Annual Report (Form 10-K), fiscal year 1994

ITEM 1. BUSINESS
THE COMPANY
Delmarva Power & Light Company (the Company) was incorporated in Delaware in 1909 and in Virginia in 1979. The Company is predominantly a public utility that provides electric service on the Delmarva Peninsula in an area consisting of about 5,700 square miles with a population of approximately 1.0 million. The Company also provides gas service in an area consisting of about 275 square miles with a population of approximately 464,000 in northern Delaware, including the City of Wilmington. In addition, the Company has wholly-owned subsidiaries engaged in nonutility activities. These subsidiaries, also incorporated in Delaware, include Delmarva Energy Company, Delmarva Industries, Inc., Delmarva Services Company, and Delmarva Capital Investments, Inc. For a discussion of the Company's subsidiaries, see "Subsidiaries" on page I-12.
SEGMENT INFORMATION
See Note 20 to the Consolidated Financial Statements contained in the Company's 1994 Annual Report to Stockholders filed as Exhibit 13.
OPERATING STATISTICS
A Schedule of Operating Statistics for the three years ended December 31, 1994 can be found on page IV-3. This schedule provides electric and gas sales and revenue data.
STRATEGIC PLANS FOR COMPETITION
Competition exists and is expected to increase for certain electric and gas energy markets historically served by regulated utilities. In recent years, changing laws and governmental regulations, interest in self-generation, and competition from other utilities as well as nonregulated energy suppliers are providing some customers with alternative sources to satisfy their electric and gas needs.
Electric Business Overview
The Public Utility Regulatory Policies Act of 1978 (PURPA) facilitated the entry of potential competitors into the electric generation business. Under PURPA, a utility may be required to purchase the electricity generated by qualifying facilities at prices reflecting the utility's avoided cost as determined by utility procedures or state regulatory bodies.
The Energy Policy Act of 1992 (the Energy Act) enabled the Federal Energy Regulatory Commission (FERC) to order the provision of transmission service (wheeling of electricity) for wholesale (resale) electricity producers and also provided for the creation of a new category of electric power producers called exempt wholesale generators (EWGs). These provisions of the Energy Act have enhanced the ability of utilities and non-utility generators to compete to serve resale customers currently served by a particular utility. Partly as a result of the Energy Act, industry-wide resale markets are experiencing increased competition. While the Company's resale business accounted for 13% of its 1994 electric revenues, neighboring utilities' resale revenues average only 1% to 2% of their electric revenues. Thus, compared to these utilities, the Company has higher resale market risk.
The Company has reduced its resale market risk through extended service contracts and longer notice provisions for load reductions. The Company has signed electric supply contracts with eight of its nine municipal customers for extended terms of eight to twenty years. These eight customers represented about 95% of 1994 municipal revenues or about 4% of total 1994 electric revenues. The Company also has signed
I-1
agreements with its other electric resale customers, representing about 9% of total 1994 electric revenues, which require two years notice for load reductions up to 30% and five years notice for load reductions greater than 30%.
Although the Energy Act only permits competition for wholesale customers, several changes affecting competition in retail markets are developing. First, large retail customers (i.e. commercial and industrial customers) are more actively pursuing choices to reduce their energy costs through special contracts, self-generation or cogeneration, the use of alternate fuel sources such as natural gas, and the location, relocation, expansion, or downsizing of their facilities. Second, both state legislatures and regulatory commissions are beginning to explore the retail wheeling of electricity, which would permit other utilities and non-utility generators to compete to serve large retail customers currently served by a particular utility. For example, the California Public Utility Commission has decided that widespread retail competition is desirable and set forth a schedule which would permit the largest industrial customers to choose an electric supplier in 1996. The California plan also would make competitive choice of electric suppliers available to all retail customers, including residential customers, by the year 2002. Maryland, New Jersey, and Pennsylvania are beginning to consider what changes in regulatory policies might be appropriate, and whether retail customers should be able to purchase electricity from sources other than their local utility. For a summary of recommendations for reform within the utility industry in Delaware, see "Other Regulatory Matters--Delaware Task Force on Regulation" on page I-16. Finally, FERC policy now requires that transmission services be offered to wholesale customers and third parties under terms and conditions that are comparable to the transmission services the Company provides to itself to transmit power to its customers. As part of the Company's filing with the FERC for approval of the purchase of Conowingo Power Company (discussed below), the Company has proposed to offer comparable transmission services.
The Company is well positioned for competition in the retail markets. The Company's prices for large retail customers are among the lowest in the region and are competitive with alternative sources of energy such as self-generation. The Company's average price for commercial customers in 1993 was 7.18 cents per kilowatt hour (kwh) compared to a regional average of 8.71 cents per kwh. The Company's average price for industrial customers in 1993 was 4.69 cents per kwh compared to a regional average of 6.65 cents per kwh. These regional averages are based on 1993 data for 27 utilities within a 300 mile radius of the Company. Should retail wheeling become a reality, downward pressure on market prices would be expected due to excess generating capacity in the northeast region. The Company projects that this excess generating capacity will be exhausted shortly after the year 2000.
Gas Business Overview
As a result of FERC initiatives, the interstate gas pipeline system has been opened to permit the transportation of natural gas by end users, including the Company's gas customers. The Company has adopted local transportation tariffs to complement this interstate pipeline service. As a result, some Company gas customers now buy gas directly from producers and transport the gas to their facilities in Delaware, paying a transportation fee to the Company for the use of the Company's gas transmission and distribution facilities. The Company has reduced its firm gas market risk through a three-year notice requirement for firm customers switching to transportation or other non-firm service. For a discussion of an additional matter related to competition, see "Other Regulatory Matters--Natural Gas Restructuring Filing" on page I-16.
Market-Driven Strategies
Recognizing changes in the utility industry, the Company has implemented market-driven strategies and segmented markets according to customer needs and buying patterns. The major market segments are the core market, the competitive market, and the commodity market as discussed below.
The core market segment, which represents about 60% of the Company's electric sales revenues, is comprised of residential and small- to medium-size commercial and industrial customers. The Company's
I-2
strategies for growth in the core market focus on sustaining relative price stability, maintaining superior customer service, and expanding and growing energy-related value added products and services.
The competitive market segment, which represents about 25% of the Company's electric sales revenues, consists of large commercial and industrial (retail) and service-oriented resale customers. The Company's goal for this segment is to grow and secure existing relationships and to position the Company to take advantage of competitive opportunities. As previously discussed, prices charged to current Company commercial and industrial customers are among the lowest in the region.
The commodity market segment, which represents about 15% of the Company's electric sales revenues, consists of energy intensive industrial and price- focused resale customers. As previously discussed, the Company has negotiated electric supply contracts with its resale customers, reducing market risk in the commodity market.
"Three-Legged Stool"
In 1994, the Company announced its "Three-Legged Stool" strategy, which includes three initiatives designed to aid the Company in achieving its financial goals of maintaining the current dividend level, growing earnings, and earning a return on equity of at least 11.5%, while keeping prices competitive. The three initiatives are as follows: (1) reduce costs by $15 million to $20 million; (2) increase non-fuel revenues by $10 million to $20 million through short-term energy and capacity sales to regional utilities and additional retail sales; (3) increase non-fuel revenues through $10 million to $15 million of targeted price increases. The amounts of the cost reductions and revenue increases are based on comparison to an earlier projection of the Company's 1995 financial results. The Company expects that its targeted total of cost reductions and revenue increases of $40 to $45 million will be achieved, allowing the Company to meet its financial goals despite lower expected sales revenues from resale customers in 1995. Non-fuel revenues from resale customers will decrease approximately $28 million due to Old Dominion Electric Cooperative's (ODEC) decision to purchase about one-half of its electricity from another utility beginning in 1995 and price incentives offered to other resale customers to secure extended purchase commitments. The Company's initiatives are discussed further below.
Cost Initiatives ----------------
The Company's voluntary 1994 early retirement offer, which has reduced the workforce by 10.5%, is expected to result in annual cost savings of $13 million to $17 million. In order to capture these savings, the Company identified areas where work could be streamlined, reduced, or eliminated. In addition, the Company's 1995 budget is structured to attain savings of approximately $13 million in other operation and maintenance expenses and capital-related costs. For a further discussion of the early retirement offer, see Note 4 to the Consolidated Financial Statements of the 1994 Annual Report to Stockholders filed as Exhibit 13.
Sales Initiatives -----------------
In December 1992, General Motors, one of the Company's largest electric and gas customers, announced plans to close its Delaware manufacturing plant in 1996. In November 1994, General Motors announced that it will continue to operate the plant through 1998. General Motor's decision, a regional unemployment rate which is improving and less than the national average, and other indicators signal that the economy of the Company's service territory is improving. Due to the improving economy and opportunities which involve expanded products and services, the Company expects that 1995 sales revenues will be higher than previously projected and contribute to the sales initiative.
On May 24, 1994, the Company entered into an agreement with PECO Energy Company (PECO) to buy its Maryland retail electric subsidiary, Conowingo Power Company (COPCO), for $150 million. This purchase is contingent upon various regulatory approvals, which the Company expects to receive by mid-1995. The COPCO purchase will add approximately 35,000 new electric retail customers, equivalent to 9%
I-3
of the Company's current customer base. The Company plans to finance the purchase with approximately 50% long-term debt and 50% common equity. The Company expects the COPCO purchase will contribute $0.04 to $0.06 of incremental earnings per share by 1997. For a further discussion of the purchase of COPCO and associated power purchase agreements with PECO, see "Challenge 2000 Plan" on page I-6, "Other Regulatory Matters--Purchase of COPCO" on page I-16, and Note 6 to the Consolidated Financial Statements of the 1994 Annual Report to Stockholders filed as Exhibit 13.
The Company proposed to purchase the electric system of the City of Dover, Delaware in 1993 for $103.5 million. On November 23, 1994, Dover's City Council requested proposals from utilities and independent power producers for power purchase agreements and potentially the purchase of, or the operation and maintenance of, the city's generating facilities. The capacity required to serve the city would be approximately 140 megawatts (MW) plus reserve requirements. On January 30, 1995, the Company filed a proposal in response to Dover's request. City officials expect to decide on a future power source in the summer of 1995.
Price Initiatives -----------------
In 1994, the Company filed applications with the Delaware Public Service Commission (DPSC) and Maryland Public Service Commission (MPSC) for increases in electric base rates of $13.5 million and $3.9 million, respectively. The Company subsequently revised its proposed Delaware electric base rate increase to $11.1 million. As further discussed under "Base Rate Proceedings" on page I- 13, both these cases are designed to recover the cost of "limited issues," which are primarily costs imposed by government and are outside the reasonable control of the Company. Net of related decreases in fuel rates, prices would increase 1.3% in Delaware and 1.1% in Maryland under the Company's proposals. Even with these proposed price increases, the Company's prices are expected to remain well below the regional average. The Hearing Examiners in Delaware and Maryland issued their reports recommending no increases. The Company filed appeals to these recommendations. Decisions on the cases are expected in late March or April 1995.
On October 18, 1994, the DPSC approved a settlement agreement for a $3.1 million, or 3.1% increase in gas base rates. The increase became effective November 1, 1994, when lower fuel rates also became effective. The reduced fuel rates combined with the base rate increase resulted in a net average decrease of 1.75%.
Certain Other Potential Ramifications of Competition
Traditionally, prices charged to utility customers are designed to recover a regulated utility's costs of providing service. Generally accepted accounting principles require regulated utilities that have cost-of-service pricing to defer the recognition of certain costs which are being or are probable of being recovered from customers. These deferred costs are often referred to as "regulatory assets." (Refer to Note 1 to the Consolidated Financial Statements contained in the Company's 1994 Annual Report to Stockholders filed as Exhibit 13 for additional information on regulatory assets.) As the utility industry shifts from traditional cost-of-service pricing to prices set by competitive market forces or alternate innovative regulatory methods, regulatory assets, and possibly other utility assets, could be required to be written down. The Company cannot predict the amount, if any, of such a write-down; however, it could be material. The Company's regulatory assets as a percentage of total assets or stockholders' equity are substantially lower than the averages for the utility industry.
ELECTRIC OPERATIONS
Installed Capacity
The net installed summer electric generating capacity available to the Company to serve its peak load as of December 31, 1994, is presented below. The Company plans to maintain a balanced approach to energy supply, including conservation and load management, purchases of capacity and energy from other utilities
I-4
and non-utility generators, and construction of new generating capacity. For a discussion of the energy supply plan, see "Challenge 2000 Plan" on page I-6.
The net generating capacity available for operations at any time may be less than the total net installed generating capacity due to generating units being temporarily out of service for inspection, maintenance, repairs, or unforeseen circumstances. See "Item 2



ITEM 2. PROPERTIES
Substantially all utility plants and properties of the Company are subject to the lien of the Mortgage under which the Company's First Mortgage Bonds are issued.
The Company's electric properties are located in Delaware, Maryland, Virginia, Pennsylvania, and New Jersey. The following table sets forth the net installed generating capacity available to the Company to serve its peak load as of December 31, 1994.
(Continued)
I-23
- -------- (A) Company portion of jointly-owned plants. (B) Represents capacity owned by a refinery customer which is available to the Company to serve its peak load.
Major transmission and distribution lines owned and in service are as follows:
The Company's electric transmission and distribution system includes 1,362 transmission poleline miles of overhead lines, 5 transmission cable miles of underground cables, 6,375 distribution poleline miles of overhead lines, and 5,073 cable miles of distribution underground cables.
The Company has a liquefied natural gas plant located in Wilmington, Delaware with a storage capacity of 3.045 million gallons and a maximum planned daily sendout capacity of 25,000 Mcf per day.
The Company also owns four natural gas city gate stations at various locations in its gas service territory. These stations have a total sendout capacity of 125,000 Mcf per day.
The following table sets forth the Company's gas pipeline miles:
-------- * Includes 11 miles of joint-use gas pipeline that is used 10% for gas and 90% for electric.
The Company owns and occupies office buildings in Wilmington and Christiana, Delaware and Salisbury, Maryland, and also owns elsewhere in its service area a number of properties that are used for office, service, and other purposes.
ITEM 3.

ITEM 3. LEGAL PROCEEDINGS
In June 1993, the Delaware Coastal Zone Industrial Control Board (the "Board") adopted regulations (the "Regulations") under Delaware's Coastal Zone Act which would, among other things, prohibit the Company from constructing new power-generating facilities or expanding any of its existing power-generating facilities outside a designated boundary. In July 1993, the Company filed a complaint in the Delaware Superior Court seeking to have the Regulations declared null and void. In addition, the Company joined with
I-24
other affected parties in filing a complaint in July 1993 in the Delaware Chancery Court. The Chancery Court complaint alleged procedural violations of the Freedom of Information Act by the Board in the passage of the Regulations and requested that the Regulations be declared null and void. The proceedings in the Superior Court were suspended pending the outcome of the Chancery Court case. On May 19, 1994, the Chancery Court found for the Company and the other plaintiffs by declaring the Regulations null and void on procedural grounds. The proceedings in the Superior Court will remain open pending the issuance of new regulations by the Board.
On December 14, 1993, Star filed a complaint against the Company in Delaware Chancery Court alleging that the Company overcharged it for pension and tax- related costs under a contract entered into by the parties' predecessors in 1955. The complaint asked for a refund and damages totalling $9.3 million. On October 20, 1994, Star and the Company signed a settlement agreement resolving Star's claims. The settlement does not have a material effect on the Company's financial position or results of operations.
ITEM 4.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year covered by this report to a vote of security holders, through the solicitation of proxies or otherwise.
I-25
PART II
ITEM 5.

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
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 and had the following dividends declared and high/low prices by quarter for the years 1994 and 1993.
The Company had 58,073 registered holders of common stock as of December 31, 1994.
While the Board of Directors intends to continue the practice of paying dividends quarterly, amounts and dates of such dividends as may be declared will necessarily be dependent upon the Company's future earnings, financial requirements, and other factors. For a further discussion of dividends, refer to the "Dividends" section of Management's Discussion and Analysis of Financial Condition and Results of Operations included in the 1994 Annual Report to Stockholders, incorporated by reference herein.
ITEM 6.

ITEM 6. SELECTED FINANCIAL DATA
This information is contained on page 20 of the 1994 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is hereby incorporated by reference herein.
ITEM 7.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This information is contained on pages 21 through 29 of the 1994 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is hereby incorporated by reference herein.
ITEM 8.


ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated financial statements, notes 1 through 21 to consolidated financial statements, and related report thereon of Coopers & Lybrand L.L.P., independent accountants, appear on pages 30 through 49 of the 1994 Annual Report to Stockholders filed herein as Exhibit 13, which portion of such Annual Report is hereby incorporated by reference herein.
ITEM 9.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
II-1
PART III
ITEM 10.



ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
"Proposal No. 1--Election of Directors" is incorporated by reference herein from the Definitive Proxy Statement which is expected to be filed on or about April 20, 1995, and information about the executive officers of the registrant is included under Item 1.
ITEM 11.

ITEM 11. EXECUTIVE COMPENSATION
"Executive Compensation" is incorporated by reference herein from the Definitive Proxy Statement which is expected to be filed on or about April 20, 1995.
ITEM 12.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
"Proposal No. 1--Election of Directors" is incorporated by reference herein from the Definitive Proxy Statement which is expected to be filed on or about April 20, 1995.
ITEM 13.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
III-1
PART IV
ITEM 14.

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
1. Financial Statements--The following financial statements are contained in the Company's 1994 Annual Report to Stockholders filed as Exhibit 13 hereto and incorporated herein by reference.
2. Financial Statement Schedules--Pursuant to SEC Financial Reporting Release No. 44, the Company has omitted previously required financial statement schedules from this report.
3. Schedule of Operating Statistics for the three years ended December 31, 1994 can be found on page IV-3 of this report.
4. Exhibits
IV-1
(b) Reports on Form 8-K (filed during the reporting period):
A Report on Form 8-K dated October 17, 1994, containing a press release announcing the results of the early retirement offer, was filed with the Commission.
IV-2
DELMARVA POWER & LIGHT COMPANY
OPERATING STATISTICS FOR THE THREE YEARS ENDED DECEMBER 31, 1994
The table below sets forth selected financial and operating statistics for the electric and gas divisions for the three years ended December 31, 1994.
- -------- (1)Includes unbilled sales. (2)Includes unbilled revenues. (3)Based on average number of customers during period.
IV-3
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Delmarva Power & Light Company (Registrant)
Dated: March 23, 1995 By /s/ Barbara S. Graham ---------------------------------- (Barbara S. Graham, Senior Vice President, Treasurer, and Chief Financial Officer)
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATE INDICATED.
SIGNATURE TITLE DATE --------- ----- ----
/s/ (Howard E. Cosgrove) Chairman of the Board, March 23, 1995 ..................................... President, Chief (Howard E. Cosgrove) Executive Officer, and Director
/s/ (H. Ray Landon) Executive Vice March 23, 1995 ..................................... President and (H. Ray Landon) Director
/s/ (Barbara S. Graham) Senior Vice President, March 23, 1995 ..................................... Treasurer, and Chief (Barbara S. Graham) Financial Officer
/s/ (James P. Lavin) Comptroller and Chief March 23, 1995 ..................................... Accounting Officer (James P. Lavin)
/s/ (Michael G. Abercrombie) Director March 23, 1995 ..................................... (Michael G. Abercrombie)
/s/ (Robert D. Burris) Director March 23, 1995 ..................................... (Robert D. Burris)
/s/ (Audrey K. Doberstein) Director March 23, 1995 ..................................... (Audrey K. Doberstein)
/s/ (Michael B. Emery) Director March 23, 1995 ..................................... (Michael B. Emery)
Director ..................................... (James H. Gilliam, Jr.)
/s/ (Sarah I. Gore) Director March 23, 1995 ..................................... (Sarah I. Gore)
/s/ (James C. Johnson) Director March 23, 1995 ..................................... (James C. Johnson)
/s/ (James T. McKinstry) Director March 23, 1995 ..................................... (James T. McKinstry)
IV-4
DELMARVA POWER & LIGHT COMPANY 1994 ANNUAL REPORT ON FORM 10-K EXHIBIT INDEX
Exhibit Page Number Description Number - ------ ----------- ------
2 Stock Purchase Agreement between PECO Energy Company and Delmarva Power & Light Company related to the acquisition of Conowingo Power Company.
10-D Copies of Amendments to the Supplemental Executive Retirement Plan, effective June 15, 1994, and November 1, 1994.
10-G Copy of the severance agreement with members of management.
10-H Copy of the current listing of members of management who have signed the severance agreement.
12-A Computation of ratio of earnings to fixed charges.
12-B Computation of ratio of earnings to fixed charges and preferred dividends.
13 Certain portions of the 1994 Annual Report to Stockholders which are incorporated by reference in this Form 10-K.
23 Consent of Independent Accountants.
27 Financial Data Schedule.