to a problem know best h o w to d eal with it. Knowing a problem first-hand and being confident in making a decision , however , takes practice. Delmarva Power employees have honed their skills, .ging a depth of experience to each new situation we face. Our employees can evaluate on the spot and decide on the right action. Then they take it. Gaining Customers.

We've already moved quickly when an opportunity came along. In 1994 , we offered to buy the Conowingo Power Company from PECO Energy Company. This purchase would bring 37 , 000 new customers to Delmarva Power. In June 1995, we sealed the sale and created the Conowingo District.

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

In early 1995 , our m a rketing dep a rtment sent out a call to Delmarva Power employees to become actively involved in providing sales leads and ideas, supporting sales efforts, and seeking sales opportunities. Using point rankings for diff e rent categories , employees were encouraged to achieve I 00,000 sales success p o ints by the end of 1995. Once again, we exce e de d our o wn expectations , accumulating almost I 55 , 000 sales success points. But what do those points add up to? Over $12.5 million in revenues for Delmarva Power in 1995. Working Together For The Future. With our Conowingo purchase , we gained more th a n customers; we also gained 60 new employees. Today they work side by side with long-time Delmarva Power employees. They quickly became part of our ai m for the future. Pictured from back to front are District Manager , Tim Smith; W chele McKeever; Mark Dell; Karen Shivers; Rich Stickley; Paige Copes; Deborah Mann; Julie Tall; Maralyn Webb; Stan Mohn; and Russell Robinson. An opportunity to add 37 ,000 new customers presents itself-250 people from all over the company work together to make it happen. A hurricane knocks out power to 100,000 people in Ocean City. Our crews restore 90°/o of all service 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br /> ahead of sched* ule. How can we move so fast and so well? Our employees have learned to think on their feet and act. We learned to listen to our customers.

These skills are paying off every day for Delmarva Power, our customers, shareholders, and employees.

KEEPING OUR CUSTOMERS SAFIE 100 .. ---------*

80 80 40 20 0 1993 1994 19H Our customers consistently rank us highly In our concem for their safety.

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

... 1 993 1994 1995 Two-thirds of customers rate us positively on environmental protection.

Traditional Co111111it111ent

!To Ou r Commun i ties! Our employees are highly visible in their communities, volunteering wherever they s ee a need. Those needs are diverse, from senior citizens waiting for a hot meal to traditional watermen concerned about their way of life. Helping People Who Need It. More than a dozen people around Wilmington look forward to seeing Gary Fullman and Alice Parks at lunch. Throughout the week during their lunch hours, Gary, Alice, and up to 40 other Delmarva Power volunteers deliver Meals on Wheels to senior citizens , ensuring that they get a hot meal that day. For the people who receive the food, this may be their only contact with other people for the day. And that contact is almost as important as the meal. Upholding Our Traditions.

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

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

Strategy Committee members Tom Shaw, Barbara Graham, Ralph Kleslus, Howard Cosgrove, and Joseph Ford discuss ways to seize new opportunities for growth In the region. A

• I

• I v s on I For The I

• Future Your investment in Delmarva Power is in good hands. Our Board of Directors and Strategy Committee are committed to directing industry change to your advantage by building on our traditional strengths and planning ahead for a challenging future. Board of Directors as of December 31, 1995 Michael G. Abercrombie, President of Cato Inc. (a petroleum distributorship), Salisbury , Maryland; member since 1993; serves on nominating and nuclear oversight committees; term expires in 1996. R. Franklin Balotti, Member of the law firm of Richards Layton & Finger , Wilmingto llA Delaware; member since 1995; term expires in 1997. W' Robert D. Burris, Pres i dent of Burris Foods Inc. (a refrigerated food distribution company); Milford , Delaware; member since 1993; serves on audit and nuclear oversight committees

term expires in 1996. Howard E. Cosgrove, Chairman of the Board, President , and Chief Executive Officer of the Company; member since 1986; serves on e xecutive, investment , and nuclear oversight mittees; term expires in 1998. Audrey K. Doberstein, President of Wilmington College , New Castle, Delaware; member since 1992; serves on audit, i nvestment , and n o minating committees

term expires in 1998. Michael B. Emery, Senior Vice President of E.I. duPont de Nemours & Company (a fied chemical , energy , and specialty products company), Wilmington, Delaware; member since 1994; serves on compensation and executive committees

term expires in 1997. James H. Gilliam Jr., Director, Executive Vice President , and General Counsel of the Beneficial Corporation (a financial services company), Wilmington , Delaware; member since 1993; serves on compensation and investment committees

term expires in 1996. Sarah I. Gore, Human Resources Associate , W. L. Gore & Associates , Inc. (a high technology manufacturing company), Newark , Delaware; member since 1990; serves on compensation and executive committees

term expires in 1997. James C. Johnson, President and Chief Executive Officer of Loyola Federal Savings Bank , Baltimore, Maryland; member since 1992; serves on audit , compensation , and executive mittees; term expires in 1998. Weston E. Nellius, President , Nellius Management Associates (a financial , management, and government relations consulting firm), Dover , Delaw a re; member since 1995; serves o. investment and nominating committees

term expires in 1998.

, '. , ... I * , I . , I I . ,*; 1, -# , I I , / /

Pennsylvania Baltimore 8 Virginia New York 13.64 76.61 Newark, N.J. 9.64 52.76 Philadelphia 7.91 76.62 Baltimore 6.06 59.73 Norfolk, Va. 6.38 74.13 Delmarva Peninsula 6.07 51.97 The chart states electric prices In cents per kilowatt-hour and natural gas prices In cents per 100 cubic feet tor the 12 months ended September 30, 1995 Electric sales (mWh) 3.7°/o Gas sales 3.1°/o & transportation (mcf) Electric customers 3.2% Gas customers Delmarva Power has a 100-year tradition of .oviding electric and gas services to customers on the Delmarva Peninsula.

We're growing in our tra* ditional area, having added more than 46,000 customers last year. But we're expanding our hori-zons for the future. Our proximity to major mar-kets along the Eastern Seaboard and upcoming regulatory changes will .able us to move new energy products and ser-vices beyond the meter and beyond the peninsula into the greater region. Within 150 miles lie Baltimore, Washington, Philadelphia, and New York City. One third of the population of the United State lives within 350 miles of us. We're well positioned for the com* petitive future, using our .ditional strengths to meet it successfully.

II Selected Financial Data (Doll ar s in Thousands , Except Pe r Sh ar e Amounts} Yea r Ended Decembe r 3 I , 1995 1994 1993 1992 1991 Operating Results and Data Op e r a ting Revenues $995,103 $991 , 021 $970 , 607 $864 , 044 $855 , 821 Opera t ing Income $178,406 $163 , I 56 (1) $1 64 ,1 39 $143 , 711 (2) $136,410 Income Before Cumulative Effec t of a Ch a nge i n Accoun ti ng Princ i ple $117,488 $108 , 310 (1) $1 1 1 , 076 $98 , 526 (2) $80 , 506 Cumul a t i ve Effect of a Cha n ge i n Account i ng fo r Unbilled Revenue s $1 2 , 730 Net Income $117,488 $108,310 (1) $111 , 076 $98,526 (2) $93 , 236 Earn i ngs Applicable to Common Stock $107,546 $98 , 940 (1) $101 , 074 $90, 177 (2) $85 , 259 Electr i c Sales (kWh OOO)C 3) 12,310,921 12 , 505 , 082 12 , 280 , 230 11 , 520 , 811 11 , 460 , 280 Gas Sold and Transported (mcf 000) 21,371 20 , 342 19 , 605 20 , 168 18 , 184 Common Stock Information E a rnings Per Share of Common Stock Befo r e Cumulative Effect of a Change i n Accounting Principle

$1.79 $1.67<1> $1.76 $1.69 (2) $1.44 Cumulative Effect of a Ch an ge i n Accounting for Unbilled Revenues $0.25 Total Earnings Pe r Share $1.79 $1.67<1> $1.76 $1.69 (2) $1.69 Dividends Declared Per Sh a re of Common Stock $1.54 $1.54 $1.54 $1.54 $1.54 Average Shares Outstanding (000) 60,217 59 , 377 57 , 557 53,456 50,581 Year-End Common Stock Price $22 3/4 $18 9/64 $23 S/9 $23 l/4 $21 l/4 Book Value Per Common Share $15.20 $14.85 $14.66 $13.77 $13.42 Return on Average Common Equity 11.7°/o 11.1% 12.0% 12.2% 12.4% Capitalization Va r iable Rate Demand Bonds (VRDB) (4) $86,500 $71 , 500 $41 , 500 $41 , 500 $41 , 500 Long-Term Debt 853,904 774 , 558 736 , 368 787 , 387 770 , 146 Preferred Stock 168,085 168 , 085 168 , 085 176,365 136 , 365 Common Stockholders

' Equity 923,440 884,169 862 , I 95 745,789 706,583 To ta l Capitalization with VRDB $2,031,929

$1,898,312

$1 , 808 , 148 $1 , 751,041 $1 , 654,594 Other Information Total Assets $2,866,685

$2 , 669 , 785 $2,592 , 479 $2 , 374 , 793 $2 , 263,718 Long-Te r m Cap i tal Lease Oblig a tion $20,768 $19 , 660 $23,335 $26,081 $29 , 337 Construction Expenditures (S) $135,614 $154 , 119 $159 , 991 $207,439 $181,820 Internally Generated Funds (IGF) (6) $137,394 $123 , 948 $108,693 $130 , 275 $96,081 IGF a s a Pe r cen t of Cons t ruction Expenditures 101 O/o 80% 68% 63% 53% (I) An ear l y retirement o ff er decreased earnings net of income taxes a n d earnings per share by $1 0. 7 mi ll ion and $0.18. respectively. (2) The sett l e m ent of a laws u it with PEC O Energy Company inc r eased earnings net of inco m e taXes and earn i ngs per share by $1 1.4 m i llion and $0.2 1 , res p ectively. (3) Excludes interchange d eliveries.

(4) Al though Varia bl e R ate D emand B o n ds are classified as current l iabilities, the Co m pany intends to use the b onds as a source of long-term fi n ancing as di scussed i n Note 12 to the Conso l idated Financial Stateme n ts. (5) Excludes All owance for F unds U sed D uring Construction.

(6) Net cash provided by operating activities less common and p referred dividen d s. Delmarv* Power & Light Comp*ny e MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Earnings Summary The earnings per average share of common stock attributed to the core utility business and nonutility subsidiaries are shown below. Core Utility Operations Early Retirement Offer Nonutility Subsidiaries Total Earnings per share from core utility operations decreased by $0.09 in 1995 compared to 1994 due to a portion of estimated additional costs that were expensed for the Salem Nuclear Generating Station (Salem) arising from operational problems, including the current outage, which is discussed further under "Salem Outage." Excluding the portion of estimated additional costs that were expensed for Salem, earnings per share from core utility operations in 1995 were unchanged from 1994, reflecting the Company's success in offsetting decreased wholesale (resale) revenues with a combination of cost tion efforts, retail sales growth, and modest price increases pursuant to the Company's "Three-Legged Stool" strategy, which is d i scussed further under "Strategic Plans for Competition-Resale Business." Operating results from the new Conowingo District, which began in June 1995 as a result of the Company's acquisition of Conowingo Power Company Dividends On December 20, 1995, the Board of Directors declared a common stock dividend of $0.38 l/2 per share for the fourth quarter. As the utility industry moves from a regulated to a competitive environment , the Company believes it can best provide shareholder value through maintaining the current 1995 1994 1993 $1.72 $1.81 $1.73 (0.18) 1.72 1.63 1.73 0.07 0.04 O.Q3 $1.79 $1.67 $1.76 (COPCO), had a minimal impact on earnings, as expected. Refer to Note 4 to the Consolidated Financial Statements for information concerning the Company's acquisition of COPCO. Earnings per share from core utility operations increased by $0.08 in 1994 compared to 1993 primarily due to additional electric base revenues from rate increases and additional tric sales. The earnings growth from additional electr i c base revenues was partially offset by higher depreciation expense and the dilutive effect of additional common shares outstanding. Core utility earnings were reduced in 1994 by $10.7 million after taxes, or $0.18 per share , to reflect a voluntary early retirement offer (ERO), which resulted in a work force reduction of I 0.5% or 296 people. Refer to Note 5 to the Consolidated Financial Statements for additional information concerning the ERO. dividend level and providing annual earnings growth. Over time , this strategy is expected to reduce the Company's dividend payout ratio and allow the Company to invest in opportunities that are anticipated to have a sustainable positive impact on earnings growth. Delmarva Power & Light Company -------1 II II Salem Outage The Company owns 7.41 % of Salem , which consists of two pressurized water nuclear reactors (PWR) and is operated by Public Service Electric & G a s Company (PSE&G). As of December 31 , 1995 , the Company's net investment in plant in-service for Salem was approximately

$57 mill i on for Unit I and $60 million for Unit 2. Each unit represents approximately 2% of the Company's total assets and approximately 3% of the Company's installed electric generating capacity. Salem Units I and 2 were removed from operation by PSE&G on May 16, 1995 , and June 7, 1995, respectively, due to tional problems and maintenance concerns.

The units will remain shut down until PSE&G makes the equipment and agement changes necessary to operate the units reliably over the long term. The restart of the units is subject to Nuclear Regulatory Commission (NRC) authorization.

In December 1995, PSE&G completed a workscope assessment of both units and estimated that Unit I would return to service in the ond quarter of 1996 and Unit 2 in the third quarter of 1996. On February 21, 1996, PSE&G informed the Company that partial results from recent inspections of Unit I using a new testing technology revealed indications of degradation in a nificant number of steam generator tubes. PSE&G is continuing its inspections and also will conduct further laboratory analysis of the tubes with results expected in April 1996. Based on the results of inspections to date, PSE&G has concluded that the Unit I outage will be extended for an indefinite period to evaluate the state of the steam generators and to subsequently determine an appropriate course of action. Degradation of steam generators in PWRs has become of increasing concern for the nuclear industry.

Nationally and internationally , utilities have undertaken actions to repair or replace steam tors. In the extreme , degradation of steam generators has contributed to the retirement of several American nuclear power reactors. PSE&G also has informed the Company that recent steam generator inspections of Unit 2 using the new testing ogy have revealed that the condition of the Unit 2 steam Strategic Plans for Competition The electr i c resale segment of the utility industry has become highly competitive as a result of federal legislation. Resale tomers now can choose their electric supplier. Competition in the retail markets also is being discussed at both the Federal and State levels. As the retail segment of the industry tions to a more competitive market, the Company is making changes in the way it manages its business. Resale Business The Company's total electric resale revenues as a percent of total billed electric sales revenues decreased from 13% in 1994 to 7% in 1995, primarily due to Old Dominion Electric Cooperative's (OQEC) purchase of about one-half of its capacity and energy requirements from other suppliers ning January I , 1995. The resulting decrease in resale non-fuel revenues in 1995 of $24.2 million was offset through the Comp a ny's " Three-Legged Stool" str a tegy , which involved a generators is within current repair limits at the present time. However , to confirm the Unit 2 test results, PSE&G also will conduct laboratory analysis of the tubes for Unit 2. As a result of the delay in the restart of Un i t I , PSE&G is focusing its efforts on the return of Unit 2 to service in the third quarter of 1996, as scheduled. However , the Company cannot predict when the NRC will approve the restart of the unit or when the restart actually will occur. In 1995, the Company incurred higher than expected operation and maintenance costs at Salem of approximately

$5 million, which reflect the operational problems at the plant. These costs were expensed as incurred.

Also , outage-related replacement power costs were estimated to be approximately

$8 million. One-half of the estimated replacement power costs was expensed and the other one-half was deferred on the Company's Consolidated Balance Sheet in expectation of future recovery. Based on PSE&G's current estimates, the Company estimates that its share of additional costs related to the outage in 1996 will consist of operation and maintenance costs ranging from $4 million to $7 million , which will be expensed as incurred, and replacement power costs while the units are out of service of approximately

$750,000 per month , per unit. In total, the Company estimates that its share of outage-related costs in 1996 will range from $17 million to $22 million. However , these 1996 estimates could change as a result of PSE&G's analysis of the degradation of the steam generator tubes. Beyond 1996 , the Company cannot predict the amount of outage-related costs it could incur. During 1996, the Company plans to file a proposal with the Delaware Public Service Commission (DPSC), the Company's primary rate jurisdiction, for recovery of replacement power costs. Since the periods during which these units will be out of vice, the extent of the maintenance that will be required, and the costs of replacement power and the extent of its recovery may be different from those currently anticipated, the actual costs to be incurred by the Company may vary from the going estimates.

combination of cost reduction efforts, retail sales growth , and modest price increases. The Company has reduced substantially the financial risk related to its resale business. In 1994 and 1995 , the Company successfully bid against other suppliers and retained all of its municipal customers under long-term contracts. In addition, the Company negotiated extended notice provisions on the remaining portion of ODEC's capacity and energy ments served by the Company. These notice provisions require ODEC to provide the Company with two years' notice for up to a 30% load reduction and five years' notice for load reductions greater than 30%. ODEC has indicated that it may issue a request for proposals in early 1996 for the remaining portion of its capacity and energy requirements currently served by the Company. To the extent there is any further reduction in load , the notice provisions provide the Company with t he a bility to m a n a ge the financial impact. Delmarva P ow er & Lig h t Comp any REDUCED RESALE FINANCIAL RISK Residential Commercial Industrial Resale Other 1995 Billed Electric Sales Revenues The Company has substantially reduced the financial risk of its resale business by signing long-term tracts and extended notice provisions with all of its resale customers.

Retail Business Retail customers also are expected to be able to choose their energy suppliers in the future. The Company is well positioned for competition, due to its relatively low prices within the region, and is taking steps to manage its separate businesses in a competitive market, as discussed below. During 1995, the Company introduced various new products and services and extended its markets into the region. Through an expanded marketing team, the Company is offering consulting, design, construction , and operating and maintenance services to commercial, industrial, and resale customers; developing and marketing residential products and services; and exploring the use of its energy delivery infrastructure to provide services to the telecommunications industry. In addition, the Company is working closely with neighboring communities, governments, and businesses to attract new customers and new jobs to the Company's service territory. During 1996, the Company will reorganize into three separate business units--energy supply, regulated delivery, and energy services-to better focus on the evolving energy markets. The Company also is investing in information technology systems that ¢/kilowatt

-hour sold Residential Commercial Industrial

• Delmarva Power D Regional Average will provide immediate access to the information needed to manage the business units in a competitive environment. In February 1996, the Company presented to the DPSC and the Maryland Public Service Commission a proposal to enter into a collaborative process to develop the transition from a regulated to a competitive energy market. The Company believes that the benefits of a competitive market can best be realized when addressed together by the Company, the Commissions, and customers. The Company also believes that this process should develop solutions for the following key issues: retail wheeling, stranded investment, the ling of electric price elements, and performance-based pricing mechanisms. The first goal will be to seek agreement on the objectives and principles for the transition to a market that allows choices for all customers.

Afterwards, specific details and filings with the Commissions will be addressed.

Impact of Competition on Stranded Costs As the electric utility industry transitions from a regulated to a competitive environment, utilities may not be able to recover certain costs, resulting in these costs being "stranded." Stranded costs could result from the shift from current of-service based pricing to market-based pricing and from tomers changing energy suppliers.

Potential stranded costs include above-market costs associated with generation ties; long-term purchased power contracts; and regulatory assets, which are expenses that have been deferred pending recovery from customers pursuant to Statement of Financial Accounting Standards (SFAS) No. 71, "A ccounting for the Effects of Certain Types of Regulation

." If changes in the ulatory environment ultimately require a recognition of any stranded costs, the Company could be required to write down asset values, and such write-downs could be material.

However, since the time frame of further deregulation, the market conditions relative to capacity and energy demand and prices at the time of de regulation, and the extent to which regulatory commissions allow recovery of stranded costs are not known at this time, the Company cannot predict the level of stranded costs it could incur. Based on recent independent studies, the Company has less exposure to stranded costs than many other utilities in the industry. Refer to "Impact of New Accounting Standards" for discussion of a related topic and Note 8 to the Consolidated Financial Statements for additional information on regulatory assets. ELECTRIC PRICE COMPARISON*

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

• Based on 1994 data Delm*rv* Power & Light Company II Components of Utility Revenues Fuel and energy costs billed to customers (fuel revenues) erally are based on rates in effect in fue l adjustment clauses which are adjusted per i odically to reflect cost changes and are subject to regulatory approval.

Rates for non-fuel costs billed to customers are dependent on rates determined in base rate proceedings before regulatory commissions. Changes in fuel (base rate) revenues can affect directly the earnings of the Company. Fuel revenues , or fuel costs billed to customers, generally do not affect net income , since the expense nized as fuel costs is adjusted to match the fuel revenues. The amount of under-or over-recovered fuel costs generally is deferred until it is subsequently recovered from or returned to utility customers.

Electric Revenues and Sales In 1995 , the percentages of total billed sales revenues contributed by the various customer classes were as follows: residential--41.4%

commercial-32.1

%; industrial-18.6%;

resale--7.0%; and other--0.9%. Details of the changes in the various components of electric revenues are shown below. Comparative Increase (Decrease) from Prior Year in Electric Revenues (Dollars in Millions) 1995 1 994 Non-fuel (Base Rate) Revenues Retail Sales Volume Resale Sales Volume Increased Rates Fuel Revenues Interchange Delivery Revenues Other Operating Revenues Total $54.9 (24.2) 3.3 (6.9) (15.1) 4.5 $16.5 $4.I (0.2) 15.9 ( 15.4) 1.0 2.1 $7.5 For 1995 compared to 1994, Non-fuel Revenues increased

$54.9 million from Retail Sales Volume due to a 7.3% increase in total retail kilowatt-hour (kWh) sales, which resulted primarily from Conowingo District sales beginning June 19, 1995. Excluding the Conowingo District, retail sales increased 2.9%, mainly due to higher commercial sales resulting from a strong economy in the Company's service territory, a 1.4% increase in the number of retail customers, and the favorable impact of hotter summer weather. Excluding the Conowingo District, billed sales to residential and commercial customers increased by I . I% and 4.5%, respectively; industrial sales were flat. Electric revenues also include interchange delivery revenues which result primarily from the sale of electr i c power to utilities in the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM Interconnection). The PJM Interconnection is an electric power pool comprised of eight utilities in the region, including the Company. The power pool provides both capital and operating economies to member utilities. Interchange delivery revenues are reflected in the calculation of rates charged to customers under fuel adjustment clauses. Due to this ratemaking treatment , interchange delivery enues generally do not affect net income. For 1994 compared to 1993 , Non-fuel Revenues increased

$4.1 million from Retail Sales Volume due to a 1.9% increase in total retail sales , which resulted primarily from a 1.6% increase in the total number of retail customers , an improving economy in the Company's service territory , and colder winter weather , offset in part by cooler summer weather. Billed sales to dential and commercial customers increased by 2.3% and 3.7%, respectively

industrial sales were flat. Non-fuel Revenues decreased

$24.2 million in 1995 from Resale Sales Volume due to a 44.0% decrease in resale sales, mainly due to ODEC's purchase of about one-half of its ity and energy requirements from other suppliers beginning January I, 1995. Changes in resale sales have less of an impact on non-fuel revenues than changes in retail sales , since average resale non-fuel rates are significantly lower than average retail non-fuel rates. The increases in Non-fuel Revenues from Increased Rates resulted from increases in electric customer base rates which became effective during 1993 and 1995. Refer to Note 2 to the Consolidated Financial Statements for information concerning these rate increases.

In 1995, Fuel Revenues decreased

$6.9 million mainly due to lower total sales. In 1994, Fuel Revenues decreased

$15.4 million due to lower rates charged to customers under the fuel adjustment clauses , partially offset by higher total sales. In 1995, Interchange Delivery Revenues decreased

$15.1 million, mainly due to lower sales and billing rates to the PJM Interconnection. D e lm a rv a Po wer & Li gh t Comp any Gas Revenues, Sales, and Transportation The Company earns g a s revenues from the sale of gas to customers and also from transporting g a s through the Company's system for some customers who purchase gas directly from other suppliers. In 1995 , total gas revenues decreased

$12.5 million from 1994 bec a use of a $4.0 million incre a se in non-fuel revenues and a $16.5 million decrease in fuel revenues. The increase in nonfuel revenues was due to $2.7 million of additional revenue from a base rate incre a se that became effective November I , 1994 , a nd a $1.3 million incre a se i n s a les volume. Total volumes of g a s sold and transported in 1995 i ncreased 5.1 % due to a 1.9% increase in firm gas sales , resulting primarily from a 2.9% incre a se in the number of customers , and a 17.2% increase in non-firm s a les a nd gas transported. Gas fuel revenues decreased

$16.5 million in 1995 due to lowe r average fuel rates charged to cu s tomers and a $6.8 million refund in 1995 of over-recovered fuel costs. In 1994 , total gas revenues increased

$13.0 million from 1993 due to a $3.0 million increase in non-fuel revenues and a $10.0 million increase in fuel revenues. The increase in fuel revenues was due to $0.6 million of additional revenue from a November I , 1994 b a se rate increase and a $2.4 million increase in sales volume. Total volumes of gas sold a nd tr a nsported i n 1994 increa s ed 3.8% du e to a 2.9% increase i n the number of custome r s and colder winter weather during the first quarter. Gas fuel revenues i ncreased $I 0.0 million in 1994 due to higher average fuel rates and higher s a les. Electric Fuel and Purchased Power Expenses In 1995 , electric fuel and purchased power expenses decreased

$14.7 million from 1994 primarily due to lower kWh output and lower purchased power pr i ces. The $14.7 million decrease is net of $4.1 million of expense , which represents one-half of the total Salem outage-related replacement power costs that were estimated for 1995. In 1994 , electric fuel and purchased power expenses creased $15.7 million from 1993 primarily due to variances Gas Purchased For 1995 , comp a red to 1 994 , the co s t of ga s purchased decre a sed $15.2 million , primar i ly due to a $6.8 m i llion r efund in 1995 of over-recove r ed fuel costs and variances in fuel costs deferred and subsequently amortized under the Company's fuel adjustment clause. The refund of over-recovered fuel costs reduced the amount of expense recorded for gas in fuel costs deferred and subsequently amortized under the Company's fuel adjustment clauses. The kWh output required to serve load w i thin the Company's service territory is substanti a lly equivalent to total output less interchange deliveries. In 1995 , the Company's output for load within its service territory was provided by 39.4% coal generation, 32. I% oil and gas generation, 16.4% net purchased power, and 12. I% nuclear generation. purchased because fuel expense is adjusted to match fuel revenues as explained under " Components of Utility Revenues." For 1994 , compared to 1993 , the cost of gas purchased i ncreased $10.2 million , primarily due to variances in fuel costs deferred and subsequently amortized under the Company's fuel adjustment clause. Delmarva Power & Light Company II II Operation, Maintenance, Depreciation, and Income Tax Expenses Operation and maintenance expenses increased i n 1995 by $8.0 million compared to 1994. The most significant factor contributing to the increase was $29.5 million of costs related to the Conowingo District , including

$26. I million for capacity purchase charges under the Company's contracts to purchase the Conowingo District's electric power requirements from PECO Energy Company (PECO). Also contributing to the increase in expense were higher than expected costs at Salem of approximately

$5 million , which reflect the operational problems at the plant , including the current outage. Largely offsetting these increases were a $17.5 million ERO expense recorded in 1994 , salary and wage savings in 1995 from reduced staff levels , and lower storm damage costs. Operation and maintenance expenses increased in 1994 by $19.2 million compared to 1993 due mainly to the following factors: the $17.5 million ERO expense , a $3.5 million increase in winter storm damage costs , a $3.5 million increase in the cost for postretirement benefits other than pensions (OPEB), and a $7.8 million reduction in pension expense , of which $4.5 million was due to a lower assumed rate of salary increase. The Company's OPEB costs were deferred during part of Utility Financing Costs Interest expense increased

$6.3 million in 1995 in comparison to 1994, primarily due to the issuance of debt to acquire COPCO. Also contributing to the increase were higher average short-term debt balances and rates. Interest expense decreased

$2.0 million in 1994, mainly due to the redemption on June I, 1993, of $50 million of I 0% First Mortgage Bonds with proceeds from a public offering of common stock. Allowance for equity and borrowed funds used during con-Energy Supply The Company's energy supply plan reflects its strategy to vide an adequate, reliable supply of electricity to customers, while minimizing adverse impacts on the environment and keeping prices competitive.

This plan , which is updated annually , is based on forecasts of demand for electricity in the service territory and reserve requirements of the PJM Interconnection. The plan emphasizes balance and flexibility, and may be accelerated, slowed, or altered in response to changing energy demands, fluctuating fuel prices, and emerging technologies. The plan considers customer-oriented load agement and strategic conservation programs (" demand-side" alternatives), with short-term power purchases, long-term power contracts , and new or renovated power plants ("ply-side" alternatives).

The plan currently matches customers' energy requirements and does not require large investments for new resources.

The Company must balance the risks of providing too much or too little capacity.

The main risks of too much capacity are that the Company's prices may become uncompetitive and that regulators may not allow the associated costs to be recovered through customer rates. The principal risks of equ a te c a p a city ar e unrel ia ble se rvi ce a nd the payment of 1993 due to probable rate recovery. In 1994, the deferral for the Delaware jurisdiction (electric and gas) was expensed in accordance with a settlement agreement , approved October 18 , 1994 , concerning the Company's gas base rate case. Depreciation expense increased in 1995 , primarily due to the addition of the Conowingo District. In 1994 , depreciation expense increased mainly due to additions to the electric tem, including Hay Road Unit 4 in mid-1993.

Inflation affects the Company through increased operating expenses and higher replacement costs for utility plant assets. Although timely rate increases can lessen the effects of tion , due to competition and the changing nature of the utility industry , the Company does not plan to file for an increase in base rates in the near term. The Company plans to use its existing cost control programs and sales initiatives as its mary means to mitigate the effects of inflation. Income tax expense on operations increased

$7.4 million in 1995 in comparison to 1994 and decreased

$2.0 million in 1994 in comparison to 1993 , mainly due to a corresponding increase and decrease in pre-tax income. struction (AFUDC) decreased

$2.4 million in 1995, mainly due to a lower AFUDC rate. The decrease in AFUDC of $3.6 million in 1994 was primarily due to lower average tion balances.

Due to common equity financing , the average number of shares of common stock outstanding increased in 1995 and 1994. The additional shares outstanding decreased earnings per share by $0.03 in 1995 and $0.05 in 1994. capacity deficiency charges to the PJM Interconnection.

The PJM Interconnection requires the Company to plan for and to provide an adequate capacity level. During the past three years, the Company's plan has reduced customers' demand for electricity by an additional 47 watts (MW), provided 205 MW of capacity from a long-term power contract with PECO beginning in 1996 , and provided 175 MW of capacity from a new power plant, Hay Road Unit 4. Looking forward through 2000, the Company's plan includes the following provisions

(I) "Demand-side" -No additional peak load reduction through customer-oriented load management and strategic conservation programs.

The Company filed to close its ing demand-side programs to new participants in Delaware and Maryland on October 3 , 1995 , because these programs are not considered the most appropriate and cost effective resources for meeting future demand requirements.

(2) "Supply-side" -Starting in 1997 and continuing through 2000, up to 125 MW of short-term power purchases, in tion to the long-term power contract discussed above. D e lm*rv* Po wer &. L ig ht Comp*ny Liquidity and Capital Resources The Company's primary capital resources are i nternally generated funds (net cash provided by operating activit i es less common and preferred dividends) and external financings. These resources provide capital for utility plant construction expenditures and other capital requirements , such as ment of maturing debt and capital lease obligations. Utility construction expenditures are the Company's largest on-go i ng capital requirement and are affected by many factors , including growth in demand for electricity , compliance with mental regulations , and the need for improvement and replacement of existing facilities. Operat i ng activities provided cash inflows of $239.4 million in 1995 , $224.6 million in 1994, and $206.7 million in 1993. After deducting common and preferred dividend payments of $I 02.0 million in 1995 , $100.6 mill i on in 1994 , and $98.0 lion in 1993, internally generated funds were $137.4 million in 1995, $124.0 million in 1994, $108.7 million in 1993. Internally generated funds provided I 0 I%, 80%, and 68% of the cash required for utility construction in 1995 , 1994 , and 1993, respectively.

Utility construction expenditures were $135.6 million in 1995 , $154. I million in 1994, and $160.0 million in 1993. tion expenditures in 1995, 1994, and 1993 included $16.4 million , $20.7 million, and $9.2 million , respectively , for projects attributed to environmental compliance.

In 1995 , the Company acquired COPCO for $158.2 million ($157.0 million net of cash acquired) with $125.8 million of long-term debt and the balance with short-term debt. During 1993-1995 , investments by the Company's nonutility sidiaries were primarily construction expenditures at a landfill business as well as the purchase of a $5.7 million office building in 1994. In 1995 and 1994 , the subsidiaries raised $3.7 million and $4.6 million , respectively, through the sale of real estate. In 1993 , the subsidiaries sold interests in leveraged leases , which resulted in a $21.5 million cash inflow. 150 100 50 0 $million*

1993 1994 1995 1996* 1997*

• Internally Generated Funds D Construction Expenditures Capital raised externally during 1993-1995 , net of $303.3 million of redemptions and refinancings, consisted of $146.3 million of common stock, $67.0 million of long-term debt, and $45.0 million of variable rate demand bonds. Preferred stock outstanding decreased

$8.3 million. After considering

$15.2 million of costs associated with issuing and refinancing debt and equity securities during 1993-1995, the net amount of capital raised from external financings during this period was $234.8 million. Issuances of common stock during 1993-1995 included a public offering in 1993 of 3 , 300 , 000 shares for $77. I million. The Company's 1993 financing requirements associated with utility plant were principally satisfied by issuing common stock in order to strengthen the Company's capital structure. Add i tional common stock was issued during 1993-1995, marily through the Dividend Reinvestment and Common Share Purchase Plan (DRIP). Depending on the financing needs of the Company , shares issued through the DRIP may be either newly issued shares or shares purchased in the open market. During 1993-1995, shares issued through the DRIP were newly issued shares , except during the last seven months of 1994 when the shares were purchased in the open market. Effective January I , 1996 , shares issued through the DRIP are being purchased in the open market. Book value per share of common stock increased to $15.20 as of December 31 , 1995, from $14.85 as of December 31, 1994. In addition to the Company's issuance in 1995 of $125.8 million of long-term debt to acquire COPCO , one of the Company's non utility subsidiaries issued $15.0 million of variable rate demand bonds to finance the past and future expansion of its landfill business. During the year, the Company's term loan balance of $45.0 million was repaid using cash from tions. No other significant debt redemption occurred in 1995. INTERNALLY GENERATED FUNDS & CONSTRUCTION EXPENDITURES The percentage of construction expenditures funded internally is expected to remain high through I 997.

• Forec as t Delm*rva Power & Light Company II II The Company's capital structure as of December 31 , 1995 and 1994, expressed as a percentage of total capitalization, is shown below. 1995 1994 Long-term debt and variable rate demand bonds Preferred stock Common stockholders

' equity 46.3°/o 8.3°/o 45.4°/o 44.6% 8.8% 46.6% Capital requirements for the period 1996-1997 are estimated to be $324 million, including

$25 million for maturity of First Mortgage Bonds in 1997 and $294 million for utility tion expenditures , excluding AFUDC. The estimate of 1996-1997 utility construction expenditures includes $I I million related to environmental compliance plans, including provision of the Clean Air Act Amendments of 1990. During 1998-2000 , Nonutility Subsidiaries Information on the Company's nonutility subsidiaries, in tion to the following discussion, can be found in Notes I and 18 to the Consolidated Financial Statements. Earnings per share of nonutility subsidiaries were $0.07 in 1995 in comparison to $0.04 in 1994. The $0.03 increase in earnings was primarily due to higher recoveries of previously written-off joint venture assets, the receipt of an additional payment related to a prior year sale of a leveraged lease est, and a 1994 adjustment to reduce the realizable value of oil and gas wells. The i ncrease in 1995 earnings was partially offset Impact of New Accounting Standards In March 1995 , the Financial Accounting Standards Board (FASB) issued SFAS No. 121 , "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of ," which requires the Company to review lived assets and certain identifiable intangibles held and used by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If an asset is considered impaired, then its value would be written down with a corresponding charge to earnings. SFAS No. 121 also requires rate-regulated companies to write off regulatory assets against earnings whenever those assets no longer meet the criteria for nition of a regulatory asset as defined by SFAS No. 71. The new standard is effective in 1996. Based on current stances, the Company does not expect the adoption of SFAS No. 121 to have a material effect upon the Company's financial condition or results of operations. However , the effects of the electric utility industry's transition to a competitive ment could result in the future write-down of asset values as an additional

$42 million of construction expenditures cluding AFUDC) related to compliance with environmental regulations are planned. The Company anticipates that $283 million will be generated ternally during 1996-1997 , net of power purchase commitments.

This represents 87% of estimated capital requirements and 96% of estimated utility construction expenditures for 1996-1997. During this period , no long-term external financings are presently planned. Since the Company's future construction program, internal generation of funds, and need for outside capital will be affected by such matters as customer demand, inflation , petition, and rate regulation , future results may vary from the foregoing estimates. by lower earnings from solid waste group operations. Both 1995 and 1994 included gains from the sale of real estate. Earnings per share of nonutility subsidiaries were $0.04 in 1994 in comparison to $0.03 in 1993. The $0.0 I increase in earnings was mainly attributed to gains on the sale of real estate, improved operating results of the solid waste group , and higher earnings from various other nonutility business activities. These earnings increases were largely offset by a 1994 adjustment to the realizable value of oil and gas wells and by 1993 after-tax gains on sales of leveraged leases. discussed under " Strategic Plans for Competition-Impact of Competition on Stranded Costs." In October 1995, the FASB issued SFAS No. 123 , " Accounting for Stock-Based Compensation," which encourages, but does not require, entities to recognize compensation costs for stock-based employee compensation plans using a fair value based method of accounting rather than the intrinsic value based method of accounting currently prescribed by Accounting Principles Board (APB) Opinion No. 25 , "Accounting for Stock Issued to Employees." Entities electing to continue using the accounting prescribed by APB Opinion No. 25 are required to disclose pro forma net income and earnings per share as if the fair value based method of accounting under SFAS No. 123 had been applied. The new standard is effective in 1996. The Company does not expect to adopt the accounting provisions of SFAS No. 123 for income statement recognition purposes. D e lm*rv* Pow e r & Light Comp a ny Report of Management Management is responsible for the information and tations contained in the Company's financial statements.

Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best mates and judgments of the expected effects of events and transactions.

Delmarva Power & Light Company maintains a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified personnel.

Coopers & Lybrand L.L.P., independent accountants, are engaged to audit the financial statements and express their opinion thereon. Their audits are conducted in accordance with generally accepted auditing standards which include a review of selected internal controls to determine the nature, timing, and extent of audit tests to be applied. The Audit Committee of the Board of Directors, composed of outside directors only, meets with management, internal auditors, and independent accountants to review accounting, auditing, and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the Audit Committee, subject to stockholder approval.

Howard E. Cosgrove Chairman of the Board, President, and Chief Executive Officer Barbara S. Graham Senior Vice President, Treasurer, and Chief Financial Officer Report of Independent Accountants To the Board of Directors and Stockholders Delmarva Power & Light Company Wilmington, Delaware O We have audited the accompanying consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in common stockholders' equity, and cash flows for each of the three years in tlie period ended December 31, 1995. These financial statements are the responsibility of the Company's management.

Our bility is to express an opinion on these financial statements

• based on our audits. We conducted our audits in accordance with generally accepted auditing standards.

Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement.

An audit includes examining, o,n a test basis, evidence supporting the amounts and disclosures in the financial statements.

An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial ment presentation.

We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial 1.statements referred to above sent fairly, in all material respects, the consolidated financial position of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1995 and 1994, and the solidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1996, except as to the information presented under the caption Salem Outage in Note 16, which the date is February 26, 1996 Delmarva Power & Light Company II Consolidated Statements of Income (Dollars in Thousands)

Year Ended December 3 I , e 1995 1994 1993 Operating Revenues*

Electric $899,662 $883,1,15

$875,663 Gas 95,441 107,906 94,944 995,103 991,021 970,607 Operating Expenses Electric fuel and purchased power 267,885 282,570 298,307 Gas purchased*

48,615 63,814 53,631 Operation and maintenance 275,165 267,207 248,052 Depreciation 113,022 109,523 100,929 Taxes other than income taxes 38,449 38,585 37,419 Income taxes 73,561 66,166 68,130 816,697 827,865 806,468 Operating Income 178,406 163,156 164,139 Other Income Nonutility Subsidiaries Revenues and gains 52,042 43,142 37,636 Expenses including interest and income taxes (47,896) (40,790) (35,828) Net earnings of nonutility subsidiaries 4,146 2,352 1,808 Allowance for equity funds used during construction 708 3,389 5,309 Other income, net of income taxes 557 (285) 511 5,411 5,456 7,628 Income Before Utility Interest Charges 183,817 168,612 171,767 Utility Interest Charges Interest expense 68,395 62,076 64,095 Allowance for borrowed funds used during construction (2,066) (1,774) (3,404) 66,329 60,302 60,691 Earnings Net income 117,488 108,310 111,076 Dividends on preferred stock 9,942 9,370 10,002 Earnings applicable to common stock $107,546 $ 98,940 $101 .. 074 Common Stock Average shares of common stock outstanding (000) 60,217 59,377 57,557 Earnings "per average share of common stock . $1.79 $1.67 $1.76 Dividends declared per share of common stock $1.54 $1.54 $1.54 See accompanying Notes to Consolidated Financial Statements .

• Delmarva Power & Light Company Consolidated Statements of Cash Flows -(Dollars in Thousands)

Year Ended December 3 I , 1995 1994 1993 Cash* Flows from Operating Activities Net income $117,488 $108,310 $111,076 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization 120,897 120,803 112,926 Allowance for equity funds used during construction (708) (3,389) (5,309) Investment tax credit adjustments, net (2,516) (1,898) (2,515) Deferred income taxes, net 15,992 4,829 (I, 171) Provision for early retirement offer_ 17,500 Net change in: Accounts receivable (14,022) 7,980 (15,851) Inventories 18,590 (21,409) 5,314 Accounts payable 3,269 5,811 (3,749) Other current assets & liabilities(IJ (14,349) (10,668) 11,441 Other, net (5,213) (3,282) (5,438) Net cash provided by operating activities 239,428 224,587 206,724 Cash Flows from Investing Activities Construction expenditures, excluding AFUDC (135,614) ( 154, 119) (159,991)

Allowance for borrowed funds used during construction (2,066) (1,774) (3,404) Change in working capital for construction 1,102 (439) 3,123 Acquisition of COPCO, net of cash acquired (157,014)

Cash flows from leveraged leases

• Sales of interests in leveraged leases 1,314 21,542 Other 1,685 1,592 1,511 Proceeds from sales of subsidiary property 3,656 4,596 Investment in subsidiary projects and operations (3,645) (11,045) (2,827) Net (increase)/decrease in bond proceeds held in trust funds 2,658 (11,816) 1,152 Deposits to nuclear decommissioning trust funds (3,612) (2,438) (2,657) Other, net (3,544) (2,336) (389) Net cash used by investing activities (295,080)

(177,779)

(141,940)

Cash Flows from Financing Activities Dividends:

Common (92,221) (91, 175) (87,989) Preferred (9,813) (9,464) (10,042) Issuances:

Long-term debtC2J 125,800 4,640 148,200 Variable rate demand bonds 15,000 30,000 15,500 Common stock 24,693 14,974 109,463 Preferred stock 20,000 Redemptions:

Long-term debt(2) (1,388) (26,096) (184,206)

Variable rate demand bonds ( 15,500) Common stock (1,253) (794) (748) Preferred stock (28,280) Principal portion of capital lease payments (7,875) (11,280) (9,956) Net change in term loan (45,000) 35,000 10,000 Net change in short-term debt 53,154 10,000 (17,000) Cost of issuances and refinancings (1,523) (601) (13,097) Net cash provided/(used) by financing activities 59,574 (44,796) (63,655) Net change in cash and cash equivalents 3,922 2,012 1,129 e Beginning of year cash and cash equivalents 25,029 23,017 21,888 End of year and cash equivalents

$28,951 $25,029 $23,017 (I) Other than debt and deferred income taXes classified as current. (2) Excluding net change in term loan. See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company II -----------

II Consolidated Balance Sheets (Dollars in Thousands)

As of December 3 I, Assets Utility Plant-At Original Cost Electric Gas Common Less: Accumulated depreciation Net utility plant in service Construction work-in-progress Leased nuclear fuel, at amortized cost Investments and Nonutility Property Investment in leveraged leases Funds held by trustee Other investments and nonutility property, net Current Assets Cash and cash equivalents Accounts receivable Customers Other Inventories, at average cost Fuel (coal, oil, and gas) Materials and supplies Prepayments Deferred income taxes, net Deferred Charges and Other Assets Prepaid pension cost Unamortized debt expense Deferred debt refinancing costs Deferred recoverable income taxes Other Total See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company 1995 1994 $2,942,969 208,245 130,949 3,282,163 1,189,269 2,092,894 105,588 31,661 2,230,143 48,367 36,275 54,781 139,423 28,951 116,606 14,630 30,076 36,823 12,969 5,400 245,455 16,899 12,256 23,972 151,250 47,287 251,664 $2,866,685

$2,676,871 196,188 120,933 2,993,992 1,062,565 1,931,427 85,220 30,349 2,046,996 49,595 32,824 57,289 139,708 25,029 93,739 15,144 48,262 37,055 9,014 9,276 237,519 5,905 11,387 26,530 149,206 52,534 245,562 $2,669,785 Consolidated Balance Sheets (Dollars in Thousands)

As of December 31, Capitalization and Liabilities Capitalization (See Statements of Capitalization)

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

1995-60,759,365, 1994---59,542,006 Additional paid-in capital Retained earnings Unearned compensation Total common stockholders' equity Preferred stock Long-term debt Current Liabilities Short-term debt Long-term debt due within one year Variable rate demand bonds Accounts payable Taxes accrued Interest accrued Dividends declared Current capital lease obligation Deferred energy costs Other Deferred Credits and Other Liabilities Deferred income taxes, net Deferred investment tax credits Long-term capital lease obligation Other ' Commitments and Contingencies (Notes 13 and 16) Total See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company 1995 1994 $136,713 $133,970 506,298 484,377 281,862 267,002 (1,433) (1,180) 923,440 884,169 168,085 168,085 853,904 774,558 1,945,429 1,826,812 63,154 10,000 1,485 1,399 86,500 71,500 64,056 59,596 4,802 7,264 16,355 15,459 23,426 22,831 12,604 12,571 222 12,241 33,595 27,538 306,199 240,399 519,597 505,435 45,061 47,577 20,768 19,660 29,631 29,902 615,057 602,574 $2,866,685

$2,669,785 II

"' Consolidated Statements of Capitalization (Dollars in Thousands)

Common Stockholders' Equity Total common stockholders' equity(!)

Cumulative Preferred Stock Par value $1 per share, I 0,000,000 shares authorized, none outstanding Par value $25 per share, 3,000,000 shares authorized, 7 3/4% Series, 1,600,000 shares issued (2) Par value $I 00 per share, 1,800,000 shares authorized:

Current call Series Shares outstanding price per share 3.70%-5% 320,000 $103.00-$105.00 6 3/4% 200,000 7.52% 150,000 Adjustable-5.56%, 5.54% (4) 160,850 Auction rate-4.54%, 3.32% (4) 450,000 Long-Term Debt First Mortgage Bonds: Maturity Interest Rates 1997 6 3/s% 2002-2003.

6.40'Yo-6.95%

2014-2015 7.30%-8.15%

2018--2022 5.90%-8.50%

2025 7.71% 2032 6.05% Amortizing First Mortgage Bonds, due 1997-2008, 6.95% Other Bonds, due 20 I 1-2017, 7. I 5'Yo-7.50%

Pollution Control Notes: Series 1973, due 1996-1998, 5 3/4% Series 1976, due 1996--2006, 7 1/s'Yo-7 l/4% Medium Term Notes, due 1998, 5.69% Medium Term Notes, due 1999, 7 1123 Medium Term Notes, due 2002-2004, 8.30%-9.29%

Medium Term Notes, due 2007, 8 1/s% Medium Term Notes, due 2020-2021, 8.96%-9.95%

Mortgage Notes, 9.65% (6) Mortgage Note, 8% (7) Term Loan (BJ Other Obligations, due 1996-2000, 9.63% Unamortized premium and discount, net Current maturities of long-term debt Total long-term debt Total capitalization Variable Rate Demand Bonds (9) Total capitalization with Variable Rate Demand Bonds (3) $103.50 $103.00 (5) $100.00 (I) Refer to Consolidated Statements of Changes in Common Stockholders' Equity for additional information.

(2) Redeemable beginning September 30, 2002, at $25 per share. (3) Redeemable beginning November I, 2003, at $100 per share. (4) Average rates during 1995 and 1994, respectively.

(5) Call price changes to $100 per share for redemptions on or after July I, 1996. (6) Repaid through monthly payments of principal and interest over 15 years ending November 2002. As of December 3 I, 1995 1994 $923,440 $884,169 40,000 40,000 32,000 32,000 20,000 20,000 15,000 15,000 1&,085 16,085 45,000 45,000 168,085 168,085 . 25,000 25,000 120,000 120,000 81,000 81,000 208,200 208,200 100,000 15,000 15,000 549,200 449,200 25,800 54,500 54,500 6,250 6,375 3,100 3,200 25,000 25,000 30,000 30,000 39,000 39,000 50,000 50,000 61,000 61,000 6,938 7,606 4,279 4,588 45,000 940 1,126 (618) (638) (1,4S5) ( 1,399) 853,904 774,558 1,945,429 1,826,812 86,500 71,500 $2,031,929

$1,898,312 (7) Repaid through monthly payments of principal and interest using a 15-year principal amortization, with the unpaid balance due in September 1999. (8) Refer to Note 12 to the Consolidated Financial Statements for additional information.

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

See accompanying Notes to Consolidated Financial Statements.

Delmarva Powor & Light Company _J

-e e Consolidated Statements of Changes in Common Equity (Dollars in Thousands)

Common Additional Unearned Shares Par Paid-in Retained Treasury Com pen-,-Outstanding Value(I) Capital Earnings Stock<2l sation Total Balance as of January 1, 1993 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 (3J 1,246,380 2,804 26,519 29,323 Stock options 139,050 313 2,689 3,002 Expenses (2,627) (2,627) Reacquired shares (31,490) $(748) (748) Shares granted (4) 31,490 748 (748) Amortization of unearned compensation 260 260 Refinancing of preferred stock (273) (951) (1,224) Balance as of December 31, 1993 58,829,283 132,366 470,997 259,507 (675) 862,195 Net income 108,310 108,310 Cash dividends declared Common stock ($1.54) (91,436) (91,436) Preferred stock (9,370) (9,370) Issuance of common stock DRIP (3J 703,726 1,584 13,199 14,783 Other Issuance 8,997 20 171 191 Reacquired shares (36,840) (794) (794) Shares granted (4J 36,840 794 (794) Amortization of unearned compensation 289 289 Other 10 (9) Balance as of December 31, 1994 59,542,006 133,970 484,377 267,002 (I, 180) 884,169 Net income 117,488 117,488 Cash dividends declared Common stock ($1.54) (92,686) (92,686) Preferred stock (9,942) (9,942) Issuance of common stock DRIP (3J 1,210,048 2,723 21,806 24,529 Stock options 3,900 9 63 72 Other issuance 4,731 11 82 93 Reacquired shares (63,370) ( 1,253) 19 (1,234) Shares granted (4) 62,050 1,223 (1,223) Amortization of unearned compensation 951 951 Balance as of December 31, 1995 60,759,365

$136,713 $506,328 $281,862 $(30) $( 1,433) $923,440 (I) The Company's common stock has a par value of $2.25 per share and 90,000,000 shares are authorized.

(2) Treasury Stock, which is recorded at cost, is included in Additional Paid-in Capital on the Consolidated Balance Sheet. (3) Dividend Reinvestment and Common Share Purchase Plan (DRIP)--As of December 31, 1995, 149,648 shares remained on the registration for issuance through the DRIP. On January 29, 1996, the Company filed with the Securities and Exchange Commission to register an additional 6,000,000 shares for issuance through the DRIP. (4) Shares of restricted common stock granted under the Company's Long Term Incentive Plan. See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Light Company II , _J II 1. Significant Accounting Policies Nature of Business The Company is predominately a public utility that provides electric and gas servjce. The Company provides electric vice to retail (residential, commercial, and industrial) and wholesale (resale) customers in Delaware, ten primarily Eastern Shore counties in Maryland, and the Eastern Shore area of Virginia in an area consisting of about 6,000 square miles with a population of approximately I. I million. In 1995, 90% of the Company's operating revenues were derived from the sale of electricity.

The Company provides gas service to retail and transportation customers in an area consisting of about 275 square miles with a population of approximately 470,000 in northern Delaware, including the City of Wilmington.

In addition, the Company and its wholly-owned subsidiaries are engaged in nonutility activities.

The Company is developing and marketing energy-related products and services primarily targeted to customers in retail markets. The subsidiaries'

_ nonutility activities include landfill and wastehauling*operations, the operation and maintenance of energy-related projects, real estate sales and development, and investments in leveraged equipment leases. Regulation of Utility Operations The Company is subject to regulation with respect to its retail utility sales by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively) and the Virginia State Corporation Commission (VSCC), which have powers over rate matters, accounting, and terms of service. Gas sales are subject to regulation by the DPSC. The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting systems and policies; the transmission of electricity, the wholesale sale of electricity, and interchange and other purchases and sales of electricity involving,other utilities.

The FERC also regulates the price and other terms of transportation of natural gas purchased by the Company. The percentage of electric and gas utility operating revenues regulated by each Commission for the year ended December 31, 1995, was as follows: DPSC, 64%;. MPSC, 27%; VSCC, 3%; and FERC, 6%. Refer to Note 8 to the Consolidated Financial Statements for a discussion of regul;;itory assets arising from the financial effects of rate regulation.

Reporting of Subsidiaries The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries-Delmarva Capital Investments, Inc.; Delmarva Energy Company; Delmarva Industries, Inc.; and Delmarva Services Company. The results of operations of the Company's nonutility sidiaries are reported in the Consolidated Statements of Income as "Other Income." Refer to Note 18 to the Consolidated Financial Statements for financial information about the Company's nonutility subsidiaries.

Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of tingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Utility Revenues At the end of each month, there is an amount of electric and gas service rendered from the last meter reading to the month-end which has not yet been billed to customers.

The non-fuel (base rate) revenues associated with such unbilled services are accrued by the Company. When interim rates are placed in effect subject to refund, the Company recognizes revenues based on expected final rates. Fuel Expense Fuel costs charged to the Company's results of operations generally are adjusted to match fuel costs included in tomer billings (fuel revenues).

The difference between fuel revenuers and actual fuel costs incurred is reported on the Consolidated Balance Sheets as "Deferred energy costs." The deferred balance is subsequently recovered from or returned to utility customers.

The Company's share of nuclear fuel at the Peach Bottom Atomic Power Station (Peach Bottom) and the Salem Nuclear Generating Station (Salem) is financed through a contract which is accounted for as a capital lease. Nuclear fuel costs, including a provision for the future disposal of spent nuclear fuel, are charged to fuel expense on a unit-of-production basis. Depreciation Expense The annual provision for depreciation on utility property is computed on the straight-line basis using composite rates by classes of depreciable property.

The relationshi_p of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.6% for 1995 and 1994, and 3.7% for 1993. Depreciation expense includes a provision for the Company's share of the estimated cost of sioning nuclear power plant reactors based on amounts billed to customers for such costs. Refer to Note 7 to the solidated Financial Statements for additional information on nuclear decommissioning.

Interest Expense The amortization of debt discount, premium, and expense, including refinancing expenses, is included in interest expense. Allowance for Funds Used During Construction Allowance for Funds Used During Construction (AFUDC) is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance construction of new utility facilities.

In the Consolidated Statements of Income, the borrowed funds component of AFUDC is reported under "Utility Interest Charges" as a reduction of interest expense and the equity funds component of AFUDC is reported as "Other Income." AFUDC was capitalized on utility plant construction at the rates of 7.1 % in 1995, 9.3% in 1994, and 9.6% in 1993. Delmarva Power & Light Company Cash Equivalents In the consolidated financial state111ents, the Company siders highly liquid marketable securities and debt instruments purchased with a maturity of three months or less to be cash equivalents.

Leveraged Leases As of December 3 I, 1995, the Company's portfolio of aged leases, held by a non utility subsidiary, consists of five aircraft which are leased to three separate airlines.

ThE) Company's investment in leveraged leases includes the aggregate of rentals receivable (net of principal and interest 2. Base Rate Matters Electric and gas base rate increases which became effective in 1993, 1994, and 1995 are summarized in the following table. Annualized Base Jurisdiction Revenue Increase Retail Electric Delaware Cl) $ 4.5 million or 0. 9% Delaware(2)

$24.9 million or 5.8% Maryland CJ) $ 7.8 million or 4.3% Virginia $ 1.3 million or 5.4% Resale (FERC)C4l

$ 1.5 million or 1.5% Gas(S) $ 3.1 million or 3.1 % (I) Net of reduced fuel rates, customer rates decreased 1.45%. (2) Net of fuel savings from Hay Road Unit 4, customer rates increased 3.7%. (3) Although a return on equity was not specified, the Company believes that the 0 implied return on equity approaches 12%. Net of fuel savings from Hay Road Unit 4, customer rates increased 2.3%. On April 18, 1995, the DPSC approved a joint resolution mitted by the Company and two customer groups for a $4.5 million or 0. 9% increase in electric base rates effective May I, 1995. The rate increase was designed to recover the costs of "limited issues," which primarily are costs imposed by ment and are outside the reasonable control of the Company. The joint resolution also provided for the following:

• A rate moratorium whereby the Company will not increase its electric base rates before January I, 1997. However, the Company is permitted to file for a redesign of electric base rates that would not result in" a change in total electric base revenues.

• A provision whereby the Company would be required to submit a proposal supporting current rate levels if its return on common equity exceeds its currently approved rate of I 1.5%. A return on common equity test will be performed quarterly beginning with the twelve-month period ended December 3 I, 1995, and continuing through the month period ended December 3 I , 1996. on nonrecourse indebtedness) and estimated residual values of the leased equipment less unearned and deferred income (including investment tax credits).

Unearned and deferred income is recognized at a level rate of return during the periods in which the net investment is positive.

Funds Held By Trustee Funds held by trustee generally include deposits in the Company's external nuclear decommissioning trusts and unexpended, restricted, tax-exempt bond proceeds.

Earnings on such trust funds are also reflected in the balance. Return On Effective Common Equity Date Allowed 05/01/95 11.5% 06/01/93 11.5% 04/01/93 I 0/05/93 11.05% 06/03/93 11/01/94 11.5% (4) The settlement agreement did not specify a return on equity. (5) Net of reduced fuel rates, customer rates decreased 1.75%.

• Funding of nuclear decommissioning costs at the current Nuclear Regulatory Commission (NRC) minimum financial assurance amount. See Note 7 to the Consolidated Financial Statements for a further discussion of the Company's accounting and funding policies for nuclear decommissioning.

In 1994, the Company also had flied an application with the MPSC for a $3.9 million "limited issues" increase in electric base rates. In April 1995, the MPSC denied the Company's application to increase rates because it was unable to mine the reasonableness of the Company's current base rates due to the "limited issues" format of the case. The electric base rate increases that became effective in 1993 were designed to recover higher costs associated with pletion of Hay Road Unit 4, costs for postretirement benefits other than pensions, and other items, including general inflation.

The gas base rate increase effective in 1994 was designed to recover higher operating costs and plant investment levels than were reflected in the previous rates. Delmarva Power & Light Company II

• 3. Income Taxes The Company and its wholly-owned subsidiaries file a dated federal income tax return. Income taxes are allocated to the Company's utility business and subsidiaries based upon their respective taxable incomes, tax credits, and effects of the alternative minimum tax, if any. Deferred income tax assets and liabilities represent the tax effects of temporary differences between the financial ment and tax bases of existing assets and liabilities and are measured using presently enacted tax rates. The portion of the Company's deferred tax liability applicable to utility tions that has not been reflected in current customer rates represents income taxes recoverable through future rates and is reflected on the Consolidated Balance Sheets as "Deferred recoverable income taxes." Deferred recoverable income taxes were $151.3 million and $149.2 million as of December 31, 1995 and 1994, respectively.

Deferred income tax expense represents the net change ing the reporting period in the net deferred tax liability and deferred recoverable income taxes. Investment tax credits (ITC) from regulated operations are being amortized over the useful lives of the related utility plant. ITC associated with leveraged leases are being tized over the lives of the related leases during the periods in which the net investment is positive.

Components of Consolidated Income Tax Expense (Dollars in Thousands)

Operation Federal: Current State: Deferred Current Deferred Investment tax credit adjustments, net Total Operation Other income Federal: Current Deferred State: Current Deferred Total Other Income Total income tax expense Reconciliation of Effective Income Tax Rate 1995 $46,517 16,452 9,851 3,257 (2,516) 73,561 5,263 (3,686) 433 (31) 1,979 $75,540 1994 1993 $50,276 $50,264 5,592 7,710 11,268 10,839 928 1,832 (1,898) (2,515) 66,166 68,130 2,789 9,398 (2,008) (9,398) 349 287 317 (1,315) 1,447 (1,028) $67,613 $67,102 The amount computed by multiplying income before tax by the federal statutory rate is reconciled below to the total income tax expense. 1995 1994 1993 (Dollars in Thousands)

Amount Rate Amount Rate Amount Rate Statutory federal income tax expense $67,560 35°/o $61,574 35% $62,362 35% Increase (decrease) due to State income taxes, net of federal tax benefit 8,792 5 8,361 4 7,567 4 Other, net (812) (1) (2,322) (1) (2,827) (1) Total income tax expense $75,540 39°/o $67,613 38% $67,102 38% Components of Deferred Income Taxes The tax effect of temporary differences that give rise to the Company's net deferred tax liability are shown below. As of December 31 (Dollars in Thousands) 1995 1994 Deferred Tax Liabilities Utility plant basis differences Accelerated depreciation Other Leveraged leases Deferred recoverable income tro<es Other Total deferred tax liabilities Deferred Tax Assets Deferred ITC Other Total deferred tax assets Total deferred taxes, net Valuation allowances for deferred tax assets were not material as of December 3 I, 1995 and Delmarva Power & Light Company e 4. Purchase of Conowingo Power Company On June 19, 1995, the Company acquired Conowingo Power Company (COPCO), the Maryland retail electric subsidiary of PECO Energy Company (PECO), for $158.2 million ($157.0 million net of cash acquired).

As disclosed in Note 12 to the Consolidated Financial Statements, the Company financed the acquisition with $125.8 million of long-term debt and the balance with short-term debt. The acquisition resulted in approximately 37,500 new electric retail customers, which represents 9% of the Company's current customer base. The acquisition has been accounted for as a purchase.

Immediately after the acquisition, COPCO was merged into the Company and is now being operated as the Conowingo District.

Operating results of the Conowingo District have been included in the Consolidated Statements of Income sirice June 19, 1995. Proforma results of the Company, assuming the sition had taken place at the beginning of each period presented, would not be materially different from the results reported.

Under FERC accounting requirements, the COPCO assets have been recorded at their net book value, reflecting electric plant of $107.8 million and related accumulated depreciation of $31.7 million and other net assets and liabilities of $7.9 million. The difference between the amount paid to PECO plus acquisition costs and the net book value of the COPCO 5. Early Retirement Offer In the third quarter of 1994, the Company completed a tary early retirement offer (ERO) for all management and union employees at least 55 years old with at least I 0 years of continuous service by December 3 I, 1994. The ERO was accepted by I 0.5% of the Company's workforce (296 people), which represented an 82% participation rate among eligible 6. Jointly Owned Plant The Company's Consolidated Balance Sheets include its portionate share of assets and liabilities related to jointly owned plant. The Company's share of operating and nance expenses of the jointly owned plant is included in the corresponding expenses in the Consolidated Statements of Ownership (Dollars in Thousands)

Share Nuclear Peach Bottom 7.51% Salem 7.41% Coal-Fired Keystone 3.70% Conemaugh 3.72% Transmission Facilities Various Other Facilities Various Total assets, or $75.8 million, has been recorded as goodwill and is included in electric utility plant. The MPSC has approved recovery of this goodwill using a sinking fund method through Maryland retail rates in two components.

Approximately

$50 million of the goodwill will be recovered as an acquisition adjustment with a carrying charge over 20 years beginning at the time of the Company's next Maryland base rate case. The remaining

$26 million will be recovered with a carrying charge over approximately I 0 years via a pre-approved surcharge to the Company's existing Maryland retail rates. This surcharge was placed in effect for Conowingo District customers on February I, 1996. For financial statement purposes, the will is being amortized on a straight-line

_basis over 40 years beginning July 1995. In conjunction with the acquisition, the Company signed a contract with PECO to purchase electric capacity and energy from the PECO system beginning February I, 1996, and ending May 3 I, 2006. The base amount of the capacity purchase, which is subject to cemin possible adjustments:

will start at 205 megawatts (MW) and will increase annually to 279 MW in 2006. Under another contract, the Company agreed to purchase the Conowingo District's interim electric power requirements from PECO from the date until February I , 1996. employees.

In accordance with _Statement of Financial Accounting Standards (SFAS) No. 88, "Employers' Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," the Company ei:cpensed

$17.5 million of costs associated with the ERO ($10.7 million after taxes or $0.18 per share). Income. The Company is responsible for providir:g its share of financing for the jointly owned facilities.

Information with respect to the Company's share of jointly owned plant as of December 31, 1995 was as follows: Megawatt Cqnstruction Capability Plant in Accumulated Work in Owned Service Depreciation Progress 164MW $129,028 $69,134 $9,595 164MW 210,458 93,728 10,103 63 MW 19,244 7,506 339 63MW 32,406 8,543 520 4,564 2,103 1,721 128 797 $397,421 $181,142 $21,354 Delmarva Power & Light Company II II 7. Nuclear Decommissioning The Company records a liability for its share of the estimated cost of decommissioning the Peach Bottom and Salem nuclear reactors over the remaining lives of the plants based on amounts collected in rates charged to electric customers.

For utility rate-setting purposes, the Company estimates its share offuture nuclear decommissioning costs based on NRC lations concerning the. minimum financial assurance amount for nuclear decommissioning.

The Company is presently ing, through electric rates in the Delaware and Virginia dictions, nuclear decommissioning costs based on the current NRC minimum financial assurance amount of approximately

$122 million. In the Maryland and FERC jurisdictions, the Company is presently recovering nuclear decommissioning costs based on the 1990 NRC minimum financial assurance amount of approximately

$50 million. ' 8. Regulatory Assets In conformity with generally accepted accounting principles, the Company's accounting policies reflect the financial effects of rate regulation and decisions issued by regulatory sions having jurisdiction over the Company's utility business.

In accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," the Company defers expense recognition of certain costs and records an asset, a result of the effects of rate regulation.

These tory assets" are included on the Company's Consolidated Balance Sheets under "Deferred Charges and Other Assets." As of December 31, 1995, the Company had $207.0 million of regulatory assets, which included the following:

Deferred debt refinancing costs-$24.0 million; Deferred recoverable income taxes-$151.3 million (refer to Note 3 to the Consolidated Financial Statements);

Deferred recoverable plant costs-$9.8 million; Deferred costs for decontamination and sioning of United States Department of Energy gaseous sion enrichment facilities-$7.2 million; Deferred demand-side management costs-$5.4 million; and other regulatory assets -$9.3 million. The costs of these assets are either being 9. Investments As of December 31, 1995, the Company had $39.6 million of investments in securities which were included in the following balance sheet classifications:

Funds held by trustee-$36.3 lion; Other investments and nonutility property, net-$1.6 million; Cash and cash equivalents-$1.7 million. These ties, based on the Company's interit and criteria established by SFAS No. I 15, "Accounting for Certain Investments in Debt and Equity Securities," are categorized as available-for-sale securities.

The fair value of such securities was not materially The Company's accrued nuclear decommissioning liability, which is reflected in the accumulated reserve for depreciation, was $37.2 million as of December 31, 1995. The provision reflected in depreciation expense for nuclear decommissioning was $3.6 million in 1995, $2.4 million in 1994, and $2.3 million in 1993. External trust funds established by the Company for the purpose of funding nuclear decommissioning costs had an aggregate balance of $25.5 million as of December 31, 1995. Earnings on the trust funds are recorded as an increase to the accrued nuclear decommissioning liability, which, in effect, reduces the expense recorded for nuclear decommissioning.

The ultimate cost of nuclear decommissioning for the Peach Bottom and Salem reactors may exceed the NRC minimum financial assurance amount, which is updated annually under a NRC prescribed formula. recovered or are probable of being recovered through customer rates. Generally, the costs of these assets are nized in operating expenses over the. period the cost is recovered from customers.

In March 1995, the FASB issued SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which requires the Company to review long-lived assets and certain identifiable intangibles held and used by the Company for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

If an asset is considered impaired, then its value would be written down with a sponding charge to earnings.

SFAS No. 121 also requires rate-regulated companies to write off regulatory assets against earnings whenever those assets no longer meet the criteria for recognition of a regulatory asset as defined by SFAS No. 71. The new standard is effective in 1996. Based on current circumstances, the Company does not expect the adoption of SFAS No. 121 to have a material effect upon the Company's financial condition or results of operations.

different from book value as of December 31, 1995. Gains and losses from the sale of investment securities were not material to the Company's operating results in 1995, 1994, and 1993. As of December 3 I, 1995, the Company's investments in debt securities, other than those consiCiered to be cash equivalents, had the following maturities:

$2.4 million due in 1996; $9.3 million due in 1997-2000; and $8.7 million due in 2001-2005.

Delmarva Power & Light Company

10. Common Stock Refer to the Consolidated Statements of Changes in Common Stockholders' Equity for information concerning issuances and redemptions of common stock during 1993-1995.

The Company's Restated Certificate and Articles of poration and the Mortgage and Deed of Trust collateralizing the Company's outstanding First Mortgage Bonds contain restrictions on the payment of dividends on common stock. Such restrictions would become applicable if the Company's capital and retained earnings fall below certain specific levels or if preferred dividends are in arrears. Under the most restrictive of these provisions,'

as of December 31, 1995, Beginning-of-year balance Options exercised Options forfeited End-of-year balance Exercisable 1995 Number Option of Shares Price 53,050 $171/2-$211/4 3,900 $171/2-$181/e 2,800 $201/2-$211/4 46,350 $171/2-$211/4 46,350 $171/2-$211/4 In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation," which encourages, but does not require, entities to recognize compensation costs for stock-based employee compensation plans using a fair value based method of accounting rather than the intrinsic value based method of accounting currently prescribed by Accounting Principles (APB) Opinion No. 25, "Accounting for Stock Issued to Employees." Entities electing 11. Preferred Stock On November 4, 1993, the Company issued 200,000 shares of 6 3/4%, cumulative preferred stock, $100 per share par value, for $20 million. On December I, 1993, the Company used the pro-12. Debt Substantially all utility plant of the Company is subject to the lien 'of the Mortgage and Deed of Trust collateralizing the Company's First Mortgage Bonds. On June 19, 1995, the Company issued the following debt to finance the $158.2 million acquisition of COPCO: $100 million of First Mortgage Bonds, Series I, 7.71 % Bonds Due June I, 2025; $25.8 million of First Mortgage Bonds, Series I, 6.95% Amortizing Bonds Due June I, 2008, with principal repayable in annual installments beginning June I, 1997; and the balance with short-term debt. On August 30, 1995, the Schuylkill County Industrial Development Authority, Commonwealth of Pennsylvania, issued on behalf of a nonutility subsidiary of the Company, $15 million of Variable Rate Demand Rewenue Bonds due on demand or at maturity on October I, 2019. Proceeds from the approximately

$246.2 million was available for payment of common dividends.

Prior to January I, 1993, the Company had a nonqualified option plan for certain employees.

Options were priced at the actual* market value on the grant date. Effective January I, 1993, the Company's Board of Directors declared that no new stock options will be granted and that the based restricted stock program will be the program in effect under the Long Term Incentive Plan. Changes in stock options are summarized.below.

1994 1993 Number Option Number Option of Shares Price of Shares Price 53,050 $171/2-$211/4 192,100 $17112-$211/4 139,050 $171/2-$211/4 53,050 $171/2-$211/4 53,050 $171/2-$211/4 53,050 $171/2-$211/4 53,050 $17112-$211/4 to continue using the accounting prescribed by APB Opinion No. 25 are required to disclose pro forma net income and earnings per share as if the fair value based method of accounting under SFAS No. 123 had been applied. The new standard is effective in 1996. Tl:ie Company does not expect to adopt the accounting provisions of SFAS No. 123 for income statement recognition purposes.

ceeds and cash on-hand to redeem $18.28 million of its 7.88% series and $I 0.0 million of its 7.84% series preferred stock. bonds are being used to finance the past and future expansion of a landfill which is owned and operated by the subsidiary.

The Company's debt obligations included Variable Rate Demand Bonds (VRDB) in the amounts of $86.5 million as of December 3 I, 1995, and $71.5 million as of December 3 I, 1994. Although VRDB are classified as current liabilities because VRDB are due on demand by the bondholder, such bonds are immediately remarketed because the interest rate is set at market. The Company may also utilize one of the fixed rate/fixed term conversion options of the bonds. Thus, the Company considers the VRDB to be a source of long-term financing.

The $86.5 million balance of VRDB outstanding as of December 3 I, 1995, matures in 2017 ($26 million), 2019 ($15 million), 2028 ($15.5 million), and 2029 ($30 million).

Average annual interest rates on the VRDB were 4.0% in 1995. Delmarva Power & Light Company II II As of December 31, 1995, the Company had $150 million of bank lines of credit, including

$130 million of such credit lines under which the Company may convert short-term borrowings to a term loan with a maturity date of 12 to 24 months following the date of the requested conversion.

As of December 31, 1994, the Company had reclassified

$45 million of short-term debt as long-term debt ("Term Loan") in nition of the expected refinancing on a long-term basis and long-term financing capability provided by the credit lines. During 1995, this short-term debt was repaid resulting in no term loan balance as of December 31, 1995. The Company generally is required to pay commitment fees for its credit lines. The lines of credit are periodically reviewed by the Company, at which time they may be renewed or canceled.

13. Commitments The Company currently estimates its expenditures for struction of utility plant, excluding AFUDC, and commitments for purchases under fuel supply contracts, excluding nuclear fuel, to be approximately

$223 milliqn in 1996 and $236 lion in 1997. The Company has a 26-year agreement with Star Enterprise, effective through May 2018, to purchase 48 MW of capacity supplied by the Delaware City Power Plant. As discussed in Note 4 to the Consolidated Financial Statements, the Company also has agreements to purchase*

capacity and energy from PECO effective June 19, 1995, through May 31, 2006. Under the terms of these agreements, the Company's expected commitments for capacity and energy charges are as follows: 1996-$57.6 million; 1997-$58.6 million; 1998-$63.6 million; 1999-$70.9 million; 2000-$77.3 million; after 2000-$505.5 million; total-$833.5 million. The Company's share of nuclear fuel at Peach Bottom and Salem is financed through a nuclear fuel energy contract which is accounted for as a capital lease. Payments under the con-Rentals Charged to Operating Expenses The following amounts were charged to operating expenses for rental payments under both capital and operating leases: (Dollars in Thousands)

Interest on capital leases Amortization of capital leases Operating leases Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 1996-$3.2 million; 1997-$29.0 million; 1998-$35.0 million; 1999-$37.4 lion; 2000-$4.2 million. As of December 31, 1995, the fair market value of the Company's long-term debt was $936.5 million in comparison to the book value of $853.9 million. As of December 31, 1994, the fair market value of the Company's long-term debt was $752.5 million in comparison to the book value of $774.6 lion. The fair market value of the Company's long-term debt was based on quoted market prices of the Company's ties or securities with similar characteristics.

tract are based on the quantity of nuclear fuel burned by the plants. The Company's obligation under the contract generally is the net book value of the nuclear fuel financed, which was $31.7 million as of December 31, 1995. The Company leases an 11.9% interest in the Merrill Creek Reservoir.

The lease is considered an operating lease and paymen.ts over the remaining lease term, which ends in 2032, are $158. I million in aggregate.

The Company also has term leases for certain other facilities and equipment.

Minimum commitments as of December 31, 1995, under the Merrill Creek Reservoir lease all other noncancelable lease agreements (excluding payments under.the nuclear fuel energy contract which cannot be reasonably estimated) are as follows: 1996-$6. I million; 1997-$6.1 million; 1998-$6.1 million; 1999-$6.0 million; 2000-$4.1 million, after 2000-$140.9 million; total-$169.3 million. Approximately 93% of the minimum lease commitments shown above are payments due under the Merrill Creek Reservoir lease. 1995 1994 1993 $1,773 $1,560 $1,296 8,044 11,456 10,243 13,619 14,552 15,176 $23,436 $27,568 $26,715 Delmarva Power & Light Company

14. Pension Plan The Company has a defined benefit pension plan covering all regular employees.

The benefits are based on years of service and the employee's compensation.

The Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum required contribution nor greater Reconciliation of Funded Status of the Plan (Dollars in Thousands)

Accumulated benefit obligation Vested Nonvested Effect of estimated future compensation increases Projected benefit obligation Plan assets at fair value Excess of plan assets over projected benefit obligation Unrecognized prior service cost Unrecognized net gain Unrecognized net transition asset Prepaid pension cost Components of Net Pension Cost (Dollars in Thousands)

Service cost-benefits earned during period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and deferral Net pension cost Assumptions Discount rates used to determine projected benefit obligation as of December 31 Rates of increase in compensation levels Expected long-term rates of return on assets The net pension cost excludes the expense recorded in 1994 under SFAS No. 88 for the Company's ERO. Prepaid pension cost as of December 3 I, 1994, was reduced by the ERO. Refer to Note 5 to the Consolidated Financial Statements for tional information on the ERO. than the maximum tax deductible contribution.

Pension plan assets consist primarily of equity securities, fixed income securities, and cash equivalents.

The following schedules show the funded status of the plan, the components of pension cost, and assumptions.

1995 $338,485 26,024 364,509 109,706 474,215 616,600 142,385 29,191 {124,850)

{29,827) $16,899 As of December 3 I, 1994 $265,597 19,311 284,908 67,947 352,855 502,588 149,733 19,155 (129,842)

(33,141) $5,905 Year ended December 3 I, 1995 $9,719 30,654 {135,850) 83,981 ${11,496) 1995 7.00°/o 5.00°10 9.00% 1994 $10,939 26,574 3,349 (52,60 I) $( 11,739) 1994 8.25% 5.50% 8.25% 1993 $13,152 26,411 (58,247) 14,748 $(3,936) 1993 7.25% 6.50% 8.25% The net 1994 pension cost reflects a decrease of $4.5 million attributed to a reduction in the assumed rate of increase in compensation levels from 6.5% to 5.5%, effective January I, 1994. Also, the discount rate was increased from 7.25% to 8.25%, effective October I, 1994. Delmarv:J Power & Light Company II II 15. Postretirement Benefits Other Than Pensions The Company provides health-care and life insurance benefits to its retired employees and substantially all of the Company's employees may become eligible for these benefits upon ment. The Company's policy is to fund its obligation to the extent that costs are reflected in customer rates, including amounts which 'are capitalized.

Plan assets held in external Reconciliation of Funded Status of the Plan (Dollars in thousands)

Accumulated postretirement benefit obligation (APBO) Active employees fully eligible for benefits Other active employees Current retirees Plan assets at fair value APBO in excess of plan assets Unrecognized prior service cost Unrecognized net loss Unrecognized transition obligation Accrued/(prepaid) postretirement benefit cost trust funds consist primarily of investments in domestic equity securities and fixed income securities.

The following schedules show the funded status of the plan, the components of the cost of postretirement benefits other than pensions, and assumptions.

1995 $6,019 23,990 63,629 93,638 24,900 68,738 (423) (5,212) (61,493) $1,610 As of December 3 I, 1994 $9,319 12,638 58,445 80,402 15,140 65,262 (256) (65,110) $(104) Annual Cost of Postretirement Benefits Other Than Pensions Year ended December 3 I, (Dollars in thousands)

Service cost-benefits earned during period Interest cost on projected benefit obligation Actual return on plan assets Amortization of the unrecognized transition obligation Other, net Net postretirement benefit cost Assumptions Discount rates used to determine APBO as of December 3 I Rates of increase in compensation levels Expected long-term rates of return on assets Health-care cost trend rate The health-care cost trend rate, or the expecte"d rate of increase in health-care costs, is assumed to decrease to I 0.0% in 1996 and gradually decrease to 5.5% by 2005. Increasing the health-care cost trend rates of future years by one percentage

16. Contingencies Salem Outage The Company owns 7.41 % of Salem, which consists of two pressurized water nuclear reactors (PWR) and is operated by Public Service Electric & Gas Company (PSE&G). As of December 3 I, 1995, the Company's net investment in plant in-service for Salem was approximately

$57 million for Unit I and $60 million for Unit 2. Each unit represents approximately 2% of the Company's total assets and approximately 3% of the Company's installed electric generating capacity.

Salem' Units I and 2 were removed from operation by PSE&G on May 16, 1995, and June 7, 1995, respectively, due to opera-1995 1994 1993 $2,152 $2,127 $2,206 6,601 5,520 5,613 (1,008) 100 3,617 3,617 3,617 149 (481) $11,511 $10,883 $11,436 1995 1994 1993 7.00o/o 8.25% 7.25% 5.00°/o 5.50% 6.50% 9.00°/o 8.25% 8.25% 10.50°/o 11.00% 12.00% point would increase the accumulated postretirement benefit obligation by $4.4 million and would increase annual aggregate service and interest costs by $0.3 million. tional problems and maintenance concerns.

The units will remain shut down until PSE&G makes the equipment and agement changes necessary to operate the units reliably over the long term. The restart of the units is subject to NRC authorization.

In December 1995, PSE&G completed a workscope assessment of both units and estimated that Unit I would return to service in the second quarter of 1996 and Unit 2 in the third quarter of 1996. On February 21, 1996, PSE&G informed the Company that partial results from recent inspections of Unit I using a new testing technology revealed indications of degradation in a sig-Delmarva Power & Light Company nificant number of steam generator tubes. PSE&G is continuing its inspections and also will conduct further laboratory analysis of the tubes with results expected in April 1996. Based on the results of inspections to date, PSE&G has concluded that the Unit I outage will be extended for, an indefinite period to evaluate the state of.the steam generators and to subsequently determine an appropriate course of action. Degradation of steam generators in PWRs has become of increasing concern for the nuclear industry.

Nationally and internationally, utilities have undertaken actions to repair or replace steam tors. In the extreme, degradation of steam generators has contributed to the retirement of several American nuclear power reactors.

PSE&G also has informed the Company that recent steam generator inspections of Unit 2 using the new testing nology have revealed that the condition of the Unit 2 steam generators is within current repair limits at the present time. However, to confirm the Unit 2 test results, PSE&G also will conduct laboratory analysis of the tubes for Unit 2. As a result of the delay in the restart of Unit I, PSE&G is focusing its efforts on the return of Unit 2 to service in the third quarter of 1996, as scheduled.

However, the Company cannot predict when the NRC will approve the restart of the unit or when the restart actually will occur. In 1995, the Company incurred higher than expected operation and maintenance costs at Salem of approximately

$5 million, which reflect the operational problems at the plant. These costs were expensed as incurred.

Also, outage-related replacement power costs were estimated to be approximately

$8 million. One-half of the estimated replacement power costs was expensed and the other one-half was deferred on the Company's Consolidated Balance Sheet in expectation of future recovery.

Based on PSE&G's current estimates, the Company estimates that its share of additional costs related to the outage in 1996 will consist of operation and maintenance costs ranging from $4 million to $7 million, which will be expensed as incurred, and replacement power costs while the units are out of service of approximately

$750,000 per month, per unit. In total, the Company estimates that its share of outage-related costs in 1996 will range from $17 million to $22 million. However, these 1996 estimates could change as a result of PSE&G's analysis of the degradation of the steam generator tubes. Beyond 1996, the Company cannot predict the amount of outage-related costs it could incur. During 1996, the Company plans to file a proposal with the DPSC, the Company's primary rate jurisdiction, for recovery of replacement power costs. Since the periods during which these units will be out of vice, the extent of the maintenance that will be required, and the costs of replacement power and the extent of its recovery may be different from those currently anticipated, the actual costs to be incurred by the Company may vary from the going estimates.

Environmental Matters The Company is subject to regulation with respect to the environmental effects of its operations, including air and water quality control, solid and hazardous waste disposal, and tion on land use by various federal, regional, state, and local authorities.

The Company has incurred, and expects to ue to incur, capital expenditures and operating costs because of environmental considerations and requirements.

The posal of Company-generated hazardous substances can result in costs to clean up facilities found to be contaminated due to past disposal practices.

Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. The Company is currently a potentially responsible party (PRP) at three federal superfund sites and is alleged to be a third-party contributor at two other federal superfund sites. The Company also has two former coal gasification sites in Delaware and one former coal gasification site in Maryland, each of which is a state superfund site. The Company is rently participating with the States of Delaware and Maryland in evaluating the coal gasification sites to assess the extent of contamination and risk to the environment.

The Company has accrued a liability of $2 million for clean-up and other tial costs related to the federal and state superfund sites. The Company does not expect such future costs to have a material effect on the Company's financial position or results of operations.

Nuclear Insurance In the event of an incident at any commercial nuclear power plant in the United States, the Company could be assessed for a portion of any third-party claims associated with the dent. Under the prpvisions of the Price Anderson Act, if third party claims relating to such an incident exceed $200 million (the amount of primary insurance), the Company could be assessed up to $23.7 million for such third-party claims. In addition, Congress could impose a revenue-raising measure on the nuclear industry to pay such claims. The co-owners of Peach Bottom and Salem maintain property insurance coverage in the aggregate amount of $2.8 billion for each unit for loss or damage to the units, including coverage for decontamination expense and premature decommissioning.

The Company is self-insured, to the extent of its ownership interest, for its share of property losses in excess of insurance coverages.

Under the terms of the various insurance ments, the Company could be assessed up to $5.4 million in any policy year for losses incurred at nuclear plants insured by the insurance companies.

The Company is a member of an industry mutual insurance company, which provides replacement power cost coverage in the event of a major accidental outage at a nuclear power plant. The premium for this coverage is subject to retrospective assessment for adverse loss experience.

The Company's sent maximum share of any assessment is $1.4 million per year. Other The Company is involved in certain legal and administrative proceedings before various courts and governmental agencies concerning rates, fuel contracts, tax filings, and other matters. The Company expects that the ultimate disposition of these proceedings will not have a material effect on the Company's financial position or results of operations.

Delmarva Power & Light Company II

• 17. Supplemental Cash Flow Information Cash Paid during the Year for (Dollars In Thousands)

Interest, net of capitalized amount Income taxes, net of refunds 18. Nonutility Subsidiaries The following presents condensed financial information of the Company's nonregulated wholly-owned subsidiaries:

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

Revenues and Gains Landfill and waste hauling Operating services Real estate Leveraged leases Other revenue Costs and Expenses Operating expenses Interest expense, net Income tax expense (benefit)

Net income Earnings per share of common stock attributed to subsidiaries 1995 $13,505 26,564 5,820 1,772 4,381 52,042 45,594 492 1,810 47,896 $4,146 $0.07 Condensed Subsidiary Balance Sheets (Dollars In Thousands)

As of December 31, Assets 1995 1994 Current assets Cash and cash equivalents

$19,483 $8,631 Other 6,633 5,702 26,116 14,333 . Noncurrent assets Investment in Leveraged leases 48,367 49,595 Other 9,925 4,354 Landfill & waste hauling property, plant & equipment 24,177 25,424 Other 9,778 9,558 92,247 88,931 Total $118,363 $103,264 Year Ended December 31, 1995 $62,660 $66,764 1994 $57,837 $67,922 1993 $58,154 $72,384 leases real estate to the Company's utility business, Delmarva Services Company, is excluded from these statements since its income is derived from intercompany transactions which are eliminated'*in consolidation.

1994 1993 $14,186 $11,745 22,468 22,118 4,450 1,677 272 835 1,766 1,261 43,142 37,636 38,499 36,424 370 1,921 (596) 40,790 35,828 $2,352 $1,808 $0.04 $0.03 Liabilities and As of December 31, Stockholder's Equity 1995 1994 Current liabilities Debt due within one year $506 $489 Variable rate demand bonds 15,000 Other 7,801 6,873 23,307 7,362 Noncurrent liabilities Long-term debt

• 4,713 5,225 Deferred income taxes 50,064 53,592 Other 2,389 2,342 57,166 61,159 Stockholder's Equity 37,890 34,743 Total $118,363 $103,264 Delmarva Power & Light Company e _J

19. Segment Information Segment information with respect to electric and gas operations was as follows: (Dollars In Thousands)

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

The quarterly data presented below reflect all adjustments, consisting of normal recurring accruals and unusual items as noted below, necessary in the opinion of the Company for a fair presentation of the interim results. Quarterly data Quarter Ended Operating Revenue Operating Income normally vary seasonally because of temperature variations,

• differences between summer and winter rates, the timing of rate orders, and the scheduled downtime and maintenance of electric generating units. Net Income Earnings Applicable to Common Stock Earnings per Average Share (Dollars in Thousands)

Average Shares Outstanding (In Thousands) 1995 March 31 $257,600 $48,252 June 30 213,228 34,178 September 30 283,065 60,960 December 31 241,210 35,016 $995,103 $178,406 1994 March 31 $292,394 $53,770 June 30 *') 218,465 33,994 September 30 260,601 42,921 December 31 219,561 32,471 $991,021 $163, 156 In the third quarter of 1994, the Company expensed the costs associated with the ERO (Note 5 to the Consolidated Financial Statements), which decreased net income by $10.7 million ($0.18 per share). $35,408 $32,889 59,738 $0.55 19,444 16,962 60,109 0.28 42,714 40,238 60,372 0.67 19,922 17,457 60,651 0.29 $117,488 $107,546 60,217 $1.79 $39,641 $37,377 59,022 $0.63 20,776 18,453 59,402 0.31 29,366 27,008 59,542 0.46 18,527 16,102 59,542 0.27 $108,310 $98,940 59,377 $1.67 In the fourth quarter of 1994, the Company reduced the rate of salary increase assumed for computation of pension cost, effective January I, 1994, which increased net income by $2.1 million ($0.03 per share). Delmarva Power & Light Company II I ____

• I Consolidated Statistics 1995 1994 1993 1992 1991 9, Electric Revenues (Thousands)

Residential

$344,351, $312,224 $305,446

$273,463 $275,888 Commercial 267,239 242,506 237,785 220,659 218,558 Industrial 155,108 145,594 150,178 144,094 144,272 Resale 58,680 105,350 104,983 96,491 98,785 Other sales revenues(I) 14,211 6,816 9,716 7,142 5,961 Sales revenues 839,589 808,108 741,849 743,464 0 Interchange deliveries 47,271 62,388 61,437 30,606 33,523 Miscellaneous revenues 12,802 8,237 6,118 7,720 7,612 Total electric revenues $899,662 $883,115. $875,663 $780,175

$784,599 Electric Sales ( 1,000 Kilowatt-Hours)

Residential 3,829,807 3,578,743 3,499,387 3,228,237 3,236,616 Commercial 3,744,879 3,461,058 3,336,847 3,140,149 3,098,599 Industrial 3,351,834 3,248, 131 3,232,233 3,115,677 3,105,338 Resale 1,213,459 2,166,154 2,131,920 1,987,393 1,952,312 Other sales(2) 170,942 50,996 79,843 49,355 67,415 Total electric sales 12,310,921 12,505,082 12,280,230 11,520,811 11,460,280 Electric Customers (End of Period) Residential 386,948 347,997 342,710 336,076 330,632 Commercial 48,345 44,060 43,324 42,427 41,539 Industrial 704 699 715 726 753 Resale 12 12 12 12 12 Other 641 604 593 578 566 Total electric custo.mers 436,650 393,372 387,354 379,819 373,502 Gas Revenues (Thousands)

Residential

$47,135 $55,091 $47,022 $43,147

$35,636 Commercial 2;4,458 28,088 23,065 20,175 16,370 Industrial 14,588 17,589 17,586 15,365 14,395 Interruptible and other(I) 6,969 5,498 6,274 3,775 3,746 Gas transported 1,870 1,191 561 1,032 710 Miscellaneous revenues 421 449 436 375 365 Total gas revenues $95,441 $107,906 $94,944 $83,869 $71,222 Gas Sales and Gas Transported Residential 7,328 7,717 7,311 7,264 6,410 (Million Cubic Feet) Commercial 4,809 4,746 4,423 4,286 3,653 Industrial 3,935 3,858 4,348 4,358 4,398 Interruptible and other(2) 2,406 i,766 1,984 1,105 1,113 Total gas sales 18,478 18,087 18,066 17,013 15,574 Gas transported 2,893 2,255 1,539 3,155 2,610 Total gas sales and gas transported 21,371 20,342 19,605 20,168 18,184 Gas Customers (End of Period) Residential 90,890 88,518 86,027 82,996 80,874 Commercial 7,369 6,982 6,751 6,500 6,313 Industrial 146 150 150 152 154 Interruptible and other 12 12 12 11 10 -e Total gas customers 98,417 95,662 92,940 89,659 87,351 (I) Includes unbilled revenues.

(2) Includes unbilled sales. L* Delmarva Power & Light Company Quarterly Common Stock Dividend and Price Ranges The Company's common stock is listed on the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges.

The Company had 56,646 holders of common stock as of December 3 I, 1995. Dividend Price 1995 Declared High Low First Quarter $.38 1/2 $20 $17 7/e Second Quarter $.38 1/2 $21 1/4 $19 */e Third Quarter $.38 1/2 $23 $19 1/z Fourth Quarter $.38 1/2 $23 s/e $21 7/e Shareholder Services Carol C. Conrad, Assistant Secretary Delmarva Power & Light Company 800 King Street, P.O. Box 23 I Wilmington, Delaware 19899 or Wilmington Trust Company Corporate Trust Operations P.O. Box 2111 Wilmington, Delaware 19899 Telephone (302) 429-3355 or toll-free (800) 365-6495 Stock Symbol Common Stock, DEW-listed on the New York and Philadelphia Stock Exchanges Annual Meeting The Annual Meeting will be held on May 30, 1996, at I I :00 a.m. in the Clayton Hall, University of Delaware, Newark, Delaware.

Regulatory Commissions Federal Energy Regulatory Commission Elizabeth A. Moler-Chairperson 825 North Capitol Street, N.E. Washington, D.C. 20426 Delaware Public Service Commission Dr. Robert J. McMahon-Chairperson 1560 S. duPont Highway P.O. Box 457 Dover, Delaware 19903-0457 Maryland Public Service Commission H. Russell Frisby Jr.-Chairperson 6 St. Paul Street Baltimore, Maryland 21202-6806 Virginia State Corporation Commission Hullihen W. Moore--Chairperson Tyler Building P.O. Box I 197 Richmond, Virginia 23209 Dividend Price 1994 r.J Declared High Low First Quarter $.38 l/i $23 5/a $20 l/i Second Quarter $.38 l/i $21 $16 7/a Third Quarter $.38 l/i $20 $17 3/4 Fourth Quarter $.38 l/i $19 l/4 $17 5/a Transfer Agents and Registrars First Mortgage Bond Trustee Chemical Bank 450 West 33rd Street New York, New York IOOO I Common and Preferred Stock Wilmington Trust Company Corporate Trust Operations P.O. Box 2111 Wilmington, Delaware 19899 Walk-in office: I I 05 N. Market Street Wilmington, Delaware Additional Reports To supplement information in this Annual Report, a Financial and Statistical Review ( 1985-1995) and the Annual Report on Form I 0-K are available upon request. Please write to: Delmarva Power & Light Company c/o Wilmington Trust Company Corporate Trust Operations P.O. Box 2111 Wilmington, Delaware 19899 Duplicate Mailings You may be receiving more than one copy of the Annual Report because of multiple accounts within your household.

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

To eliminate duplicate mailings, please send a written request to Wilmington Trust Company at the above address and enclose the mailing labels from the extra copies. More Information For more information about Delmarva Power, visit our Internet site: http://www.delmarva.com Delmarva Power & Light Company II II Officers as of December 3 I, 1995 Howard E. Cosgrove, Chairman of the Board, 'President, and Chief Executive Officer Joseph W. Ford, Senior Vice President tfl' Barbara S. Graham, Senior Vice President, Treasurer, and Chief Financial Officer Ralph E. Klesius, Senior Vice President Thomas S. Shaw, Senior Vice President/President, Delmarva Capital Investments, Inc. Donald E. Cain, Vice President, Administration Paul S. Gerritsen, Vice President Wayne A. Lyons, Vice President Frank J. Perry Jr., Vice President, Production Dale G *. Stoodley, Vice President and General Counsel W. Douglas Boyce, Vice President, Central Division Donald P. Connelly, Secretary Hudson P. Hoen Ill, Vice President, Southern Division James P. Lavin, Comptroller and Chief Accounting Officer Dennis R. McDowell, Comptroller-Operating Duane C. Taylor, Vice President, Electric Systems Engineering Jack Urban, Vice President, Gas Division D. Wayne Yerkes, Vice President, Northern Division Board of Directors Committees Audit Committee James C. Johnson, Chairperson; Robert D. Burris; Audrey K. Doberstein Compensation Committee Sarah I. Gore, Chairperson; Michael B. Emery; James H. Gilliam Jr.; James C. Johnson Executive Committee Howard E. Cosgrove, Chairperson; Sarah I. Gore, Vice Chairperson; Michael B. Emery; James C. Johnson Investment Committee Howard E. Cosgrove, Chairperson; Audrey K. Doberstein; James H. Gilliam Jr.; Weston E. Nellius Nominating Committee Audrey K. Doberstein, Chairperson; Michael G. Abercrombie; Weston E. Nellius

• Nuclear Oversight Committee Michael G. Abercrombie, Chairperson; Robert D. Burris; Howard E. Cosgrove Dividend Reinvestment and Common Share Purchase Plan More than 40% of the commcfn shareholders of record are now participating in the Dividend Reinvestment and Common Share Purchase Plan. If you are not participating, you may want to consider the benefits of joining this plan. Under the plan, you can invest your cash dividends and also invest additional cash, up to $100,000 per calendar year, to purchase additional shares of common stock without a service fee. You may obtain a prospectus with the plan description and an enrollment authorization card by writing to: Delmarva Power & Light Company clo Wilmington Trust Company Corporate Trust Operations P.O. Box 2111 Wilmington, DE 19899 Delmarva Power & Light Company