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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1994
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-1405
DELMARVA POWER & LIGHT COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE & VIRGINIA 51-0084283
(STATES OR OTHER JURISDICTIONS OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
800 KING STREET, P. O. BOX 231
WILMINGTON, DELAWARE
(ADDRESS OF PRINCIPAL EXECUTIVE 19899
OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 302-429-3359
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SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
FIRST MORTGAGE BONDS (SERIES NEW YORK STOCK EXCHANGE AND
ISSUED PRIOR TO 1968) PHILADELPHIA STOCK EXCHANGE.
PREFERRED STOCK, CUMULATIVE, PAR PHILADELPHIA STOCK EXCHANGE
VALUE $100.00 (SERIES ISSUED
PRIOR TO 1978)
COMMON STOCK, PAR VALUE $2.25 NEW YORK STOCK EXCHANGE AND
PHILADELPHIA STOCK EXCHANGE.
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NONE
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INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES X NO
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO
THE BEST OF THE REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION
STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K. [X]
THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE
REGISTRANT AS OF FEBRUARY 28, 1995 WAS $1,186,293,276.
AS OF FEBRUARY 28, 1995, THERE WERE ISSUED AND OUTSTANDING 59,849,876 SHARES
OF THE REGISTRANT'S COMMON STOCK, PAR VALUE $2.25.
----------------
DOCUMENTS INCORPORATED BY REFERENCE
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PART OF FORM 10-K DOCUMENT INCORPORATED BY REFERENCE
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I (ITEM 1-SEGMENT PORTIONS OF THE 1994 ANNUAL REPORT TO STOCKHOLDERS OF DELMARVA
INFORMATION) AND POWER & LIGHT COMPANY.
II (ITEMS 6, 7 AND
8)
III PORTIONS OF THE DEFINITIVE PROXY STATEMENT FOR THE ANNUAL
MEETING OF STOCKHOLDERS OF DELMARVA POWER & LIGHT COMPANY, TO BE
HELD MAY 25, 1995, WHICH DEFINITIVE PROXY STATEMENT IS EXPECTED
TO BE FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OR
ABOUT APRIL 20, 1995.
IV PORTIONS OF THE 1994 ANNUAL REPORT TO STOCKHOLDERS OF DELMARVA
POWER & LIGHT COMPANY
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TABLE OF CONTENTS
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PART I
Item 1. Business:
The Company.................................................. I-1
Segment Information.......................................... I-1
Operating Statistics......................................... I-1
Strategic Plans for Competition.............................. I-1
Electric Operations.......................................... I-4
Installed Capacity........................................ I-4
Power Pool................................................ I-5
Reserve Margin............................................ I-5
Challenge 2000 Plan....................................... I-6
Power Plants................................................. I-7
Nuclear................................................... I-7
Peach Bottom Units........................................ I-7
Salem Units............................................... I-8
Life Extensions and Repowerings........................... I-9
Purchased Power.............................................. I-9
Cost of Output for Load...................................... I-10
Fuel Supply for Electric Generation.......................... I-10
Coal...................................................... I-10
Oil....................................................... I-10
Gas....................................................... I-10
Nuclear................................................... I-11
Gas Operations............................................... I-12
Subsidiaries................................................. I-12
Regulatory and Rate Matters.................................. I-13
Base Rate Proceedings..................................... I-13
Fuel Adjustment Clauses................................... I-14
Other Regulatory Matters.................................. I-16
Construction and Financing Program........................... I-17
Environmental Matters........................................ I-18
Construction Expenditures................................. I-18
Clean Air Act............................................. I-18
Salem Operating Permit.................................... I-19
Water Quality Regulations................................. I-19
Hazardous Substances...................................... I-20
Emerging Environmental Issues............................. I-21
Subsidiaries.............................................. I-21
Retail Franchises............................................ I-21
Number of Employees.......................................... I-22
Executive Officers of the Registrant......................... I-22
Item 2. Properties....................................................... I-23
Item 3. Legal Proceedings................................................ I-24
Item 4. Submission of Matters to a Vote of Security Holders.............. I-25
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TABLE OF CONTENTS
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PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters.................................................... II-1
Item 6. Selected Financial Data....................................... II-1
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations.................................. II-1
Item 8. Financial Statements and Supplementary Data................... II-1
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure................................... II-1
PART III
Item 10. Directors and Executive Officers of the Registrant............ III-1
Item 11. Executive Compensation........................................ III-1
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................... III-1
Item 13. Certain Relationships and Related Transactions................ III-1
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K........................................................... IV-1
Signatures.............................................................. IV-4
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PART I
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
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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
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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%
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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
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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.
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% OF
INSTALLED SUMMER CAPACITY MEGAWATTS TOTAL
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Coal Fired................................................. 1,141 41
Oil-Fired.................................................. 595 21
Combustion Turbines/Combined Cycle......................... 511 18
Nuclear.................................................... 321 11
Peaking Units.............................................. 183 7
Purchased Capacity......................................... 48 2
Customer-owned Capacity.................................... 57 2
----- ---
Subtotal................................................. 2,856 102
Capacity Transferred to Another Utility.................... (50) (2)
----- ---
Total.................................................... 2,806 100
===== ===
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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--Properties" on page I-23 for a detailed listing of
net installed generating capacity by station.
Power Pool
The Company is a member of the Pennsylvania-New Jersey-Maryland
Interconnection Association (PJM Interconnection). Under the PJM
Interconnection Agreement, the Company's generation and transmission facilities
are operated on an integrated basis with those of seven other utilities in
Pennsylvania, New Jersey, Maryland, and the District of Columbia. This power
pool was formed for the purpose of improving the reliability and operating
economies of the systems in the group and to provide capital economies by
permitting the sharing of reserve requirements on a group basis. The Company
estimates that its fuel savings associated with energy transactions within the
pool amounted to $15.4 million during 1994.
The PJM Interconnection's installed capacity as of December 31, 1994, was
56,073 MW. The PJM Interconnection peak demand during 1994 was 45,992 MW on
July 8th, which resulted in a summer reserve margin of 21.4% (based on
installed capacity of 55,851 MW on that date). The all-time peak demand of
46,429 MW was set on July 8, 1993 and resulted in a summer reserve margin of
19.4% (based on installed capacity of 55,440 MW on that date).
The Company is also a party to the Mid-Atlantic Area Coordination Agreement
which provides for review and evaluation of plans for generation and
transmission facilities and other matters relevant to the reliability of the
bulk electric supply systems in the Mid-Atlantic area.
Reserve Margin
The Company's peak load in 1994 was 2,551 MW on July 8th, which surpassed the
Company's previous peak demand of 2,544 MW on July 9, 1993. Because adequate
generation was available at the time, these peaks do not reflect full
implementation of the Company's demand-side programs, including the curtailment
of large interruptible customers. The Company's PJM Interconnection reserve
obligation is based on normal weather conditions and full implementation of its
demand-side programs, which the Company estimates would have resulted in a peak
of 2,389 MW in 1994. Based upon this estimated peak and the Company's installed
generating capacity of 2,806 MW at the time, the Company's reserve margin would
have been 17.5%. The Company's PJM Interconnection reserve obligation varies
from year to year but is typically around 18%.
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Challenge 2000 Plan
The Challenge 2000 Plan reflects the Company's strategy to provide an
adequate, reliable supply of electricity to customers, while minimizing adverse
impacts on the environment and keeping prices competitive. The Company's 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
Company's plan emphasizes balance and flexibility, and may be accelerated,
slowed, or altered in response to changing energy demands, fluctuating fuel
prices, and emerging technologies. The plan combines customer-oriented load
management and strategic conservation programs ("Save Some"), short-term power
purchases and long-term power contracts ("Buy Some"), and new or renovated
power plants ("Build Some"). The Company's current plan closely matches
customers' energy requirements and does not require large investments for new
resources during the next two years.
As of the end of 1994, the demand-side programs ("Save Some") of the
Challenge 2000 Plan had enrolled about 80,000 residential customers and about
1,000 commercial and industrial customers who in aggregate provide the Company
with the ability to reduce its peak by approximately 240 MW. On March 31, 1994,
following the approval of the Virginia State Corporation Commission (VSCC), the
Company implemented five new conservation programs in Virginia. Included were
two programs for residential customers, promoting high-efficiency cooling
equipment and new home construction standards, and three programs for
commercial and industrial customers, promoting high-efficiency lighting and
cooling technologies. The Company previously implemented conservation programs
in Delaware and Maryland.
As part of the "Buy Some" portion of the Challenge 2000 Plan, the Company is
purchasing 48 MW of peaking capacity through May 2018 from the Delaware City
Power Plant owned by Star Enterprise (Star). On October 27, 1994, the Company
canceled an agreement with the Delaware Clean Energy Project which would have
provided 165 MW of capacity for 30 years beginning in 1999. The decision to
terminate the agreement was based on uncertainties associated with the
Company's load requirements, a general decline in wholesale market prices, and
absence of need for long-term capacity. The capacity and energy that will be
required to serve COPCO subsequent to the planned acquisition will be purchased
from PECO. The power purchase, which is contingent on closing of the
acquisition, is expected to provide 205 MW of capacity beginning in 1996 or
later, increasing to 259 MW by the end of the contract in 2006. Short-term
purchases during the period 1998-2000 are also being contemplated to meet
capacity obligations during the repowering outages at the Indian River Power
Plant. The repowering plans are further discussed under "Life Extensions and
Repowerings" on page I-9.
In June 1993, as part of the "Build Some" portion of the Challenge 2000 Plan,
the Company placed into service a 175 MW combined cycle addition to the Hay
Road combustion turbines (CTs). The Company has a power plant life extension
program and repowering plans to extend the operating lives of certain
generating units as further discussed under "Life Extensions and Repowerings"
on page I-9.
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The table below summarizes the latest peak load and capacity forecast of the
Challenge 2000 Plan over the current and next five PJM Interconnection planning
periods, which begin on June 1 of each year. The Company periodically reviews
and updates its forecast to reflect changes in peak load and capacity
estimates, and the table incorporates the effect of the planned acquisition of
COPCO and the associated power purchase agreement with PECO, starting in 1996.
<TABLE>
<CAPTION>
PEAK LOAD (MW) CAPACITY (MW)
PJM --------------------- ----------------------
PLANNING GROSS NET
YEAR SUMMER TOTAL SUMMER TOTAL TOTAL TOTAL RESERVE
BEGINNING COMPANY "SAVE COMPANY "BUY "BUILD INSTALLED MARGIN
JUNE 1 PEAK SOME" PEAK SOME" SOME" CAPACITY (%)
--------- ------- ----- ------- ----- ------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
1994 2,629 240 2,389 48 2,758 2,806 17.5%
1995 2,527 242 2,285 48 2,805 2,853 24.9%
1996 2,769 251 2,518 253 2,810 3,063 21.6%
1997 2,832 264 2,568 260 2,810 3,070 19.5%
1998 2,900 277 2,623 290 2,810 3,100 18.2%
1999 2,970 291 2,679 446 2,721 3,167 18.2%
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POWER PLANTS
Nuclear
The Company's nuclear capacity is provided by Peach Bottom Atomic Power
Station (Peach Bottom) Units 2 and 3 and by Salem Nuclear Generating Station
(Salem) Units 1 and 2. The Company jointly owns these units, as tenants in
common, with PECO, Atlantic City Electric Company, and Public Service Electric
and Gas Company (PSE&G). The Peach Bottom units are operated by PECO and have a
combined summer capacity of 2,086 MW, of which the Company is entitled to 157
MW (7.51%). The Salem units are operated by PSE&G and have a combined summer
capacity of 2,212 MW, of which the Company is entitled to 164 MW (7.41%).
The operation of nuclear generating units is regulated by the Nuclear
Regulatory Commission (NRC). Such regulation requires that all aspects of plant
operation be conducted in accordance with NRC safety and environmental
requirements and that continuous demonstrations be made to the NRC that plant
operations meet applicable requirements. The NRC has the ultimate authority to
determine whether any nuclear generating unit may operate.
For a discussion of the Company's funding of its share of the estimated
future cost of decommissioning the Peach Bottom and Salem nuclear reactors, see
Note 8 to the Consolidated Financial Statements contained in the Company's 1994
Annual Report to Stockholders filed as Exhibit 13.
As by-products of their operations, nuclear generating units, including the
Peach Bottom and Salem units, produce low level radioactive waste (LLRW). Such
waste includes paper, plastics, protective clothing, and other materials which
must be properly disposed. Prior to July 1994, PECO and PSE&G disposed of such
materials at a federally licensed permanent disposal facility in South
Carolina. However, in accordance with the Low Level Radioactive Waste Policy
Act, as amended, disposal sites have exercised their authority to either cease
operations or deny access to states which are not members of their regional
compact. Effective July 1, 1994, LLRW from Peach Bottom and Salem could no
longer be disposed at the South Carolina site and is being stored temporarily
on site until Pennsylvania and New Jersey provide permanent disposal sites.
Both these states are in the process of locating suitable sites. The on-site
facilities at PECO and PSE&G have capacity for at least five years' storage.
Peach Bottom Units
On March 28, 1994, the NRC approved PECO's request to extend the expiration
dates of the Facility Operating Licenses for Peach Bottom Units 2 and 3 by
approximately six years to August 2013 and July 2014, respectively.
I-7
<PAGE>
On June 29, 1994, the NRC issued its Systematic Assessment of Licensee
Performance (SALP) Report on the performance of activities at Peach Bottom for
the period November 1, 1992, to April 30, 1994. This SALP was conducted under
the revised process in which the number of assessment areas has been reduced
from seven to four. The numeric rating criteria remains unchanged with "1"
being the highest rating and "3" the lowest rating, although still acceptable.
Under the recent SALP, Peach Bottom earned a rating of "1" in Operations and a
rating of "2" in each of the other three areas: Maintenance, Engineering, and
Plant Support. Overall, the NRC found continued improvement in performance
during the period. The NRC stated that enhancement in problem identification
and resolution, good control of refuelings and outages, and excellent oversight
by plant management of day-to-day activities in a manner that ensured safer
operation of the units contributed to the improvement. Despite the overall
improvement, the NRC noted that some areas require continued management
attention and that management needs to continue to encourage plant personnel at
all levels to identify existing, and sometimes longstanding, problems so that
priorities can be established and effective corrective actions implemented. The
NRC also noted instances of personnel inattention to detail and failure to
follow procedures which warranted additional management attention. PECO has
informed the Company that it has taken and is taking actions to address the
weaknesses discussed in the SALP Report.
PECO has informed the Company that on October 18, 1994, the NRC held an
enforcement conference to discuss a violation at Peach Bottom. An emergency
service water valve was left closed and unattended for approximately 45 minutes
during testing, which would have prevented safety-related equipment from
receiving the proper cooling flow in an emergency. On November 21, 1994, PECO
received a Notice of Violation for this incident, including a civil penalty of
$87,500.
PECO has informed the Company that in October 1990, General Electric Company
(GE) reported that crack indications were discovered near the seam welds of the
core shroud assembly in a GE Boiling Water Reactor (BWR) located outside the
United States. As a result, GE issued a letter requesting that the owners of GE
BWR plants take interim corrective actions, including a review of fabrication
records and visual examinations of accessible areas of the core shroud seam
welds. Peach Bottom Unit 3 was examined in October 1993 during the last
refueling outage and crack indications were identified at two locations. In
November 1993, PECO presented its findings to the NRC and provided
justification for continued operation of Unit 3 for another two-year cycle with
crack indications. Peach Bottom Unit 2 was examined in October 1994 during its
last refueling outage and the inspection revealed a minimal number of flaws. In
November 1994, PECO submitted its findings to the NRC and provided
justification for continued operation of Unit 2. PECO is participating in a GE
BWR Owners Group to develop long-term corrective actions.
Salem Units
As a result of the NRC investigation following the reactor shutdown of Salem
Unit 1 in April 1994, PSE&G was fined $500,000 for violations relating to (1)
the failure to identify and correct significant conditions adverse to quality
at the facility related to spurious steam flow signals and inoperable
atmospheric relief valves, both of which, the NRC concluded, led to unnecessary
safety injections during the event; (2) the failure to identify and correct
significant conditions adverse to quality at the facility related to providing
adequate training, guidance and procedures for the operators to cope with the
event; and (3) the failure by supervisors to exercise appropriate command and
control of the operations staff and the reactor during the event. On November
1, 1994, PSE&G responded to the violations and paid the fine.
On January 3, 1995, the NRC issued its SALP Report on the performance of
activities at Salem for the period June 30, 1993, to November 5, 1994. The NRC
assigned ratings of "3" to the Operations and Maintenance areas, "2" to
Engineering, and "1" to Plant Support. The NRC noted that "overall performance
has declined and we are particularly concerned with the challenges to plant
systems and operators caused by repetitive equipment problems and personnel
errors that had the potential to, or actually did, adversely affect plant or
personnel safety. Notwithstanding, we recognize that [PSE&G] has, within the
last year, initiated
I-8
<PAGE>
several comprehensive actions that have the potential to improve overall plant
performance. However, while we acknowledge some recent incremental performance
gains, these efforts have not yet resulted in any noticeable change in overall
performance."
PSE&G has informed the Company that it is taking significant steps to address
performance shortfalls at Salem. In 1993, a comprehensive performance
assessment team identified areas of weakness through an in-depth investigation
of common causes and events. Corrective action plans and effectiveness measures
were then initiated in 1994 and are ongoing, along with additional measures
designed to achieve a change in Salem's performance. Personnel performance is
being addressed through improved supervisory training and increased monitoring
of work activities, improved operational command and control, and the
reorganization and increased staffing of Salem. PSE&G has established a goal of
safe, uneventful operation to be achieved through enhanced self-assessment and
corrective action processes, resolution of long-standing equipment problems,
improved independent oversight of plant operations and improved root-cause
analysis of plant problems. In furtherance of these goals, PSE&G has
reorganized the operational structure of its Nuclear Department and recruited a
new chief nuclear officer from outside PSE&G. In addition, PSE&G's parent
company, Public Service Enterprise Group, Incorporated (Enterprise), has
strengthened oversight of nuclear plant operations by establishing a standing
Nuclear Committee of its Board of Directors.
PSE&G also has informed the Company that on March 21, 1995, representatives
of the NRC met with the Boards of Directors of Enterprise and PSE&G to discuss
the need for continued improvements in equipment reliability and staff
performance. PSE&G cannot predict what further actions, if any, the NRC may
take or require to improve Salem's performance.
See page I-19 for a discussion on the status of the operating permit at
Salem.
Life Extensions and Repowerings
The Company is conducting a life extension program on its older major
generating units to extend the operating life of each unit by a minimum of 20
years beyond the normal unit 30-year design life. Continued operation of these
units will defer the construction of new capacity and will help to meet PJM
Interconnection generating reserve margin obligations. Surveys of Indian River
Units 1, 2, and 3 and Edge Moor Units 3 and 4 have been completed. Projects
identified during the surveys are being implemented during scheduled
maintenance outages. Edge Moor Unit 5 and Vienna Unit 8 will undergo surveys
beginning in 1996. Construction expenditures on these projects for the five-
year period 1995-1999 are expected to total approximately $45 million,
excluding allowance for funds used during construction (AFUDC).
The Company also plans to repower Indian River Units 1 and 2 utilizing
circulating fluidized bed technology. These projects, which will be performed
during consecutive two-year outages beginning in 1999, will extend the
operating life of each unit by 20 years and reduce emissions. Construction
expenditures on these projects for the five-year period 1995-1999 are expected
to be approximately $88 million, excluding AFUDC.
PURCHASED POWER
The Company purchases coal-fired energy from the Allegheny Power System on an
economic basis to replace higher-cost generation from the Company's oil-fired
units. The Company also purchases 200 MW of energy from PECO under a short-term
agreement, extending through December 31, 1995. The Company receives additional
energy from PECO (above 200 MW) as the energy is available. The Company's
estimated fuel savings from these purchases amounted to $3.8 million during
1994.
The Company also has purchased 48 MW of long-term capacity and has entered
into a power purchase agreement with PECO associated with its acquisition of
COPCO as discussed under "Challenge 2000 Plan" on page I-6.
I-9
<PAGE>
COST OF OUTPUT FOR LOAD
The following table sets forth the Company's annual generation output, fuel
cost per megawatt hour (MWh), and generation mix by unit fuel type for all
Company-owned facilities. Coal is the Company's predominant fuel. Corresponding
values for purchased power and for net interchange (purchases less sales) as a
member of the PJM Interconnection are also listed.
<TABLE>
<CAPTION>
GENERATION 1994 1993 1992
---------- ---------------- ---------------- --------------
1,000 $/ 1,000 $/ 1,000 $/
UNIT FUEL TYPE MWH MWH % MWH MWH % MWH MWH %
-------------- ------ --- --- ------ --- --- ------ --- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Coal-fired............... 5,499 18 42 6,028 18 47 4,696 19 39
Oil-fired................ 1,998 27 15 2,343 24 18 1,713 26 14
Nuclear.................. 2,052 8 16 1,883 7 14 1,696 7 14
Natural Gas (1).......... 2,033 19 15 1,010 23 8 443 32 4
------ --- --- ------ --- --- ------ --- ---
Total Company
Generation............ 11,582 18 88 11,264 18 87 8,548 18 71
<CAPTION>
PURCHASES/INTERCHANGE
---------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Purchases................ 2,873 23 22 3,200 22 25 2,826 22 23
Net Interchange.......... (1,328) (32) (10) (1,568) (30) (12) 755 7 6
------ --- --- ------ --- --- ------ --- ---
Total Output for Load.. 13,127 17 100 12,896 18 100 12,129 19 100
====== === === ====== === === ====== === ===
</TABLE>
- --------
(1) Includes the output of a 175 MW combined cycle unit, Hay Road Unit 4,
effective June 1, 1993.
FUEL SUPPLY FOR ELECTRIC GENERATION
The Company's electric generating capacity by fuel type is shown under
"Electric Operations--Installed Capacity," on page I-4.
Coal
Edge Moor Units 3 and 4, and the Indian River, Keystone and Conemaugh
generating stations are coal-fired. As of December 31, 1994, a maximum of 84%
of the Company's coal requirements were under supply contracts. During 1994,
34% of the coal was purchased under short-term contracts (less than three
years), 52% under long-term contracts (up to ten years), and the balance was
obtained through spot purchases. The Company does not anticipate any difficulty
in obtaining adequate amounts of coal at reasonable prices.
Oil
From 75% to 100% of the residual oil used in Edge Moor Unit 5 is currently
being supplied under a two-year contract which expires in 1996. Any amount over
75% of requirements may be purchased in the spot market. Natural gas is
utilized when economically feasible. The fuel supply contract for the Vienna
Generating Station, which expires in 1995, provides from 70% to 100% of that
station's requirements. Any amount over 70% of requirements may be purchased in
the spot market. The Company expects to negotiate a new contract in 1995 with
similar terms.
Gas
Natural gas, which is the primary fuel for the three CTs at the Company's Hay
Road site and a secondary fuel at Edge Moor Unit 5, is supplied partly through
contracts described under "Gas Operations" on page I-12. Additional natural gas
is purchased on a firm or interruptible basis from one of the Company's
pipeline suppliers. The secondary fuel for the Hay Road CTs is kerosene, which
is purchased in the spot market.
I-10
<PAGE>
Nuclear
The cycle of production and use of nuclear fuel involves the mining and
milling of uranium ore to uranium concentrate, conversion of the uranium
concentrate to uranium hexaflouride, enrichment of that gas, conversion of the
enriched gas to fuel pellets, fabrication of fuel assemblies, and the use of
the fuel assemblies in the generating station reactor. After spent fuel is
removed from a nuclear reactor, it is placed in temporary storage for cooling
in a spent fuel pool at the nuclear station site. The Federal Government has an
obligation for the transportation and ultimate disposal of the spent fuel, as
discussed below.
PECO has informed the Company that it has contracts for uranium concentrates
which will satisfy the fuel requirements of Peach Bottom through 2002. In
February 1995, two companies which supply uranium concentrates to PECO filed
petitions for bankruptcy under Chapter 11 of the Bankruptcy Code. The two
companies supply approximately half of PECO's 1995 and 1996 requirements for
uranium concentrates. In addition, one of the companies is under contract to
supply approximately 25% of PECO's uranium concentrate requirements for the
period 1997 to 2002. PECO has made alternative arrangements with other
suppliers to satisfy its short-term requirements for uranium concentrates. For
the longer-term, PECO is evaluating its requirements and potential supply
sources, including the two suppliers which have filed petitions for bankruptcy.
PECO does not anticipate any difficulties in obtaining its requirements for
uranium concentrates. PSE&G also has informed the Company that it has contracts
for uranium concentrates which will satisfy the fuel requirements of Salem
fully through 2000 and, thereafter, 60% through 2002. PSE&G does not anticipate
any difficulties in obtaining its requirements for uranium concentrates. The
table below summarizes the years through which PECO and PSE&G have contracted
for the other segments of the nuclear fuel supply cycle.
<TABLE>
<CAPTION>
CONVERSION ENRICHMENT FABRICATION
---------- ---------- -----------
<S> <C> <C> <C>
Peach Bottom Unit 2........................ 1997 (1) 1999
Peach Bottom Unit 3........................ 1997 (1) 1998
Salem Unit 1............................... 2000 (2) 2004
Salem Unit 2............................... 2000 (2) 2005
</TABLE>
- --------
(1) PECO is committed for enrichment services under contract with the United
States Enrichment Corporation. The commitments represent 100% of the
enrichment requirements through 1998 and 70% through 1999. PECO does not
anticipate any difficulties in obtaining necessary enrichment services for
Peach Bottom.
(2) 100% coverage through 1998; approximately 50% coverage through 2002; and
approximately 30% coverage through 2004. PSE&G does not anticipate any
difficulties in obtaining necessary enrichment services for Salem.
In conformity with the Nuclear Waste Policy Act of 1982 (NWPA), PECO and
PSE&G entered into contracts with the United States Department of Energy (DOE)
on behalf of the joint owners providing that the Federal Government shall for a
fee take title to, transport, and dispose of spent nuclear fuel and high level
radioactive waste from the Salem and Peach Bottom reactors. The Company is
collecting one-tenth of one cent per kWh of nuclear generation net of station
use from electric customers through fuel rates to provide for the future cost
of spent nuclear fuel disposal and is paying such amounts to the DOE. The DOE
may revise this charge as necessary to ensure full cost recovery of nuclear
fuel disposal. Under the NWPA, the Federal Government was to begin accepting
spent fuel for permanent off-site storage no later than 1998. However, in
December 1989, the DOE announced that it would not be able to open a permanent,
high-level nuclear waste storage facility until 2010, at the earliest. In
October 1990, the NRC determined that spent nuclear fuel generated in any
reactor can be stored safely and without significant environmental impact in
reactor facility storage pools or in independent spent nuclear fuel storage
installations located at or away from reactor sites for at least 30 years
beyond the licensed life for operation (which may include the term of a revised
or renewed license). In May 1994, the DOE issued a Notice of Inquiry in which
it took the position that it has no legal obligation to begin accepting spent
fuel until it has a suitable storage facility in operation.
I-11
<PAGE>
In June 1994, two separate lawsuits were filed by a group of states and Public
Utility Commissions and a group of utilities, respectively, in the U.S. Court
of Appeals for the District of Columbia Circuit to compel the DOE to accept
spent fuel by 1998. The Company is not a party to the lawsuit brought by the
group of utilities. The Company cannot predict when the DOE sponsored temporary
or permanent storage sites will become available.
PECO has advised the Company that Peach Bottom has adequate on-site temporary
storage capability until 1998 for Unit 2 and 1999 for Unit 3. Options for
expansion of storage capacity are being investigated by PECO. PSE&G has advised
the Company that, pursuant to a license from the NRC to replace the existing
high-density racks in the spent-fuel storage pools of Salem Units 1 and 2 with
maximum-density racks, it will extend the storage capability of Salem Unit 1
through March 2008 and Salem Unit 2 through March 2012.
The Energy Act provides, among other things, for the creation of a
Decontamination & Decommissioning (D&D) Fund to pay for the future cleanup of
DOE gaseous diffusion enrichment facilities. This plan is to be funded by both
domestic utilities and the Federal Government. Domestic utilities will pay an
aggregate amount of $150 million each year, adjusted annually for inflation,
into the D&D Fund based on their past purchases from the DOE Uranium Enrichment
Enterprise. This will continue through 2008 or until $2.25 billion, adjusted
annually for inflation, is collected. In 1992, the Company accrued a liability
and corresponding regulatory asset of $8.1 million, representing its share of
the $2.25 billion. The Energy Act provides that this cost is to be recoverable
in the same manner as other fuel costs. The Company recovers fuel costs through
fuel adjustment clause revenues as discussed on page I-14. The liability for
the Company's share of the D&D Fund cost was $7.2 million as of December 31,
1994.
GAS OPERATIONS
During 1994, the average production cost of all gas sold was $3.06 per
thousand cubic feet (Mcf), compared with $3.22 per Mcf in 1993 and $2.70 per
Mcf in 1992. The Company's maximum 24-hour system capability, including natural
gas purchases, storage deliveries, and the planned send out of its local peak
shaving plant, is 148,957 Mcf. With the use of emergency peak shaving
capabilities at its local peak shaving plant, the Company's maximum daily
sendout capacity is 168,957 Mcf. The Company experienced a new all-time peak
daily firm sendout of 158,512 Mcf on January 19, 1994, during extreme weather
conditions. Emergency peak shaving was used to meet the peak demand. The
Company's previous all-time peak daily firm sendout of 119,284 Mcf had occurred
on January 21, 1985.
The gas requirements of the Company are purchased primarily under contracts
with three pipeline suppliers. The Company is entitled to receive the following
volumes of gas per day under its various contracts.
<TABLE>
<CAPTION>
NUMBER OF EXPIRATION DAILY
CONTRACTS DATES MCF
--------- ---------- -------
<S> <C> <C> <C>
Supply.......................................... 4 1996-2004 21,730
Transportation.................................. 3 2004 59,795
Storage......................................... 4 1995-2004 42,432
Local Peak Shaving.............................. -- -- 25,000
-------
Total......................................... 148,957
=======
</TABLE>
The Company also purchases gas from pipelines and producers primarily under
one- to five-year agreements. To provide supplemental gas, the Company has its
own liquefied natural gas plant for liquefaction, storage, and re-gasification
of natural gas. The plant has a maximum planned sendout of 25,000 Mcf per day
and emergency capability of 45,000 Mcf per day.
SUBSIDIARIES
Delmarva Capital Investments, Inc. (Delcap) is a wholly-owned subsidiary of
the Company that has invested in leveraged equipment leases, landfill and
waste-hauling companies, alternative energy projects, real estate projects and
has also undertaken operation and maintenance contracts for alternative energy
and
I-12
<PAGE>
related projects. A Delcap subsidiary operates and maintains Star's Delaware
City Power Plant from which the Company purchases peaking capacity.
Opportunities to grow Delcap's operating businesses and participate in other
energy-related businesses, in conjunction with Company goals, are being
pursued. Certain Company contributions have and may be required in pursuit of
these opportunities. During 1994, Delcap made dividend payments of $8 million
to the Company. As of December 31, 1994, its stockholder's equity was $32.7
million, of which landfill and waste-hauling represented about $22.8 million.
Delmarva Services Company, a wholly-owned subsidiary of the Company, leases
an office building to the Company. As of December 31, 1994, its stockholder's
equity was $5.6 million.
Delmarva Energy Company and Delmarva Industries, Inc. are wholly-owned
subsidiaries of the Company and are partners in joint venture oil and gas
exploration and development programs in New York, Ohio, and Pennsylvania. As of
December 31, 1994, their combined stockholder's equity was $2.1 million.
For a further discussion of the Company's subsidiaries see "Environmental
Matters--Subsidiaries" on page I-21 as well as the Nonutility Subsidiaries
section of Management's Discussion and Analysis of Financial Condition and
Results of Operations and Notes 1, 5, and 19 to the Consolidated Financial
Statements of the 1994 Annual Report to Stockholders filed as Exhibit 13.
REGULATORY AND RATE MATTERS
The Company is subject to regulation with respect to its retail utility sales
by the DPSC, MPSC, and the VSCC, each of which have broad powers over rate
matters, accounting, and terms of service. Gas sales are subject to regulation
by the DPSC. In limited respects concerning properties and operations in New
Jersey and Pennsylvania, the Company is subject to regulation by the utility
commissions in those states. The FERC exercises jurisdiction with respect to
the Company's accounting systems and policies, and the transmission and
wholesale (resale) sale of electricity. 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, 1994, was as follows: DPSC 64%; MPSC
22%; VSCC 3%; and FERC 11%.
BASE RATE PROCEEDINGS
The Company's most recent base rate filings are discussed below:
Delaware (Docket No. 94-84)
On August 16, 1994, the Company filed an application with the DPSC for a
$13.5 million "limited issue" increase in electric base rates. The Company
subsequently revised the amount of the proposed increase to $11.1 million. The
proposed increase, when netted with fuel savings related to reduction in load
by a resale customer (ODEC) beginning in 1995, is $6.4 million or 1.3%. This
"limited issue" increase is designed to recover costs specific to the Company's
compliance with the Clean Air Act Amendments of 1990, the 1% increase in the
marginal federal income tax rate to 35% during 1993, demand side management and
conservation programs, and an increase in funding for nuclear decommissioning
based on the current NRC minimum funding requirements. The DPSC staff and other
parties to the case have recommended that no revenue increase be granted due to
the Company's current return earned from its Delaware electric operations.
However, the DPSC staff has suggested that if the DPSC decides to consider a
"limited issue" approach, an alternative to approving a rate increase would be
to instead authorize a $9 million increase if monthly or quarterly 1995
earnings fall below certain levels. On March 1, 1995, the Hearing Examiner
issued his report recommending no change in current rates. On March 16, 1995,
the Company filed exceptions to the Hearing Examiner's report. The Company
expects a DPSC decision on the case in late March 1995.
Maryland (Case No. 8676)
On September 1, 1994, the Company filed an application with the MPSC for a
$3.9 million "limited issue" increase in electric base rates. The proposed
increase, when netted with ODEC related fuel savings, is $2.2 million or 1.1%.
This "limited issue" increase is designed to recover costs similar to those in
the Delaware "limited issue" case, except for demand side management and
conservation program costs which
I-13
<PAGE>
are recoverable from Maryland customers through a surcharge. The MPSC staff's
testimony proposes a rate decrease of $9.6 million, reflecting a historical
test year, a lower return on equity, and certain adjustments which are beyond
the scope of the limited-issue filing. On February 3, 1995, the Hearing
Examiner issued his proposed order recommending no change in current rates. On
March 6, 1995, the Company filed an appeal to the Hearing Examiner's proposed
order. The Company expects a MPSC decision on the case in April 1995.
The Company's most recent base rate increases are summarized below. Gas base
rates were increased during 1994 to recover higher operating costs and
investment levels than were reflected in previous rates. Electric base rates
were increased during 1993 to recover higher costs associated with completion
of Hay Road Unit 4, postretirement benefit costs under Statement of Financial
Accounting Standards (SFAS) No. 106, and other items, including general
inflation.
<TABLE>
<CAPTION>
DELAWARE VIRGINIA DELAWARE MARYLAND SYSTEM
RETAIL RETAIL RETAIL RETAIL RESALE
GAS ELECTRIC ELECTRIC ELECTRIC ELECTRIC
DOCKET 94-22 PUE 930036 DOCKET 92-85 CASE 8492 ER 93-96
------------ ---------- ------------ --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Company Filing
Date of Filing........ 5/6/94 5/7/93 10/30/92 10/30/92 10/30/92
Revenue Increase
Filed................ $4,200 $2,315 $36,554 $11,961 $5,566
Percent Increase
Filed................ 4.10% 10.06% 8.48% 6.55% 5.44%
Interim Rates
Date Effective........ 7/5/94 10/5/93 6/1/93 -- 6/3/93
Revenue Increase...... $1,000 $2,315 $35,377 -- $4,000
Commission Order
Date of Order......... 10/18/94 2/23/94 10/5/93 3/26/93 -- (4)
Date Effective........ 11/1/94 10/5/93 6/1/93 4/1/93(3) 6/3/93
Revenue Increase Al-
lowed................ $3,100(1) $1,281 $24,900(2) $7,800(3) $1,500(4)
Percent Increase Al-
lowed................ 3.15%(1) 5.41% 5.80%(2) 4.27%(3) 1.47%
Return on Common Eq-
uity Allowed......... 11.50% 11.05% 11.50% N.A.(3) N.A.
</TABLE>
- --------
(1) Reduced fuel rates also became effective November 1, 1994. The reduced fuel
rates, when combined with the base rate increase, resulted in a net average
decrease of 1.75%.
(2) When offset by the fuel savings associated with Hay Road Unit 4, which were
included in the lower fuel rates that became effective in June 1993,
customer rates increased 3.7%.
(3) The effective date of the increase was two months earlier than expected.
When offset by the fuel savings associated with Hay Road Unit 4, which were
included in the lower fuel rates that became effective in April 1993,
customer rates increased 2.3%. Although a specific return on equity was not
specified, the Company believes that the implied return on equity
approaches 12%.
(4) The base rate increase was reached through settlement agreements with all
resale customers. The agreements were approved by the FERC between June and
December 1994 and also provided for longer termination notice periods (a
two-year notice for up to 30% load reduction and a five-year notice for
greater than 30% load reduction).
FUEL ADJUSTMENT CLAUSES
The Company's tariffs generally include fuel adjustment clauses that permit
the collection of the costs of fuel burned in generating stations and the
variable (energy) costs of purchased and net interchange power from the
Company's retail and resale electric customers, and the costs of natural gas
from its gas customers. Fuel costs are deferred and charged to operations on
the basis of fuel costs included in customer billings under the Company's
tariffs. For the Delaware, Virginia, and FERC jurisdictional customers, the
clauses are based upon estimated annual fuel costs. For the Maryland
jurisdictional customers, the clause is based on historical average costs.
Supporting data are filed with and audited by the various commissions and
formal hearings are held at periodic intervals as required by law. Fixed costs
(capacity or demand charges) associated with purchased power transactions
entered into for reliability reasons are generally subject to base rate
recovery. The present status or results of significant fuel rate issues are
discussed below. As of December 31,
I-14
<PAGE>
1994, the Company had accrued fuel disallowance reserves which adequately
provide for any disallowances of fuel costs and penalties related to the issues
discussed below.
Delaware
The DPSC has a Power Plant Performance Program (PPPP) under which the Company
can receive financial rewards or penalties based on the performance of its 15
major generating units. The maximum level or "cap" for rewards or penalties is
limited to two percent (2%) of the total equity investment in the 15 units or
approximately $3.7 million. The PPPP compares actual performance (defined as
the three-year average equivalent availability factor for fossil units or
capacity factor for nuclear units) with a predetermined target for each
generating unit. Results under the PPPP for calendar year 1993 were a reward of
$80,000. Preliminary calculations under the PPPP for 1994 result in a penalty
of approximately $350,000 due primarily to various outages between 1992 and
1994 at Salem Units 1 and 2 and Indian River Unit 4. Should the Company's 1995
annual retail fuel adjustment filing result in the disallowance of certain
replacement power costs (as discussed below), then the PPPP penalty for 1994 is
estimated at approximately $200,000. PPPP reward or penalty amounts are
reflected in base rates as an additional charge or credit in the second year
after the program year (i.e. the 1993 reward is being reflected in calendar
year 1995 base rates as an additional charge, and the expected 1994 penalty
would be reflected in calendar year 1996 as a credit to base rates).
In October 1994, the Company made its annual retail fuel adjustment filing
for 1995. DPSC staff has recommended a disallowance of approximately $800,000
of net replacement power costs associated with the Salem Unit 1 outage which
lasted from April 7, 1994 to June 4, 1994.
The DPSC has a gas incentive program whereby the Company can receive a
maximum $300,000 annual reward or penalty if unaccounted-for gas volumes are
below or above 2.5% of total gas sendout volumes with a deadband of plus or
minus 0.5%. For the twelve months ended July 1993, unaccounted-for gas volumes
were within the deadband resulting in neither a reward nor a penalty. For the
twelve months ended July 1994, unaccounted-for gas volumes were 1.1% of sendout
resulting in the maximum reward amount. The reward is being collected through a
base rate charge during the twelve-month period beginning November 1994. On
March 21, 1995, the DPSC eliminated the gas incentive program with respect to
rates effective November 1995.
Maryland
The MPSC has a Generating Unit Performance Program (GUPP) which is used to
assess the overall performance of the Company's 15 major generating units. The
GUPP does not result in automatic rewards or penalties. When an overall system
performance standard is not met, the MPSC could institute an investigation into
the performance levels of those units that operated below their individual
performance standards and disallow certain fuel costs. The Company's
calculation of the 1993 and 1994 GUPP results indicated that the overall system
performance standard was met.
Resale
The Company incurred certain mine closing costs that it recovered from resale
customers through its wholesale fuel adjustment clause. The FERC staff issued
an audit report in 1994 which required that the Company recompute the cost of
fuel used in fuel adjustment clause billings to wholesale customers by
eliminating the mine closing costs beginning in 1989 and make refunds with
interest for any overbilled amounts. In accordance with the audit report, on
December 27, 1994, the Company refunded $897,000, including interest, to its
resale customers.
On May 19, 1993, the Company's municipal customers filed a complaint with the
FERC seeking a $5.3 million refund of alleged excessive fuel and replacement
power costs related to coal procurement practices and the operating performance
of certain electric power plants. The Company believes the complaint is without
merit and has filed an answer which includes a motion seeking dismissal of the
complaint. It is anticipated that the FERC will rule on the motion in the third
quarter of 1995.
I-15
<PAGE>
OTHER REGULATORY MATTERS
Purchase of COPCO
For a discussion of the Company's purchase of COPCO, see "Competition--"Three
Legged Stool', Sales Initiatives" on page I-3 and Note 6 to the Consolidated
Financial Statements contained in the Company's 1994 Annual Report to
Stockholders filed as Exhibit 13. The Company's purchase of COPCO is contingent
on various regulatory approvals. The DPSC and MPSC approved the Company's
filings for regulatory approval on November 22, 1994, and January 18, 1995,
respectively. The Company expects the VSCC and FERC will approve the Company's
filings by mid-1995.
Transmission Rate Filing
As part of the Company's filing with the FERC for approval of the purchase of
COPCO, the Company has proposed to offer comparable transmission services.
Delaware Task Force on Regulation
In 1993, the Governor of Delaware convened a task force "to recommend reforms
to the existing regulatory process, structure and organization that will
improve utility efficiency and encourage utility innovation, while assuring
continued availability of utility services at affordable and competitive
prices." The task force included representatives from the DPSC, utilities
(including the Company), industrial customers, government, and the public. In
June 1994, the task force issued its report to the Governor which included the
following recommendations:
(1) Replace the current five-member, part-time DPSC with three full-time
commissioners and expand the Staff in order to manage the regulatory
process more effectively, examine policy issues more thoroughly, and reduce
the use of outside consultants and attorneys.
(2) Provide the DPSC with the authority to deregulate competitive
markets, implement alternative forms of regulation, and allow economic
development rates.
(3) Pass legislation which would encourage the DPSC to resolve matters
through the use of settlements.
(4) Strengthen the role of the Office of the Public Advocate (OPA) and
provide the OPA with an in-house legal and regulatory research staff.
(5) Have the DPSC Staff, OPA, utilities, and other interested parties
submit annual progress reports to the DPSC citing any advances and cost
savings achieved and setbacks experienced toward fully implementing the
task force's recommendations.
Legislation, which the Governor supports, has been filed with the 1995
session of the General Assembly to implement items 2 and 3 above.
Natural Gas Restructuring Filing
On March 1, 1995, the Company filed an application with the DPSC to
restructure the Company's natural gas pricing and service options. Although the
Company is not requesting a change in total revenues, through the redesign of
gas rates and modification of the gas cost adjustment mechanism, revenues among
various classes of customers would be reallocated to more accurately reflect
the cost of serving those customers. The changes would result in an increase in
gas prices for residential and low volume commercial customers and a decrease
for most other commercial and industrial customers. The Company also is
proposing to unbundle and separately price several services so that eligible
customers, such as large commercial and industrial customers, can elect to use
and pay for only the services they need. A DPSC ruling is expected in 1996.
I-16
<PAGE>
CONSTRUCTION AND FINANCING PROGRAM
Utility construction expenditures for the period 1992-1994, excluding $24
million of AFUDC, and estimated utility construction expenditures for the
period 1995-1999, excluding $36 million of AFUDC, are shown in the following
table:
<TABLE>
<CAPTION>
CALENDAR YEAR (DOLLARS IN THOUSANDS)
-----------------------------------------------------
1997-
1992 1993 1994 1995 1996 1999
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Electric Facilities:
Production.......... $125,800 $ 69,100 $ 54,300 $ 50,400 $ 42,300 $269,000
Transmission........ 12,200 17,300 26,400 11,600 11,700 27,600
Distribution........ 43,000 40,300 37,800 36,600 36,000 126,200
Gas Facilities........ 14,300 17,000 19,400 14,000 20,900 36,000
General Facilities.... 12,100 16,300 16,200 16,800 23,100 72,200
-------- -------- -------- -------- -------- --------
$207,400 $160,000 $154,100 $129,400 $134,000 $531,000
======== ======== ======== ======== ======== ========
</TABLE>
Capital requirements for the period 1995-1996 are estimated to be $448
million, including $150 million for the purchase of COPCO and $263 million for
utility construction, excluding AFUDC. The Company anticipates that during the
period 1995-1996, approximately $267 million will be generated internally,
which represents 90% of estimated capital requirements, adjusted to exclude the
COPCO acquisition, and 102% of estimated utility construction expenditures.
Capital requirements for the period 1997-1999 are estimated to be $690 million,
including $531 million for utility construction, excluding AFUDC, and $86
million for the maturity of long-term debt. The Company anticipates that during
the period 1997-1999, $449 million will be generated internally, which
represents 65% of estimated capital requirements and 85% of estimated utility
construction expenditures. The forecasted internally generated funds are net of
expected power purchase commitments, including the planned purchase from PECO
associated with the COPCO acquisition. The Company plans to finance the COPCO
acquisition with approximately 50% long-term debt and 50% common stock sold
through its Dividend Reinvestment and Common Share Purchase Plan over
approximately three years. The balance of capital requirements for both periods
is expected to be provided by the sale of long-term debt and equity securities.
The types, amounts, and times of such sales will depend upon future market
conditions and the Company's target capital structure.
The issuance of unsecured debt is limited by certain provisions in the
Company's Restated Certificate and Articles of Incorporation, as amended (the
Charter), to 20% of the Company's total capitalization excluding unsecured
debt. As of December 31, 1994, these provisions would have permitted the
Company to issue approximately $70 million of additional unsecured debt.
The issuance of First Mortgage Bonds by the Company is limited by a covenant
in its Mortgage and Deed of Trust dated October 1, 1943, as supplemented and
amended (the Mortgage), with Chemical Bank (Trustee) requiring the pro forma
ratio of consolidated earnings to interest on First Mortgage Bonds for any
twelve consecutive months within the fifteen months preceding such issuance to
be not less than 2.00. This ratio for the twelve months ended December 31, 1994
was 7.22. The issuance of First Mortgage Bonds by the Company also is limited
in the Mortgage by the bondable value of property additions.
Certain provisions in the Company's Charter limit the issuance of preferred
stock. The most restrictive of these provisions requires that the pro forma
ratio of consolidated earnings to fixed charges and preferred stock dividend
requirements combined for any twelve consecutive months within the fifteen
months preceding an issuance of preferred stock be 1.50 or greater. This ratio
was 2.38 for the twelve months ended December 31, 1994.
The Company does not expect that any of these limitations will restrict its
ability to issue unsecured debt, First Mortgage Bonds, and preferred stock in
the amounts necessary to meet its anticipated capital requirements.
I-17
<PAGE>
The Company's ratios of earnings to fixed charges and earnings to fixed
charges and preferred dividends under the Securities and Exchange Commission
(SEC) Methods for 1990-1994 are shown below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1993 1992 1991 1990
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Ratio of Earnings to Fixed Charges (SEC
Method)...................................... 3.49X 3.47X 3.03X 2.58X 2.03X
Ratio of Earnings to Fixed Charges (SEC
Method) as Adjusted (1)...................... 3.74X 3.47X 2.78X 2.58X 2.89X
Ratio of Earnings to Fixed Charges and
Preferred Dividends (SEC Method)............. 2.85X 2.88X 2.51X 2.24X 1.69X
Ratio of Earnings to Fixed Charges and
Preferred Dividends (SEC Method) as Adjusted
(1).......................................... 3.05X 2.88X 2.30X 2.24X 2.41X
</TABLE>
- --------
(1) Adjusted ratios reflect the following pre-tax amounts: for 1994, the
exclusion of an early retirement offer charge of $17.5 million; for 1992,
the exclusion of the gain from the Company's share of a settlement reached
in the lawsuit against PECO in connection with the shutdown of Peach
Bottom of $18.5 million; and for 1990, the exclusion of the write-off of
an investment in certain non-regulated subsidiary projects of $62.5
million.
Under the SEC Methods, earnings, including AFUDC, have been computed by
adding income taxes and fixed charges to net income. Fixed charges include
gross interest expense and the estimated interest component of rentals. For
the ratio of earnings to fixed charges and preferred dividends, preferred
dividends represent annualized preferred dividend requirements multiplied by
the ratio that pre-tax income bears to net income. Net income and income taxes
related to the cumulative effect of a change in accounting for unbilled
revenues recorded in 1991 are excluded from the computation of these ratios.
For further information on the Company's financing program, see Notes 10
through 12 to the Consolidated Financial Statements and the Liquidity and
Capital Resources section of Management's Discussion and Analysis of Financial
Condition and Results of Operations in the 1994 Annual Report to Stockholders
filed as Exhibit 13.
ENVIRONMENTAL MATTERS
The Company is subject to regulation with respect to the environmental
effects of its operations, including air and water quality control, oil
pollution control, and solid and hazardous waste disposal, and limitation on
land use by various federal, regional, state, and local authorities. Permits
are required for the Company's construction projects and existing facilities.
The Company has incurred, and expects to continue to incur, construction
expenditures and operating costs because of environmental considerations and
requirements. The Company is engaged in a continuing program to assure
compliance with the environmental standards adopted by various regulatory
authorities.
Construction Expenditures
Construction expenditures for environmental compliance, primarily with the
Clean Air Act Amendments of 1990 (The Clean Air Act), for the years 1995-1999
are estimated at $77 million (excluding AFUDC). These amounts have been
included in the Company's estimates of utility construction expenditures under
"Construction and Financing Program" on page I-17.
Clean Air Act
The Clean Air Act requires utilities and other industries to reduce
significantly emissions of air pollutants such as sulfur dioxide (SO/2/) and
oxides of nitrogen (NOx). Title IV of the Clean Air Act, the acid rain
provisions, establish a two-phase program under which certain utility units
must reduce SO/2/ and NOx emissions in 1995 (Phase I) and other utility units
must reduce SO/2/ and NOx emissions beginning in the year 2000 (Phase II).
Emission reductions at the jointly-owned Conemaugh Power Plant, the only units
I-18
<PAGE>
required to comply with Title IV in 1995, will be achieved through installation
and operation of flue gas desulfurization (FGD) systems. The remainder of the
Company's wholly- and jointly-owned fossil fuel fired units are expected to
meet Phase II emission limits through a combination of fuel switching, FGD,
repowering, environmental dispatch and SO/2/ allowance trading.
In addition to complying with Title IV federal requirements, as major sources
of NOx emissions, Company facilities must comply with Clean Air Act Title I
ozone nonattainment provisions designed to attain the National Ambient Air
Quality Standard for Ozone. Title I requires states to promulgate Reasonably
Available Control Technology (RACT) regulations for existing sources located
within ozone nonattainment areas or within the Northeast Ozone Transport Region
(NOTR). Company facilities in Delaware and Maryland must comply with RACT
requirements because they are in the NOTR. The Company proposes to comply with
the NOx RACT requirements by undertaking certain operating changes and the
installation of low NOx burner technology. The Company's Delaware and Maryland
RACT proposals have not yet been approved by the EPA as part of each State's
respective State Implementation Plan. Consequently, it is possible that
additional costs may be incurred at these facilities to further control NOx as
part of the RACT effort.
"Post-RACT" NOx emission reductions may also be imposed on Company facilities
as a result of a Memorandum of Understanding (MOU) signed by a majority of
members of the Ozone Transport Commission. The MOU would require sources to
meet certain emission limitations or to reduce NOx emissions up to 65% below
1990 levels by 1999. Under the MOU, states would be required to impose even
further NOx reductions by 2003 if necessary. While the provisions of the MOU
have not been implemented by regulations in Delaware or Maryland, the Company
will likely be required to install post-combustion NOx control equipment on
some or all of the Company's major generating units. At this time, the Company
cannot determine the potential operating impacts and anticipated costs
associated with this "post-RACT" initiative.
To help attain air quality standards, the Clean Air Act mandates that the
emission of certain air pollutants by new sources or increased emissions from
existing facilities be offset by reductions in similar emissions from existing
sources. Such requirements may affect the Company's ability to locate,
construct, and expand generating facilities in the future.
The Company anticipates that the costs of complying with the Clean Air Act
will be recoverable from its customers.
Salem Operating Permit
On July 20, 1994, the New Jersey Department of Environmental Protection and
Energy (NJDEPE) issued a final five-year permit, effective September 1, 1994,
that would require PSE&G to undertake various measures to protect aquatic life
in the Delaware Estuary and to provide broad-ranging ecological benefits. Such
measures include the restoration and/or enhancement of 10,000 acres of
marshlands, modifications to Salem's intake screens, and a comprehensive
biological monitoring program. The final permit does not require PSE&G to
construct closed-cycle cooling towers, which were originally proposed under a
1990 NJDEPE draft permit and which PSE&G believes are unnecessary. PSE&G has
informed the Company that the NJDEPE has granted the requests of certain
parties, including the State of Delaware, for hearings with the NJDEPE
challenging the final permit, which are pending before the New Jersey Office of
Administrative Law. The EPA, which has authority to review the final permit
issued by the NJDEPE, has completed its review and has not raised any
objections. PSE&G is implementing the permit. Additional permits from various
agencies are required to be obtained to implement the permit. No assurances can
be given as to the receipt of any such additional permits. The estimated
capital cost of compliance with the final permit is approximately $100 million,
of which the Company's share is 7.41%.
Water Quality Regulations
DNREC and the Maryland Department of the Environment (MDE) have promulgated
major changes to water quality regulations which emphasize increased control of
toxic pollutants and signal a shift away
I-19
<PAGE>
from technology-based standards. In addition, DNREC has proposed increased
restrictions on thermal discharge limits. As part of this process, one
discharge from the Indian River Power Plant was included on a Delaware list of
suspected toxic pollutant discharges and one discharge from the Vienna Power
Plant was added to the Maryland toxic discharge list by the EPA. National
Pollutant Discharge Elimination System (NPDES) permit modifications for each
plant are expected in 1995. The cost of complying with the final modified
Delaware and Maryland regulations is not expected to be material.
The Clean Water Act requires that the cooling water intake and discharge
systems at the Edge Moor and Indian River Power Plants minimize adverse
environmental impact. Between 1976 and 1979, the Company submitted to DNREC the
results of environmental impact studies which demonstrated compliance with the
Act. DNREC is in the process of updating the Company's studies to determine if
the systems are in compliance. These studies are expected to take one to two
years. If it should be determined that the intake and/or discharge systems are
not in compliance with the Act, construction expenditures to modify the systems
could cost up to $47 million.
Hazardous Substances
The disposal 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 remediate certain abandoned or uncontrolled hazardous
waste sites. The Company's exposure is minimized by adherence to environmental
standards for Company-owned facilities and through a waste disposal contractor
screening and audit process.
The Company is a potentially responsible party (PRP) at a federal Superfund
site in Philadelphia, Pennsylvania (the Metal Bank/Cottman Avenue site), a
member of a de minimis PRP group at a federal Superfund site in Jamestown,
North Carolina (the Seaboard Chemical site), and alleged to be a third-party
contributor at two other federal Superfund sites (the Bridgeport Rental and Oil
Services site in Logan Township, New Jersey and the Berks Associates site in
Douglassville, Pennsylvania). Because the Company's imputed share of the
potential liabilities at these sites is small, the Company does not expect its
share of cleanup costs at these sites, either separately or cumulatively, to be
material.
The Company's former coal gasification sites in Wilmington and New Castle
have been placed on Delaware's list of state superfund sites by DNREC and are
discussed below. Also, the Company's former coal gasification site in Cambridge
has been placed on Maryland's list of state superfund sites by the MDE. While
the MDE has not acted on the Cambridge site to date, the EPA recommended the
site for "no further action" in 1990.
The Company completed its own investigation and risk assessment of the
Wilmington coal gasification site in 1987. Based on the results of that study,
which were submitted to DNREC, the Company determined that the site posed a
minimal risk to the environment and the surrounding community. In 1992, DNREC
advised the Company that additional sampling was required so that an updated
risk assessment could be completed. The Facility Evaluation and risk assessment
were completed in August 1994 and submitted to DNREC for review. Once DNREC
finishes their review of the report and risk assessment, the Company may be
required to incur costs for cleanup.
The Company's New Castle coal gasification site represents a 3-acre portion
within a 41-acre marsh currently being investigated by DNREC. Sediment sample
results indicate that low levels of contaminates were found throughout the
marsh. These contaminates could have originated from a number of sources within
the marsh area or from surface runoff from adjacent roadways. Once DNREC
completes the Facility Evaluation report, the Company may be required to incur
certain costs for further investigation.
In 1994, the Company accrued a liability of $2 million representing its
estimate of site study and cleanup costs for all of the above Federal and State
Superfund sites.
I-20
<PAGE>
Emerging Environmental Issues
An environmental issue that could affect the electric utility industry is
that of potential health risks associated with exposure to electric and
magnetic fields (EMF) from electric transmission lines and other facilities.
Studies present conflicting evidence and inconclusive results. Although no
direct link between EMF and human health has been identified, the Company
supports further research. The outcome of future studies may affect the
Company's design, location, and cost of electric power facilities. However, the
Company cannot predict the outcome of this issue.
Another environmental issue that could affect the electric utility industry
is the emission of "greenhouse gases," in particular the release of carbon
dioxide from generating facilities into the atmosphere which has been
associated with the potential for global warming. Despite scientific
uncertainties and disagreements regarding the effects of global warming, the
Company is exploring cost-effective ways to reduce greenhouse gas emissions
while satisfying its customers' growing demand for energy. Specific actions
include supporting scientific research, continuing its balanced environmental
stewardship/energy resource plans (the Challenge 2000 Plan), and enhancing
energy conservation in the Company's operations. As part of President Clinton's
climate challenge action plan introduced in October 1993, a climate challenge
program was developed. Under this program, the DOE and electric utilities will
explore and promote ways in which electric utilities can voluntarily reduce,
limit, avoid or offset emissions of carbon dioxide and other greenhouse gases.
The Company agreed to participate in this program. Should mandatory emissions
limitations or a "carbon tax" be imposed, the Company's operations could be
affected. The Company cannot predict the outcome of this issue.
Subsidiaries
Certain of the Company's subsidiaries are also subject to regulations with
respect to the environmental effects of their operations, including air and
water quality control, solid waste disposal, and limitation on land use by
various federal, regional, state, and local authorities. One of the Company's
indirect subsidiaries, Pine Grove Landfill, Inc. (Pine Grove), which owns and
operates a solid waste disposal facility in Pennsylvania, entered into a
Consent Order and Agreement, dated March 3, 1995, with the Pennsylvania
Department of Environmental Resources (PADER) which addresses alleged past
violations of State solid waste management and air quality regulations due to
odors emanating from its waste disposal facility. The terms of the Consent
Order and Agreement provide for the payment by Pine Grove of a $22,000 civil
penalty and the costs of certain environmental services and facility
enhancements. Pine Grove's management believes it has corrected the odor
problem at the disposal facility. Pine Grove's management cannot predict the
nature of any actions which PADER may take in the event of future odor
emissions under authority PADER possesses to impose fines upon, close, limit
expansion of, or order changes in the business practices at, the disposal
facility. The Company believes that its other subsidiaries are in substantial
compliance with all environmental regulations.
RETAIL FRANCHISES
The franchises discussed below could be impacted by legislation promoting the
retail wheeling of electricity. For a further discussion on the development of
competition in retail markets, see "Strategic Plans for Competition--Electric
Business Overview," on page I-1.
The Company holds franchises, which for the most part are perpetual, for the
rendition of retail electric and gas service in certain designated areas and
municipalities in the State of Delaware, pursuant to legislative enactments of
the General Assembly and to consents, orders, and permits from various public
bodies and municipal authorities.
The Company holds franchises, which for the most part are perpetual, for the
rendition of retail electric service in all of its assigned territories in the
State of Maryland, pursuant to Maryland law and appropriate orders of the MPSC.
I-21
<PAGE>
The Company holds perpetual franchises for the rendition of retail electric
service in certain designated areas of the Commonwealth of Virginia, pursuant
to appropriate orders of the VSCC under the Virginia Public Utility Facilities
Act. It also has franchises for the rendition of retail electric service within
other municipalities which are not perpetual, but which are expected to be
renewed at their expiration dates.
In Pennsylvania, the Company holds certificates of public convenience from
the Pennsylvania Public Utility Commission to own and exercise rights with
respect to its interests in certain electric generating stations and
transmission lines located in the State.
NUMBER OF EMPLOYEES
The number of full time employees of the Company at January 1, 1995, was
2,487.
A total of 1,435 employees are represented by the International Brotherhood
of Electrical Workers Locals 1238 (Northern) and 1307 (Southern) whose
contracts with the Company expire on December 15, 1996 and June 25, 1995,
respectively.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages, and positions of all of the executive officers of the
Company as of January 1, 1995 are listed below along with their business
experience during the past five years. Officers are elected annually by the
Board of Directors at the meeting of directors immediately following the Annual
Meeting of Stockholders. There are no family relationships among these
officers, nor any arrangement or understanding between any officer and any
other person pursuant to which the officer was selected.
EXECUTIVE OFFICERS OF THE REGISTRANT
(AS OF JANUARY 1, 1995)
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME, AGE AND POSITION DURING PAST 5 YEARS
---------------------- -------------------
<S> <C>
Howard E. Cosgrove, 51........ Elected 1992. President and Chief Operating
Chairman of the Board, Officer from 1991 to 1992; Executive Vice
President, and Chief President from 1985 to 1991.
Executive Officer and
Director
H. Ray Landon, 59............. Elected 1988.
Executive Vice President and
Director
Ralph E. Klesius, 52.......... Elected 1992. Vice President, Engineering from
Senior Vice President and 1988 to 1992.
Environmental Compliance
Officer
Thomas S. Shaw, 47............ Elected 1992. Vice President/President, Delmarva
Senior Vice Capital Investments, Inc. from 1991 to 1992;
President/President, Delmarva Vice President, Gas Division from 1990 to 1991;
Capital Investments, Inc. Vice President, Production from 1984 to 1990.
Barbara S. Graham, 46......... Elected 1995. Vice President and Chief Financial
Senior Vice President, Officer from 1992 to 1994. Treasurer from 1987
Treasurer, and Chief to 1992.
Financial Officer
Donald E. Cain, 49............ Elected 1988.
Vice President,
Administration
Paul S. Gerritsen, 49......... Elected 1993. Vice President and Chief Financial
Vice President Officer from 1987 to 1992.
Wayne A. Lyons, 55............ Elected 1990. Vice President from 1985 to 1990.
Vice President, Division
Operations
</TABLE>
(Continued)
I-22
<PAGE>
<TABLE>
<CAPTION>
BUSINESS EXPERIENCE
NAME, AGE AND POSITION DURING PAST 5 YEARS
---------------------- -------------------
<S> <C>
Frank J. Perry, 51............. Elected 1990. Vice President, Gas Division from
Vice President, Production 1986 to 1990.
Jack Urban, 51................. Elected 1991. General Manager, Production
Vice President, Gas Division Services from 1990 to 1991; General Manager,
Fuel Supply from 1984 to 1990.
James P. Lavin, 47............. Elected 1993. Comptroller-Corporate and Chief
Comptroller and Chief Accounting Officer from 1989 to 1993.
Accounting Officer
</TABLE>
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.
<TABLE>
<CAPTION>
NET INSTALLED
SUMMER
GENERATING
CAPACITY
STATION LOCATION (KILOWATTS)
------- -------- -------------
<S> <C> <C>
COAL-FIRED
Edge Moor................. Wilmington, DE................. 251,000
Indian River.............. Millsboro, DE.................. 764,000
Conemaugh................. New Florence, PA............... 63,000(A)
Keystone.................. Shelocta, PA................... 63,000(A)
---------
1,141,000
---------
OIL-FIRED
Edge Moor................. Wilmington, DE................. 444,000
Vienna.................... Vienna, MD..................... 151,000
---------
595,000
---------
COMBUSTION TURBINES/COMBINED
CYCLE
Hay Road.................. Wilmington, DE................. 511,000
---------
NUCLEAR
Peach Bottom.............. Peach Bottom Twp., PA.......... 157,000(A)
Salem..................... Lower Alloways Creek Twp., NJ.. 164,000(A)
---------
321,000
---------
PEAKING UNITS
Christiana................ Wilmington, DE................. 45,000
Edge Moor................. Wilmington, DE................. 13,000
Madison Street............ Wilmington, DE................. 11,000
West...................... Marshallton, DE................ 14,000
Delaware City............. Delaware City, DE.............. 14,000
Indian River.............. Millsboro, DE.................. 17,000
Vienna.................... Vienna, MD..................... 17,000
Tasley.................... Tasley, VA..................... 26,000
Salem..................... Lower Alloways Creek Twp., NJ.. 3,000(A)
Crisfield................. Crisfield, MD.................. 10,000
Bayview................... Bayview, VA.................... 12,000
</TABLE>
(Continued)
I-23
<PAGE>
<TABLE>
<CAPTION>
NET INSTALLED
SUMMER
GENERATING
CAPACITY
STATION LOCATION (KILOWATTS)
------- -------- -------------
<S> <C> <C>
Keystone................... Shelocta, PA................... 400(A)
Conemaugh.................. New Florence, PA............... 400(A)
---------
182,800
---------
PURCHASED CAPACITY........... Delaware City, DE.............. 48,000
CUSTOMER-OWNED CAPACITY...... Delaware City, DE.............. 57,000(B)
---------
Total...................................................... 2,855,800
=========
</TABLE>
- --------
(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:
<TABLE>
<CAPTION>
VOLTAGE CIRCUIT MILES
------- -------------
<S> <C>
Transmission:
500 kV..................................................... 16
230 kV..................................................... 247
138 kV..................................................... 450
69 kV..................................................... 715
Distribution:
34 kV..................................................... 95
25 kV and below........................................... 8,042
</TABLE>
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:
<TABLE>
<S> <C>
Transmission Mains............................................... 110*
Distribution Mains............................................... 1,362
Service Lines.................................................... 1,039
</TABLE>
--------
* 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. 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
<PAGE>
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. 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
<PAGE>
PART II
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.
<TABLE>
<CAPTION>
1994 1993
------------------------ ----------------------
PRICE PRICE
DIVIDEND --------------- DIVIDEND -------------
DECLARED HIGH LOW DECLARED HIGH LOW
-------- ------- ------- -------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
First Quarter................... $.38 1/2 $23 5/8 $20 1/2 $.38 1/2 $24 22 1/8
Second Quarter.................. .38 1/2 21 16 7/8 .38 1/2 24 1/8 21 1/2
Third Quarter................... .38 1/2 20 17 3/4 .38 1/2 25 7/8 23 1/8
Fourth Quarter.................. .38 1/2 19 1/4 17 5/8 .38 1/2 25 5/8 21 1/4
</TABLE>
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. 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. 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. 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. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
II-1
<PAGE>
PART III
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. 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. 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. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
III-1
<PAGE>
PART IV
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.
<TABLE>
<CAPTION>
1994
ANNUAL REPORT
FINANCIAL STATEMENT (PAGE)
------------------- -------------
<S> <C>
Consolidated Statements of Income for the three years ended
December 31, 1994............................................ 31
Consolidated Balance Sheets as of December 31, 1994 and 1993.. 32 and 33
Consolidated Statements of Cash Flows for the three years
ended December 31, 1994...................................... 34
Consolidated Statements of Capitalization as of December 31,
1994 and 1993................................................ 35
Consolidated Statements of Changes in Common Stockholders' Eq-
uity for the three years ended December 31, 1994............. 36
Notes to Consolidated Financial Statements.................... 37 to 49
</TABLE>
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
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
2 Stock Purchase Agreement between PECO Energy Company and Delmarva
Power & Light Company related to the acquisition of Conowingo Power
Company.
3-A Copy of the Restated Certificate and Articles of Incorporation
effective as of April 12, 1990. (Filed with Registration Statement
No. 33-50453.)
3-B Copy of the Company's Certificate of Designation and Articles of
Amendment establishing the 7 3/4% Preferred Stock--$25 Par. (Filed
with Registration Statement No. 33-50453.)
3-C Copy of the Company's Certificate of Designation and Articles of
Amendment establishing the 6 3/4% Preferred Stock. (Filed with
Registration Statement No. 33-53855.)
3-D Copy of the Company's By-Laws as amended September 30, 1993. (Filed
with Form 10-K for the year ended December 31, 1993, File No. 1-
1405.)
4-A Copy of the Mortgage and Deed of Trust of Delaware Power & Light
Company to the New York Trust Company, Trustee, (Chemical Bank,
successor Trustee) dated as of October 1, 1943 and copies of the
First through Sixty-Eighth Supplemental Indentures thereto. (Filed
with Registration Statement No. 33-1763.)
4-B Copy of the Sixty-Ninth Supplemental Indenture. (Filed with
Registration Statement No. 33-39756.)
4-C Copies of the Seventieth through Seventy-Fourth Supplemental
Indentures. (Filed with Registration Statement No. 33-24955.)
4-D Copies of the Seventy-Fifth through the Seventy-Seventh Supplemental
Indentures. (Filed with Registration Statement No. 33-39756.)
4-E Copies of the Seventy-Eighth and Seventy-Ninth Supplemental
Indentures. (Filed with Registration Statement No. 33-46892.)
</TABLE>
IV-1
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
-------
<C> <S>
4-F Copy of the Eightieth Supplemental Indenture. (Filed with
Registration Statement No. 33-49750.)
4-G Copy of the Eighty-First Supplemental Indenture. (Filed with
Registration Statement No. 33-57652.)
4-H Copy of the Eighty-Second Supplemental Indenture. (Filed with
Registration Statement No. 33-63582.)
4-I Copy of the Eighty-Third Supplemental Indenture. (Filed with
Registration Statement No. 33-50453.)
4-J Copies of the Eighty-Fourth through Eighty-Eighth Supplemental
Indentures. (Filed with Registration Statement No. 33-53855.)
10-A Copy of the Management Incentive Compensation Plan amended and
restated as of January 1, 1992. (Filed with Form 10-K for the year
ended December 31, 1991, File No. 1-1405.)
10-B Copy of an amendment to the Management Incentive Compensation Plan
adopted by the Board of Directors on January 28, 1993, effective as
of January 1, 1993. (Filed with Form 10-K for the year ended
December 31, 1992, File No. 1-1405.)
10-C Copy of the Supplemental Executive Retirement Plan, revised as of
October 29, 1991. (Filed with Form 10-K for the year ended December
31, 1992, File No. 1-1405.)
10-D Copies of amendments to the Supplemental Executive Retirement Plan,
effective June 15, 1994, and November 1, 1994.
10-E Copy of the Long Term Incentive Plan amended and restated as of
January 1, 1992. (Filed with Form 10-K for the year ended December
31, 1991, File No. 1-1405.)
10-F Copy of an amendment to the Long Term Incentive Plan adopted by the
Board of Directors on January 28, 1993, effective as of January 1,
1993. (Filed with Form 10-K for the year ended December 31, 1992,
File No. 1-1405.)
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.
10-I Copy of the Management Life Insurance Plan amended and restated as
of January 1, 1992. (Filed with Form 10-K for the year ended
December 31, 1991, File No. 1-1405.)
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.
</TABLE>
(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
<PAGE>
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.
<TABLE>
<CAPTION>
1994 1993 1992
---------- ---------- ----------
<S> <C> <C> <C>
ELECTRIC:
Electricity generated and purchased (MWh):
Generated................................ 11,581,929 11,264,540 8,548,233
Purchased................................ 3,766,169 3,857,133 4,579,521
Interchange deliveries................... (2,220,898) (2,225,384) (998,679)
---------- ---------- ----------
Total output for load................... 13,127,200 12,896,289 12,129,075
========== ========== ==========
Electric sales (MWh):
Residential.............................. 3,578,743 3,499,387 3,228,237
Commercial............................... 3,461,058 3,336,847 3,140,149
Industrial............................... 3,248,131 3,232,233 3,115,677
Resale................................... 2,166,154 2,131,920 1,987,393
Other sales (1).......................... 50,996 79,843 49,355
---------- ---------- ----------
Total sales............................. 12,505,082 12,280,230 11,520,811
Losses and miscellaneous system uses...... 622,118 616,059 608,264
---------- ---------- ----------
Total disposition of energy.............. 13,127,200 12,896,289 12,129,075
========== ========== ==========
Operating revenue (thousands):
Residential.............................. $312,224 $305,446 $273,463
Commercial............................... 242,506 237,785 220,659
Industrial............................... 145,594 150,178 144,094
Resale................................... 105,350 104,983 96,491
Other sales revenues (2)................. 6,816 9,716 7,142
Interchange deliveries................... 62,388 61,437 30,606
Miscellaneous revenues................... 8,237 6,118 7,720
---------- ---------- ----------
Total revenues.......................... $883,115 $875,663 $780,175
========== ========== ==========
Number of customers (end of period):
Residential.............................. 347,997 342,710 336,076
Commercial............................... 44,060 43,324 42,427
Industrial............................... 699 715 726
Resale................................... 12 12 12
Other.................................... 604 593 578
---------- ---------- ----------
Total customers......................... 393,372 387,354 379,819
========== ========== ==========
Average annual use per residential cus-
tomer (kWh)(3)........................... 10,359 10,336 9,680
Average annual revenue per residential
customer (3)............................. $903.74 $902.14 $820.02
Average revenue per kWh (cents):
Residential.............................. 8.7 8.7 8.5
Commercial............................... 7.0 7.1 7.0
Industrial............................... 4.5 4.7 4.6
GAS:
Gas sales (Mcf)........................... 18,087 18,066 17,013
Gas transported (Mcf)..................... 2,255 1,539 3,155
Gas revenue (thousands)................... $107,906 $94,944 $83,869
Number of customers (end of period):
Residential.............................. 88,518 86,027 82,996
Commercial............................... 6,982 6,751 6,500
Industrial............................... 150 150 152
Interruptible and other.................. 12 12 11
---------- ---------- ----------
Total customers......................... 95,662 92,940 89,659
========== ========== ==========
Residential gas service:
Average annual use per customer (Mcf)(3). 88.55 86.85 88.71
Average annual revenue per customer (3).. $632.11 $558.59 $526.94
Average revenue per Mcf.................. $7.14 $6.43 $5.94
</TABLE>
- --------
(1)Includes unbilled sales.
(2)Includes unbilled revenues.
(3)Based on average number of customers during period.
IV-3
<PAGE>
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
<PAGE>
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.
<PAGE>
EXHIBIT 2
STOCK PURCHASE AGREEMENT
BETWEEN
PECO ENERGY COMPANY
AND
DELMARVA POWER & LIGHT COMPANY
May 24, 1994
<PAGE>
TABLE OF CONTENTS
Page
----
ARTICLE I................................................... 1
1.1. The Sale......................................... 1
1.2. Consideration.................................... 2
1.3. Calculation of Adjustments....................... 2
1.4. Payment of Adjustment to Purchase Price.......... 6
ARTICLE II.................................................. 7
2.1. Time and Place of Closing........................ 7
2.2. Deliveries by PECO Energy........................ 8
2.3. Deliveries by the Buyer.......................... 8
ARTICLE III................................................. 9
3.1. Organization; Qualification...................... 9
3.2. The Company's Capitalization..................... 11
3.3. Title to Stock................................... 11
3.4. Authority Relative to this Agreement............. 12
3.5. Consents and Approvals; No Violation............. 13
3.6. Reports.......................................... 16
3.7. Financial Statements............................. 17
3.8. Undisclosed Liabilities.......................... 18
3.9. Absence of Certain Changes or Events............. 18
3.10. Title and Related Matters........................ 20
3.11. Leases........................................... 21
3.12. Insurance........................................ 21
3.13. Environmental Matters............................ 22
3.14. Labor Matters.................................... 27
3.15. ERISA; Benefit Plans............................. 28
3.16. Certain Contracts and Arrangements............... 31
3.17. Legal Proceedings, etc........................... 32
3.18. Permits.......................................... 33
3.19. Regulation as a Utility.......................... 34
3.20. Taxes............................................ 35
3.21. Disclosure....................................... 38
ARTICLE IV.................................................. 39
4.1. Organization..................................... 39
4.2. Authority Relative to this Agreement............. 39
<PAGE>
Page
----
4.3. Consents and Approvals; No Violation............. 40
4.4. Regulation as a Utility.......................... 43
4.5. Acquisition of Stock for Investment.............. 43
4.6. Financing........................................ 44
ARTICLE V................................................... 44
5.1. Conduct of Business of the Company............... 44
5.2. Access to Information............................ 50
5.3. Expenses......................................... 52
5.4. Further Assurances............................... 52
5.5. Public Statements................................ 53
5.6. Consents and Approvals........................... 54
5.7. Fees and Commissions............................. 56
5.8. Sales and Transfer Taxes......................... 57
5.9. Supplements to Schedules......................... 57
5.10. Employees........................................ 58
5.11. No Negotiations.................................. 66
5.12. Post-Closing Assistance.......................... 67
5.13. Record Retention Procedures...................... 68
5.14. Section 338(h)(10) Election...................... 69
5.15. Other Tax Matters................................ 70
5.16. Transfer of Certain Assets, Properties and
Other Items.................................... 71
5.17. Termination of Tax Sharing Agreements............ 72
5.18. Power Purchase Arrangements...................... 73
ARTICLE VI.................................................. 73
6.1. Conditions to Each Party's Obligations to
Effect the Transactions Contemplated
Hereby......................................... 73
6.2. Conditions to Obligations of the Buyer........... 75
6.3. Conditions to Obligations of PECO Energy......... 79
ARTICLE VII................................................. 82
7.1. Termination...................................... 82
7.2. Procedure and Effect of Termination.............. 84
ARTICLE VIII................................................ 85
8.1. Indemnification.................................. 85
8.2. Defense of Claims................................ 88
<PAGE>
Page
----
8.3. Tax Indemnification.............................. 93
8.4. Tax Exclusivity.................................. 103
ARTICLE IX.................................................. 103
9.1. Amendment and Modification....................... 104
9.2. Waiver of Compliance; Consents................... 104
9.3. Survival of Representations and Warranties....... 104
9.4. Indemnification and Adjustment Payments.......... 105
9.5. Notices.......................................... 105
9.6. Assignment....................................... 107
9.7. Governing Law.................................... 107
9.8. Counterparts..................................... 107
9.9. Interpretation................................... 107
9.10. Entire Agreement................................. 110
9.11. No Third Party Beneficiary Rights................ 110
<PAGE>
STOCK PURCHASE AGREEMENT
------------------------
STOCK PURCHASE AGREEMENT, dated as of May 24, 1994, between PECO Energy
Company, a Pennsylvania corporation ("PECO Energy"), and Delmarva Power & Light
Company, a Delaware and Virginia corporation (the "Buyer").
WHEREAS, the Buyer desires to purchase, and PECO Energy desires to sell,
all of the outstanding common stock (the "Company Common Stock") of the
Conowingo Power Company, a Maryland corporation (the "Company") upon the terms
and conditions hereinafter set forth in this Agreement.
NOW, THEREFORE, in consideration of the mutual covenants, representations,
warranties and agreements hereinafter set forth, and intending to be legally
bound hereby, the parties hereto agree as follows:
ARTICLE I
SALE OF STOCK AND TERMS OF PAYMENT
----------------------------------
1.1. The Sale. Upon the terms and subject to the satisfaction of the
---------
conditions contained in this Agreement, at the Closing (as hereinafter defined)
PECO Energy will sell, assign, transfer and deliver to the
1
<PAGE>
Buyer, and the Buyer will purchase and acquire from PECO Energy, the Company
Common Stock.
1.2. Consideration. (a) Upon the terms and subject to the satisfaction of
-------------
the conditions contained in this Agreement, in consideration of the aforesaid
sale, assignment, transfer and delivery of the Company Common Stock, at the
Closing the Buyer will pay or cause to be paid to PECO Energy an amount equal to
$150,000,000.00 (the "Purchase Price") on the Closing Date (as hereinafter
defined).
(b) on the 90th day after the Closing Date (the "Adjustment Date"), the
Purchase Price will be increased or decreased by the sum of the adjustments set
forth on Annex 1 hereto (the "Adjustment Amount").
(c) The Buyer will pay the Purchase Price by delivery of funds which are
immediately available or, upon the mutual agreement of the parties hereto, in a
combination of immediately available funds and assets of the Buyer.
1.3. Calculation of Adjustments. (a) As promptly as practicable after the
---------------------------
Closing Date, PECO Energy will deliver to the Buyer a copy of a balance sheet of
the Company as of the Closing Date (the "Closing Balance Sheet"), together with
PECO Energy's calculation of the Adjustment Amount. The parties hereto agree
that the
2
<PAGE>
closing Balance Sheet will be prepared in accordance with generally accepted
accounting principles on a basis consistent with the presentations in the
Company Balance Sheet and the Company's 1993, 1992 and 1991 balance sheets,
respectively (such presentation is referred to herein as the "PECO Energy
Closing Balance Sheet Preparation Method.")
(b) Within twenty business days after the Buyer's receipt of the Closing
Balance Sheet, the Buyer will provide PECO Energy with written notice
indicating whether the Buyer agrees or disagrees with PECO Energy's calculation
of the Adjustment Amount. If the Buyer agrees with PECO Energy's calculation of
the Adjustment Amount, or if the Buyer fails to deliver to PECO Energy such
written notice within such 20-day period, PECO Energy's calculation of the
Adjustment Amount will be deemed to be conclusive, final and binding on the
parties to this Agreement.
(c) Within five business days after PECO Energy's receipt of any notice of
the Buyer's disagreement with PECO Energy's calculation of the Adjustment
Amount, PECO Energy and the Buyer will begin good faith negotiations to resolve
such disagreement. If PECO Energy and the Buyer are able to resolve such
disagreement within ten business days after such negotiations begin, PECO
3
<PAGE>
Energy's calculation of the Adjustment Amount will be adjusted accordingly to
reflect such resolution and, as adjusted, will be deemed to be conclusive, final
and binding on the parties to this Agreement. If PECO Energy and the Buyer are
unable to resolve such disagreement within ten business days after such
negotiations begin, such disagreement will be submitted to a nationally
recognized independent auditing firm (other than the regular auditing firms for
PECO Energy, any subsidiary thereof or the Buyer) that PECO Energy and the Buyer
may agree upon (the "Settlement Auditor") for resolution. PECO Energy and the
Buyer will cooperate with the Settlement Auditor and will proceed in good faith
to cause the Settlement Auditor to resolve such disagreement on or before the
Adjustment Date. The fees of the Settlement Auditor shall be borne by PECO
Energy and the Buyer with each party bearing a portion of such fees equal to
(i) the total fees multiplied by (ii) a fraction, (A) the numerator of which is
the difference between such party's determination of the Adjustment Amount and
the Settlement Auditor's determination of the Adjustment Amount and (B) the
denominator of which is the difference between PECO Energy's and the Buyer's
determination of the Adjustment Amount.
4
<PAGE>
(d) The Settlement Auditor, in its sole discretion, will determine (i)
the nature and extent of the participation by PECO Energy, the Buyer, and their
respective independent auditors in connection with the resolution of any
disagreement submitted to the Settlement Auditor, (ii) the nature and extent of
information that PECO Energy and the Buyer may submit to the Settlement Auditor
for consideration in connection with such resolution and (iii) the personnel of
the Settlement Auditor who will review such information and resolve such
disagreement. All elements of the Adjustment Amount that are disputed by PECO
Energy and the Buyer shall be subject to review and recalculation by the
Settlement Auditor. In any such calculation of the Adjustment Amount, the
Settlement Auditor shall comply with the PECO Energy Closing Balance Sheet
Preparation Method. Notwithstanding the foregoing sentence, in any determination
of the Adjustment Amount by the Settlement Auditor, the result so obtained
shall be no greater or less than the range of amounts proposed by PECO Energy
and the Buyer, respectively. The Settlement Auditor's resolution of any such
dispute will be reflected in a written report which will be delivered promptly
to, and will be final and binding upon, PECO Energy and the Buyer. PECO
Energy's calculation of the
5
<PAGE>
Adjustment Amount will be adjusted accordingly to reflect such resolution and,
as adjusted, will be deemed to be conclusive, final and binding on the parties
to this Agreement.
(e) From the Closing Date to the Adjustment Date, the Buyer will give to
the Settlement Auditor, PECO Energy and their respective representatives such
access during ordinary business hours to the records and personnel of the
Company as is necessary to prepare the Closing Balance Sheet and the calculation
of the Adjustment Amount.
1.4. Payment of Adjustment to Purchase Price. On the Adjustment Date, or
--------------------------------- -----
if the resolution of the calculation of the Adjustment Amount pursuant to
Section 1.3 has not occurred by such date, as soon as is reasonably possible
following a conclusive, final and binding determination of the Adjustment Amount
pursuant to Section 1.3, but no later than five (5) business days thereafter,
(a) if the Adjustment Amount is payable to the Buyer, then PECO Energy shall pay
to the Buyer such amount, and (b) if the Adjustment Amount is payable to PECO
Energy, then the Buyer shall pay to PECO Energy such amount. Any such payment
shall be made by wire transfer of immediately available funds to such account as
shall have been designated in writing by the
6
<PAGE>
recipient thereof, with interest on the amount due from the Closing Date to the
date of payment at a rate calculated based on a per annum rate computed on the
basis of a 365 day year and equal to the average of the high and low bid rates
for federal funds on the Closing Date as such bid rates were published in
The Wall Street Journal (Eastern Edition).
- -----------------------
ARTICLE II
THE CLOSING
-----------
2.1. Time and Place of Closing. Upon the terms and subject to the
-------------------------
satisfaction of the conditions contained in this Agreement, the closing of the
transactions contemplated by this Agreement (the "Closing") will take place at
the offices of Skadden, Arps, Slate, Meagher & Flom, 919 Third Avenue, New York,
New York 10022, at 9:00 A.M. (local time) on the first business day following
the date on which all of the conditions to each party's obligations hereunder
have been satisfied or waived; or at such other place or time as the parties may
agree. The date and time at which the Closing actually occurs is hereinafter
referred to as the "Closing Date."
7
<PAGE>
2.2. Deliveries by PECO Energy. At the Closing, PECO Energy will deliver
-------------------------
the following to the Buyer:
(a) Stock certificates representing all of the Company Common Stock, duly
executed in blank or accompanied by duly executed instruments of transfer, and
any other documents that are necessary to transfer to the Buyer good and
marketable title to the Company Common Stock;
(b) The stock book, stock ledger, minute book and corporate seal of the
Company;
(c) The opinion and certificate contemplated by Section 6.2; and
(d) Such other documents, instruments and writings as are required to be
delivered by PECO Energy at or prior to the Closing Date pursuant to this
Agreement or otherwise required in connection herewith or as may be reasonably
requested by the Buyer.
2.3. Deliveries by the Buyer. At the Closing, the Buyer will deliver the
-----------------------
following to PECO Energy:
(a) The Purchase Price by (i) interbank transfer of immediately available
funds or (ii) such other means as are agreed upon by PECO Energy and the Buyer;
8
<PAGE>
(b) The opinion and certificate contemplated by Section 6.3; and
(c) Such other documents, instruments and writings as are required to be
delivered by the Buyer at or prior to the Closing Date pursuant to this
Agreement or otherwise required in connection herewith or as may be reasonably
requested by PECO Energy.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF PECO ENERGY
---------------------------------------------
PECO Energy represents and warrants to the Buyer as follows:
3.1. Organization; Qualification. (a) PECO Energy is a corporation duly
----------------------------
organized, validly existing and in good standing under the laws of the
Commonwealth of Pennsylvania and has all requisite power to own and to dispose
of the Company Common Stock.
(b) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland, and has all requisite
corporate power and authority to own, lease, and operate its properties and to
carry on its business as now being conducted. The Company is duly qualified or
licensed
9
<PAGE>
to do business as a foreign corporation and is in good standing in each
jurisdiction in which the property owned, leased or operated by it or the nature
of the business conducted by it makes such qualification necessary, except in
each case in those jurisdictions where the failure to be so duly qualified or
licensed and in good standing would not in the aggregate have a Material
Adverse Effect (as hereinafter defined). Schedule 3.1 sets forth, as of the
date of this Agreement, each jurisdiction in which the Company is qualified to
do business as a foreign corporation. PECO Energy has heretofore delivered to
the Buyer complete and correct copies of the Certificate of Incorporation and
Bylaws as currently in effect of the Company.
The term "Material Adverse Effect" as used in this Agreement, shall mean a
material adverse effect on the business, results of operations or financial
condition of the Company.
For purposes of this Agreement, the loss of Employees (as defined in
Section 5.10 hereof) pursuant to the Voluntary Retirement Incentive Program
("VRIP") or the Voluntary Separation Incentive Program ("VSIP") is deemed not
to be a "Material Adverse Effect."
10
<PAGE>
(c) The Company does not own the majority of the outstanding voting
capital stock or other interest of any corporation, partnership, proprietorship,
trust, association or other business organization.
3.2. The Company's Capitalization. The authorized capital stock of the
------------------------------
Company consists of 100,000 shares of common stock, 51,143 shares of which are
issued and outstanding and owned by PECO Energy. All outstanding shares of
Company Common Stock are duly authorized, validly issued, fully paid and
nonassessable. Other than this Agreement, there is no subscription, option,
warrant, call, right, agreement or commitment relating to the issuance, sale,
delivery or transfer by the Company or PECO Energy (including any right of
conversion or exchange under any outstanding security or other instrument) of
any capital stock of the Company. There are no outstanding contractual
obligations of the Company to repurchase, redeem or otherwise acquire any
outstanding shares of capital stock of the Company.
3.3. Title to Stock. PECO Energy owns the Company Common Stock, free and
--------------
clear of all pledges, security interests, liens, charges, encumbrances, claims,
options or limitations affecting its abilities to vote such shares or to
transfer such shares to the
11
<PAGE>
Buyer. At the Closing, the Buyer will acquire good title to the Company Common
Stock, free and clear of all pledges, security interests, liens, charges,
encumbrances, claims, options or limitations of any nature whatsoever.
3.4. Authority Relative to this Agreement. PECO Energy has full
------------------------------------
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby. The execution and delivery of
this Agreement and the consummation of the transactions contemplated hereby have
been duly and validly authorized by the Board of Directors of PECO Energy and no
other corporate proceedings on the part of PECO Energy are necessary to
authorize this Agreement or to consummate the transactions contemplated hereby.
This Agreement has been duly and validly executed and delivered by PECO Energy,
and assuming that this Agreement constitutes a valid and binding agreement of
Buyer, subject to the receipt of the PECO Energy Required Regulatory Approvals
(as hereinafter defined), and the Buyer Required Regulatory Approvals (as
hereinafter defined), constitutes a valid and binding agreement of PECO Energy,
enforceable against PECO Energy in accordance with its terms, except that such
enforceability may be limited by applicable bankruptcy,
12
<PAGE>
insolvency, moratorium or other similar laws affecting or relating to
enforcement of creditors, rights generally or general principles of equity.
3.5. Consents and Approvals; No Violation. (a) Except as set forth in
------------------------------------
Schedule 3.5, and other than obtaining the PECO Energy Required Regulatory
Approvals and the Buyer Required Regulatory Approvals, neither the execution and
delivery of this Agreement by PECO Energy nor the performance by PECO Energy of
its obligations under this Agreement will (i) conflict with or result in any
breach of any provision of the Articles of Incorporation or Bylaws of PECO
Energy or the Certificate of Incorporation or Bylaws of the Company, (ii)
require any consent, approval, authorization or permit of, or filing with or
notification to, any governmental or regulatory authority, except (a) where the
failure to obtain any such consents, approvals, authorizations or permits, or to
make such filings or notifications, would not have, in the aggregate, a Material
Adverse Effect or (b) for those requirements which become applicable to PECO
Energy as a result of the specific regulatory status of the Buyer (or any of its
affiliates) or as a result of any other facts that specifically relate to the
business or activities in which the Buyer (or any of its affiliates) is or
13
<PAGE>
proposes to be engaged; (iii) result in a default (or give rise to any right of
termination, cancellation or acceleration) under any of the terms, conditions or
provisions of any note, bond, mortgage, indenture, deed of trust, franchise,
permit, concession, contract, license, agreement or other instrument or
obligation to which PECO Energy or the Company is a party or by which PECO
Energy or the Company, or any of their respective assets may be bound, except
for such defaults (or rights of termination, cancellation or acceleration) as to
which requisite waivers or consents have been obtained or which would not have,
in the aggregate, a Material Adverse Effect or a material adverse effect on the
ability of PECO Energy to perform its obligations under this Agreement; or (iv)
violate any law, order, writ, injunction, decree, statute, rule or regulation
applicable to the Company, or any of its assets, which violation together with
all other violations would have a Material Adverse Effect.
(b) Except as set forth in Schedule 3.5 and except for (i) any required
approvals under the Federal Power Act of 1935 (the "Federal Power Act"), (ii)(A)
application by PECO Energy to and an order by the Maryland Public Service
Commission (the "MPSC") approving the transactions contemplated by this
14
<PAGE>
Agreement and (B) the approval, if required, of the Pennsylvania Public Utility
Commission and any municipalities or other local governmental bodies in the
State of Maryland and Commonwealth of Pennsylvania, in the case of each of (A)
and (B), pursuant to the Public Service Commission Law of Maryland and the
Public Utility Code of Pennsylvania, respectively (the "Utility Codes"), (iii)
the approval, if required, of the Securities and Exchange Commission
(the "SEC") pursuant to the Public Utility Holding Company Act of 1935, as
amended (the "Holding Company Act"), (iv) the filings by PECO Energy and the
Buyer required by Title II of the Hart-Scott-Rodino Antitrust Improvements Act
of 1976, as amended (the "HSR Act") and (v) all approvals of any governmental
authority, including the Federal Energy Regulatory Commission (the "FERC"),
with respect to the transactions contemplated by the parties in connection with
the Power Purchase Agreement (as defined herein) (the applications, filings and
approvals referred to in clauses (i) through (v) are collectively referred to as
the "PECO Energy Required Regulatory Approvals"), no declaration, application,
filing or registration with, or notice to, or authorization, consent or approval
of any governmental or regulatory body or authority is necessary for the
15
<PAGE>
consummation by PECO Energy of the transactions contemplated hereby, other than
such declarations, applications, filings, registrations, notices,
authorizations, consents or approvals which, if not obtained or made, will not,
in the aggregate, have a Material Adverse Effect.
3.6. Reports. Since January 1, 1991, PECO Energy and the Company, pursuant
-------
to the Securities Act of 1933, as amended (the "Securities Act"), the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), the applicable State and
Commonwealth public utility laws, the Federal Power Act and the Holding Company
Act, have filed or caused to be filed with the SEC, the applicable state or
local utility commissions or regulatory bodies, or the FERC, as the case may
be, all material forms, statements, reports and documents (including all
exhibits, amendments and supplements thereto) required to be filed by them with
respect to the business and operations of the Company under each of the
Securities Act, the Exchange Act, the applicable Utility Codes, the Federal
Power Act and the Holding Company Act and the respective rules and regulations
thereunder, all of which complied in all material respects with all applicable
requirements of the
16
<PAGE>
appropriate act and the rules and regulations thereunder in effect on the date
each such report was filed.
3.7. Financial Statements. PECO Energy has previously furnished to the
---------------------
Buyer (i) audited balance sheets of the Company as of December 31, 1991, 1992
and 1993, and (ii) the related audited statements of income and retained
earnings and changes in financial position of the Company for each of the
fiscal years then ended, together with the respective reports thereon of
Coopers & Lybrand, the Company's independent auditors. The balance sheet of the
Company as of December 31, 1993 is hereinafter referred to as the "Company
Balance Sheet." The Company has also furnished an unaudited balance sheet of
the Company for the quarter ended March 31, 1994, together with the related
unaudited statement of income. Each of the balance sheets included in the
financial statements referred to in this Section 3.7 (including the related
notes thereto) presents fairly the financial position of the Company as of their
respective dates, and the other related statements included therein (including
the related notes thereto) present fairly the results of operations and changes
in financial position for the periods then ended, all in conformity with
generally
17
<PAGE>
accepted accounting principles applied on a consistent basis, except as
otherwise noted therein.
3.8. Undisclosed Liabilities. Except as set forth in Schedule 3.8, the
-----------------------
Company has no liability or obligation, secured or unsecured (whether absolute,
accrued, contingent or otherwise, and whether due or to become due), which are
not accrued or reserved against in the Company Balance Sheet or disclosed in the
notes thereto in accordance with generally accepted accounting principles,
except those which either were incurred in the ordinary course of business,
whether before or after the date of the Company Balance Sheet, or those which in
the aggregate would not have a Material Adverse Effect.
3.9. Absence of Certain Changes or Events. Except (i) as set forth in
------------------------------------
Schedule 3.9, or in the reports, schedules, registration statements and
definitive proxy statements filed by the Company or PECO Energy with respect to
the Company since December 31, 1990 (the "PECO Energy SEC Reports") and (ii) as
otherwise contemplated by this Agreement, since the date of the Company Balance
Sheet there has not been: (a) any Material Adverse Effect; (b) any declaration,
setting aside or payment of any dividend or other distribution (whether in
cash, stock, property or any combination
18
<PAGE>
thereof) in respect of the Company Common Stock, or any redemption or other
acquisition by the Company of any shares of capital stock of the Company, or any
payment by the Company to PECO Energy; (c) any damage, destruction or casualty
losses, whether covered by insurance or not, which, in the aggregate, had a
Material Adverse Effect; (d) (i) any increase in the rate or terms of
compensation or benefits payable or to become payable by the Company to its
directors, officers or employees, except increases occurring in the ordinary
course of business and consistent with past practice (which shall include normal
periodic performance reviews and related compensation and benefit increases)
and except pursuant to the VRIP or the VSIP according to the terms of such
programs on the date hereof, (ii) any adoption, amendment or termination of any
Company Plan, except any adoption, amendment or termination occurring in the
ordinary course of business and consistent with past practice or to comply with
any applicable law or regulation or except pursuant to the VRIP or the VSIP;
(e) any entry into any agreement, commitment or transaction (including without
limitation any borrowing, capital expenditure or capital financing) or the
incurrence of any obligation or liability, whether absolute, accrued, contingent
or otherwise and whether
19
<PAGE>
due or to become due, by the Company in excess of $250,000, except agreements,
commitments, transactions, obligations or liabilities entered into or incurred
in the ordinary course of business and consistent with past practice or as
contemplated herein; (f) any material change by PECO Energy or the Company, with
respect to the Company, in accounting methods, principles or practices except as
required by generally accepted accounting principles; (g) any strike, concerted
work stoppage or slow-down or any material charges or complaints of unfair labor
practices related to the Company filed with any authority; or (h) any written
communication to PECO Energy or the Company from any customers or suppliers or
agencies regulating the Company which, in the aggregate, would reasonably lead
PECO Energy or the Company to expect a Material Adverse Effect therefrom.
3.10. Title and Related Matters. Schedule 3.10 sets forth all of the
---------------------------
real property owned in fee by the Company. Except as set forth in Schedule
3.10 and except for Permitted Exceptions (as defined in Section 9.9), the
Company has good and marketable title to all of the real property listed on
Schedule 3.10 and all other assets which it purports to own that are reflected
in the Company Balance Sheet (other than those which
20
<PAGE>
have been disposed of since the date thereof in the ordinary course of
business), free and clear of all security interests, liens, claims, charges, or
other encumbrances. There is no pending condemnation, expropriation, eminent
domain or similar proceeding affecting all or any portion of the real property
listed on Schedule 3.10 and to PECO Energy's knowledge, no such proceeding is
threatened or contemplated.
3.11. Leases. Schedule 3.11 lists, as of the date of this Agreement, all
------
real property leases under which the Company is a lessee or lessor and which (i)
provide for annual payments of more than $100,000 or (ii) are material to the
business, operations or financial condition of the Company. Except as set
forth in Schedule 3.11, all such leases are valid, binding and enforceable in
accordance with their terms, and are in full force and effect; there are no
existing material defaults by the Company thereunder; no event has occurred
which (whether with or without notice, lapse of time or both) would constitute a
material default thereunder.
3.12. Insurance. Except as set forth in Schedule 3.12, all material
---------
policies of fire, liability, workmen's compensation and other forms of insurance
owned or held by and insuring the Company are in full
21
<PAGE>
force and effect, all premiums with respect thereto covering all periods up to
and including the date as of which this representation is being made have been
paid (other than retrospective premiums which may be payable with respect to
comprehensive general liability and workmen's compensation insurance policies),
and no notice of cancellation or termination has been received with respect to
any such policy which was not replaced on substantially similar terms prior to
the date of such cancellation. Such policies are valid, outstanding and
enforceable policies and will not in any way be affected by, or terminate or
lapse by reason of, the transactions contemplated by this Agreement. The
insurance policies to which the Company is a party are sufficient for
compliance with all material requirements of law and of all material agreements
to which the Company is a party. Except as described in Schedule 3.12, as of
the date of this Agreement the Company has not been refused any insurance with
respect to its assets or operations nor has its coverage been limited by any
insurance carrier to which it has applied for any such insurance or with which
it has carried insurance during the last twelve months.
3.13. Environmental Matters. (a) For purposes of this Section 3.13:
---------------------
22
<PAGE>
(i) "Environmental Law" means any Federal, state or local statute,
regulation or ordinance, and any permits and legally binding decisions, orders,
directives, rules and regulations of federal, state and local governmental
agencies and authorities thereunder, relating to the protection of any water or
water vapor, any land, including land surface or subsurface, air, fish,
wildlife, biota and all other natural resources, and/or governing the use,
storage, treatment, generation, transportation, processing, handling,
production, clean-up or disposal of Hazardous Materials.
(ii) "Hazardous Material", means, without limitation, any flammable,
explosive or radioactive material, radon, asbestos, ureaformaldehyde foam
insulation, polychlorinated biphenyls, petroleum and petroleum products,
methane and any other material or substance which is defined as a "hazardous
waste," "hazardous material," "hazardous substance," "extremely hazardous
waste," "restricted hazardous waste," "pollutant," "toxic waste" or "toxic
substance" under
23
<PAGE>
any provision of the comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA") (42 U.S.C. (S) 9601 et seq.), the Resource Conservation
------
and Recovery Act (42 U.S.C. (S) 6901 et seq.), the Toxic Substances Control Act
------
(15 U.S.C. (S) 2601 et seq.), or any other applicable Environmental Law or any
------
regulations promulgated pursuant thereto.
(iii) "Release" means any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge or dispersal, into the environment, at
or from any property owned or operated by the Company or related to Hazardous
Materials generated by the Company.
(iv) "Remedial Action" means all actions required to (x) clean up, remove
or treat any Hazardous Material; (y) prevent the Release or threat of Release,
or minimize the further Release of any Hazardous Material so it does not
endanger or threaten to endanger public health or welfare or the environment; or
(z) perform preremedial studies and investigations or post-remedial
24
<PAGE>
monitoring and care directly related to or in connection with any such remedial
action.
(b) With respect to applicable Environmental Laws, except as set forth in
Schedule 3.13
(i) The Company is in substantial compliance with all applicable
Environmental Laws;
(ii) Under applicable Environmental Laws, the Company has obtained or has
submitted timely applications for all environmental permits required for the
operation of its businesses as presently conducted on the date hereof;
(iii) Neither PECO Energy, the Company nor any other subsidiary of PECO
Energy has received any written communication with any governmental authority
or other party with respect to (A) the actual or alleged violation by the
Company of any Environmental Laws, (B) any actual or proposed Remedial Action
relating to the Company or (C) any Release or threatened Release by the Company
of a Hazardous Material;
25
<PAGE>
(iv) To PECO Energy's knowledge, there are no underground storage tanks,
active or abandoned, at any property owned, operated or leased by the Company;
(v) No written notification of a Release of a Hazardous Material has been
filed by or on behalf of the Company with respect to any property when owned,
operated or leased by the Company. To PECO Energy's knowledge, no property of
the Company is listed or proposed for listing on the National Priority List
promulgated pursuant to CERCLA or on any similar state list of sites requiring
investigation or clean-up;
(vi) To PECO Energy's knowledge, the Company is not required by any
applicable Environmental Law to place any notice or restriction relating to the
presence or disposal of Hazardous Material in the deed to any property owned by
it; and
(vii) To PECO Energy's knowledge, no Release of any polychlorinated
biphenyls, and no Release of petroleum or petroleum products, other than minor
spills
26
<PAGE>
and leaks occurring in the ordinary course of business, has occurred at, on or
under any property now or when formerly owned, operated or leased by the
Company, except for Releases that have been remediated in accordance with
applicable Environmental Laws.
3.14. Labor Matters. The Company is neither party to nor subject to any
-------------
labor union or collective bargaining agreements. Except to the extent set forth
in Schedule 3.14 and except for such matters as will not individually have a
Material Adverse Effect: (a) the Company is in compliance with all applicable
laws, regulations, rules, and orders respecting employment and employment
practices, wages and hours, and any terms or conditions of employment; (b)
there is no unfair labor practice charge or complaint pending against the
Company before the National Labor Relations Board; (c) there is no charge of
unlawful discrimination pending against the Company before the Equal Employment
Opportunity Commission or any State fair employment practices agency; (d) there
is no audit or other investigation of the Company being conducted by the Office
of Federal Contract Compliance Programs of the United States Department of
Labor; (e) there is no investigation of the Company being conducted by the Wage
and Hour
27
<PAGE>
Division of the United States Department of Labor; (f) there is no labor
strike, dispute, work slowdown or stoppage actually pending or threatened
against or affecting the Company, and the Company has not experienced any
primary work stoppage since December 31, 1991; (g) no representation petition
respecting any employees of the Company has been filed with the National
Labor Relations Board; and (h) there is no proceeding or litigation of any sort
whatsoever pending or threatened against the Company involving employees of the
Company and their wages, hours, or any terms or conditions of their employment
(including any benefits relating thereto but excluding any claims for benefits
made in the ordinary course of business and consistent with past practice under
the Company's employee benefit plans).
3.15. ERISA; Benefit Plans.
--------------------
(a) There is no accumulated funding deficiency, whether or not waived,
within the meaning of Section 302 of the Employee Retirement Income Security
Act of 1974, as amended ("ERISA"), and Section 412 of the Internal Revenue Code
of 1986, as amended (the "Code"), with respect to any Plan (as hereinafter
defined) that is subject to such Sections. Each Company Plan (as
28
<PAGE>
hereinafter defined), except for such matters as will not, in the aggregate,
have a Material Adverse Effect, is and has been operated in compliance in all
respects with the presently applicable provisions of ERISA and the Code. The
Company has not incurred any liability under Title IV of ERISA to the Pension
Benefit Guaranty Corporation in connection with any Plan which is subject to
Title IV of ERISA which has not been fully paid prior to the date hereof, other
than liability for premiums due the Pension Benefit Guaranty Corporation (the
"PBGC"), which premiums have been or will be paid when due. Except as set
forth in Schedule 3.15, the Internal Revenue Service has issued, with respect to
each Company Plan intended to be tax qualified under Sections 401(a) and 501(a)
of the Code, a letter determining that such Plan is qualified and its related
trust is exempt from United States Federal Income Tax under Sections 401(a) and
501(a) of the Code, respectively, and there has been no occurrence since the
date of any such determination letter which has adversely affected such
qualification. Except as set forth in Schedule 3.15, no Plan is a "multiple
employer plan" (within the meaning of Section 413(c) of the Code) or a
"multiemployer plan" (as defined in Section 3(37) of ERISA), and no withdrawal
liability has been incurred by or asserted
29
<PAGE>
against the Company with respect to any employee pension benefit plan which is a
multiple employer plan or a multiemployer plan.
(b) Schedule 3.15 lists all Company Plans. Accurate and complete copies
of all Company Plans and the summary descriptions, the most recent annual
reports on Internal Revenue Service Form 5500 and actuarial reports, if
applicable, have been previously provided to the Buyer.
(c) Each Plan that is a "group health plan" (as defined in Section 4980B of
the Code) has been operated in compliance with Section 4980B of the Code at all
times, except for such matters as will not have a Material Adverse Effect.
Except as provided in Schedule 3.15 and except as required by Section 4980B of
the Code, the Company does not maintain any plan that provides medical benefits
or life insurance benefits in respect of any employees or former employees of
the Company beyond their retirement. Except as set forth in Schedule 3.15, no
Plan provides for severance pay, unemployment compensation or any similar
payment with respect to any current or former employee, officer, director, or
agent of the Company. The consummation of the transactions contemplated by this
Agreement will not: (i) entitle
30
<PAGE>
any such individual to severance pay, unemployment compensation or other
similar payment; (ii) accelerate the time of payment or vesting of any amount;
(iii) increase the amount of compensation due to any such individual; or (iv)
constitute a "prohibited transaction" (as defined in Section 406 of ERISA or
Section 4975 of the Code).
(d) For purposes of this Agreement, "Plan" shall mean all employee plans,
practices and arrangements, including without limitation, all employee benefit
plans (within the meaning of Section 3(3) of ERISA), employee pension benefit
plans, programs, arrangements or agreements, all health, medical, welfare,
disability, life insurance, bonus, severance pay and other employee benefit or
fringe benefit plans maintained by or with respect to which the Company has any
fixed or contingent, direct or indirect liability, and "Company Plans" shall
mean all Plans that provide benefits to or in respect of employees or former
employees of the Company or their beneficiaries.
3.16. Certain Contracts and Arrangements. Except as listed in Schedule
----------------------------------
3.16 or as reflected in the Company Balance Sheet, as of the date of this
Agreement, the Company is not a party to any written: (1) employment
agreement; (2) indenture, mortgage, note,
31
<PAGE>
installment obligation, agreement or other instrument relating to the borrowing
of money in excess of $100,000 by the Company or the guaranty of any obligation
for the borrowing of money in excess of $100,000 by the Company; or (3)
agreement which (i) is not terminable by the Company on ninety or fewer days'
notice at any time without penalty, (ii) has a remaining term, as of the date of
this Agreement, of over one year in length of obligation on the part of the
Company; and (iii) involves the receipt or payment by the Company of more than
$100,000, except for agreements with suppliers, distributors and sales
representatives entered into in the ordinary course of business and consistent
with past practice. Except as set forth in Schedule 3.16, there is not, under
any of the aforesaid obligations, any default or event which, with notice or
lapse of time or both, would constitute a default on the part of the Company,
except such events of default and other events as to which requisite waivers or
consents have been obtained or which would not, in the aggregate, have a
Material Adverse Effect.
3.17. Legal Proceedings, etc. Except as set forth in Schedule 3.17, there
-----------------------
are no claims, actions, or proceedings pending or investigation pending or, to
PECO Energy's knowledge, threatened against or relating to
32
<PAGE>
the Company before any court, governmental or regulatory authority or body
acting in an adjudicative capacity, which, if adversely determined, would have a
Material Adverse Effect. Except as set forth in schedule 3.17, the Company is
not subject to any outstanding judgment, rule, order, writ, injunction or
decree of any court, governmental or regulatory authority or other body acting
in an adjudicative capacity which has, or is reasonably likely to have in the
aggregate, a Material Adverse Effect.
3.18. Permits. The Company has all material permits, licenses,
-------
franchises and other governmental authorizations, consents and approvals (other
than with respect to Environmental Laws) (collectively, "Permits") necessary to
conduct its business as presently conducted, except where the failure to have
such Permits does not have a Material Adverse Effect. Except as set forth in
Schedule 3.18, the Company has not received any written notification that it is
in violation of any of such Permits, or any law, statute, order, rule,
regulation, ordinance or judgment of any governmental or regulatory body or
authority applicable to it, except for notifications of violations which would
not, in the aggregate, have a Material Adverse Effect. The Company is in
compliance with all Permits, laws, statutes,
33
<PAGE>
orders, rules, regulations, ordinances, or judgments of any governmental or
regulatory body or authority applicable to it, except for violations which, in
the aggregate, do not have, and are not reasonably likely to have, a Material
Adverse Effect.
3.19. Regulation as a Utility. (a) The Company is an operating public
-----------------------
utility not subject to registration under the Holding Company Act and is not a
subsidiary of a registered public utility holding company under the Holding
Company Act. Except as set forth on Schedule 3.19(a), the Company is not
subject to regulation as a public utility or public service company (or similar
designation) by the United States, any State or Commonwealth of the United
States, any foreign country or any municipality or any political subdivision of
the foregoing.
(b) PECO Energy is a public utility holding company exempt from
registration under the Holding Company Act and is not a subsidiary of a public
utility holding company registered under the Holding Company Act. Except as set
forth on Schedule 3.19(b), PECO Energy is not subject to regulation as a public
utility or public service company (or similar designation) by the United States,
any State or Commonwealth of the United States,
34
<PAGE>
any foreign country or any municipality or any political subdivision of the
foregoing.
3.20. Taxes. (a) The Company, or PECO Energy on the Company's behalf,
-----
has (i) filed all Tax Returns (as hereinafter defined) required to be filed by
or with respect to the Company as of the date hereof, other than those Tax
Returns the failure of which to file would not have a Material Adverse Effect,
and all such filed Tax Returns are true and complete in all material respects
and (ii) duly paid in full (or there has been paid on its behalf) or made
adequate provision for on the appropriate books and records (in accordance with
generally accepted accounting principles) all Taxes (as hereinafter defined)
shown to be due on such filed Tax Returns. Except as set forth in Schedule
3.20, (A) neither PECO Energy nor the Company has received any written notice of
deficiency or assessment from any taxing authority with respect to liabilities
for Taxes of the Company which have not been fully paid or finally settled, (B)
any such deficiency shown in such Schedule 3.20 is being contested in good faith
through appropriate proceedings, and (C) neither PECO Energy nor the Company has
any knowledge of any pending or threatened action or proceeding by any taxing
authority with respect to liabilities for Taxes of the Company.
35
<PAGE>
The federal income and material state income Tax Returns of PECO Energy, which
include the Company, have been examined or the applicable statutory periods of
limitations have expired for all periods to and including those set forth in
Schedule 3.20, and except as set forth in Schedule 3.20, there are no
outstanding agreements or waivers extending the applicable statutory periods of
limitation for such Taxes for any period.
(b) Except as set forth in Schedule 3.20, no power of attorney or similar
instrument granted by the Company or PECO Energy with respect to matters
affecting Taxes of the Company is currently in force.
(c) Except as set forth in Schedule 3.20, there are no material liens with
respect to Taxes (except for liens with respect to real property Taxes not yet
due) upon any of the assets of the Company.
(d) Except as set forth in Schedule 3.20, (i) no consent to the
application of Section 341(f)(2) of the Code (or any predecessor provision) has
been made or filed by or with respect to the Company or any of its assets, (ii)
none of the assets of the Company is an asset or property that is (A) required
to be treated as being owned by any person (other than the Company)
36
<PAGE>
pursuant to the provisions of Section 168(f)(8) of the Internal Revenue Code
of 1954, as amended and in effect immediately before the enactment of the Tax
Reform Act of 1986, or (B) tax-exempt use property within the meaning of Section
168(h)(1) of the Code.
(e) The Company has not agreed to nor is it required to make any
adjustment pursuant to Section 481(a) of the Code (or any predecessor provision)
by reason of any change in any accounting method prior to the date hereof, and
there is no application pending with any taxing authority requesting permission
for any changes in any accounting method of the Company. To the knowledge of
PECO Energy, the Internal Revenue Service has not proposed in writing any such
adjustment or change in accounting method.
(f) Other than as disclosed in Schedule 3.20, the Company is not a party
to nor has any obligation under, any Tax sharing, allocation or similar
agreement.
(g) For purposes of this Agreement, the term "Taxes" shall mean all taxes,
charges, fees, levies, penalties or other assessments imposed by any United
States federal, state, local or foreign taxing authority, including, but not
limited to, income, gross receipts, ad valorem, excise, real property, personal
37
<PAGE>
property, sales, use, transfer, franchise, employment, payroll, withholding,
social security, medicare or other taxes, including any interest, penalties or
additions attributable there to.
(h) For purposes of this Agreement, the term "Tax Return" shall mean any
return, report, information return or other document (including any related or
supporting information) required to be supplied to any taxing authority with
respect to Taxes.
3.21. Disclosure. Neither this Agreement, nor any Schedule, certificate,
----------
statement, writing, financial statement or document that is specifically
required by this Agreement to be furnished to the Buyer by or on behalf of PECO
Energy, as of the date thereof, will contain any untrue statement of a material
fact or omits or will fail to state a material fact necessary to make the
statements therein, in light of the circumstances in which they are made, not
false or misleading.
38
<PAGE>
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF THE BUYER
-------------------------------------------
The Buyer represents and warrants to PECO Energy as follows:
4.1. Organization. The Buyer is a corporation duly organized, validly
------------
existing and in good standing under the laws of the State of Delaware and the
Commonwealth of Virginia and has all requisite corporate power to perform its
obligations under this Agreement. The Buyer has heretofore delivered to PECO
Energy complete and correct copies of its Certificate of Incorporation and By-
Laws (or other similar governing documents), as currently in effect.
4.2. Authority Relative to this Agreement. The Buyer has full corporate
------------------------------------
power and authority to execute and deliver this Agreement and to consummate the
transactions contemplated hereby. The execution and delivery of this Agreement
and the consummation of the transactions contemplated hereby have been duly and
validly authorized by the Board of Directors of the Buyer and no other corporate
proceedings on the part of the Buyer are necessary to authorize this Agreement
or to consummate the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by the Buyer, and assuming that this
Agreement
39
<PAGE>
constitutes a valid and binding agreement of PECO Energy, subject to the receipt
of the Buyer Required Regulatory Approvals and the PECO Energy Required
Regulatory Approvals, constitutes a valid and binding agreement of the Buyer,
enforceable against the Buyer in accordance with its terms, except that such
enforceability may be limited by applicable bankruptcy, insolvency, moratorium
or other similar laws affecting or relating to enforcement of creditors, rights
generally or general principles of equity.
4.3. Consents and Approvals; No Violation. (a) Except as set forth in
------------------------------------
Schedule 4.3, and other than obtaining the Buyer Required Regulatory Approvals
and the PECO Energy Required Regulatory Approvals, neither the execution and
delivery of this Agreement by the Buyer nor the performance by the Buyer of its
obligations under this Agreement will (i) conflict with or result in any breach
of any provision of the Certificate of Incorporation or By-Laws (or other
similar governing documents) of the Buyer, (ii) require any consent, approval,
authorization or permit of, or filing with or notification to, any governmental
or regulatory authority, except (a) where the failure to obtain any such
consents, approvals, authorizations, or
40
<PAGE>
permits, or to make such filings or notifications would not, in the aggregate,
have a material adverse effect on the ability of the Buyer to perform its
obligations under this Agreement or (b) for those requirements which become
applicable to the Buyer as a result of the specific regulatory status of the
Company, PECO Energy (or any of their respective affiliates) or as a result of
any other facts that specifically relate to the business or activities in which
the Company, PECO Energy (or any of their respective affiliates) is or proposes
to be engaged, (iii) to the best knowledge of the Buyer, result in a default (or
give rise to any right of termination, cancellation or acceleration) under any
of the terms, conditions or provisions of any note, bond, mortgage, indenture,
deed of trust, franchise, permit, concession, contract, license agreement or
other instrument or obligation to which the Buyer is a party or by which any of
its assets may be bound, except for such defaults (or rights of termination,
cancellation or acceleration) as to which requisite waivers or consents have
been obtained or which, in the aggregate, would not have a material adverse
effect on the ability of the Buyer to perform its obligations under this
Agreement.
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<PAGE>
(b) Except as set forth in Schedule 4.3 and except for (i) any required
approvals under the Federal Power Act, (ii) (A) application by the Buyer to, and
an order by, the MPSC approving the transactions contemplated by the Agreement
and the related approvals applied for by the Buyer, (B) application by the
Buyer to and an order by the Delaware Public Service Commission and the Virginia
State Corporation Commission approving the transactions contemplated by this
Agreement and (C) approval, if required, of municipalities or other local
governmental bodies in the States of Delaware and Maryland and the Commonwealth
of Virginia, in the case of each of (A), (B) and (C), pursuant to the Delaware
Public Utility Act of 1974, the Maryland Public Service Commission Law and
Section 56-1 et seq. of the Virginia Code, (iii) the approval, if required, of
------
the SEC pursuant to the Holding Company Act, (iv) the filings by the Buyer and
PECO Energy required by Title II of the HSR Act and (v) all approvals of any
governmental authority, including the FERC with respect to the transactions
contemplated by the parties in connection with the Power Purchase Agreement
(the filings and approvals referred to in clauses (i) through (v) are
collectively referred to as the "Buyer Required Regulatory Approvals"), no
declaration, application,
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<PAGE>
filing or registration with, or notice to, or authorization, consent or approval
of any governmental or regulatory body or authority is necessary for the
consummation by the Buyer of the transactions contemplated hereby, other than
such declarations, applications, filings, registrations, authorizations,
consents or approvals which, if not obtained or made, will not, in the
aggregate, have a material adverse effect on the ability of the Buyer to perform
its obligations under this Agreement.
4.4. Regulation as a Utility. The Buyer is not a public utility holding
-----------------------
company under the Holding Company Act. Except in the States of Delaware and
Maryland and the Commonwealth of Virginia and by the FERC, the Buyer is not
subject to regulation as a public utility or public service company (or similar
designation) by the United States, any State or Commonwealth of the United
States, any foreign country or any municipality or any political subdivision of
the foregoing.
4.5. Acquisition of Stock for Investment. The Buyer is acquiring the
-----------------------------------
Company Common Stock for investment and not with a view toward, or for sale in
connection with, any distribution thereof, nor with any present intention of
distributing or selling such Company Common Stock. The Buyer agrees that the
Company
43
<PAGE>
Common Stock may not be sold, transferred, offered for sale, pledged,
hypothecated or otherwise disposed of without registration under the Securities
Act, except pursuant to an exemption from such registration available under the
Securities Act.
4.6. Financing. The Buyer has sufficient funds available or has received
---------
written commitments from responsible financial institutions to provide
sufficient funds on the Closing Date to pay the Purchase Price.
ARTICLE V
COVENANTS OF THE PARTIES
------------------------
5.1. Conduct of Business of the Company. Except as described in Schedule
----------------------------------
5.1, during the period from the date of this Agreement to the Closing Date, PECO
Energy will cause the Company to conduct its business and operations and
maintain the assets of the Company in good repair and condition (subject to
ordinary wear and tear), all according to its ordinary and usual course of
business consistent with past practice. PECO Energy will use its reasonable
best efforts to preserve intact the business organization of the Company and its
goodwill, and keep available the services of its present
44
<PAGE>
officers and key employees, and preserve intact the business relationships with
suppliers, customers and others having a business relationship with the Company,
and will also maintain its present relationship in all material respects with
the Company. Without limiting the generality of the foregoing, and, except as
contemplated in this Agreement or as described in Schedule 5.1, PECO Energy will
not prior to the Closing Date, without the prior written consent of the Buyer,
permit the Company to:
(a) (i) create, incur or assume any obligation or liability, whether
absolute, accrued, contingent or otherwise and whether due or to become due, in
excess of $250,000, other than in the ordinary course of business and consistent
with past practice, including obligations in respect of capital leases but
excluding purchase money mortgages granted in connection with the acquisition
of property in the ordinary course of business and consistent with past
practice; or (ii) assume, guarantee, endorse or otherwise become liable or
responsible (whether directly, contingently or otherwise) for the obligations of
any other person except in the ordinary course of business and consistent with
past practice; provided, that the Company may
45
<PAGE>
endorse negotiable instruments in the ordinary course of business and consistent
with past practice;
(b) declare, set aside or pay any dividend or other distribution (whether
in cash, stock or property or any combination thereof) in respect of the
Company's capital stock (other than pursuant to Section 5.16), or redeem or
otherwise acquire any shares of the Company's capital stock;
(c) (i) increase the rate or terms of compensation or benefits payable or
to become payable by the Company to its directors, officers or employees, except
increases occurring in the ordinary course of business and consistent with past
practice (which shall include normal periodic performance reviews and related
compensation and benefit increases) and except pursuant to the VRIP or the VSIP
according to the terms of such programs on the date hereof; (ii) adopt, amend or
terminate any Company Plan, except any adoption, amendment or termination
occurring in the ordinary course of business and consistent with past practice
or to comply with any applicable law or regulation; or (iii) hire any new
employee, other than as necessary in order to conduct its business in its
ordinary course and consistent with past practice. Any such employee may only
be hired to replace a then current employee and
46
<PAGE>
such newly hired employee shall not receive a salary or benefits in excess of
the departing employee;
(d) amend the Articles of Incorporation or Bylaws of the Company;
(e) issue any equity or debt security other than debt securities meeting
the requirements of clause (a) above;
(f) purchase, sell, lease, dispose of or otherwise transfer or subject to
any lien or encumbrance (other than liens and encumbrances set forth in Schedule
3.10, 5.16 and Permitted Exceptions), any assets of the Company, other than,
with respect to any individual item having a value of less than $100,000 and
with respect to all assets of the Company the aggregate value of which shall not
exceed $500,000 in the ordinary course of business and consistent with past
practice;
(g) change in any material respect or terminate any of the insurance
policies referred to in Section 3.12 in effect on the date hereof, unless
equivalent coverage at an equivalent or lesser price is obtained;
(h) perform any act or omit to perform any act which would cause a breach
or default under any contract, lease or agreement set forth on Schedule 3.11
47
<PAGE>
or Schedule 3.16, except where any such breaches or defaults would not, in the
aggregate, have a Material Adverse Effect;
(i) enter into any new or terminate, renew, extend or renegotiate any
existing power purchase, exchange or transmission contract necessary to supply
power to the Company's service area;
(j) engage in any transaction or transactions with PECO Energy or any
affiliate of PECO Energy, except for transactions contemplated by this Agreement
or in the ordinary course of business and consistent with past practice or which
in the aggregate do not exceed $100,000;
(k) make any capital expenditure other than those which are set forth in
the Company's Capital Expenditure Forecast, a copy of which previously has been
provided to the Buyer in the management presentation, except that PECO Energy or
the Company shall not make any capital expenditure with respect to the new
Service/Headquarters Building that is currently being constructed at the
Peninsula Industrial Park, Lums Road Site, North East, Maryland (the "New
Service/HQ Building");
48
<PAGE>
(l) other than pursuant to clause (k) above, make any capital expenditures
or capital expenditure commitments or enter into any lease, as lessee, of
capital equipment or other property, except with respect to any individual
capital expenditure or lease having a cost to the Company not in excess of
$100,000 and with respect to all capital expenditures and leases the aggregate
cost of which shall not exceed $500,000 incurred in the ordinary course of
business and consistent with past practice;
(m) make any changes in accounting principles, methods or practices or
financial policies and practices applicable to the Company, except as required
by generally accepted accounting principles;
(n) change the Company's taxable year;
(o) make, file, or enter into (whether before or after the Closing Date)
any election, consent, or agreement described in Section 3.20(d) or Section
3.20(e) hereof with respect to the Company or any of its assets;
(p) enter into, amend, terminate or waive any material provision of any
agreement, commitment or transaction not described in clauses (a) through (p)
above (including without limitation any borrowing, capital expenditure or
capital financing), material to
49
<PAGE>
the business, operations or financial condition of the Company, except
agreements, commitments or transactions in the ordinary course of business and
consistent with past practice or as contemplated herein;
(q) commence actual construction of any new facilities, except for those
projects set forth on Schedule 5.1;
(r) engage in any activity which would cause a change in the status of the
Company, under any applicable regulatory body;
(s) except with respect to those matters set forth on Schedule 5.1, file
any applications, petitions, motions, orders, briefs, settlement agreements or
other papers in any proceeding before any governmental authority, or make any
appeals related thereto; or
(t) enter into any contract, agreement, commitment or arrangement, whether
written or oral, with respect to any of the transactions set forth in the
foregoing paragraphs (a) through (s).
5.2. Access to Information.
---------------------
(a) Between the date of this Agreement and the Closing Date, PECO Energy
will cause the Company, during ordinary business hours and upon reasonable
notice, to (i) give the Buyer and its accountants, counsel,
50
<PAGE>
environmental consultants, financial advisors and other authorized
representatives (the "Buyer Representatives") reasonable access to all books,
records, plants, offices and other facilities and properties of the Company to
which the Buyer is permitted access by law, (ii) permit the Buyer to make such
reasonable inspections thereof as the Buyer may reasonably request; (iii) cause
its officers and advisors to furnish the Buyer with annual and quarterly
financial statements of the Company for all periods between the date hereof and
the closing Date and such other financial and operating data and other
information with respect to the business and properties of the Company as the
Buyer may from time to time reasonably request; (iv) cause its officers and
advisors to furnish the Buyer a copy of each report, schedule or other document
filed or received by them with the SEC, MPSC or FERC with respect to the Company
provided, however, that (A) any such investigation shall be conducted in such a
- -------- -------
manner as not to interfere unreasonably with the operation of the business of
the Company, (E) the Company shall not be required to take any action which
would constitute a waiver of the attorney-client privilege and (C) the Company
need not
51
<PAGE>
supply the Buyer with any information which the Company is under a legal
obligation not to supply.
(b) All information furnished to or obtained by the Buyer and the Buyer
Representatives pursuant to this Section 5.2 shall be subject to the provisions
of the Confidentiality Agreement, dated March 25, 1994 between PECO Energy and
the Buyer (the "Confidentiality Agreement") and shall be treated as
"Information" (as defined in the Confidentiality Agreement).
5.3. Expenses. Whether or not the transactions contemplated hereby are
--------
consummated, all costs and expenses incurred in connection with this Agreement
and the transactions contemplated hereby shall be borne by the party incurring
such costs and expenses.
5.4. Further Assurances. Subject to the terms and conditions of this
------------------
Agreement, each of the parties hereto will use all reasonable efforts to take,
or cause to be taken, all action, and to do, or cause to be done, all things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
From time to time after the date hereof, without further consideration, PECO
Energy will, at its own expense, execute and deliver such documents to the Buyer
as the Buyer may reasonably request in order more effectively to vest in the
Buyer good title to the Company Common Stock. From time to time after the date
hereof, without further consideration, the Buyer will, at its own expense,
execute and deliver such documents to PECO Energy as PECO Energy may reasonably
request in order more effectively to
52
<PAGE>
consummate the sale of the Company Common Stock pursuant to this Agreement.
5.5. Public Statements. The parties shall consult with each other prior
-----------------
to issuing any public announcement, statement or other disclosure with respect
to this Agreement or the transactions contemplated hereby and shall not issue
any such public announcement, statement or other disclosure prior to such
consultation, except as may be required by law and except that the parties may
make public announcements, statements or other disclosures with respect to this
Agreement and the transactions contemplated hereby to the extent and under the
circumstances in which the parties are expressly permitted by the
Confidentiality Agreement to make disclosures of "Information" (as defined in
the Confidentiality Agreement).
53
<PAGE>
5.6. Consents and Approvals.
----------------------
(a) PECO Energy and the Buyer shall each file or cause to be filed with the
Federal Trade Commission and the United States Department of Justice any
notifications required to be filed under the HSR Act and the rules and
regulations promulgated thereunder with respect to the transactions contemplated
hereby. The parties shall consult with each other as to the appropriate time of
filing such notifications and shall use their best efforts to make such filings
at the agreed upon time, to respond promptly to any requests for additional
information made by either of such agencies, and to cause the waiting periods
under the HSR Act to terminate or expire at the earliest possible date after the
date of filing.
(b) PECO Energy and the Buyer shall cooperate with each other to (i)
promptly prepare and file all necessary documentation, (ii) effect all necessary
applications, notices, petitions and filings and execute all agreements and
documents, (iii) use all reasonable efforts to obtain all necessary permits,
consents, approvals and authorizations of all governmental bodies and (iv) use
all reasonable efforts to obtain all necessary Permits, consents, approvals and
authorizations of all other parties, in the case of each
54
<PAGE>
of the foregoing clauses (i), (ii), (iii) and (iv), necessary or advisable to
consummate the transactions contemplated by this Agreement (including, without
limitation, the PECO Energy Required Regulatory Approvals and the Buyer Required
Regulatory Approvals) or required by the terms of any note, bond, mortgage,
indenture, deed of trust, license, franchise, permit, concession, contract,
lease or other instrument to which the Company or the Buyer or any of its
subsidiaries is a party or by which any of them is bound. PECO Energy shall
have the right to review and approve in advance all characterizations of the
information relating to PECO Energy; the Buyer shall have the right to review
and approve in advance all characterizations of the information relating to the
Buyer; and each of PECO Energy and the Buyer shall have the right to review and
approve in advance all characterizations of the information relating to the
Company and the transactions contemplated by this Agreement which appear in any
filing made in connection with the transactions contemplated hereby. The
parties hereto agree that they will consult with each other with respect to the
obtaining of all such necessary Permits, consents, approvals and authorizations
of all third parties and governmental bodies. PECO Energy and the Buyer shall
55
<PAGE>
designate separate counsel with respect to all applications, notices, petitions
and filings (joint or otherwise) relating to this Agreement and the transactions
contemplated hereby and in connection with the Power Purchase Agreement
(including but not limited to the PECO Energy Required Regulatory Approvals
and the Buyer Required Regulatory Approvals) on behalf of PECO Energy, the
Company and the Buyer with all governmental bodies.
(c) The parties hereto shall consult with each other prior to proposing or
entering into any stipulation or agreement with any Federal, State, Commonwealth
or local governmental authority or agency or any third party in connection with
any Federal, State, Commonwealth or local governmental consents and approvals
legally required for the consummation of the transactions contemplated hereby
and shall not propose or enter into any stipulation or agreement without the
other party's prior written consent, which consent shall not be unreasonably
withheld.
5.7. Fees and Commissions. PECO Energy and the Buyer each represent and
--------------------
warrant to the other that, except for Morgan Stanley & Co. Incorporated, which
is acting for and at the expense of PECO Energy, and Merrill Lynch, Pierce,
Fenner & Smith Incorporated,
56
<PAGE>
which is acting for and at the expense of the Buyer, no broker, finder or other
person is entitled to any brokerage fees, commissions or finder's fees in
connection with the transaction contemplated hereby by reason of any action
taken by the party making such representation. PECO Energy and the Buyer will
pay to the other or otherwise discharge, and will indemnify and hold the other
harmless from and against, any and all claims or liabilities for all brokerage
fees, commissions and finder's fees (other than as described above) incurred by
reason of any action taken by such party.
5.8. Sales and Transfer Taxes. Notwithstanding anything in this Agreement
------------------------
to the contrary, all transfer taxes (including all stock transfer taxes, if any)
incurred in connection with this Agreement and the transactions contemplated
hereby shall be borne by the Buyer, and the Buyer will, at its own expense, file
all necessary Tax Returns and other documentation with respect to all such
transfer taxes, and, if required by applicable law, PECO Energy will join in the
execution of any such Tax Returns or other documentation.
5.9. Supplements to Schedules. From time to time prior to the Closing
------------------------
Date, PECO Energy shall supplement
57
<PAGE>
or amend the Schedules required by Article III with respect to any matter
hereafter arising which, if existing or occurring at the date of this
Agreement, would have been required to be set forth or described in such
Schedules; provided, however, that any matters included therein, by so
supplementing or amending the Schedules, will not be deemed to cure any breach
of any representation or warranty made in this Agreement.
5.10. Employees. (a) Individuals who are employees of the Company as of
---------
the Closing Date shall not exceed 92 less any employees of the Company who prior
to the Closing Date participate in either the VRIP or the VSIP plus any person
who is hired by the Company pursuant to Section 5.1(c)(iii). Employees of the
Company as of the Closing Date ("Employees") will be employed immediately
following the Closing Date in such positions as the Buyer shall thereafter
determine, giving due consideration to the previous work history, job
experience, and qualifications of the Employees as well as the Buyer's needs.
(b) (i) For a period of three years following the Closing Date, Employees
not covered after the Closing Date by a collective bargaining agreement shall be
treated as any other similarly-situated employees of the Buyer in the event of
any reductions in the Buyer's
58
<PAGE>
working force, without regard to whether their past employment was with the
Company or the Buyer.
(ii) Employees that are covered after the Closing Date by a collective
bargaining agreement shall be treated as provided in the then-effective
collective bargaining agreement between the Buyer and the collective bargaining
representative of the Employees in the event of any reductions in the Buyer's
working force; provided, that the Buyer shall negotiate in good faith with the
collective bargaining representative and thereby attempt to ensure that, for a
period of three years following the Closing Date, Employees who accept
positions with the Buyer that are covered by a collective bargaining agreement
shall be treated as any other similarly-situated employees of the Buyer in the
event of any reduction in the Buyer's working force, without regard to whether
their past employment was with the Company or the Buyer. Nothing in the
foregoing shall require, however, that the Buyer make any concession or other
commitment during such negotiations unless the Buyer determines, in its sole
and unreviewable discretion, that is appropriate to do so.
(c) Except as otherwise provided in paragraph (d) below, immediately
following the Closing Date, the
59
<PAGE>
Employees shall be employed on substantially the same terms and conditions as,
and shall be covered by benefit plans or arrangements which, in the aggregate,
provide substantially equivalent benefits (at no additional cost) as were
provided to the Employees immediately prior to the Closing Date, except to the
extent otherwise required by the then-effective collective bargaining agreement
covering such Employees (as applicable). Such Employees shall receive credit
for past service with the Company, PECO Energy or its subsidiaries for purposes
of eligibility, participation, vesting, benefit accrual or entitlement under any
such benefit plans and arrangements, including, but not limited to, satisfaction
of any preexisting condition exclusion under any such plan providing health
care coverage.
(d) Effective as of the Closing Date, the Buyer will establish a pension
plan for the benefit of all Employees who continue in the employment of the
Buyer following the Closing Date ("Continuing Employees"). Such plan (the
"Buyer's Plan") shall provide accrued pension benefits for each Continuing
Employee in respect of service prior to the Closing Date in an amount at least
equal to the amount of such benefits accrued as of the Closing Date by such
Continuing
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Employee (the "PECO Accrued Benefit") under the Service Annuity Plan of
Philadelphia Electric Company ("PECO Energy's Plan"). The Buyer represents and
warrants that the Buyer's Plan is or will become qualified under Section 401(a)
of the Code. Credit for prior service and earnings with PECO Energy or its
affiliates in respect of each Continuing Employee for purposes of eligibility
and vesting and for accrual of benefits shall be provided under the Buyer's
Plan. PECO Energy shall cause to be transferred to the Buyer's Plan, as soon as
practical following the Closing Date, but in no event before the 31st day after
the filing of all of the required Forms 5310-A, if any, in connection with such
transfer, and in no event later than 60 days following the Closing Date, an
amount equal to (i) plus (ii) less (iii):
(i) An amount equal to the aggregate actuarial present value (as
determined as set forth below) of the PECO Accrued Benefit for each Employee.
Such PECO Accrued Benefits shall include the value, based on benefits accrued
under PECO Energy's Plan as of the Closing Date, of early retirement benefits as
described in Section 4.3 and Section 4.6 of PECO Energy's Plan and the 50%
Contingent Annuitant Option as described in Section 5.3(b) of PECO Energy's Plan
for those
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Continuing Employees who upon termination of employment with the Buyer meet the
requirements for early retirement as described in Section 4.3 of PECO Energy's
Plan. In addition, such PECO Accrued Benefit shall include the value of
preretirement death benefits as described in Section 5.3 and Section 5.4 of
PECO Energy's Plan.
(ii) Interest on the amount determined under (i) from the Closing Date to
the date of transfer of such assets and liabilities (the "Transfer Date") at the
Pension Benefit Guaranty Corporation immediate interest rate in effect at the
Closing Date.
(iii) Any payment made to or in respect of a Continuing Employee who
retires or otherwise terminates employment after the Closing Date but before the
Transfer Date.
The actuarial present value of benefits shall be determined by the actuary
for PECO Energy's Plan as of the Closing Date and shall be calculated in
accordance with Section 414(1) of the Code on the basis of the following
assumptions:
(A) The interest rates, mortality assumption, and retirement age assumption as
used by the Pension Benefit Guaranty Corporation for terminating single employer
plans as of the Closing Date.
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(B) The same percentage married and turnover assumptions as used by PECO
Energy's actuary in preparing the most recent actuarial valuation report for the
PECO Energy's Plan.
(e) PECO Energy shall pay all benefits accrued under PECO Energy's Plan
that become due and payable in respect of Continuing Employees prior to the
Transfer Date. As of the Transfer Date, the Buyer shall assume all of the
liabilities and obligations under PECO Energy's Plan with respect to the PECO
Accrued Benefits and each of PECO Energy and PECO Energy's Plan shall be
relieved of all such liabilities and obligations. Upon the transfer of assets
and liabilities in accordance with this Section, the Buyer agrees to indemnify
and hold harmless PECO Energy, its officers, directors, employees, agents and
affiliates, and the PECO Energy Plan and its fiduciaries, agents and delegatees,
from and against any and all costs, damages, losses, expenses or other
liabilities arising out of or related to the Buyer's Plan, including benefits
accrued by Continuing Employees prior to the Transfer Date which are provided
by the Buyer's Plan; provided, however, that the Buyer shall not indemnify or
-------- -------
hold harmless such parties with respect to those costs, damages, losses or other
liabilities that result from the acts or omissions of
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such parties, which acts or omissions occurred or should have occurred prior to
the Transfer Date.
(f) PECO Energy shall cooperate with and supply sufficient information to
the actuary designated by the Buyer to enable such actuary to verify all
calculations required under this section.
(g) Except as specifically provided in paragraph (e) above, PECO Energy
and its affiliates (other than the Company) shall retain any and all liability
with respect to any Plan after the Closing Date with respect to any Employees
who are not Continuing Employees and with respect to any liabilities incurred
prior to the Closing Date with respect to Continuing Employees ("PECO Energy
Employee Liabilities"). PECO Energy agrees to indemnify and hold harmless the
Buyer and the Company, their officers, directors, employees, agents and
affiliates and the Buyer's Plan and its fiduciaries, agents and delegatees for
any and all Seller's Liabilities including, but not limited to, any and all
costs, damages, losses, expenses or other liabilities arising out of or related
to any PECO Energy Employee Liabilities; provided, however, PECO Energy shall
-------- -------
not hold harmless such parties with respect to those costs, damages, losses or
other liabilities with respect to
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Continuing Employees that result from the acts or omissions of such parties that
occurred after the Closing Date.
(h) Effective as of the Closing Date, the Buyer will establish or
designate a profit sharing plan including a cash or deferred arrangement
("Buyer's Savings Plan") for the benefit of all Continuing Employees. The Buyer
represents and warrants that the Buyer's Savings Plan is or will become
qualified under sections 401(a) and 401(k) of the Code. PECO Energy shall cause
to be transferred to the Buyer's Savings Plan, as soon as practical following
the Closing Date, but in no event before the 31st day after the filing of all
Forms 5310-A, if required in connection with such transfer, assets representing
the account balances (in cash or cash equivalents) of all Continuing Employees
under the PECO Energy Employee Savings Plan. The PECO Energy Employee Savings
Plan shall pay all benefits accrued thereunder that become due and payable in
respect of Continuing Employees prior to the date of such transfer. As of the
date of such transfer, the Buyer shall assume all of the liabilities and
obligations under the PECO Energy Employee Savings Plan with respect to
Continuing Employees and each of PECO Energy and the PECO Energy Employee
Savings Plan shall
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be relieved of all such liabilities and obligations. The parties hereto shall
cooperate to achieve such transfer in a manner intended to reduce any
administrative inconvenience. Upon the transfer of assets and liabilities in
accordance with this Section, the Buyer agrees to indemnify and hold harmless
PECO Energy, its officers, directors, employees, agents and affiliates, and the
PECO Energy Employee Savings Plan and its fiduciaries and agents, from and
against all costs, damages, losses, expenses or other liabilities arising out
of or related to the Buyer & Savings Plan, including benefits accrued by
Continuing Employees prior to the date of transfer of assets and liabilities
which are provided by the Buyer's Savings Plan; provided, however, that the
-------- -------
Buyer shall not indemnify or hold harmless such parties with respect to those
costs, damages, losses or other liabilities that result from the acts or
omissions of such parties, which acts or omissions occurred or should have
occurred prior to the date of transfer of assets and liabilities.
5.11. No Negotiations. To the extent not required by any governmental
---------------
authority or agency, PECO Energy shall and shall cause the Company and each
person acting for or on behalf of PECO Energy or the Company to
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refrain from taking, directly or indirectly, any action (a) to seek or encourage
any offer or proposal from any person to acquire any assets (other than in the
ordinary course of business and consistent with past practice) or shares of
capital stock or other securities of the Company, (b) to merge, consolidate or
combine or permit any other person to merge, consolidate or combine with the
Company, (c) to negotiate or reach any agreement or understanding (whether or
not such agreement or understanding is absolute, revocable, contingent or
conditional) for, or otherwise to attempt to consummate any such acquisition,
transfer, merger, consolidation or combination or (d) to furnish or cause to be
furnished any information with respect to the Company to any person (other than
the Buyer or as otherwise required by law or any governmental authority). PECO
Energy will promptly advise the Buyer of receipt by PECO Energy, the Company or
any of their respective representatives of any offer, proposal or informational
request that is subject to this Section 5.11 from any person (other than the
Buyer).
5.12. Post-Closing Assistance. PECO Energy shall make its employees
-----------------------
available from time to time upon reasonable notice, so as not to interfere with
PECO Energy's business and operations, subsequent to the
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Closing Date and shall provide such data and other information in such form as
may be reasonably requested by the Buyer to assist the Buyer at the Buyer's
reasonable cost and expense, in connection with the defense, prosecution or
investigation of any of the Buyer's obligations, rights and liabilities relating
to the Company.
5.13. Record Retention Procedures. Until the fifth anniversary of the
---------------------------
Closing Date, PECO Energy shall not dispose of any books, records, documents or
information relating to the Company prior to the Closing Date without first
giving notice to the Buyer and permitting the Buyer to retain or copy such books
and records as it may select, which selection must be made within a reasonable
time. During such period, PECO Energy shall permit the Buyer to make copies, at
the Buyer's expense, of such books, records, documents or information for any
reasonable purpose. In addition, PECO Energy shall make available to the Buyer
after Closing upon reasonable notice so as not to interfere with PECO Energy's
business and operations, those employees of PECO Energy with knowledge of or
relevant to the above-described matters for the purpose of consultation and/or
testimony in connection therewith,
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such services to be performed at the Buyer's reasonable cost and expense.
5.14. Section 338(h)(10) Election. (a) With respect to the purchase by
---------------------------
the Buyer of the Company Common Stock (i) PECO Energy, the Company and the Buyer
shall jointly make a valid, timely and effective election as provided for in
Section 338(h)(10) of the Code and the Treasury Regulations provided thereunder
(the "Election") (and any comparable election under state or local tax law),
(ii) PECO Energy, the Company and the Buyer shall, as promptly as practicable
following the Closing Date, cooperate with each other to take all actions
necessary and appropriate (including filing such forms, returns, elections,
schedules and other documents as may be required) to effect and preserve a
timely Election in accordance with the provisions of Treasury Regulation (S)
1.338(h)(10)-i (or any comparable provision of state or local tax law) or any
successor provisions and (iii) PECO Energy and the Buyer shall report the
purchase by the Buyer of the Company Common Stock consistent with the Election
(and any comparable elections under state or local tax laws) and shall take no
position to the contrary thereto in any Tax Return, any proceeding before any
taxing authority, or otherwise.
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(b) In connection with the Election, PECO Energy and the Buyer shall act
together in good faith to agree on the Aggregate Deemed Sales Price (as defined
under applicable Treasury Regulations) and the allocation of such Aggregate
Deemed Sales Price among the Company's assets. Such allocation of the Aggregate
Deemed Sales Price shall be made in accordance with Section 338(b) of the Code
and any applicable Treasury Regulations. If PECO Energy and the Buyer are
unable to agree on such allocation, such dispute shall be resolved by the
Settlement Auditor, whose fees and expenses shall be paid equally by both PECO
Energy and the Buyer. PECO Energy and the Buyer (i) shall be bound by such
allocation for purposes of determining any Taxes, (ii) shall prepare and file
all Tax Returns to be filed with any taxing authority in a manner consistent
with such allocation, and (iii) shall take no position inconsistent with such
allocation in any Tax Return, any proceeding before any taxing authority or
otherwise. In the event that such allocation is disputed by any taxing
authority, the party receiving notice of such dispute shall promptly notify and
consult with the other party concerning resolution of such dispute.
5.15. Other Tax Matters. PECO Energy will refrain from making an election
-----------------
to reattribute any losses of the
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Company under Treasury Regulation Section 1.1502-20(g). PECO Energy shall cause
the Company to be included in its federal consolidated income Tax Return for its
taxable year ended December 31, 1993.
5.16. Transfer of Certain Assets, Properties and Other Items. (a) Prior
-------------------------------------- --------- -----
to the Closing, PECO Energy shall cause the Company to transfer to PECO Energy
(or any of its subsidiaries other than the Company) (i) title to the 500kV Peach
Bottom-Keeney transmission line and all real property relating thereto, except
that the Company will reserve the property rights set forth in Schedule 5.16(a),
(ii) title to the Company's service facility at the intersection of Bridge and
High Streets in Elkton, Maryland (the "Elkton Service Center"), and (iii) the
Company's employees, leased vehicles, equipment and parts in stock, and the
lease of the Building in Delta, Pennsylvania, which are used by the Company to
provide customer and maintenance services in the PECO Energy service territory
in York County, Pennsylvania (the "York Transfer"). A Schedule of the property
to be transferred in connection with the York Transfer shall be provided by PECO
Energy to the Buyer prior to the Closing and, immediately upon the consummation
of the York Transfer, the Company's
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obligation to provide customer and maintenance services in York County,
Pennsylvania shall terminate.
(b) The distribution of properties and as sets by the Company to PECO
Energy contemplated by Section 5.16(a) shall be effected pursuant to a plan of
liquidation pursuant to Section 332 of the Code, which the company shall adopt
prior to the Closing Date.
(c) PECO Energy and the Buyer hereby agree that not later than 45 days
following the date of this Agreement, PECO Energy (or any subsidiary of PECO
Energy that is to acquire title to the Elkton Service Center pursuant to Section
5.16(a)) and the Buyer shall negotiate in good faith, and execute, a definitive
agreement relating to the lease of the Elkton Service Center by the Buyer, the
terms and conditions of which shall be reasonably satisfactory to the parties
hereto and include, without limitation, the terms and conditions set forth in
Annex 2 hereto.
5.17. Termination of Tax Sharing Agreements. PECO Energy agrees to
-------------------------------------
terminate on or prior to the Closing Date any Tax sharing agreement, arrangement
or similar contract between PECO Energy (or any affiliate thereof) and the
Company, and in no event shall the Company be required to make any payments
thereunder on
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account of any transactions occurring prior to, on or after the Closing Date.
5.18. Power Purchase Arrangements. The Buyer and PECO Energy agree to
---------------------------
cause the termination of the Tri-Partite Agreement, dated May 1, 1972, among the
Company, PECO Energy and Susquehanna Electric Company, and the implementation of
the Power Purchase Agreement attached hereto as Annex 3 (the "Power Purchase
Agreement"), in each case effective as of February 1, 1996.
ARTICLE VI
CLOSING CONDITIONS
------------------
6.1. Conditions to Each Party's Obligations to Effect the Transactions
---------------------------------------------------- ------------
Contemplated Hereby. The respective obligations of each party to effect the
- -------------------
transactions contemplated hereby shall be subject to the fulfillment at or prior
to the Closing Date of the following conditions.
(a) The waiting period under the HSR Act applicable to the consummation of
the transactions contemplated hereby shall have expired or been terminated;
(b) No preliminary or permanent injunction or other order or decree by any
federal or state court which prevents the consummation of the transactions
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contemplated hereby shall have been issued and remain in effect (each party
agreeing to use its reasonable best efforts to have any such injunction, order
or decree lifted) and no statute, rule or regulation shall have been enacted by
any State, Commonwealth or Federal government or governmental agency in the
United States which prohibits the consummation of the transactions contemplated
hereby;
(c) All Federal, State, Commonwealth and local government consents and
approvals required for the consummation of the transactions contemplated hereby
and in connection with the Power Purchase Agreement, including, without
limitation, the PECO Energy Required Regulatory Approvals and the Buyer Required
Regulatory Approvals, shall have been obtained and have become Final Orders and
shall contain no provisions or conditions which, directly or indirectly, would
have a material adverse effect on the business, operations, financial condition
or prospects of both (i) the net transmission and distribution assets of the
Company and (ii) the net transmission and distribution assets in Maryland of the
Buyer. A "Final Order", means a final order after all opportunities for
rehearing are exhausted (whether or not any appeal thereof is pending).
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<PAGE>
(d) All consents and approvals required under the terms of any note, bond,
mortgage, indenture, contract or other agreement to which PECO Energy, the
Company or the Buyer, or any of their respective subsidiaries, is a party for
the consummation of the transactions contemplated hereby shall have been
obtained, other than those which, if not obtained, would not, in the aggregate,
have a Material Adverse Effect or a material adverse effect on the ability of
PECO Energy or the Buyer to perform its obligations pursuant to this Agreement.
(e) The Power Purchase Agreement attached hereto as Annex 3 shall have
been executed and delivered by the parties thereto.
6.2. Conditions to Obligations of the Buyer. The obligation of the Buyer
--------------------------------------
to effect the transactions contemplated by this Agreement shall be subject to
the fulfillment at or prior to the Closing Date of the following additional
conditions:
(a) There shall not have occurred and be continuing, a Material Adverse
Effect;
(b) PECO Energy shall have performed and complied with in all material
respects the covenants and agreements contained in this Agreement required to be
performed and complied with by it at or prior to the
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Closing Date, and the representations and warranties of PECO Energy set forth in
this Agreement shall be true and correct in all material respects as of the date
of this Agreement and as of the Closing Date as though made at and as of the
Closing Date; and
(c) The Buyer shall have received a certificate from an authorized officer
of PECO Energy, dated the Closing Date, to the effect that to the best of such
officer's knowledge, the conditions set forth in Section 6.2(a) and (b) have
been satisfied;
(d)(i) All indebtedness, whether secured or unsecured, of the Company
(other than trade payables incurred in the ordinary course of business and
consistent with past practice) shall have been offset or paid in full with no
adverse Tax consequences to the Company resulting from such offset or payment in
full; (ii) All indebtedness or other obligations of the Company to PECO Energy
or any affiliate of PECO Energy or of PECO Energy or any affiliate of PECO
Energy to the Company (including, but not limited to, those items shown on the
financial statements and books and records of the Company as power purchase
receivables or payables, federal Taxes receivable or payable and deferred
alternative minimum Tax receivable or payable) shall have been offset or paid in
full with no adverse
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<PAGE>
Tax consequences to the Company resulting from such offset or payment in full;
and (iii) the cash and cash equivalents held by the Company on Closing Date
shall not be less than $1,000,000.
(e) The Buyer shall have received an opinion from Skadden, Arps, Slate,
Meagher & Flom, special counsel to PECO Energy, dated the Closing Date and
satisfactory in form and substance to the Buyer and its counsel, substantially
to the effect that:
(i) PECO Energy is a corporation duly organized, validly existing and in
good standing under the laws of the Commonwealth of Pennsylvania and has the
corporate power and authority to execute and deliver this Agreement and to
consummate the transactions contemplated hereby; and the execution and delivery
of this Agreement and the consummation of the transaction contemplated hereby
have been duly authorized by requisite corporate action taken on the part of
PECO Energy;
(ii) The Company is a corporation duly organized, validly existing and in
good standing under the laws of the State of Maryland;
(iii) this Agreement has been executed and delivered by PECO Energy and
(assuming that the PECO Energy Required Regulatory Approvals and the Buyer
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Required Regulatory Approvals are obtained) is a valid and binding obligation of
PECO Energy, enforceable against PECO Energy in accordance with its terms,
except (A) that such enforcement may be subject to bankruptcy, insolvency,
reorganization, moratorium or other similar laws now or hereafter in effect
relating to creditors' rights, (B) that the remedy of specific performance and
injunctive and other forms of equitable relief may be subject to certain
equitable defenses and to the discretion of the court before which any
proceeding therefore may be brought and (C) that such counsel expresses no
opinion with respect to the indemnification provisions contained in Article VIII
hereof;
(iv) the execution, delivery and performance of this Agreement by PECO
Energy will not constitute a violation of the Articles of Incorporation or
Bylaws in each case as currently in effect, of PECO Energy; and
(v) PECO Energy, by reason of delivery of certificates for the shares of
Company Common Stock in the name of the Buyer, will transfer to the Buyer good
title to such shares, free and clear of any liens, encumbrances, equities and
claims.
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As to any matter contained in such opinion which involves the laws of any
jurisdiction other than the federal laws of the United States or the laws of the
State of New York, such counsel may rely upon opinions of counsel admitted in
such other jurisdictions. Any opinions relied upon by such counsel as aforesaid
shall be delivered together with the opinion of such counsel. Such opinion may
expressly rely as to matters of fact upon certificates furnished by PECO Energy
and appropriate officers and directors of the Company and by public officials.
6.3. Conditions to Obligations of PECO Energy. The obligation of PECO
----------------------------------------
Energy to effect the transactions contemplated by this Agreement shall be
subject to the fulfillment at or prior to the Closing Date of the following
additional conditions:
(a) The Buyer shall have performed in all material respects its covenants
and agreements contained in this Agreement required to be performed at or prior
to the Closing Date;
(b) The representations and warranties of the Buyer set forth in this
Agreement shall be true and correct in all material respects as of the date of
this Agreement
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and as of the Closing Date as though made at and as of the Closing Date;
(c) PECO Energy shall have received a certificate from an authorized
officer of the Buyer, dated the Closing Date, to the effect that, to the best of
such officer's knowledge, the conditions set forth in Section 6.3(a) and (b)
have been satisfied; and
(d) PECO Energy shall have received an opinion from LeBoeuf, Lamb, Greene &
MacRae, counsel for the Buyer, dated the Closing Date and satisfactory in form
and substance to PECO Energy and its counsel, substantially to the effect that:
(i) the Buyer is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and the Commonwealth of
Virginia and has the corporate power and authority to execute and deliver this
Agreement and to consummate the transactions contemplated hereby; and the
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by requisite
corporate action taken on the part of the Buyer;
(ii) this Agreement has been executed and delivered by the Buyer and
(assuming that the PECO
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Energy Required Regulatory Approvals and the Buyer Required Regulatory Approvals
are obtained) is a valid and binding obligation of the Buyer, enforceable
against the Buyer in accordance with its terms, except (A) that such enforcement
may be subject to bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect relating to creditors' rights, (B) that
the remedy of specific performance and injunctive and other forms of equitable
relief may be subject to certain equitable defenses and to the discretion of the
court before which any-proceeding therefore may be brought and (C) that such
counsel expresses no opinion with respect to the indemnification provisions
contained in Article VIII hereof; and
(iii) the execution, delivery and performance of this Agreement by the
Buyer will not constitute a violation of the Certificate of Incorporation or By-
Laws, as currently in effect, of the Buyer. As to any matter contained in such
opinion which involves the laws of any jurisdiction other than the federal laws
of the United States and the State of New York, such counsel may rely upon
opinions of counsel admitted to practice in such other jurisdictions. Any
opinions relied upon by such counsel as aforesaid shall be
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delivered together with the opinion of such counsel. Such opinion may expressly
rely as to matters of facts upon certificates furnished by appropriate officers
and directors of the Buyer and its subsidiaries and by public officials.
ARTICLE VII
TERMINATION AND ABANDONMENT
---------------------------
7.1. Termination.
-----------
(a) This Agreement may be terminated at any time prior to the Closing
Date, by mutual written consent of the Buyer and PECO Energy.
(b) This Agreement may be terminated by PECO Energy or the Buyer if the
transactions contemplated hereby shall not have been consummated on or before 12
months from the date of this Agreement; provided that the right to terminate
--------
this Agreement under this Section 7.1(b) shall not be available to any party
whose failure to fulfill any obligation under this Agreement has been the cause
of, or resulted in, the failure of the Closing Date to occur on or before such
date; and provided, further, that the termination date specified in this Section
-------- -------
7.1(b) shall automatically be extended to 18 months from the date of this
Agreement if after 12 months from the date of this Agreement, (i) the
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condition set forth in Section 6.1(c) has not been satisfied or waived, (ii) all
other conditions set forth in Article VI have been or are then capable of being
satisfied and (iii) the approvals required by Section 6.1(c) which have at that
time not yet been obtained are being pursued with diligence.
(c) This Agreement may be terminated by either PECO Energy or the Buyer if
(i) any governmental or regulatory body, the consent of which is a condition to
the obligations of PECO Energy and the Buyer to consummate the transactions
contemplated hereby, shall have determined not to grant its consent and all
appeals of such determination shall have been taken and have been unsuccessful,
or (ii) any court of competent jurisdiction in the United States or any State or
Commonwealth shall have issued an order, judgment or decree permanently
restraining, enjoining or otherwise prohibiting the transactions contemplated
hereby and such order, judgment or decree shall have become final and
nonappealable.
(d) This Agreement may be terminated by the Buyer, if there has been a
material violation or breach by PECO Energy of any agreement, representation or
warranty contained in this Agreement which has rendered the
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satisfaction of any condition to the obligations of the Buyer impossible and
such violation or breach has not been waived by the Buyer.
(e) This Agreement may be terminated by PECO Energy, if there has been a
material violation or breach by the Buyer of any agreement, representation or
warranty contained in this Agreement which has rendered the satisfaction of any
condition to the obligations of PECO Energy impossible and such violation or
breach has not been waived by PECO Energy.
7.2. Procedure and Effect of Termination. In the event of termination of
-----------------------------------
this Agreement and abandonment of the transactions contemplated hereby by either
or both of the parties pursuant to Section 7.1, written notice thereof shall
forthwith be given by the terminating party to the other party and this
Agreement shall terminate and the transactions contemplated hereby shall be
abandoned, without further action by any of the parties hereto. If this
Agreement is terminated as provided herein:
(a) said termination shall be the sole remedy of the parties hereto with
respect to breaches of any agreement, representation or warranty contained in
this Agreement and none of the parties hereto nor any of
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their respective trustees, directors, officers or affiliates, as the case may
be, shall have any liability or further obligation to the other party or any of
their respective trustees, directors, officers or affiliates, as the case may
be, pursuant to this Agreement, except in each case as stated in this Section
7.2 and in Sections 5.2(b), 5.3 and 5.7; and
(b) all filings, applications and other submissions made pursuant to this
Agreement, to the extent practicable, shall be withdrawn from the agency or
other person to which they were made.
ARTICLE VIII
INDEMNIFICATION
---------------
8.1. Indemnification. (a) PECO Energy will indemnify, defend and hold
---------------
harmless the Buyer from and against any and all claims, demands or suits (by any
person), losses, liabilities, damages, obligations, payments, costs and expenses
(including, without limitation, the costs and expenses of any and all actions,
suits, proceedings, assessments, judgments, settlements and compromises relating
thereto and reasonable attorneys' fees and disbursements in connection
therewith) to the extent the foregoing are not covered by insurance, and
excluding any amounts
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indemnified by either PECO Energy or the Buyer pursuant to Section 8.3 hereof
(collectively, "Indemnifiable Losses"), asserted against or suffered by the
Buyer relating to, resulting from or arising out of (i) any breach by PECO
Energy of any of the representations and warranties of PECO Energy contained in
or made pursuant to this Agreement or (ii) any breach by PECO Energy of any
covenant or agreement of PECO Energy contained in this Agreement.
(b) The Buyer will indemnify, defend and hold harmless PECO Energy from
and against any and all Indemnifiable Losses asserted against or suffered by
PECO Energy relating to, resulting from or arising out of (i) any breach by the
Buyer of any of the representations and warranties of the Buyer contained in or
made pursuant to this Agreement or (ii) any breach by the Buyer of any covenant
or agreement of the Buyer contained in this Agreement.
(c) Either the person required to provide indemnification under this
Agreement (the "Indemnifying Party") or the person entitled to receive
indemnification under this Agreement (the "Indemnitee") may assert any offset or
similar right in respect of its obligations under this Section 8.1 based upon
any actual
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or alleged breach of any representation, warranty, covenant or agreement
contained in this Agreement.
(d) Any Indemnitee having a claim under these indemnification provisions
shall make a good faith effort to recover all losses, damages, costs and
expenses from insurers of such Indemnitee under applicable insurance policies so
as to reduce the amount of any Indemnifiable Loss hereunder. The amount of any
Indemnifiable Loss shall be reduced (i) to the extent the Indemnitee receives
any insurance proceeds with respect to an Indemnifiable Loss and (ii) to take
into account any net Tax benefit recognized by the Indemnitee arising from the
recognition of the Indemnifiable Loss and any payment actually received with
respect to an Indemnifiable Loss.
(e) The expiration, termination or extinguishment of any covenant,
agreement, representation or warranty pursuant to Section 9.3 shall not affect
the parties' obligations under this Section 8.1 if the Indemnitee provided the
Indemnifying Party with proper notice of the claim or event for which
indemnification is sought prior to such expiration, termination or
extinguishment.
(f) PECO Energy and the Buyer shall have indemnification obligations with
respect to
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Indemnifiable Losses asserted against or suffered by PECO Energy or the Buyer,
as the case may be, to the extent that the aggregate of all such Indemnifiable
Losses exceed the Indemnification Basket (as hereinafter defined), but not in
excess of $10,000,000, it being agreed and understood that neither PECO Energy
nor the Buyer, as the case may be, shall have any liability at any time for
Indemnifiable Losses asserted against or suffered by PECO Energy or the Buyer in
an amount that is less than or equal to the then current Indemnification Basket.
The term "Indemnification Basket" shall mean an amount equal to no more than
$500,000.
8.2. Defense of Claims. (a) If any Indemnitee receives notice of the
-----------------
assertion of any claim or of the commencement of any claim, action, or
proceeding made or brought by any person who is not a party to this Agreement or
an affiliate of a party to this Agreement ("Third Party Claim") with respect to
which indemnification is to be sought from an Indemnifying Party, the Indemnitee
will give such Indemnifying Party reasonably prompt written notice thereof, but
in any event not later than ten (10) calendar days after the Indemnitee's
receipt of notice of such Third Party Claim. Such notice shall describe the
nature of the
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Third Party Claim in reasonable detail and will indicate the estimated amount,
if practicable, of the Indemnifiable Loss that has been or may be sustained by
the Indemnitee. The Indemnifying Party will have the right to participate in
or, by giving written notice to the Indemnitee, to elect to assume the defense
of any Third Party Claim at such Indemnifying Party's own expense and by such
Indemnifying Party's own counsel, and the Indemnitee will cooperate in good
faith in such defense at such Indemnitee's own expense.
(b) If within ten (10) calendar days after an Indemnitee provides written
notice to the Indemnifying Party of any Third Party Claim the Indemnitee
receives written notice from the Indemnifying Party that such Indemnifying Party
has elected to assume the defense of such Third Party Claim as provided in the
last sentence of Section 8.2(a), the Indemnifying Party will not be liable for
any legal expenses subsequently incurred by the Indemnitee in connection with
the defense thereof; provided, however, that if the Indemnifying Party fails to
-------- -------
take reasonable steps necessary to defend diligently such Third Party Claim
within twenty (20) calendar days after receiving notice from the Indemnitee that
the Indemnitee believes the Indemnifying Party has failed to take such steps,
the Indemnitee may assume its own
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<PAGE>
defense, and the Indemnifying Party will be liable for all reasonable expenses
thereof. Without the prior written consent of the Indemnitee, the Indemnifying
Party will not enter into any settlement of any Third Party Claim which would
lead to liability or create any financial or other obligation on the part of the
Indemnitee for which the Indemnitee is not entitled to indemnification
hereunder. If a firm offer is made to settle a Third Party Claim without
leading to liability or the creation of a financial or other obligation on the
part of the Indemnitee for which the Indemnitee is not entitled to
indemnification hereunder and the Indemnifying Party desires to accept and agree
to such offer, the Indemnifying Party will give written notice to the Indemnitee
to that effect. If the Indemnitee fails to consent to such firm offer within
ten (10) calendar days after its receipt of such notice, the Indemnitee may
continue to contest or defend such Third Party Claim and, in such event, the
maximum liability of the Indemnifying Party as to such Third Party Claim will be
the amount of such settlement offer, plus reasonable costs and expenses paid or
incurred by the Indemnitee up to the date of such notice.
(c) Any claim by an Indemnitee on account of an Indemnifiable Loss which
does not result from a Third
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<PAGE>
Party Claim (a "Direct Claim") will be asserted by giving the Indemnifying Party
reasonably prompt written notice thereof, stating the nature of such claim in
reasonable detail and indicating the estimated amount, if practicable, but in
any event not later than ten (10) calendar days after the Indemnitee becomes
aware of such Direct Claim, and the Indemnifying Party will have a period of
thirty (30) calendar days within which to respond to such Direct Claim. If the
Indemnifying Party does not respond within such thirty (30) calendar day period,
the Indemnifying Party will be deemed to have accepted such claim. If the
Indemnifying Party rejects such claim, the Indemnitee will be free to seek
enforcement of its rights to indemnification under this Agreement.
(d) If the amount of any Indemnifiable Loss, at any time subsequent to the
making of an indemnity payment in respect thereof, is reduced by recovery,
settlement or otherwise under or pursuant to any insurance coverage, or pursuant
to any claim, recovery, settlement or payment by or against any other entity,
the amount of such reduction, less any costs, expenses or premiums incurred in
connection therewith (together with interest thereon from the date of payment
thereof), will promptly be repaid by the Indemnitee to the Indemnifying Party.
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Upon making any indemnity payment, the Indemnifying Party will, to the extent of
such indemnity payment, be subrogated to all rights of the Indemnitee against
any Third Party in respect of the indemnifiable Loss to which the indemnity
payment relates; provided, however, that (i) the Indemnifying Party will then be
-------- -------
in compliance with its obligations under this Agreement in respect of such
Indemnifiable Loss and (ii) until the Indemnitee recovers full payment of its
Indemnifiable Loss, any and all claims of the Indemnifying Party against any
such third party on account of said indemnity payment is hereby made expressly
subordinated and subjected in right of payment to the Indemnitee's rights
against such third party. Without limiting the generality or effect of any
other provision hereof, each such Indemnitee and Indemnifying Party will duly
execute upon request all instruments reasonably necessary to evidence and
perfect the above-described subrogation and subordination rights.
(e) A failure to give timely notice as provided in this Section 8.2 will
not affect the rights or obligations of any party hereunder except if, and only
to the extent that, as a result of such failure, the party which was entitled to
receive such notice was actually prejudiced as a result of such failure.
92
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8.3. Tax Indemnification. (a) PECO Energy will be responsible for, will
-------------------
pay or cause to be paid, and will indemnify and hold harmless the Buyer from and
against each and all of the following:
(i) any and all Taxes resulting from (A) the Election made pursuant to
Section 5.14 hereof; and (B) the transfers of the 5OOkV Peach Bottom-Keeney
transmission line, the Elkton Service Center and certain other properties of the
Company as described in Section 5.16 hereof;
(ii) any and all Taxes with respect to any taxable period of the Company
ending on or before the Closing Date, other than those Taxes listed in clause
(i) above;
(iii) any and all Taxes resulting from the Company having been (or ceasing
to be) included in any affiliated, consolidated, combined, or unitary Tax Return
that PECO Energy included the Company for any taxable period (or portion
thereof) ending on or prior to the Closing Date (including without limitation
(A) any liability for Taxes resulting from a "deferred
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<PAGE>
intercompany transaction," within the meaning of Treasury Regulation Section
1.1502-13(a)(2) (or any analogous or similar provision under state, local or
foreign law), that occurred on or prior to the Closing Date) and (B) any
liability of the Company pursuant to Treasury Regulation Section 1.1502-6(a) or
any analogous or similar state, local or foreign law;
(iv) any breach by PECO Energy of any representation, warranty, agreement
or covenant contained in Sections 3.20, 5.1(n), 5.13, 5.14, 5.15 and 5.16 hereof
or this Section 8.3; and
(v) any and all Taxes allocated to PECO Energy pursuant to Section 8.3(c)
hereof.
Notwithstanding the foregoing, PECO Energy shall indemnify the Buyer for
the Taxes described in clauses (ii) through (v) only to the extent that the sum
of such Taxes described in clauses (ii) through (v) exceeds the amount reserved
therefor on the Closing Balance Sheet of the Company.
(b) The Buyer shall indemnify PECO Energy and its affiliates and hold them
harmless from and against any
94
<PAGE>
and all liability for Taxes of the Company for any taxable period ending after
the Closing Date (except to the extent such taxable period began before the
Closing Date, in which case the Buyer's indemnity cover only that portion of any
such Taxes that are not for the Pre-Closing Tax Period (as hereinafter defined).
(c) Taxes attributable to the taxable period of the Company beginning
before the Closing Date and ending after the Closing Date (the "Overlap Period")
shall be apportioned between the portion of such Overlap Period ending on the
Closing Date (the "Pre-Closing Tax Period") and the portion of such period
ending after the Closing Date on the basis of an interim closing of the books.
With respect to any Tax Return required to be filed by the Buyer for the Overlap
Period, the Buyer shall provide PECO Energy with a statement calculating in
reasonable detail the amount of Tax that is allocable to PECO Energy pursuant to
this Section 8.3(c) (a "Statement") and copies of all relevant Tax Returns at
least twenty business days prior to the due date for filing of such Tax Return
(including extensions). Not later than five business days before the due date
for payment of Taxes with respect to such Tax Return, PECO
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Energy shall pay to the Buyer an amount equal to the Taxes shown on the
Statement that are allocable to PECO Energy pursuant to this Section 8.3(c);
provided, however, that if PECO Energy and the Buyer are unable to agree on the
- -------- -------
amount of PECO Energy's indemnification obligation hereunder, such dispute will
be settled by the Settlement Auditor whose fees and expenses shall be paid by
the Buyer and PECO Energy in proportion to each party's respective liability for
Taxes as determined by the Settlement Auditor, and PECO Energy shall pay the
amount determined by the Settlement Auditor within five days of such
determination. Any payment by PECO Energy as determined by the Settlement
Auditor shall bear interest from the date such Taxes were due to be paid at a
rate calculated based on a per annum rate computed on the basis of a 365 day
year and equal to the average of the high and low bid rates for federal funds on
such due date as such bid rates were published in The Wall Street Journal
-----------------------
(Eastern Edition). No payment pursuant to this Section 8.3(c) shall excuse PECO
Energy from its indemnification obligations pursuant to Section 8.3(a) hereof
should the amount of Taxes as ultimately determined (on audit or otherwise), for
the periods covered by such Tax Returns and which are the
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<PAGE>
responsibility of PECO Energy, exceed the amount of PECO Energy's payment under
this Section 8.3(c).
(d) If a claim, audit, adjustment, examination or other claim or adjustment
shall be made by any taxing authority concerning Taxes covered in Section 8.3(a)
hereof, the party seeking indemnification the ("Tax Indemnified Party") shall
promptly notify the other party (the "Tax Indemnifying Party") in writing of
such claim (the "Tax Claim"). If a notice of a Tax Claim (the "Tax Notice") is
not given to the Tax Indemnifying Party within a reasonably sufficient time to
allow the Tax Indemnifying Party effectively to contest such Tax Claim, or in
reasonable detail to apprise the Tax Indemnifying Party of the nature of the Tax
Claim, taking into account the facts and circumstances with respect to such Tax
Claim, the Tax Indemnifying Party shall not be liable to the Tax Indemnified
Party or any of its affiliates to the extent (but only to such extent) that the
Tax Indemnifying Party's position is actually prejudiced as a result thereof.
With respect to any Tax Claim which might result in an indemnity payment to
the Buyer pursuant to Section 8.3(a), PECO Energy shall, to the extent permitted
by law, control all proceedings taken in connection with
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such Tax Claim (including, without limitation, selection of counsel) and,
without limiting the foregoing, may in its sole discretion at its sole expense
pursue or forego any and all administrative appeals, proceedings, hearings and
conferences with any taxing authority with respect thereto, and may, in its sole
discretion, either pay the Tax claimed and sue for a refund where applicable law
permits such refund suits or contest such Tax Claim in any permissible manner.
In no case shall the Buyer settle or compromise any Tax Claim referred to in the
proceeding sentence without PECO Energy's prior written consent; provided,
--------
however, that the Buyer shall be entitled to settle or compromise such Tax Claim
- -------
in the event it waives its rights to any indemnity payment with respect thereto
and; provided, further, that such settlement or compromise will not, in PECO
-------- -------
Energy's sole discretion, increase PECO Energy's obligation under Section
8.3(a). The Buyer shall cooperate with PECO Energy in contesting such Tax
Claim, which cooperation shall include, without limitation, the reasonable
retention and (upon PECO Energy's request) the provision to PECO Energy of
records and information which are reasonably relevant to such Tax Claim, and
making employees available to provide additional information or
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explanation of any material provided hereunder or to testify at proceedings
relating to such Tax Claim, all at PECO Energy's expense.
(e) PECO Energy shall include, or cause to be included, the Company in (i)
the United States consolidated federal income Tax Return of PECO Energy for the
taxable periods of the Company ending on December 31 of the calendar year
immediately preceding the calendar year in which the Closing Date occurs and the
taxable period of the Company ending on the Closing Date, and (ii) all other
consolidated and all affiliated, combined, or unitary Tax Returns of PECO Energy
or its affiliates for the taxable period of the Company ending on December 31 of
the calendar year immediately preceding the calendar year in which the Closing
Date occurs and the taxable period ending on the Closing Date to the extent
permitted or required by applicable law. Such Tax Returns referred to in
clauses (i) and (ii) above are referred to as "PECO Energy Consolidated or
Combined Returns." PECO Energy shall prepare, or cause to be prepared, and
timely file, or cause to be timely filed, all PECO Energy Consolidated or
Combined Returns which include the Company or its assets or operations for all
taxable periods of the Company ending on or prior to the Closing Date (which
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<PAGE>
Tax Returns shall include the Company and the reportable items from the assets
or operations of the Company through and including the Closing Date). PECO
Energy also shall prepare, or cause to be prepared, and timely file, or cause to
be timely filed, all other Tax Returns of or which include the Company or its
assets or operations with respect to any taxable period ending on or prior to
the Closing Date. PECO Energy shall pay all Taxes shown to be due on such Tax
Returns. The Buyer shall prepare, or cause to be prepared, and file, or cause
to be filed, all Tax Returns of the Company which PECO Energy is not required to
file pursuant to this Section 8.3(e). PECO Energy and the Buyer shall
cooperate fully with each other, and make available to each other in a timely
fashion, such Tax data and other information as may be reasonably required by
PECO Energy or the Buyer, in connection with the preparation or filing of any
Tax Returns described in Section 8.3. Any Tax Returns required to be filed by
PECO Energy pursuant to this Section 8.3(e) shall be reviewed by an accounting
firm of national standing prior to their submission to the Buyer.
(f) PECO Energy and the Buyer will provide to each other, and the Buyer
will cause the Company to
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<PAGE>
provide to PECO Energy, full access, at any reasonable time and from time to
time after the Closing Date, at the business location at which the books and
records of the Company are maintained, to such Tax data relating solely to the
Company as PECO Energy or the Buyer, as the case may be, may from time to time
reasonably request and will furnish, and request the independent accountants and
legal counsel of PECO Energy, the Buyer or the Company to furnish to PECO Energy
or the Buyer, as the case may be, such additional Tax and other information and
documents relating solely to the Company in the possession of such persons as
PECO Energy or the Buyer may from time to time reasonably request. In
particular, PECO Energy will provide to the Buyer, to the extent requested by
the Buyer, true and complete copies of all separate Tax Returns (and related
workpapers) of the Company and such portions of the affiliated, consolidated,
combined or unitary Tax Returns of affiliated groups of which the Company was a
member (and related workpapers), in each case to the extent such returns or such
portions related exclusively to the Company.
(g) PECO Energy shall be responsible for, shall pay or cause to be paid,
and shall indemnify and hold harmless the Buyer or the Company from and against
any
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liability of the Company arising under any Tax sharing, Tax indemnity, Tax
allocation or similar contracts (whether or not written) to which the Company is
a party or is obligated thereunder on or prior to the Closing Date.
(h) Any refunds, carrybacks or credits of Taxes of the Company for any
taxable period ending on or before the Closing Date shall be for the account of
PECO Energy and shall be paid by the Buyer to PECO Energy within ten days after
the Buyer receives such refund. Any refunds or credits of Taxes of the Company
for any taxable period beginning after the Closing Date shall be for the account
of the Buyer and shall be paid by PECO Energy to the Buyer within ten days after
PECO Energy receives such refund. Any refunds or credits of Taxes of the
Company for any Overlap Period shall be allocated between PECO Energy and the
Buyer on the basis of an interim closing of the books.
8.4. Tax Exclusivity. This Article VIII shall be the exclusive remedy for
---------------
all Tax matters.
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<PAGE>
ARTICLE IX
MISCELLANEOUS PROVISIONS
------------------------
9.1. Amendment and Modification. Subject to applicable law, this Agreement
--------------------------
may be amended, modified or supplemented only by written agreement of PECO
Energy and the Buyer.
9.2. Waiver of Compliance; Consents. Except as otherwise provided in this
------------------------------
Agreement, any failure of any of the parties to comply with any obligation,
covenant, agreement or condition herein may be waived by the party entitled to
the benefits thereof only by a written instrument signed by the party granting
such waiver, but such waiver or failure to insist upon strict compliance with
such obligation, covenant, agreement or condition shall not operate as a waiver
of, or estoppel with respect to, any subsequent or other failure.
9.3. Survival of Representations and warranties. Subject to the provisions
------------------------------------------
of Section 7.2, the representations and warranties contained in this Agreement
and the Schedules will survive the Closing and will remain in full force and
effect thereafter (a) until the expiration of the applicable statute of
limitation in the case of the representations and
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warranties of PECO Energy set forth in Section 3.20, (b) until the third
anniversary of the Closing Date in the case of the representations and
warranties set forth in Section 3.13 and (c) until the first anniversary of the
Closing Date in the case of all other representations and warranties set forth
in Articles III and IV hereof. Subject to the provisions of Section 7.2, the
covenants and agreements contained in this Agreement shall expire on the Closing
Date (other than the covenants and agreements contained in Sections 5.2(b), 5.3,
5.4, 5.7, 5.8, 5.10, 5.12, 5.13, 5.14, 5.15, 5.16(b), 5.18 and Article VIII,
which shall survive the Closing Date in accordance with their respective terms).
9.4. Indemnification and Adjustment Payments. Unless otherwise required
---------------------------------------
by law, PECO Energy and the Buyer agree that any payment made by PECO Energy to
the Buyer or by the Buyer to PECO Energy under Section 1.4 or ARTICLE VIII
hereof will be treated by the parties on their Tax Returns as an adjustment to
the consideration paid by the Buyer for the Company and shall take no position
to the contrary in any audit, examination or administrative proceeding.
9.5. Notices. All notices and other communications hereunder shall be in
-------
writing and shall be deemed given if delivered personally or by facsimile
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transmission, telexed or mailed by registered or certified mail (return receipt
requested), postage prepaid, to the parties at the following addresses (or at
such other address for a party as shall be specified by like notice; provided
--------
that notices of a change of address shall be effective only upon receipt
thereof):
(a) If to PECO Energy, to:
PECO Energy Company
2301 Market, Box 8699
Philadelphia, Pennsylvania
Attention: Gregory A. Cucchi
Vice President-Planning and Performance
with copies to:
Skadden, Arps, Slate, Meagher & Flom
919 Third Avenue
New York, New York 10022
Attention: Sheldon S. Adler, Esq.
(b) if to the Buyer, to:
Delmarva Power & Light Company
800 King Street
Wilmington, Delaware 19899
Attention: Thomas S. Shaw
with copies to:
LeBoeuf, Lamb, Greene & MacRae
125 West 55th Street
New York, New York 10019
Attention: Douglas W. Hawes, Esq.
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<PAGE>
9.6. Assignment. This Agreement and all of the provisions hereof shall be
----------
binding upon and inure to the benefit of the parties hereto and their respective
successors and permitted assigns, but neither this Agreement nor any of the
rights or interests hereunder shall be assigned or obligations delegated by any
party hereto, including by operation of law without the prior written consent
of the other party.
9.7. Governing Law. This Agreement shall be governed by and construed in
-------------
accordance with the laws of the State of New York (without regard to any New
York law or rule requiring the application of the laws of any other
jurisdiction) as to all matters, including but not limited to matters of
validity, construction, effect, performance and remedies.
9.8. Counterparts. This Agreement may be executed in two or more
------------
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
9.9. Interpretation. The article and section headings contained in this
--------------
Agreement are solely for the purpose of reference, are not part of the agreement
of the parties and shall not in any way affect the meaning or interpretation of
this Agreement. As used in this
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Agreement, the term "person" shall mean and include an individual, a
partnership, a joint venture, a corporation, a trust, an unincorporated
organization and a governmental entity or any department or agency thereof. As
used in this Agreement, the term "Permitted Exceptions" shall mean and include
(i) those exceptions to title to the properties and assets of the Company listed
in Schedule 3.10; (ii) all exceptions, restrictions, easements, rights of way
and encumbrances set forth in title reports or title insurance binders which
have been made available to the Buyer prior to the date of this Agreement; (iii)
mortgages, liens, pledges, charges, encumbrances and restrictions which secure
debt that is reflected as a liability on the Company Balance Sheet or which are
otherwise reflected in the Company Balance Sheet or disclosed in the notes
thereto; (iv) mortgages, liens, pledges, charges, encumbrances and restrictions
incurred in connection with the Company's purchase of properties and assets in
the ordinary course of business after the date of the Company Balance Sheet
securing all or a portion of the purchase price therefor; (v) statutory liens
for current taxes or assessments not yet due or delinquent or the validity of
which is being contested in good faith by appropriate proceedings; (vi)
mechanics', carriers', workers',
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repairers', and other similar liens arising or incurred in the ordinary course
of business relating to obligations as to which there is no default on the part
of the Company; (vii) zoning, entitlement and other land use and environmental
regulations by governmental authorities that are not material to the business
and operations of the Company and (viii) such other liens, imperfections in
title, charges, easements, restrictions and encumbrances which do not materially
detract from the value of or materially interfere with the present use of any
property subject thereto or affected thereby that is material to the business,
operations or financial condition of the Company or which relate to properties
that are not material to the Company and do not, in the aggregate have a
Material Adverse Effect. As used in this Agreement, the term "subsidiary" when
used in reference to any other person shall mean any corporation of which
outstanding securities having ordinary voting power to elect a majority of the
Board of Directors of such corporation are owned directly or indirectly by such
other person. As used in this Agreement, the terms "affiliate" and "parent"
shall have the meanings set forth in Rule 12b-2 of the General Rules and
Regulations under the Exchange Act. Any statement in this Agreement made to PECO
Energy's
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knowledge shall be deemed to include the knowledge of the Company.
9.10. Entire Agreement. This Agreement, including the documents,
----------------
schedules, certificates and instruments referred to herein, and the
Confidentiality Agreement embody the entire agreement and understanding of the
parties hereto in respect of the transactions contemplated by this Agreement.
There are no restrictions, promises, representations, warranties, covenants or
undertakings, other than those expressly set forth or referred to herein or
therein. This Agreement supersedes all prior agreements and understandings
between the Parties with respect to such transactions other than the
Confidentiality Agreement.
9.11. No Third Party Beneficiary Rights. This Agreement is not intended
---------------------------------
to and shall not be construed to give any person or entity other than the
parties signatory hereto (or any duly authorized successor thereto) any interest
or rights with respect to or in connection with any agreement or provision
contained herein or contemplated hereby
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IN WITNESS WHEREOF, PECO Energy and the Buyer have caused this agreement to
be signed by their respective duly authorized officers as of the date first
above written.
PECO ENERGY COMPANY
By /s/ Gregory A. Cucchi
---------------------
Title Vice President
----------------
DELMARVA POWER & LIGHT COMPANY
By /s/ T. S. Shaw
--------------
Title Sr. Vice President
------------------
<PAGE>
Annex 1
-------
Calculation of Adjustment Amount/1/
Net Working Capital (as defined below)
- - $2,500,000 (required working capital)
+ or - Deferred Fuel Adjustment
+ The greater of (i) 0 and (ii) Cumulative Capital
Expenditures actually made from the date of the
Stock Purchase Agreement until the Closing Date
minus Cumulative Net Earnings from the date of the
-----
Stock Purchase Agreement until the Closing Date
= Adjustment Amount
Net Working Capital
+ Cash and Temporary Cash Investments
+ Accounts Receivable (Trade)/2/
- - Allowance
+ Materials and Supplies
+ Prepayments
+ Accrued Unbilled Revenue/3/
- - Accounts Payable
- - Customer Deposits
- - Accrued State and Local Taxes/4/
- - Tax Collections Payable/5/
- - Accrued Vacation and Sicktime
- - Customer Advances
= Net Working Capital
- --------------------
/1/ Determined in accordance with the information set forth in the Closing
Balance Sheet (as defined in Section 1.3 of the Stock Purchase).
/2/ Accounts Receivable (Trade) shall include only those accounts receivable
actually collected within the 90 day period following the Closing Date.
/3/ Calculation method to be based upon the output method in a manner applied
consistently with PECO Energy's past practice.
/4/ Excluding Taxes resulting from (i) the joint election pursuant to Section
338(h)(10) of the Code provided for in Section 5.14 of the Stock Purchase
Agreement and (ii) the transfers of the 500kV Peach Bottom-Keeney
transmission line, the Elkton Service Center and certain other properties
of the Company pursuant to Section 5.16 of the Stock Purchase Agreement,
which shall be the sole obligation of PECO Energy as provided in the
Stock Purchase Agreement.
/5/ Excluding Taxes resulting from (i) the joint election pursuant to Section
338(h)(10) of the Code provided for in Section 5.14 of the Stock Purchase
Agreement and (ii) the transfers of the 500kV Peach Bottom-Keeney
transmission line, the Elkton Service Center and certain other properties
of the Company pursuant to Section 5.16 of the Stock Purchase Agreement,
which shall be the sole obligation of PECO Energy as provided in the
Stock Purchase Agreement.
<PAGE>
Annex 2
-------
Terms and Conditions of Service Center Lease
PECO Energy and Buyer shall on the Closing Date enter into the Service
Center Lease (as hereinafter defined) for the Elkton Service Center, between
PECO Energy, as landlord, and Buyer, as tenant. PECO Energy shall deliver a
proposed form of lease for the Elkton Service Center (the "Service Center
--------------
Lease") to Buyer on or prior to June 30, 1994, which lease shall be between PECO
Energy, as landlord, and Buyer, as tenant, and shall contain provisions
consistent with the following terms (the "Required Terms"):
--------------
(a) the Service Center Lease shall be a net lease, with Buyer obligated to
(i) maintain, repair and operate the Elkton Service Center at Buyer's
sole cost and expense throughout the term of the Service Center Lease
and deliver the same at the end of the term in the same condition that
existed upon lease commencement, except for ordinary wear and tear, and
(ii) pay all real estate taxes and assessments attributable to the
premises.
(b) the Service Center Lease will commence on the Closing Date and will be
for a term of the earlier of three years from the Closing Date or the
end 30 days after the New Service/HQ Building is substantially
completed (the "Initial Term").
(c) the rent payable under the Service Center Lease shall be $1 per year
for each year of the Initial Term. For any extension of the Initial
Term, the rent shall be a commercially reasonable amount, to be agreed
upon by the parties hereto.
(d) the Elkton Service Center will be delivered by PECO Energy, and
accepted by Buyer, in its "as is" condition.
(e) neither PECO Energy nor any of its subsidiaries shall be required to
provide any services or utilities to the premises, all of which will
be provided and obtained, as the case may be, by Buyer, at Buyer's sole
cost and expense.
<PAGE>
(f) Buyer shall be required to maintain such insurance as is reasonably
required by PECO Energy.
(g) Buyer shall operate the Elkton Service Center in full compliance with
Environmental Law, and Buyer's operation of the Elkton Service Center
shall not cause PECO Energy to be out of compliance with Environmental
Law.
(h) Buyer shall, as necessary, clean up and take all other action necessary
to assure that PECO Energy does not at any time suffer or have
asserted against it, either directly or indirectly, any claim, loss or
liability relating to the presence, release or threatened release of
Hazardous Materials in or on the Elkton Service Center relating to the
operations, actions or omission to act of Buyer.
(i) Buyer shall not, without the permission of PECO Energy, which shall not
be unreasonably withheld, use or allow Hazardous Materials at the
Elkton Service Center in materially greater amounts, or of different
kinds (other than de minimis use), as compared to prior to the Closing
Date.
(j) Buyer shall promptly report to PECO Energy any disposal or release of
Hazardous Materials during Buyer's leasehold in, on or from the Elkton
Service Center other than de minimis releases relating to ordinary
operations which are promptly cleaned up and releases made in
compliance with Environmental Law.
(k) Buyer shall permit PECO Energy and any environmental consultants of
PECO Energy at all reasonable times to inspect the Elkton Service
Center and Buyer's operations thereat.
(l) Buyer shall not, except to the extent required by law, disclose to a
third party any facts or information relating to environmental
conditions at the Elkton Service Center which are the responsibility of
PECO Energy, or otherwise instigate any claim, demand or requirement by
any third party with respect to such environmental conditions.
2
<PAGE>
(m) Buyer shall not have the right to perform alterations within the
premises, assign the lease, or sublet all or any portion of the
premises, without PECO Energy's prior written consent, which consent
may be withheld in PECO Energy's sole discretion.
(n) the lease shall contain a general indemnity, pursuant to which Buyer
shall indemnify and hold PECO Energy, its subsidiaries and affiliates
(the "PECO Group") harmless from and against any and all liability,
cost, expense and damage suffered by the PECO Group which relates to,
results from or arises out of any breach by the Buyer of any term or
condition of the lease.
The Service Center Lease shall also contain such other customary commercial
lease provisions for similar leases reasonably required by PECO Energy and the
Buyer, provided that the same shall not be inconsistent with the Required Terms.
3
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Schedule 3.1 Organization; Qualification.
-----------------------------------------
Commonwealth of Pennsylvania
<PAGE>
Schedule 3.5 Consents and Approvals; No Violation.
---------------------------------------------------
None
2
<PAGE>
Schedule 3.8 Undisclosed Liabilities
------------------------------------
None
3
<PAGE>
Schedule 3.9 Absence of Certain Changes or Events.
--------------------------------------------------
(d) Proposed Health Plan Amendment requiring retiree contribution for
medical coverage.
4
<PAGE>
Schedule 3.10 Title and Related Matters
---------------------------------------
FEE PROPERTY OWNED BY
CONOWINGO POWER COMPANY
<TABLE>
<CAPTION>
File No. Acreage Use
<C> <S> <C>
1897 0.057 Northeast Substation
1939 0.280 Chesapeake City Substation
3145 0.172 Kilby Substation
3637 0.689 Liberty Grove Substation
3668 0.737 Oldfield 33-4 KV Substation
3701 0.389 Perryville Storage Bldg.
3705 0.075 Rising Sun substation
3711 2.4 Elkton Service Bldg.
3712 0.247 Elkton Service Bldg.
3713 41.880 Cecil Substation
3714 9.930 Cecil Substation
3715 8.354 Cecil Substation
3716 0.743 Glen Substation
3720 0.689 Cathers Substation
3721 0.680 Andora Substation
3725 0.779 Normina 33-4 KV Substation
3727 0.670 Irishtown 33-4 KV Substation
3736 0.745 Mechanics 33-4 KV Substation
3749 0.642 Harris Substation
3751 0.689 Charles Substation
3752 0.792 Appleton Substation
3753 0.780 Macton Substation
3754 0.978 Gilpins Substation
3755 0.688 Prince Substation
3756 1.0 Bohemia 33-4 KV Substation
3757 0.681 Middle 33-4 Substation
3758 0.775 Perch Substation
3759 0.680 Elkneck 33-4 KV Substation
3771 0.531 Harford 33-4 KV Substation
3773 0.459 Gallion Substation
3784 4.419 Elkton Pole Storage
3793 0.559 Leslie 33-4 Substation
3794 0.643 Calvert 33-4 KV Substation
3796 0.158 Elkton Service Building
3807 0.671 Greenbank 33-4 KV Substation
3811 0.497 Cayots 33-4 KV Substation
3812 0.476 Cayots 33-4 KV Substation
</TABLE>
5
<PAGE>
Schedule 3.10 Title and Related matters.
----------------------------------------
FEE PROPERTY OWNED BY
CONOWINGO POWER COMPANY
(Continued)
<TABLE>
<CAPTION>
File No. Acreage Use
<C> <S> <C>
3813 0.612 Triumph Substation
4073 0.325 Theodore 33-4 KV Substation
4078 13.15 New Service Building Site
6138 16.079 Colora 220-33 KV Substation
6101 3.8 Peach Bottom/Keeney Corridor
6118 26.306 Peach Bottom/Keeney Corridor
6119 21.589 Peach Bottom/Keeney Corridor
6120 15.44 Peach Bottom/Keeney Corridor
6121 6.304 Peach Bottom/Keeney Corridor
6123 7.355 Peach Bottom/Keeney Corridor
6124 25.984 Peach Bottom/Keeney Corridor
6125 4.356 Peach Bottom/Keeney Corridor
6126 19.452 Peach Bottom/Keeney Corridor
6127 1.930 Peach Bottom/Keeney Corridor
6128 4.069 Peach Bottom/Keeney Corridor
6129 26.345 Peach Bottom/Keeney Corridor
6130 11.827 Peach Bottom/Keeney Corridor
6131 26.929 Peach Bottom/Keeney Corridor
6132 9.107 Peach Bottom/Keeney Corridor
6133 42.555 Peach Bottom/Keeney Corridor
6134 11.327 Peach Bottom/Keeney Corridor
6135 14.342 Peach Bottom/Keeney Corridor
6136 3.654 Peach Bottom/Keeney Corridor
6137 8.858 Peach Bottom/Keeney Corridor
6138 16.079 Colora Substation
6138 67.826 Peach Bottom/Keeney Corridor
6139 20.707 Peach Bottom/Keeney Corridor
6140 17.879 Peach Bottom/Keeney Corridor
6141 5.841 Peach Bottom/Keeney Corridor
6142 62.64 Peach Bottom/Keeney Corridor
6143 15.639 Peach Bottom/Keeney Corridor
6145 10.424 Peach Bottom/Keeney Corridor
6146 34.75 Peach Bottom/Keeney Corridor
6147 9.074 Peach Bottom/Keeney Corridor
6148 14.952 Peach Bottom/Keeney Corridor
6149 15.786 Peach Bottom/Keeney Corridor
6150 16.921 Peach Bottom/Keeney Corridor
</TABLE>
6
<PAGE>
Schedule 3.10 Title and Related Matters.
----------------------------------------
FEE PROPERTY OWNED BY
CONOWINGO POWER COMPANY
(Continued)
<TABLE>
<CAPTION>
File No. Acreage Use
<C> <S> <C>
6151 24.218 Peach Bottom/Keeney Corridor
6152 6.576 Peach Bottom/Keeney Corridor
6153 27.395 Peach Bottom/Keeney Corridor
6154 23.34 Peach Bottom/Keeney Corridor
6155 2.994 Peach Bottom/Keeney Corridor
6156 23.375 Peach Bottom/Keeney Corridor
6157 10.663 Peach Bottom/Keeney Corridor
6158 11.157 Peach Bottom/Keeney Corridor
6159 7.428 Peach Bottom/Keeney Corridor
6160 18.515 Peach Bottom/Keeney Corridor
6161 1.916 Peach Bottom/Keeney Corridor
6162 1.248 Peach Bottom/Keeney Corridor
6163 29.843 Peach Bottom/Keeney Corridor
6164 12.998 Peach Bottom/Keeney Corridor
6166 2.711 Peach Bottom/Keeney Corridor
6167 3.757 Peach Bottom/Keeney Corridor
6168 54.509 Peach Bottom/Keeney Corridor
6169 6.111 Peach Bottom/Keeney Corridor
6172 63.974 Peach Bottom/Keeney Corridor
6173 11.078 Peach Bottom/Keeney Corridor
6174 6.311 Peach Bottom/Keeney Corridor
6175 5.605 Peach Bottom/Keeney Corridor
6176 10.208 Peach Bottom/Keeney Corridor
6177 36.0 Peach Bottom/Keeney Corridor
6178 9.469 Peach Bottom/Keeney Corridor
6179 10.086 Peach Bottom/Keeney Corridor
6180 0.461 Peach Bottom/Keeney Corridor
6181 44.715 Peach Bottom/Keeney Corridor
6182 0.550 Peach Bottom/Keeney Corridor
6184 15.456 Peach Bottom/Keeney Corridor
6185 44.705 Peach Bottom/Keeney Corridor
6187 21.515 Peach Bottom/Keeney Corridor
6188 21.232 Peach Bottom/Keeney Corridor
6189 18.655 Peach Bottom/Keeney Corridor
6191 4.916 Peach Bottom/Keeney Corridor
6192 5.294 Peach Bottom/Keeney Corridor
6193 3.621 Peach Bottom/Keeney Corridor
</TABLE>
7
<PAGE>
Schedule 3.10
-------------
FEE PROPERTY OWNED BY
CONOWINGO POWER COMPANY
(Continued)
<TABLE>
<CAPTION>
File No. Acreage Use
<C> <S> <C>
6195 11.426 Peach Bottom/Keeney Corridor
6196 13.124 Peach Bottom/Keeney Corridor
6197 1.052 Peach Bottom/Keeney Corridor
6198 9.813 Peach Bottom/Keeney Corridor
6199 3.522 Peach Bottom/Keeney Corridor
6200 12.925 Peach Bottom/Keeney Corridor
6204 9.164 Peach Bottom/Keeney Corridor
6206 0.115 Peach Bottom/Keeney Corridor
6209 0.372 Peach Bottom/Keeney Corridor
6211 10.360 Peach Bottom/Keeney Corridor
9995 0.169 Elkton Service Building
</TABLE>
8
<PAGE>
Schedule 3.11 Leases.
----------------------
None
9
<PAGE>
Schedule 3.12 Insurance.
------------------------
None
10
<PAGE>
Schedule 3.13 Environmental Matters.
------------------------------------
(iii) U.S. Environmental Protection Agency letter dated August 23, 1988;
U.S. Environmental Protection Agency letter dated September 3, 1985;
U.S. Environmental Protection Agency letter dated April 17, 1987;
U.S. Environmental Protection Agency letter dated July, 1991.
(iv) Underground Storage Tanks
-------------------------
1000 gallon underground waste oil storage tank
10,000 gallon underground gasoline tank
400 gallon underground diesel fuel tank
2000 gallon underground heating oil tank
All of the above items are located at Elkton Service Center.
11
<PAGE>
Schedule 3.14 Labor Matters.
----------------------------
1. OFCPP Consolidation Agreement as fully described in the PECO Energy June
30, 1992 Quarterly Report to the SEC on Form IO-Q (page 26).
2. Two Company employees are part of the class of plaintiffs in the
Fisher/Kurz class action lawsuits, described in PECO Energy's Annual Report
to the SEC on Form 10-K (Page 27)
3. Election Bar Period for PECO Energy Company, with respect to a
representation petition filing, expires on June 22, 1994, after which a
union may file a representation petition. Currently there is no unfair
labor practice charge against the Company pending before the National Labor
Relations Board; however, it is common in a representation petition filing
to file unfair labor practice charges.
12
<PAGE>
Schedule 3.15 ERISA; Benefit Plans.
----------------------------------
1. PECO Energy Severance Benefit Plan
2. 1994 Voluntary Separation Incentive Program
3. 1994 Voluntary Retirement Incentive Plan
4. PECO Energy Medical Benefits Plan
5. PECO Energy Dental Benefits Plan
6. PECO Energy Group Life Insurance
7. PECO Energy Employee Savings Plan
8. PECO Energy Service Annuity Plan
9. PECO Energy Dependent Life Insurance Plan
10. PECO Energy Accidental Death and Dismemberment Plan
11. PECO Energy Short-Term Disability Plan
12. PECO Energy Long-Term Disability Plan
13. PECO Energy Beneficial Association Special Benefit Plan
14. PECO Energy Beneficial Association (Employee Association and Athletic
Association)
15. PECO Energy Health Care Flexible Spending Account
16. PECO Energy Dependent Care Assistance Flexible Spending Account
17. PECO Energy SILO Merchandise Plan
18. PECO Energy Employee Assistance Plan
19. PECO Energy Occupational Hazard Plan
20. PECO Energy Travel Accident Plan
21. PECO Energy Disability Payroll Plan
22. PECO Energy Tuition Refund Plan
23. PECO Energy Deferred Compensation and Supplemental Retirement Benefit Plan
24. PECO Energy Management Group Deferred Compensation
and Retirement Benefit Plan
25. PECO Energy 1989 Long-Term Incentive Plan
26. PECO Energy Incentive Compensation Plan
27. PECO Energy Management Incentive Compensation Plan
28. PECO Energy Quarter Century Club (one free dinner)
13
<PAGE>
Schedule 3.16 Certain Contracts and Arrangements.
-------------------------------------------------
Master Leasing Agreement, dated as of June 1, 1986, between BLC Corporation and
Conowingo Power Company.
14
<PAGE>
Schedule 3.17 Legal Proceedings; etc.
-------------------------------------
None
15
<PAGE>
Schedule 3.18 Permits.
-----------------------
None
16
<PAGE>
Schedule 3.19 Recalculation as a Utility.
------------------------------------------
3.19(a)
- -------
State of Maryland
3.19(b)
- -------
Commonwealth of Pennsylvania
17
<PAGE>
Schedule 3.20 Taxes
--------------------
3.20(a)
- -------
Agreement by PECO Energy extending the statutory period of limitation to 1995
for federal income taxes for the years 1987-90.
3.20(b)
- -------
IRS Power of Attorney (IRS Form 4828) granted by PECO Energy Company to Louis W.
Ricker, Esq. and Steven G. Lioce, Esq. with respect to federal income tax
matters (Form 1120) for the years 1987-90.
18
<PAGE>
Schedule 4.3 Consents and Approvals; No Violation
--------------------------------------------------
None
19
<PAGE>
Schedule 5.1 Conduct of the Company.
-------------------------------------
5.1(c)
- ------
Proposed Retiree Health Plan amendment requiring retiree contribution for
medical coverage.
5.1(s) Regulatory Filings
- --------------------------
MPSC
- ----
o ECR (rate filing and semi-annual status reports)
o DSM Rider (rate filing and semi-annual interim DSM updates)
o Environmental surcharge
o COPCO 10-year plan
o Section 69(b) filing (due January 1995)
o Monthly earnings reports
o MPSC Assessment filing
o NARUC Rate Report
o E2R2 Report
FERC
- ----
o monthly Fuel Adjustment
20
<PAGE>
Schedule 5.16(a)
----------------
Company will retain ownership of all facilities associated with the transmission
and distribution lines addressed by the following perpetual easements and rights
of way to be retained by Company.
1. A perpetual easement to a strip of ground approximately 170 feet wide
located on the south side of the Peach Bottom-Keeney transmission corridor from
the Colora Substation to the point where the Cecil/Colora Transmission Line
crosses Interstate Highway 95. The easement will provide Company the rights
required to operate, maintain, repair and replace existing transmission and
distribution facilities within the easement area and to install, operate,
maintain, repair, and replace additional transmission or distribution facilities
within the easement area together with the necessary rights for access across
PECO Energy property or easements and vegetation trimming rights.
2. A perpetual easement to a strip of ground approximately 125 feet wide
located on the south side of the Peach Bottom-Keeney transmission corridor from
the Delaware State Line to a point where the existing 138 KV transmission line
enters the existing AMTRAK corridor. The easement will provide Company the
rights required to operate, maintain, repair and replace existing transmission
and distribute facilities within the easement area and to install, operate,
maintain, repair, and replace additional transmission or distribution facilities
within the easement area together with the necessary rights for access across
PECO Energy property or easements and vegetation trimming rights.
3. A perpetual easement to a strip of ground approximately 170 feet wide
located on the north side of the Peach Bottom-Keeney transmission corridor from
the Colora Substation to the point where the line connects with the transmission
line owned by Susquehanna Power Company. The easement will provide Company the
rights required to operate, maintain, repair and replace existing transmission
and distribution facilities within the easement area and to install, operate,
maintain, repair, and replace additional transmission or distribution
facilities within the easement area together with the necessary rights for
21
<PAGE>
access across PECO Energy property or easements and vegetation trimming rights.
4. A perpetual easement to a strip of ground approximately 170 feet wide
located in the center of the Peach Bottom-Keeney transmission corridor from the
Colora Substation to the point where the line connects with the transmission
line owned by Susquehanna Power Company. The easement will provide Company the
rights required to operate, maintain, repair and replace existing transmission
and distribution facilities within the easement area and to install, operate,
maintain, repair, and replace additional transmission or distribution facilities
within the easement area together with the necessary rights for access across
PECO Energy property or easements and vegetation trimming rights. This easement
will be subject to a requirement that the Company or Buyer, at PECO Energy's
request and expense, will relocate the existing transmission line or any
additional facilities added after Closing to a new easement provided for by PECO
Energy and further subject to the requirement that PECO Energy shall coordinate
any required relocation with Buyer to minimize disruption of service by Buyer.
5. In addition to the above described perpetual easements, Company will retain
the necessary rights of way to operate, maintain, renew, repair, and replace the
distribution facilities crossing or longitudinally located on the Peach Bottom-
Keeney transmission corridor. These rights of way will be subject to a
requirement that the Company or Buyer, at PECO Energy's request and expense,
will relocate the distribution facilities to a new easement provided for by
PECO Energy and further subject to the requirement that PECO Energy shall
coordinate any required relocation with Buyer to minimize disruption of service
by Buyer.
22
<PAGE>
Exhibit 10-D
DELMARVA POWER & LIGHT COMPANY
MINUTES
(Compensation Committee Meeting - April 28, 1994)
AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Mr. Cain stated that the Company plans to extend to H. Ray Landon, Executive
Vice President, the terms of the 1994 Early Retirement Option. In the case of
Mr. Landon, Management wishes to extend the offer through the Supplemental
Executive Retirement Plan. Mr. Landon is excluded from the offer made through
the Retirement Plan. This special offer will contain the following provisions
for Mr. Landon:
(1) Granting of an additional five (5) years of service
credit.
(2) Waiver of any benefit reduction for early retirement.
(3) Voluntary election to be made with a reasonable advance
notice submitted prior to the effective date of retire-
ment as agreed to by Mr. Landon and the Compensation
Committee with such retirement date to be not later
than July 1, 1996.
After discussion, on motion duly made, seconded and unanimously adopted, it
was
RESOLVED, That the Compensation Committee recommends to the Board
of Directors that the Supplemental Executive Retirement Plan be, and it
hereby is, amended effective June 15, 1994, to provide an enhanced
retirement benefit to H. Ray Landon provided that he elects such benefit
prior to the effective date of retirement, such retirement date to be not
later than July 1, 1996, as determined by the Chairman of the Board and
approved by the Compensation Committee of the Company's Board of Directors.
FURTHER RESOLVED, That the enhanced retirement benefit for this
special election shall be determined by adding an additional five (5) years
of service credit to Mr. Landon's total service for purposes of computing
the amount of his retirement benefit and by waiving any benefit reduction
for early retirement.
FURTHER RESOLVED, That if Mr. Landon retires under the offer
described in the foregoing resolutions on a date after the effective date
of the "cap" under the Retiree Medical Plan, he shall be exempt from that
"cap."
During the Executive Session, Committee members modified Management's
recommendation to include July 1, 1995 as the earliest date that Mr. Landon
could retire.
<PAGE>
DELMARVA POWER & LIGHT COMPANY
MINUTES
(Compensation Committee Meeting - October 26, 1994)
AMENDMENT TO SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN
Mr. Cosgrove stated that the Company planed to extend to Wayne A. Lyons,
Vice President, the terms of the 1994 Early Retirement Option. In the case of
Mr. Lyons, Management wishes to extend the offer through the Supplemental
Executive Retirement Plan. This special offer will contain the following
provisions for Mr. Lyons:
(1) Granting of an additional five (5) years of service credit.
(2) Waiver of any benefit reduction for early retirement.
(3) Voluntary election to be made with a reasonable advance notice
submitted prior to the effective date of retirement as agreed to by Mr.
Lyons and the Compensation Committee with such retirement date not to
be earlier than February 1, 1996 nor later than December 1, 1996.
After discussion, on motion duly made, seconded and unanimously adopted, it
was
RESOLVED, That the Supplemental Executive Retirement Plan be, and it
hereby is, amended effective November 1, 1994, to provide an enhanced
retirement benefit to Wayne A. Lyons provided that he elects such benefit
prior to the effective date of retirement, such retirement date not to be
earlier than February 1, 1996, nor later than December 1, 1996, as
determined by the Chairman of the Board and approved by the Compensation
Committee of the Company's Board of Directors.
FURTHER RESOLVED, That the enhanced retirement benefit for this special
election shall be determined by adding an additional five (5) years of
service credit to Mr. Lyons' total service for purposes of computing the
amount of his retirement benefit and by waiving any benefit reduction for
early retirement.
FURTHER RESOLVED, That Mr. Lyons be exempt from the "cap" under the
Retiree Medical Plan.
<PAGE>
Exhibit 10-G
PERSONAL AND CONFIDENTIAL
-------------------------
XXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX
XXXXXXXXXXXXXXXXXXXXX
Dear:
Delmarva Power & Light Company (the "Company") considers it essential to the
best interests of its stockholders to foster the continuous employment of key
management personnel. In this connection, the Board of Directors of the Company
(the "Board") recognizes that, as is the case with many publicly held
corporations, the possibility of a change in control may exist and that such
possibility, and the uncertainty and questions which it may raise among
management, may result in the distraction or departure of management personnel
to the detriment of the Company and its stockholders.
The Board has determined that appropriate steps should be taken to reinforce
and encourage the continued attention and dedication of members of the Company's
management, including yourself, to their assigned duties without distraction in
the face of potentially disturbing circumstances arising from the possibility of
a change in control of the Company, although no such change is known to be
contemplated.
In order to induce you to remain in the employ of the Company and in
consideration of your agreement set forth in Subsection 2(ii) hereof, the
Company agrees that you shall receive the severance benefits set forth in this
letter agreement ("Agreement") in the event your employment with the Company is
terminated
<PAGE>
subsequent to a "change in control of the Company" (as defined in Section 2
hereof) under the circumstances described below.
1. Term of Agreement. This Agreement shall commence on the date hereof and
------------------
shall continue in effect through December 31, XXXX; provided, however, that
commencing on January 1, XXXX, and each January 1 thereafter, the term of this
Agreement shall automatically be extended for one additional year unless, not
later than September 30 of the preceding year, the Company shall have given
notice that it does not wish to extend this Agreement; provided, further, if a
change in control of the Company shall have occurred during the original or
extended term of this Agreement, this Agreement shall continue in effect for a
period of twenty-four (24) months beyond the month in which such change in
control occurred.
2. Change in Control. (i) No benefits shall be payable hereunder unless
------------------
there shall have been a change in control of the Company, as set forth below.
For purposes of this Agreement, a "change in control of the Company" shall be
deemed to have occurred if (A) any "person" (as such term is used in Sections
13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), other than a trustee or other fiduciary holding securities
under an employee benefit plan of the Company or a corporation owned, directly
or indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company, is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities; or (B)
during any period of two consecutive years (not including any period prior to
the execution of this Agreement), individuals who at the beginning of such
period constitute the Board and any new director (other than a director
designated by a person who has entered into an agreement with the Company to
effect a transaction
2
<PAGE>
described in clauses (A) or (C) of this Subsection) whose election by the Board
or nomination for election by the Company's stockholders was approved by a vote
of at least two-thirds (2/3) of the directors then still in office who either
were directors at the beginning of the period or whose election or nomination
for election was previously so approved, cease for any reason to constitute a
majority thereof; or (C) the shareholders of the Company approve a merger or
consolidation of the Company with any other corporation, other than a merger or
consolidation which would result in the voting securities of the Company
outstanding immediately prior thereto continuing to represent (either by
remaining outstanding or by being converted into voting securities of the
surviving entity) at least 80% of the combined voting power of the voting
securities of the Company or such surviving entity outstanding immediately after
such merger or consolidation, or the shareholders of the Company approve a plan
of complete liquidation of the Company or an agreement for the sale or
disposition by the Company of all or substantially all the Company's assets.
(ii) For purposes of this Agreement, a "potential change in control of the
Company" shall be deemed to have occurred if (A) the Company enters into an
agreement, the consummation of which would result in the occurrence of a change
in control of the Company, (B) any person (including the Company) publicly
announces an intention to take or to consider taking actions which if
consummated would constitute a change in control of the Company; (C) any person,
other than a trustee or other fiduciary holding securities under an employee
benefit plan of the Company or a corporation owned, directly or indirectly, by
the stockholders of the Company in substantially the same proportion as their
ownership of stock of the Company, who is or becomes the beneficial owner,
directly or indirectly, of securities of the Company representing 9.5% or more
of the combined voting power of the Company's then outstanding securities,
increases his beneficial ownership of such securities by 5% or more over the
percentage so owned by such person on the date hereof; or (D) the
3
<PAGE>
Board adopts a resolution to the effect that, for purposes of this Agreement, a
potential change in control of the Company has occurred. You agree that, subject
to the terms and conditions of this Agreement, in the event of a potential
change in control of the Company, you will remain in the employ of the Company
until the earliest of (i) a date which is six (6) months from the occurrence of
such potential change in control of the Company, (ii) the termination by you of
your employment by reason of Disability or Retirement (at your normal retirement
age), as defined in Subsection 3(i), or (iii) the occurrence of a change in
control of the Company.
3. Termination Following Change in Control. If any of the events described
---------------------------------------
in Subsection 2(i) hereof constituting a change in control of the Company shall
have occurred, you shall be entitled to the benefits provided in Subsection
4(iii) hereof upon the subsequent termination of your employment during the term
of this Agreement unless such termination is (A) because of your death,
Disability or Retirement, (B) by the Company for Cause, or (C) by you other than
for Good Reason.
(i) Disability; Retirement. If, as a result of your incapacity due to
----------------------
physical or mental illness, you shall have been absent from the full-time
performance of your duties with the Company for six (6) consecutive months, and
within thirty (30) days after written notice of termination is given you shall
not have returned to the full-time performance of your duties, your employment
may be terminated for "Disability". Termination by the Company or you of your
employment based on "Retirement" shall mean termination in accordance with the
Company's retirement policy, including early retirement, generally applicable to
its salaried employees or in accordance with any retirement arrangement
established with your consent with respect to you.
(ii) Cause. Termination by the Company of your employment for "Cause"
-----
shall mean termination upon (A) the willful and continued failure by you to
substantially perform your duties with the Company (other than any such failure
4
<PAGE>
resulting from your incapacity due to physical or mental illness or any such
actual or anticipated failure after the issuance of a Notice of Termination, by
you for Good Reason as defined in Subsections 3(iv) and 3(iii), respectively)
after a written demand for substantial performance is delivered to you by the
Board, which demand specifically identifies the manner in which the Board
believes that you have not substantially performed your duties, or (B) the
willful engaging by you in conduct which is demonstrably and materially
injurious to the Company, monetarily or otherwise. For purposes of this
Subsection, no act, or failure to act, on your part shall be deemed "willful"
unless done, or omitted to be done, by you not in good faith and without
reasonable belief that your action or omission was in the best interest of the
Company. Notwithstanding the foregoing, you shall not be deemed to have been
terminated for Cause unless and until there shall have been delivered to you a
copy of a resolution duly adopted by the affirmative vote of not less than
three-quarters (3/4) of the entire membership of the Board at a meeting of the
Board called and held for such purpose (after reasonable notice to you and an
opportunity for you, together with your counsel, to be heard before the Board),
finding that in the good faith opinion of the Board you were guilty of conduct
set forth above in clauses (A) or (B) of the first sentence of this Subsection
and specifying the particulars thereof in detail.
(iii) Good Reason. You shall be entitled to terminate your employment for
-----------
Good Reason. For purposes of this Agreement, "Good Reason" shall mean, without
your express written consent, the occurrence after a change in control of the
Company of any of the following circumstances unless, in the case of paragraphs
(A), (E), (F), (G) or (H), such circumstances are fully corrected prior to the
Date of Termination specified in the Notice of Termination, as defined in
Subsections 3(v) and 3(iv), respectively, given in respect thereof:
(A) the assignment to you of any duties inconsistent with your status as
XXXXXXXXXXXXXXXXXXXXX, of the Company, or a substantial adverse
5
<PAGE>
alteration in the nature or status of your responsibilities from those in
effect immediately prior to the change in control of the Company;
(B) a reduction by the Company in your annual base salary as in effect
on the date hereof or as the same may be increased from time to time except
for across-the-board salary reductions similarly affecting all executives of
the Company and all executives of any person in control of the Company;
(C) the relocation of the Company's principal executive offices
(presently located at 800 King Street, Wilmington, Delaware) to a location
more than fifty (50) miles from the location of such offices prior to the
change in control of the Company, or the closing thereof, or the Company's
requiring you to be based anywhere other than the location at which you are
based immediately prior to the change in control of the Company, except for
required travel on the Company's business to an extent substantially
consistent with your present business travel obligations;
(D) the failure by the Company, without your consent, to pay to you any
portion of your current compensation except pursuant to an across-the-board
compensation deferral similarly affecting all executives of the Company and
all executives of any person in control of the Company;
(E) the failure by the Company to offer you any compensation plan
introduced to other executives of similar responsibility or any substitute
plans adopted prior to the change in control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has been
made with respect to such plan, or the failure by the Company to continue
your participation therein (or in such substitute or alternative plan) on a
basis not materially less favorable, both in terms of the amount of benefits
provided and the level of your participation relative to other participants,
as existed at the time of the change in control;
6
<PAGE>
(F) the failure by the Company to continue to provide you with benefits
substantially similar to those enjoyed by you under any of the Company's
pension, savings and thrift, group life insurance, medical, dental or
disability plans in which you were participating at the time of the change
in control of the Company, the taking of any action by the Company which
would directly or indirectly materially reduce any of such benefits or
deprive you of any material fringe benefit enjoyed by you at the time of the
change in control of the Company, or the failure by the Company to provide
you with the number of paid vacation days to which you are entitled on the
basis of years of service with the Company in accordance with the Company's
normal vacation policy in effect at the time of the change in control of the
Company;
(G) the failure of the Company to obtain a satisfactory agreement from
any successor to assume and agree to perform this Agreement, as contemplated
in Section 5 hereof; or
(H) any purported termination of your employment which is not effected
pursuant to a Notice of Termination satisfying the requirements of
Subsection (iv) below (and if applicable, the requirements of Subsection
(ii) above); for purposes of this Agreement, no such purported termination
shall be effective.
Your right to terminate your employment pursuant to this Subsection shall not be
affected by your incapacity due to physical or mental illness. Your continued
employment shall not constitute consent to, or a waiver of rights with respect
to, any circumstance constituting Good Reason hereunder.
(iv) Notice of Termination. Any purported termination of your employment
----------------------
by the Company or by you shall be communicated by written Notice of Termination
to the other party hereto in accordance with Section 6 hereof. For purposes of
this Agreement, a "Notice of Termination" shall mean a notice which shall
indicate the specific termination provision in this Agreement relied upon and
shall set forth in
7
<PAGE>
reasonable detail the facts and circumstances claimed to provide a basis for
termination of your employment under the provision so indicated.
(v) Date of Termination, Etc. "Date of Termination" shall mean (A) if your
-------------------------
employment is terminated for Disability, thirty (30) days after Notice of
Termination is given (provided that you shall not have returned to the full-time
performance of your duties during such thirty (30) day period), and (B) if your
employment is terminated pursuant to Subsection (ii) or (iii) above or for any
other reason (other than Disability), the date specified in the Notice of
Termination (which, in the case of a termination pursuant to Subsection (ii)
above shall not be less than thirty (30) days, and in the case of a termination
pursuant to Subsection (iii) above shall not be less than fifteen (15) nor more
than sixty (60) days, respectively, from the date such Notice of Termination is
given); provided that if within fifteen (15) days after any Notice of
Termination is given, or, if later, prior to the Date of Termination (as
determined without regard to this proviso), the party receiving such Notice of
Termination notifies the other party that a dispute exists concerning the
termination, the Date of Termination shall be the date on which the dispute is
finally determined, either by mutual written agreement of the parties, by a
binding arbitration award, or by a final judgment, order or decree of a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided further that the Date of Termination shall be extended by a notice of
dispute only if such notice is given in good faith and the party giving such
notice pursues the resolution of such dispute with reasonable diligence.
Notwithstanding the pendency of any such dispute, the Company will continue to
pay you your full compensation in effect when the notice giving rise to the
dispute was given (including, but not limited to, base salary) and continue you
as a participant in all compensation, benefit and insurance plans in which you
were participating when the notice giving rise to the dispute was given, until
the dispute is finally resolved in
8
<PAGE>
accordance with this Subsection. Amounts paid under this Subsection are in
addition to all other amounts due under this Agreement and shall not be offset
against or reduce any other amounts due under this Agreement except to the
extent otherwise provided in paragraph (E) of Subsection 4(iii).
4. Compensation Upon Termination or During Disability. Following a change
--------------------------------------------------
in control of the Company, as defined by Subsection 2(i), upon termination of
your employment or during a period of disability you shall be entitled to the
following benefits:
(i) During any period that you fail to perform your full-time duties with
the Company as a result of incapacity due to physical or mental illness, you
shall continue to receive your base salary at the rate in effect at the
commencement of any such period, together with all compensation payable to you
under any other plan in effect during such period, until this Agreement is
terminated pursuant to Section 3(i) hereof. Thereafter, or in the event your
employment shall be terminated by the Company or by you for Retirement, or by
reason of your death, your benefits shall be determined under the Company's
retirement, insurance and other compensation programs then in effect in
accordance with the terms of such programs.
(ii) If your employment shall be terminated by the Company for Cause or by
you other than for Good Reason, Disability, death or Retirement, the Company
shall pay you your full base salary through the Date of Termination at the rate
in effect at the time Notice of Termination is given, plus all other amounts to
which you are entitled under any compensation plan of the Company at the time
such payments are due, and the Company shall have no further obligations to you
under this Agreement.
(iii) If your employment by the Company shall be terminated (a) by the
Company other than for Cause, Retirement or Disability or (b) by you for Good
Reason, then you shall be entitled to the benefits provided below:
9
<PAGE>
(A) the Company shall pay you your full base salary through the Date of
Termination at the rate in effect at the time Notice of Termination is
given, plus all other amounts to which you are entitled under any
compensation plan of the Company, at the time such payments are due, except
as otherwise provided below.
(B) in lieu of any further salary payments to you for periods subsequent
to the Date of Termination, the Company shall pay as severance pay to you a
lump sum severance payment (the "Severance Payment") equal to 2.99 times
your "base amount", as defined in section 280G of the Internal Revenue Code
of 1954, as amended (the "Code"). Such base amount shall be determined in
accordance with temporary or final regulations, if any, promulgated under
section 280G of the Code and based upon the advice of the tax counsel
referred to in paragraph (C), below.
(C) The Severance Payment shall be reduced by the amount of any other
payment or the value of any benefit received or to be received by you in
connection with a change in control of the Company or your termination of
employment (whether pursuant to the terms of this Agreement or any other
plan, agreement or arrangement with the Company, any person whose actions
result in a change of control, or any person affiliated with the Company or
such person) unless (i) you shall have effectively waived your receipt or
enjoyment of such payment or benefit prior to the date of payment of the
Severance Payment, (ii) in the opinion of tax counsel selected by the
Company's independent auditors and acceptable to you, such other payment or
benefit does not constitute a "parachute payment" within the meaning of
section 280G(b)(2) of the Code, or (iii) in the opinion of such tax counsel,
the Severance Payment (in its full amount or as partially reduced under this
paragraph (C), as the case may be) plus all other payments or benefits which
constitute "parachute payments"
10
<PAGE>
within the meaning of section 280G(b)(2) of the Code are reasonable
compensation for services actually rendered, within the meaning of section
280G(b)(4) of the Code or are otherwise not subject to disallowance as a
deduction by reason of section 280G of the Code. The value of any non-cash
benefit or any deferred payment or benefit shall be determined by the
Company's independent auditors in accordance with the principles of sections
280G(d)(3) and (4) of the Code.
(D) The Company shall pay to you all legal fees and expenses incurred by
you as a result of such termination (including all such fees and expenses,
if any, incurred in contesting or disputing any such termination or in
seeking to obtain or enforce any right or benefit provided by this Agreement
or in connection with any tax audit or proceeding to the extent attributable
to the application of section 4999 of the Code to any payment or benefit
provided hereunder), such payment to be made at the later of the times
provided in paragraph (E), below, or within five (5) days after your request
for payment accompanied with such evidence of fees and expenses incurred as
the Company reasonably may require.
(E) The payments provided for in paragraphs (B) and (D), above, shall
(except as otherwise provided therein) be made not later than the fifth day
following the Date of Termination, provided, however, that if the amounts of
such payments, and the limitation on such payments set forth in paragraph
(C) above, cannot be finally determined on or before such day, the Company
shall pay to you on such day an estimate, as determined in good faith by the
Company, of the minimum amount of such payments and shall pay the remainder
of such payments (together with interest at the rate provided in Section
1274(b)(2)(B) of the Code) as soon as the amount thereof can be determined
but in no event later than the thirtieth day after the Date of Termination.
In the event that the amount of the estimated payments exceeds
11
<PAGE>
the amount subsequently determined to have been due, such excess shall
constitute a loan by the Company to you, payable on the fifth day after
demand by the Company (together with interest at the rate provided in
Section 1274(b)(2)(B) of the Code).
(F) In the event that any payment or benefit received or to be received
by you in connection with a change in control of the Company or the
termination of your employment (whether pursuant to the terms of this
Agreement or any other plan, arrangement or agreement with the Company, any
person whose actions result in a change in control or any person affiliated
with the Company or such person) (collectively with the Severance Payments,
"Total Payments") would not be deductible (in whole or part) as a result of
section 280G of the Code by the Company, an affiliate or other person making
such payment or providing such benefit, the Severance Payments shall be
reduced until no portion of the Total Payments is not deductible, or the
Severance Payments are reduced to zero. For purposes of this limitation (i)
no portion of the Total Payments the receipt or enjoyment of which you shall
have effectively waived in writing prior to the date of payment of the
Severance Payments shall be taken into account, (ii) no portion of the Total
Payments shall be taken into account which in the opinion of tax counsel
selected by the Company's independent auditors and acceptable to you does
not constitute a "parachute payment" within the meaning of section
280G(b)(2) of the Code, (iii) the Severance Payments shall be reduced only
to the extent necessary so that the Total Payments (other than those
referred to in clauses (i) or (ii)) in their entirety constitute reasonable
compensation for services actually rendered within the meaning of section
280G(b)(4) of the Code or are otherwise not subject to disallowance as
deductions, in the opinion of the tax counsel referred to in clause (ii);
and (iv) the value of any non-cash benefit or any deferred payment or
benefit included in
12
<PAGE>
the Total Payments shall be determined by the Company's independent auditors
in accordance with the principles of sections 280G(d)(3) and (4) of the
Code.
(G) If it is established pursuant to a final determination of a court or
an Internal Revenue Service proceeding that, notwithstanding the good faith
of you and the Company in applying the terms of this Subsection 4(iii), the
aggregate "parachute payments" paid to or for your benefit are in an amount
that would result in any portion of such "parachute payments" not being
deductible by reason of section 280G of the Code, then you shall have an
obligation to pay the Company upon demand an amount equal to the sum of (1)
the excess of the aggregate "parachute payments" paid to or for your benefit
over the aggregate "parachute payments" that could have been paid to or for
your benefit without any portion of such "parachute payments" not being
deductible by reason of section 280G of the Code; and (2) interest on the
amount set forth in clause (1) of this sentence at the rate provided in
Section 1274(b)(2)(B) of the Code) from the date of your receipt of such
excess until the date of such payment.
(iv) If your employment shall be terminated (A) by the Company other than
for Cause, Retirement or Disability or (B) by you for Good Reason, then for a
twenty-four (24) month period after such termination, the Company shall arrange
to provide you with group life, disability, medical and dental insurance
benefits substantially similar to those which you are receiving immediately
prior to the Notice of Termination. Benefits otherwise receivable by you
pursuant to this Subsection 4(iv) shall be reduced to the extent comparable
benefits are actually received by you during the twenty-four (24) month period
following your termination, and any such benefits actually received by you shall
be reported to the Company. If the benefits provided to you under this
Subsection shall result in a decrease, pursuant to paragraph (E) of Subsection
4(iii), in the Severance Payments and such benefits are thereafter reduced
pursuant to the immediately preceding sentence, the Company shall, at the time
of
13
<PAGE>
such reduction, pay to you the lesser of (a) the amount of such decrease in the
Severance Payments or (b) the maximum amount which can be paid to you without
being, or causing any other payment to be, nondeductible by reason of section
280G of the Code.
(v) If your employment shall be terminated (A) by the Company other than
for Cause, Retirement or Disability or (B) by you for Good Reason, then in
addition to the retirement benefits to which you are entitled under the
Company's Retirement Plan and Supplemental Executive Retirement Plan or any
successor plans thereto, the Company shall pay you in cash at the time and in
the manner provided in paragraph (E) (F) (G) of Subsection 4(iii), a lump sum
equal to the actuarial equivalent of the excess of (x) the retirement pension
(determined as a straight life annuity commencing at age 65) which you would
have accrued under the terms of the Company's Retirement Plan and Supplemental
Executive Retirement Plan (without regard to any amendment to the Company's
Retirement Plan and Supplemental Executive Retirement Plan made subsequent to a
change in control of the Company and on or prior to the Date of Termination,
which amendment adversely affects in any manner the computation of retirement
benefits thereunder, determined as if you were fully vested thereunder and had
accumulated (after the Date of Termination) twenty-four (24) additional months
of service credit thereunder at your highest annual rate of compensation during
the twelve (12) months immediately preceding the Date of Termination and (y) the
retirement pension (determined as a straight life annuity commencing at age
sixty-five (65) which you had then accrued pursuant to the provisions of the
Company's Retirement Plan and Supplemental Executive Retirement Plan. For
purposes of this Subsection, "actuarial equivalent" shall be determined using
the same methods and assumptions utilized under the Company's Retirement Plan
and Supplemental Executive Retirement Plan immediately prior to the change in
control of the Company.
14
<PAGE>
(vi) You shall not be required to mitigate the amount of any payment
provided for in this Section 4 by seeking other employment or otherwise, nor
shall the amount of any payment or benefit provided for in this Section 4 be
reduced by any compensation earned by you as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by you to the Company, or otherwise.
(vii) In addition to all other amounts payable to you under this Section 4,
you shall be entitled to receive all benefits payable to you under the Company's
Retirement Plan, Savings and Thrift Plan and any other plan or agreement
relating to retirement benefits.
5. Successors; Binding Agreement. (i) The Company will require any
successor (whether direct or indirect, by purchase, merger, consolidation or
otherwise) to all or substantially all of the business and/or assets of the
Company to expressly assume and agree to perform this Agreement in the same
manner and to the same extent that the Company would be required to perform it
if no such succession had taken place. Failure of the Company to obtain such
assumption and agreement prior to the effectiveness of any such succession shall
be a breach of this Agreement and shall entitle you to compensation from the
Company in the same amount and on the same terms as you would be entitled to
hereunder if you terminate your employment for Good Reason following a change in
control of the Company, except that for purposes of implementing the foregoing,
the date on which any such succession becomes effective shall be deemed the Date
of Termination. As used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or assets as
aforesaid which assume and agrees to perform this Agreement by operation of law,
or otherwise.
(ii) This Agreement shall inure to the benefit of and be enforceable by
your personal or legal representatives, executors, administrators, successors,
heirs,
15
<PAGE>
distributees, devisees and legatees. If you should die while any amount would
still be payable to you hereunder if you had continued to live, all such
amounts, unless otherwise provided herein, shall be paid in accordance with the
terms of this Agreement to your devisee, legatee or other designee or, if there
is no such designee, to your estate.
6. Notice. For the purpose of this Agreement, notices and all other
------
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when delivered or mailed by United States
registered mail, return receipt requested, postage prepaid, addressed to the
respective addresses set forth on the first page of this Agreement, provided
that all notice to the Company shall be directed to the attention of the Board
with a copy to the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith, except
that notice of change of address shall be effective only upon receipt.
7. Miscellaneous. No provision of this Agreement may be modified, waived
-------------
or discharged unless such waiver, modification or discharge is agreed to in
writing and signed by you and such officer as may be specifically designated by
the Board. No waiver by either party hereto at any time of any breach by the
other party hereto of, or compliance with, any condition or provision of this
Agreement to be performed by such other party shall be deemed a waiver of
similar or dissimilar provisions or conditions at the same or at any prior or
subsequent time. No agreements or representations, oral or otherwise, express
or implied, with respect to the subject matter hereof have been made by either
party which are not expressly set forth in this Agreement. The validity,
interpretation, construction and performance of this Agreement shall be governed
by the laws of the State of Delaware. All references to sections of the
Exchange Act or the Code shall be deemed also to refer to any successor
provisions to such sections. Any payments provided for hereunder shall be
16
<PAGE>
paid net of any applicable withholding required under federal, state or local
law. The obligations of the Company under Section 4 shall survive the expiration
of the term of this Agreement.
8. Validity. The invalidity or unenforceability or any provision of this
--------
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
9. Counterparts. This Agreement may be executed in several counterparts,
------------
each of which shall be deemed to be an original but all of which together will
constitute one and the same instrument.
10. Arbitration. Any dispute or controversy arising under or in connection
-----------
with this Agreement shall be settled exclusively by arbitration in Wilmington,
Delaware in accordance with the rules of the American Arbitration Association
then in effect. Judgment may be entered on the arbitrator's award in any court
having jurisdiction; provided, however, that you shall be entitled to seek
specific performance of your right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
This letter is submitted in duplicate. If it sets forth our agreement on
the subject matter hereof, kindly sign both copies and return one copy to me
within thirty (30) days (after which this offer of severance benefits will
lapse). These letters will then constitute our agreement on this subject. If
you do not wish to accept the offer of severance benefits set out in this
letter, please fill out the attached form and return the completed form to me
for the Company's records.
Sincerely,
DELMARVA POWER & LIGHT COMPANY
By_____________________________
Name: Donald E. Cain
Title: Vice President, Administration
Agreed to this ________ day
of ______________ , XXXX.
_________________________________
Signature
17
<PAGE>
TO: Donald E. Cain
Delmarva Power & Light Company
800 King Street
P. O. Box 231
Wilmington, DE 19899
I hereby decline to accept the Company's XXXXXXXXXXXXXX, offer of Severance
Benefits. I do so voluntarily and with the understanding that I may not be
offered such benefits in the future or be given the opportunity to reconsider my
decision.
- --------------------- ----------------------------
Date Signature
----------------------------
Please Print Name
18
<PAGE>
Exhibit 10-H
DELMARVA POWER & LIGHT COMPANY
1994 FORM 10-K
CURRENT LISTING OF SEVERANCE AGREEMENTS
AS OF MARCH 1, 1995
-------------------
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
DATE OF
NAME CURRENT TITLE AGREEMENT
- --------------------------------------------------------------------------------
<C> <S> <C> <C>
1. Arturo F. Agra General Manager, Product 03/01/95
Management & Development
2. Heinz J. Beck Manager, Transmission & 05/07/93
Distribution
3. W. Douglas Boyce Vice President, Central Division 05/07/93
4. Roberta S. Brown General Manager, Electric System 05/07/93
Engineering
5. Donald E. Cain Vice President 05/22/89
6. Raymond V. Civatte General Manager, Operations 04/10/94
7. Peter F. Clark Counsel, Assistant General 05/11/89
8. Donald P. Connelly Secretary, Corporate 02/11/87
9. Howard E. Cosgrove Chairman, President & Chief 05/07/93
Executive Officer
10. Moira K. Donoghue Manager, Compensation, Benefits & 11/04/94
Organizational Development
11. Richard H. Evans Vice President, Corporate 02/11/87
Communications
12. Carmine F. Gargiulo Manager, Systems Development 02/11/87
13. Charles R. Gates Plant Manager (Indian River) 02/11/87
14. Paul S. Gerritsen Vice President 05/07/93
15. Barbara S. Graham Sr. Vice President, Treasurer & 03/01/95
Chief Financial Officer
16. R. Erik Hansen General Manager, Regulatory 05/07/93
Practice
17. Michael J. Harrison Manager, Delmarva Operating 03/01/95
Services
18. Hudson P. Hoen, III Vice President, Southern Division 04/09/94
19. Albert F. Kirby General Manager, Mechanical 03/04/90
Engineering & Standards
20. Ralph E. Klesius Sr. Vice President 05/07/93
21. John W. Land General Manager, Administrative 04/19/94
Services
22. H. Ray Landon Executive Vice President 05/11/89
23. James P. Lavin Comptroller/Corporate Accounting 05/22/89
24. Wayne A. Lyons Vice President 02/11/87
25. D. Bruce McClenathan Plant Manager (Delaware City) 02/11/87
26. Dennis R. McDowell Comptroller/Operating Accounting 05/22/89
27. Robert F. Molzahn General Manager, Environmental 05/22/89
Affairs
28. James L. Parks Manager, Fuel Supply 05/07/93
29. Frank J. Perry, Jr. Vice President 03/14/90
30. Kenneth L. Pfeil Plant Manager (Edge Moor) 04/08/94
31. Philip S. Reese General Manager, Marketing 03/01/95
32. Richard W. Sarau Plant Manager (Hay Road) 03/01/95
33. Mark H. Schneider Manager, Solid Waste Group 05/07/93
34. Thomas S. Shaw Sr. Vice President/President, DCI 05/07/93
35. James R. Silvius Manager, Electrical Engineering 05/11/89
36. William H. Spence Manager, Gas Operations & Planning 05/07/93
37. Richard J. Squadron Manager/General Manager, CFO - DCI 04/12/94
38. Dale G. Stoodley Vice President & General Counsel 04/18/89
39. Duane C. Taylor Vice President Information Systems 02/11/87
40. Jack Urban Vice President, Gas Division 01/27/91
41. George G. Vapaa Manager, Corporate Planning 03/25/91
42. Joseph M. Wathen Manager, Pricing 04/08/94
43. James R. Wittine General Manager, System Planning 05/07/93
44. Jeremiah F. Wright, Jr. General Manager, Purchasing 03/14/90
45. D. Wayne Yerkes Vice President, Northern Division 03/14/90
46. John T. Zimmerman Manager, Employee Relations 03/25/91
- --------------------------------------------------------------------------------
</TABLE>
<PAGE>
Exhibit 12-A
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges
----------------------------------
(Dollars in Thousands)
---------------------
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net income (1) $108,310 $111,076 $98,526 $80,506 $37,311
-------- -------- -------- -------- --------
Income taxes (1) 67,613 67,102 54,834 43,249 24,556
-------- -------- -------- -------- --------
Fixed charges:
Interest on long-term debt
including amortization of
discount, premium and
expense 61,128 62,651 66,976 68,133 63,709
Other interest 9,336 9,245 8,449 10,192 8,618
-------- -------- -------- -------- --------
Total fixed charges 70,464 71,896 75,425 78,325 72,327
-------- -------- -------- -------- --------
Equity in net loss of less-than-
fifty-percent-owned invest-
ments accounted for under the
equity method 0 0 0 0 12,772
Nonutility capitalized interest (256) (246) (231) (143) (373)
-------- -------- -------- -------- --------
Earnings before income taxes
and fixed charges $246,131 $249,828 $228,554 $201,937 $146,593
======== ======== ======== ======== ========
Ratio of earnings to fixed
charges 3.49 3.47 3.03 2.58 2.03
</TABLE>
For purposes of computing the ratio, earnings are net income plus income taxes,
fixed charges, and equity in the net loss of less-than-fifty-percent-owned
investments which are accounted for under the equity method, less nonutility
capitalized interest. Fixed charges consist of interest on long- and short-term
debt, amortization of debt discount, premium, and expense, plus the interest
factor associated with the Company's major leases, and one-third of the
remaining annual rentals.
(1)Net income and income taxes related to the cumulative effect of a change in
accounting for unbilled revenues recorded in 1991 are excluded from the
computation of this ratio.
<PAGE>
Exhibit 12-B
Delmarva Power & Light Company
Ratio of Earnings to Fixed Charges and Preferred Dividends
----------------------------------------------------------
(Dollars in Thousands)
----------------------
<TABLE>
<CAPTION>
1994 1993 1992 1991 1990
-------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net income (1) $108,310 $111,076 $98,526 $80,506 $37,311
-------- -------- ------- ------- -------
Income taxes (1) 67,613 67,102 54,834 43,249 24,556
-------- -------- ------- ------- -------
Fixed charges:
Interest on
long-term debt including
amortization of discount,
premium and expense 61,128 62,651 66,976 68,133 63,709
Other interest 9,336 9,245 8,449 10,192 8,618
-------- -------- ------- ------- -------
Total fixed charges 70,464 71,896 75,425 78,325 72,327
------- ------- ------- ------- -------
Equity in net loss of less-than-
fifty-percent-owned invest-
ments accounted for under the
equity method 0 0 0 0 12,772
Nonutility capitalized interest (256) (246) (231) (143) (373)
-------- -------- ------- ------- -------
Earnings before income taxes
and fixed charges $246,131 $249,828 $228,554 $201,937 $146,593
======== ======== ======== ======== ========
Fixed Charges $ 70,464 $ 71,896 $ 75,425 $ 78,325 $ 72,327
Preferred dividend requirements 15,948 14,803 15,785 11,672 14,406
-------- -------- ------- ------- -------
$86,412 $86,699 $91,210 $89,997 $86,733
======== ======== ======= ======= =======
Ratio of earnings to fixed
charges and preferred
dividends 2.85 2.88 2.51 2.24 1.69
</TABLE>
For purposes of computing the ratio, earnings are net income plus income taxes,
fixed charges, and equity in the net loss of less-than-fifty-percent-owned
investments which are accounted for under the equity method, less nonutility
capitalized interest. Fixed charges consist of interest on long- and short-term
debt, amortization of debt discount, premium, and expense, plus the interest
factor associated with the Company's major leases, and one-third of the
remaining annual rentals. Preferred dividend requirements represent annualized
preferred dividend requirements multiplied by the ratio that pre-tax income
bears to net income.
(1)Net income and income taxes related to the cumulative effect of a change in
accounting for unbilled revenues recorded in 1991 are excluded from the
computation of this ratio.
<PAGE>
Exhibit 13
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands, Except Per Share Amounts) 1994 1993 1992 1991 1990
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Operating Results and Data
- --------------------------
Operating Revenues $991,021 $970,607 $864,044 $855,821 $812,217
Operating Income $163,156(1) $164,139 $143,711(2) $136,410 $144,473(3)
Income Before Cumulative Effect of a
Change in Accounting Principle $108,310(1) $111,076 $98,526(2) $80,506 $37,311(3)
Cumulative Effect of a Change in
Accounting for Unbilled Revenues -- -- -- $12,730 --
Net Income $108,310(1) $111,076 $98,526(2) $93,236 $37,311(3)
Earnings Applicable to Common Stock $98,940(1) $101,074 $90,177(2) $85,259 $28,527(3)
Electric Sales (kWh 000) (4) 12,505,082 12,280,230 11,520,811 11,460,280 11,081,211
Gas Sold and Transported (mcf 000) 20,342 19,605 20,168 18,184 18,263
Common Stock Information
- ------------------------
Earnings Per Share of Common Stock
Before Cumulative Effect of a
Change in Accounting Principle $1.67(1) $1.76 $1.69(2) $1.44 $0.60(3)
Cumulative Effect of a Change in
Accounting for Unbilled Revenues -- -- -- $0.25 --
Total Earnings Per Share $1.67(1) $1.76 $1.69(2) $1.69 $0.60(3)
Dividends Declared Per
Share of Common Stock $1.54 $1.54 $1.54 $1.54 $1.54
Average Shares Outstanding (000) 59,377 57,557 53,456 50,581 47,534
Year-End Common Stock Price $18 9/64 $23 5/8 $23 1/4 $21 1/4 $18 1/8
Book Value Per Common Share $14.85 $14.66 $13.77 $13.42 $12.84
Return on Average Common Equity 11.1% 12.0% 12.2% 12.4% 4.3%
Capitalization
- --------------
Variable Rate Demand Bonds (VRDB) (5) $71,500 $41,500 $41,500 $41,500 $41,500
Long-Term Debt 774,558 736,368 787,387 770,146 741,032
Preferred Stock 168,085 168,085 176,365 136,365 136,365
Common Stockholders' Equity 884,169 862,195 745,789 706,583 614,692
----------------------------------------------------------------------------------
Total Capitalization with VRDB $1,898,312 $1,808,148 $1,751,041 $1,654,594 $1,533,589
==================================================================================
Other Information
- -----------------
Total Assets $2,669,785 $2,592,479 $2,374,793 $2,263,718 $2,125,715
Long-Term Capital Lease Obligation $19,660 $23,335 $26,081 $29,337 $32,354
Construction Expenditures (6) $154,119 $159,991 $207,439 $181,820 $187,823
Internally Generated Funds (IGF) (7) $123,948 $108,693 $130,275 $96,081 $112,551
IGF as a Percent of Construction
Expenditures 80% 68% 63% 53% 60%
</TABLE>
(1) An early retirement offer decreased earnings net of income taxes and
earnings per share by $10.7 million and $0.18, respectively.
(2) The settlement of a lawsuit with PECO Energy Company increased
earnings net of income taxes and earnings per share by $11.4 million
and $0.21, respectively.
(3) The write-off of joint venture subsidiary investments decreased
earnings net of income taxes and earnings per share by $42.5 million
and $0.89, respectively.
(4) Excludes interchange deliveries.
(5) Although Variable Rate Demand Bonds are classified as current
liabilities, the Company intends to use the bonds as a source of
long-term financing as discussed in Note 12 to the Consolidated
Financial Statements.
(6) Excludes Allowance for Funds Used During Construction.
(7) Net cash provided by operating activities less common and preferred
dividends.
20
Delmarva Power & Light Company
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Earnings
- --------
The earnings per average share of common stock attributed to the core utility
business and nonutility subsidiaries are shown below.
<TABLE>
<CAPTION>
1994 1993 1992
-------------------------------
<S> <C> <C> <C>
Core Utility
Operations $ 1.81 $1.73 $1.47
Early retirement offer (0.18) -- --
Peach Bottom lawsuit settlement -- -- 0.21
-------------------------------
1.63 1.73 1.68
Nonutility subsidiaries 0.04 0.03 0.01
-------------------------------
Total $ 1.67 $1.76 $1.69
===============================
</TABLE>
Dividends
- ---------
On December 21, 1994, the Board of Directors declared a common stock dividend of
$0.38 1/2 per share for the fourth quarter. During 1994, the Board reaffirmed
their commitment to the current dividend of $1.54 per year. The Board believes
the dividend is secure and sustainable at its current level, barring major
unforeseen changes. Future earnings and cash flow are expected to support the
current dividend, which provides a competitive yield for the Company's stock. On
a historical basis, common dividends per share as a percentage of earnings per
share were 92% in 1994, 88% in 1993, and 91% in 1992.
Core Utility Earnings
- ---------------------
The components of change from the prior year in core utility earnings per share
are shown below.
<TABLE>
<CAPTION>
1994 vs. 1993 1993 vs. 1992
--------------------------------
<S> <C> <C>
Operations
Electric revenues, net of fuel expense
Rate increases $ 0.17 $ 0.31
Sales volume and other 0.08 0.37
Gas revenues, net of fuel expense 0.03 0.01
Operation and maintenance expense (0.02) (0.17)
Depreciation (0.09) (0.07)
Effect of increased number of average common shares (0.05) (0.13)
Other (0.04) (0.06)
--------------------------------
0.08 0.26
Early retirement offer (0.18) --
Peach Bottom lawsuit settlement -- (0.21)
--------------------------------
$(0.10) $ 0.05
================================
</TABLE>
Excluding the effects of unusual items discussed below, earnings per share from
core utility operations compared to the prior year increased by $0.08 in 1994
and $0.26 in 1993. Both years' earnings increases were primarily due to
additional electric base revenues from increased electric sales and rate
increases which were effective for part of 1993 and all of 1994. Significant
variances which partially offset the growth in earnings from core utility
operations in 1994 and 1993 included higher depreciation expense and the
dilutive effect of additional common shares outstanding. In 1993, higher
operation and maintenance expense also substantially reduced the earnings
growth. The variance in other net financing costs--interest expense, preferred
dividends, and allowance for funds used during construction--did not
significantly affect 1994 and 1993 earnings per share comparisons against the
prior year.
21
Delmarva Power & Light Company
<PAGE>
Core utility earnings for 1994 and 1992 reflect certain unusual items. In 1994,
as discussed in Note 4 to the Consolidated Financial Statements, the Company
recorded a charge to earnings ($10.7 million after taxes or $0.18 per share) to
reflect its voluntary early retirement offer which resulted in a workforce
reduction of 10.5% or 296 people. In 1992, as discussed in Note 5 to the
Consolidated Financial Statements, net income and earnings per share were
increased by $11.4 million and $0.21, respectively, due to settlement with PECO
Energy Company (PECO) of a lawsuit filed by the Company concerning the 1987 to
1989 shutdown of the Peach Bottom Atomic Power Station by the Nuclear Regulatory
Commission.
Strategic Plans for Competition
- -------------------------------
Competition for the business of electric wholesale (resale) customers has
increased primarily due to federal legislation and customer demands. Resale
customers can choose their local utility or another power producer to supply
their electricity requirements. 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,
representing about 95% of municipal revenues, for extended terms of eight to
twenty years. The Company also has signed agreements with its other electric
resale customers which require two years notice for load reductions up to 30%
and five years notice for load reductions greater than 30%.
In addition to increased competition in the resale market, changes affecting
competition in the retail markets are developing. Individual states, including
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.
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.
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 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. Prices charged to current Company
customers in the competitive market 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 revenues by $10 million to $20 million through short-term energy and
capacity sales to regional utilities and additional retail sales; (3) increase
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 in
1995 due to Old Dominion Electric Cooperative's (ODEC) decision to
22
Delmarva Power & Light Company
<PAGE>
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 about 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 $5 million in other operation and maintenance expenses and $8
million in capital-related costs, primarily due to lower capital expenditures.
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 falling and is 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, the Company expects that 1995 sales revenues will be higher
than previously projected and will contribute to the sales initiative.
On May 24, 1994, the Company entered into an agreement with 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% 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 to contribute $0.04 to $0.06 incremental earnings per share by
1997.
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. 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 in Note 2 to the Consolidated Financial
Statements, 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 DPSC Staff, MPSC Staff,
and other parties to the rate cases are opposing the proposed increases.
Decisions on the cases are expected in the first quarter of 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
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.
23
Delmarva Power & Light Company
<PAGE>
Components of Utility Revenues
- ------------------------------
Fuel and energy costs billed to customers (fuel revenues) are based on rates in
effect in fuel adjustment clauses which are adjusted periodically to reflect
cost changes and are subject to regulatory approval. Rates for non-fuel costs
billed to customers are dependent on rates determined in base rate proceedings
before regulatory commissions. Changes in non-fuel (base rate) revenues can
directly affect the earnings of the Company. Fuel revenues, or fuel costs billed
to customers, generally do not affect net income since the expense recognized as
fuel costs is adjusted to match the fuel revenues. The amount of under- or over-
recovered fuel costs is generally deferred until it is subsequently recovered
from or returned to utility customers.
Electric revenues also include interchange delivery revenues which result
primarily from the sale of electric 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 revenues do not
affect net income.
Electric Revenues and Sales
- ---------------------------
In 1994, the percentages of total billed sales revenues contributed by the
various customer classes were as follows: residential--38.4%; commercial--29.8%;
industrial--17.9%; resale--13.0%; and other--0.9%.
Details of the changes in the various components of electric revenues are
shown below.
Comparative Increase (Decrease) from Prior Year in Electric Revenues
<TABLE>
<CAPTION>
(Dollars in Millions) 1994 1993
-----------------------
<S> <C> <C>
Non-fuel (Base Rate) Revenue
Increased Rates $15.9 $26.6
Sales Volume and Other 6.0 32.2
Fuel Revenue (15.4) 5.9
Interchange Delivery Revenue 1.0 30.8
-----------------------
Total $7.5 $95.5
=======================
</TABLE>
The increases in non-fuel revenues shown above as "Increased Rates" of $15.9
million for 1994 and $26.6 million for 1993 resulted from the increases in
electric customer base rates which became effective in April, June, and October
of 1993. Refer to Note 2 to the Consolidated Financial Statements for
information concerning these rate increases.
The non-fuel revenue variances shown in the above table as "Sales Volume and
Other" are attributable to changes in sales volume, sales mix, and other
factors. For 1994 compared to 1993, "Sales Volume and Other" variances were
principally due to a 1.8% increase in total kilowatt-hours (kWh) sold, which
resulted from a 1.6% increase in the total number of customers, an improving
economy in the Company's service territory, and colder winter weather during the
first quarter. The sales increase was reduced by cooler summer weather. Sales to
residential, commercial, and resale customers increased by 2.3%, 3.7%, and 1.6%,
respectively. Sales to industrial customers were relatively flat.
"Sales Volume and Other" variances for 1993 compared to 1992 were principally
due to a 6.6% increase in total kWh sold. Sales to residential, commercial, and
resale customers increased by 8.4%, 6.3%, and 7.3%, respectively, mainly due to
hotter summer weather. Industrial sales increased 3.7% due to increased
production levels of certain large customers and more kWh sales to a major
customer that provides some of its own power. In 1993, the total number of
customers increased by 2.0%
24
Delmarva Power & Light Company
<PAGE>
In 1994, electric fuel revenues decreased $15.4 million due to lower rates
charged to customers under the fuel adjustment clauses, partially offset by
higher kWh sales. In 1993, electric fuel revenues increased $5.9 million due to
higher kWh sales, partially offset by lower fuel adjustment clause rates.
In 1993, interchange delivery revenues increased $30.8 million due to higher
sales to utilities in the PJM Interconnection, which resulted from increased
demand for electricity in the region and greater availability of the Company's
generating units.
Gas Revenues, Sales, and Transportation
- ---------------------------------------
The Company earns gas revenues from the sale of gas to customers and also from
transporting gas through the Company's system for some customers who purchase
gas directly from other suppliers.
Total 1994 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 non-fuel revenues was due to $0.6 million of additional revenue from
the $3.1 million base rate increase that became effective November 1, 1994, and
a $2.4 million increase in sales volume. Total cubic feet of gas sold and
transported in 1994 increased 3.8% over 1993 due to a 2.9% increase in the
number of customers and colder winter weather during the first quarter. Gas fuel
revenues increased $10.0 million in 1994 due to higher average fuel rates and
higher sales.
In 1993, total gas revenues increased $11.1 million from 1992 because of a $1.2
million increase in non-fuel revenues and a $9.9 million increase in fuel
revenues. Non-fuel revenues increased despite a 2.8% decrease in total cubic
feet of gas sold and transported mainly due to increased sales to firm customers
which are billed at higher rates than sales to non-firm (interruptible) and
transportation customers. Firm sales increased 1.8% due to a 3.7% increase in
the number of customers which was partially offset by lower average usage per
customer. The $9.9 million increase in gas fuel revenues was principally
attributed to higher average fuel rates.
Electric Fuel and Purchased Power Expenses
- ------------------------------------------
In 1994, electric fuel and purchased power expenses decreased $15.7 million for
the following reasons. (1) Expenses decreased $17.5 million due to variances in
fuel costs deferred and subsequently amortized under the Company's fuel
adjustment clauses. (2) Expenses increased $4.4 million due to increased kWh
output which was attributed to higher sales demand within the Company's service
territory and the region served by the PJM Interconnection. (3) Expenses
decreased $2.6 million due to a lower average cost per kWh of output which was
largely the result of lower prices paid for purchased gas and the effect of a
full year's operation of Hay Road Unit 4, a combined cycle unit added to the
electric system on June 1, 1993. This generating unit uses exhaust heat from
three combustion turbine units as its energy source. These favorable average
cost variances were partially offset by higher average oil prices.
In 1993, electric fuel and purchased power expenses increased $36.5 million for
the following reasons. (1) Expenses increased $39.2 million due to increased kWh
output which resulted from stronger sales demand in the Company's service
territory and in the region served by the PJM Interconnection. (2) Expenses
decreased $6.9 million due to a lower average cost per kWh of output which was
primarily due to completion of Hay Road Unit 4. (3) Expenses increased $4.2
million due to variances in fuel costs deferred and subsequently amortized under
the Company's fuel adjustment clauses.
The kWh output required to serve load within the Company's service territory is
basically equivalent to total output less interchange deliveries. In 1994, the
Company's output for load within its service territory was provided by 41.9%
coal generation, 30.7% oil and gas generation, 15.6% nuclear generation, and
11.8% net purchased power.
25
Delmarva Power & Light Company
<PAGE>
Operation, Maintenance, Depreciation, and Income Tax Expenses
- -------------------------------------------------------------
In comparing 1994 operation and maintenance expenses versus 1993, four principal
factors accounted for a $19.2 million increase: the $17.5 million pre-tax charge
for the Company's voluntary early retirement offer; a $7.8 million reduction in
pension expense of which $4.5 million was due to a lower assumed rate of salary
increase; higher winter storm damages of $3.5 million; and a $6.0 million
increase in other expenses, including postretirement benefits other than
pensions (OPEB). The Company's OPEB costs were deferred during part 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.
In 1993, operation and maintenance expenses increased by $15.0 million from 1992
largely due to higher administrative and general expenses, including increases
for salaries and wages, and OPEB costs due to adoption of the accounting
required by Statement of Financial Accounting Standards (SFAS) No. 106.
Depreciation expense increased $8.6 million in 1994 and $5.6 million in 1993
primarily due to additions to the electric system, 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 inflation, the regulatory process can result in a lag
between the time when costs rise and when prices can be adjusted. Also, due to
competition and the changing nature of the utility industry, raising prices is
becoming more difficult. Thus, the Company's existing cost control programs are
becoming increasingly important.
In 1994, income tax expense on operations decreased $2.0 million in comparison
to 1993 principally due to lower pre-tax income. In 1993, income tax expense on
operations increased $18.7 million in comparison to 1992 mainly due to higher
pre-tax income. The $18.7 million increase also reflects $1.6 million of higher
income taxes due to an increase in the federal income tax rate from 34% to 35%,
effective January 1, 1993.
(A graph titled "Electric Operation & Maintenance Expenses per kWh sold" is
displayed on page 26 of the 1994 Annual Report to Stockholders. A description of
this graph is included in the Appendix to Management's Discussion and Analysis
of Financial Condition and Results of Operations.)
Utility Financing Costs
- -----------------------
In comparison to the prior year, interest charges of the core utility decreased
$2.0 million in 1994 and $4.1 million in 1993 mainly due to redemption on June
1, 1993, of $50 million of 10% First Mortgage Bonds with proceeds from a public
offering of common stock.
Dividends on preferred stock decreased $0.6 million in 1994 primarily due to a
net $8.3 million reduction in preferred stock outstanding which occurred in
November and December 1993, as discussed in Note 11 to the Consolidated
Financial Statements. In 1993, dividends on preferred stock increased $1.7
million mainly because $40 million of 7 3/4% preferred stock issued in August
1992 was outstanding for all of 1993 compared to part of 1992.
Allowance for equity and borrowed funds used during construction (AFUDC)
decreased $3.6 million in 1994 and $1.0 million in 1993 mainly due to lower
average construction work-in-progress balances resulting from completion of Hay
Road Unit 4 in mid-1993.
Due to common equity financing, the average number of shares of common stock
outstanding increased in 1994 and 1993. The additional shares outstanding
decreased earnings per share by $0.05 in 1994 and $0.13 in 1993. However, when
customer rates are increased, additional revenues offset the dilution of
earnings per share due to increased common equity financing.
26
Delmarva Power & Light Company
<PAGE>
Energy Supply
- -------------
The Challenge 2000 Plan reflects the Company's strategy to provide an adequate,
reliable supply of electricity to customers, while minimizing adverse impacts on
the environment and keeping prices competitive. The Company's 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 Company's
plan emphasizes balance and flexibility, and may be accelerated, slowed, or
altered in response to changing energy demands, fluctuating fuel prices, and
emerging technologies. The plan combines customer-oriented load management and
strategic conservation programs ("Save Some"), short-term power purchases and
long-term power contracts ("Buy Some"), and new or renovated power plants
("Build Some").
The Company's current plan closely matches customers' energy requirements and
does not require large investments for new resources during the next two years.
The capacity and energy that will be required to serve COPCO subsequent to the
planned acquisition will be purchased from PECO. The power purchase, which is
contingent on closing of the acquisition, is expected to provide 205 megawatts
(MW) of capacity beginning in 1996 or later, increasing to 259 MW by the end of
the contract in 2006.
On October 27, 1994, the Company exercised its right to cancel an agreement with
the Delaware Clean Energy Project which would have provided 165 MW of capacity
for 30 years beginning in 1999. The decision to terminate the agreement was
based on uncertainties associated with the Company's load requirements, a
general decline in wholesale market prices, and absence of need for long-term
capacity.
The Company must balance the potential risks of providing too much or
insufficient capacity. The main risks of excess capacity are that the Company's
prices may become uncompetitive or that regulators may not allow the associated
costs to be recovered through customer rates. The principal risks of inadequate
capacity are unreliable service and the payment of capacity deficiency charges
to the PJM Interconnection. The PJM Interconnection Agreement requires the
Company to plan for and provide an adequate capacity level.
During the past three years, the Challenge 2000 Plan has reduced customers'
demand for electricity by an additional 77 MW, provided 48 MW of capacity from a
long-term power contract which began in 1992, and provided 175 MW of capacity
from a new power plant, Hay Road Unit 4. Looking forward through 1999, the
Company's current plan includes the following resources:
(1) "Save Some"--Approximately 51 MW of additional peak load reduction through
customer-oriented load management and strategic conservation programs.
(2) "Buy Some"--During 1998 to 1999, up to 200 MW of short-term power purchases,
in addition to the power purchase from PECO discussed above.
(3) "Build Some"--Repowering of Indian River Units 1 and 2, 89 MW units, with
new, cleaner-burning boilers during consecutive two-year outages beginning in
1999.
(A graph titled "Regional Electric Price Comparison" is displayed on page 27 of
the 1994 Annual Report to Stockholders. A description of this graph is included
in the Appendix to Management's Discussion and Analysis of Financial Condition
and Results of Operations.)
27
Delmarva Power & Light Company
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company's primary capital resources are internally generated funds (net cash
provided by operating activities less common and preferred dividends) and
external financings. These resources provide capital for utility plant
construction expenditures and other capital requirements, such as repayment of
maturing debt and capital lease obligations. Utility construction expenditures
are the Company's largest capital requirement and are affected by many factors
including growth in demand for electricity, compliance with environmental
regulations, and the need for improvement and replacement of existing
facilities.
Operating activities provided net cash inflows of $224.6 million in 1994, $206.7
million in 1993, and $220.8 million in 1992. Net cash provided by operating
activities increased $17.9 million in 1994 primarily due to higher non-fuel
electric revenues from rate increases and higher sales. In 1992, operating cash
flow was increased by $11.4 million, net of income taxes, from receipt of a
payment for settlement of the Peach Bottom lawsuit. After considering common and
preferred dividend payments of $100.6 million in 1994, $98.0 million in 1993,
and $90.5 million in 1992, internally generated funds were $123.9 million in
1994, $108.7 million in 1993, and $130.3 million in 1992. Internally generated
funds provided 80%, 68%, and 63% of the cash required for utility construction
in 1994, 1993, and 1992, respectively.
Utility construction expenditures were $154.1 million in 1994, $160.0 million in
1993, and $207.4 million in 1992. Construction expenditures in 1994 included
$20.7 million for projects attributed to environmental compliance. Construction
expenditures decreased $47.4 million in 1993 primarily because construction of
Hay Road Unit 4 was completed in mid-1993.
In 1994, investments by the Company's nonutility subsidiaries included purchase
of a $5.7 million office building and $5.3 million of other capital investments,
which were primarily construction expenditures at the Pine Grove Landfill. In
1994, the subsidiaries also sold real estate parcels and a mini-storage
facility, raising $4.6 million. In 1993, the subsidiaries sold interests in
leveraged leases, which resulted in a $21.5 million cash inflow.
Capital raised externally during 1992-1994, net of $513.1 million of
refinancings and redemptions, consisted of $154.8 million of common stock, $31.7
million of preferred stock, $30 million of variable rate demand bonds, and $3.7
million of long-term debt. Issuances of common stock during 1992-1994 included a
public offering in 1993 of 3,300,000 shares for $77.1 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
capitalization and reduce the level of financial risk. After considering $29.9
million of costs associated with issuing and refinancing debt and equity
securities during 1992-1994, the net amount of capital raised from external
financings during this period was $190.3 million.
In 1994, the Company issued $30 million of variable rate demand bonds, which are
being used to finance investments in the Company's gas system, and $4.6 million
of long-term debt associated with the Company's nonutility subsidiaries. In
addition, the Company's term loan balance increased by $35 million. The only
significant debt redemption in 1994 resulted from maturity of 4 5/8% First
Mortgage Bonds, $25 million principal amount, on October 1, 1994.
The Company issued $15.0 million of common stock in 1994 primarily through the
Dividend Reinvestment and Common Share Purchase Plan (DRIP). Depending on the
financing needs of the Company, shares issued through the DRIP may be either
newly issued shares or shares purchased in the open market, as occurred during
the last seven months of 1994. In conjunction with the Company's plans to
finance the COPCO acquisition with 50% common equity, the DRIP began issuing new
shares on January 1, 1995. Book value per share of common stock increased to
$14.85 as of December 31, 1994, from $14.66 as of December 31, 1993.
(A graph titled "Internally Generated Funds & Construction Expenditures" is
displayed on page 28 of the 1994 Annual Report to Stockholders. A description of
this graph is included in the Appendix to Management's Discussion and Analysis
of Financial Condition and Results of Operations.)
28
Delmarva Power & Light Company
<PAGE>
The Company's capital structure as of December 31, 1994, and 1993, expressed as
a percentage of total capitalization, is shown below.
<TABLE>
<CAPTION>
1994 1993
-------------------
<S> <C> <C>
Long-term debt and variable rate demand bonds 44.6% 43.0%
Preferred stock 8.8% 9.3%
Common stockholders' equity 46.6% 47.7%
</TABLE>
Capital requirements for the period 1995-1996 are estimated to be $448 million,
including $150 million for the purchase of COPCO and $263 million for utility
construction, excluding AFUDC. The estimate of 1995-1996 utility construction
requirements includes $50 million of expenditures related to environmental
compliance plans, including provisions of the Clean Air Act Amendments of 1990.
During 1997-1999, an additional $27 million of construction expenditures
(excluding AFUDC) related to compliance with environmental regulations are
planned.
The Company anticipates that $267 million will be generated internally during
1995-1996. Forecasted internally generated funds are net of expected power
purchase commitments, including the planned power purchase from PECO associated
with the COPCO acquisition. Forecasted internally generated funds for 1995-1996
represent 90% of estimated capital requirements, adjusted to exclude the COPCO
acquisition, and 102% of estimated utility construction expenditures. During
1995-1996, long-term external financings are presently estimated at $221
million, including $170 million of long-term debt and $51 million (market value)
of common stock. These amounts reflect the Company's plans to finance the COPCO
acquisition and to reduce the term loan balance in 1996.
Nonutility Subsidiaries
- -----------------------
Information on the Company's nonutility subsidiaries, in addition to the
following discussion, can be found in Notes 1, 5, and 19 to the Consolidated
Financial Statements.
Earnings per share of nonutility subsidiaries were $0.04 in 1994 in comparison
to $0.03 in 1993. The $0.01 per share increase in earnings was mainly attributed
to gains on the sale of real estate (including the mini-storage facility),
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.
Earnings per share of nonutility subsidiaries were $0.03 in 1993 in comparison
to $0.01 in 1992. The $0.02 per share increase in earnings was primarily due to
earnings from the waste hauling and landfill businesses in 1993 versus a loss in
1992 and to the transfer of the contract for operation and maintenance of the
Delaware City Power Plant (owned by Star Enterprise) from the parent company to
a nonutility subsidiary. The 1993 after-tax gains on sales of interests in
leveraged leases were offset by lower operating leveraged leasing income and the
one percent increase in the federal income tax rate.
In 1994, total subsidiary revenues and gains increased by $5.5 million to $43.1
million principally due to gains on the sale of real estate. In 1993, total
subsidiary revenues and gains were $37.6 million compared to $14.4 million in
1992. The $23.2 million revenue increase was mainly due to transfer of the
contract for operation and maintenance of the Delaware City Power Plant from the
parent company to a subsidiary.
29
Delmarva Power & Light Company
<PAGE>
Report of Management
- --------------------
Management is responsible for the information and representations contained in
the Company's financial statements. Our financial statements have been prepared
in conformity with generally accepted accounting principles, based upon
currently available facts and circumstances and management's best estimates and
judgments of the expected effects of events and transactions.
Delmarva Power & Light Company maintains a system of internal controls designed
to provide reasonable, but not absolute, assurance of the reliability of the
financial records and the protection of assets. The internal control system is
supported by written administrative policies, a program of internal audits, and
procedures to assure the selection and training of qualified personnel.
Coopers & Lybrand L.L.P., independent accountants, are engaged to audit the
financial statements and express their opinion thereon. Their audits are
conducted in accordance with generally accepted auditing standards which include
a review of selected internal controls to determine the nature, timing, and
extent of audit tests to be applied.
The Audit Committee of the Board of Directors, composed of outside directors
only, meets with management, internal auditors, and independent accountants to
review accounting, auditing, and financial reporting matters. The independent
accountants are appointed by the Board on recommendation of the Audit Committee,
subject to stockholder approval.
Howard E. Cosgrove Barbara S. Graham
Chairman of the Board, President and Senior Vice President, Treasurer, and
Chief Executive Officer Chief Financial Officer
Report of Independent Accountants
- ---------------------------------
To the Board of Directors and Stockholders
Delmarva Power & Light Company
Wilmington, Delaware
We have audited the accompanying consolidated balance sheets and statements of
capitalization of Delmarva Power & Light Company and Subsidiary Companies as of
December 31, 1994 and 1993, and the related consolidated statements of income,
changes in common stockholders' equity, and cash flows for each of the three
years in the period ended December 31, 1994. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Delmarva Power &
Light Company and Subsidiary Companies as of December 31, 1994 and 1993, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1994, in conformity with generally
accepted accounting principles.
As discussed in notes 3 and 15, respectively, to the consolidated financial
statements, in 1993 the Company changed its method of accounting for income
taxes and postretirement benefits other than pensions.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
February 3, 1995
30
Delmarva Power & Light Company
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Revenues
- ------------------
Electric $883,115 $875,663 $780,175
Gas 107,906 94,944 83,869
------------------------------------
991,021 970,607 864,044
------------------------------------
Operating Expenses
- ------------------
Electric fuel and purchased power 282,570 298,307 261,784
Gas purchased 63,814 53,631 43,797
Operation and maintenance 267,207 248,052 233,038
Depreciation 109,523 100,929 95,285
Taxes other than income taxes 38,585 37,419 37,037
Income taxes 66,166 68,130 49,392
------------------------------------
827,865 806,468 720,333
------------------------------------
Operating Income 163,156 164,139 143,711
- ---------------- ------------------------------------
Other Income
- ------------
Nonutility Subsidiaries
Revenues and gains 43,142 37,636 14,397
Expenses including interest and income taxes (40,790) (35,828) (13,908)
------------------------------------
Net earnings of nonutility subsidiaries 2,352 1,808 489
Allowance for equity funds used during construction 3,389 5,309 5,631
Other income, net of income taxes (285) 511 12,855
------------------------------------
5,456 7,628 18,975
------------------------------------
Income Before Utility Interest Charges 168,612 171,767 162,686
- -------------------------------------- ------------------------------------
Utility Interest Charges
- ------------------------
Interest expense 62,076 64,095 68,237
Allowance for borrowed funds used during construction (1,774) (3,404) (4,077)
------------------------------------
60,302 60,691 64,160
------------------------------------
Earnings
- --------
Net income 108,310 111,076 98,526
Dividends on preferred stock 9,370 10,002 8,349
------------------------------------
Earnings applicable to common stock $ 98,940 $101,074 $ 90,177
====================================
Common Stock
- ------------
Average Shares of Common Stock Outstanding (000) 59,377 57,557 53,456
Earnings Per Average Share of Common Stock $1.67 $1.76 $1.69
Dividends Declared Per Share of Common Stock $1.54 $1.54 $1.54
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
31
Delmarva Power & Light Company
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
(Dollars in Thousands) 1994 1993
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Utility Plant--At Original Cost
- -------------------------------
Electric $2,676,871 $2,561,507
Gas 196,188 176,167
Common 120,933 122,182
-------------------------------
2,993,992 2,859,856
Less: Accumulated depreciation 1,062,565 989,351
-------------------------------
Net utility plant in service 1,931,427 1,870,505
Construction work-in-progress 85,220 91,001
Leased nuclear fuel, at amortized cost 30,349 33,905
-------------------------------
2,046,996 1,995,411
-------------------------------
Investments and Nonutility Property
- -----------------------------------
Investment in leveraged leases 49,595 50,914
Funds held by trustee 32,824 17,577
Other investments and nonutility property, net 57,289 55,248
-------------------------------
139,708 123,739
-------------------------------
Current Assets
- --------------
Cash and cash equivalents 25,029 23,017
Accounts receivable
Customers 93,739 98,472
Other 15,144 18,405
Inventories, at average cost
Fuel (coal, oil and gas) 48,262 27,335
Materials and supplies 37,055 37,687
Prepayments 9,014 9,534
Deferred income taxes, net 9,276 10,713
-------------------------------
237,519 225,163
-------------------------------
Deferred Charges and Other Assets
- ---------------------------------
Unamortized debt expense 11,387 11,222
Deferred debt refinancing costs 26,530 28,794
Deferred recoverable plant costs 12,693 14,563
Deferred recoverable income taxes 149,206 144,463
Other 45,746 49,124
-------------------------------
245,562 248,166
-------------------------------
Total $2,669,785 $2,592,479
===============================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
32
Delmarva Power & Light Company
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
(Dollars in Thousands) 1994 1993
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Capitalization And Liabilities
Capitalization (See Statements of Capitalization)
- -------------------------------------------------
Common stock, $2.25 par value; shares authorized--90,000,000;
shares outstanding: 1994--59,542,006, 1993--58,829,283 $ 133,970 $ 132,366
Additional paid-in capital 484,377 470,997
Retained earnings 267,002 259,507
Unearned compensation (1,180) (675)
--------------------------------
Total common stockholders' equity 884,169 862,195
Preferred stock 168,085 168,085
Long-term debt 774,558 736,368
--------------------------------
1,826,812 1,766,648
--------------------------------
Current Liabilities
- -------------------
Short-term debt 10,000 --
Long-term debt due within one year 1,399 25,986
Variable rate demand bonds 71,500 41,500
Accounts payable 59,596 55,175
Taxes accrued 7,264 10,987
Interest accrued 15,459 15,522
Dividends declared 22,831 22,664
Current capital lease obligation 12,571 12,684
Deferred energy costs 12,241 14,229
Other 27,538 31,631
--------------------------------
240,399 230,378
--------------------------------
Deferred Credits and Other Liabilities
- --------------------------------------
Deferred income taxes, net 505,435 497,457
Deferred investment tax credits 47,577 49,475
Long-term capital lease obligation 19,660 23,335
Other 29,902 25,186
--------------------------------
602,574 595,453
--------------------------------
Commitments and Contingencies (Notes 13, 16, and 17) -- --
--------------------------------
Total $2,669,785 $2,592,479
================================
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
33
Delmarva Power & Light Company
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(Dollars in Thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash Flows from Operating Activities
- ------------------------------------
Net income $108,310 $111,076 $98,526
Adjustments to reconcile net income to
net cash provided by operating activities
Depreciation and amortization 120,803 112,926 105,624
Allowance for equity funds used during construction (3,389) (5,309) (5,631)
Investment tax credit adjustments, net (1,898) (2,515) (2,417)
Deferred income taxes, net 4,829 (1,171) 10,749
Provision for early retirement offer 17,500 -- --
Net change in:
Accounts receivable 7,980 (15,851) (4,384)
Inventories (21,409) 5,314 9,696
Accounts payable 5,811 (3,749) 8,779
Other current assets & liabilities (1) (10,668) 11,441 (680)
Other, net (3,282) (5,438) 491
-----------------------------------------------
Net cash provided by operating activities 224,587 206,724 220,753
-----------------------------------------------
Cash Flows from Investing Activities
- ------------------------------------
Construction expenditures, excluding AFUDC (154,119) (159,991) (207,439)
Allowance for borrowed funds used during construction (1,774) (3,404) (4,077)
Change in working capital for construction (439) 3,123 (9,823)
Cash flows from leveraged leases
Sale of interests in leveraged leases -- 21,542 --
Insurance proceeds from casualty loss -- -- 4,115
Other 1,592 1,511 1,858
Proceeds from the sale of subsidiary property 4,596 -- --
Investment in subsidiary projects and operations (11,045) (2,827) (7,013)
Net (increase)/decrease in bond proceeds held in trust funds (11,816) 1,152 6,076
Deposits to nuclear decommissioning trust funds (2,438) (2,657) (3,770)
Other, net (2,336) (389) (2,677)
-----------------------------------------------
Net cash used by investing activities (177,779) (141,940) (222,750)
-----------------------------------------------
Cash Flows from Financing Activities
- ------------------------------------
Dividends: Common (91,175) (87,989) (81,986)
Preferred (9,464) (10,042) (8,492)
Issuances: Long-term debt (2) 4,640 148,200 273,335
Variable rate demand bonds 30,000 15,500 --
Common stock 14,974 109,463 32,200
Preferred stock -- 20,000 40,000
Redemptions: Long-term debt (26,096) (184,206) (257,178)
Variable rate demand bonds -- (15,500) --
Common stock (794) (748) (259)
Preferred stock -- (28,280) --
Principal portion of capital lease payments (11,280) (9,956) (10,339)
Net change in term loan 35,000 10,000 --
Net change in short-term debt 10,000 (17,000) 5,950
Cost of issuances and refinancings (601) (13,097) (16,187)
-----------------------------------------------
Net cash used by financing activities (44,796) (63,655) (22,956)
-----------------------------------------------
Net change in cash and cash equivalents 2,012 1,129 (24,953)
Beginning of year cash and cash equivalents 23,017 21,888 46,841
-----------------------------------------------
End of year cash and cash equivalents $25,029 $23,017 $21,888
===============================================
</TABLE>
(1) Other than debt and deferred income taxes classified as current.
(2) Excluding net change in term loan.
See accompanying Notes to Consolidated Financial Statements.
34
Delmarva Power & Light Company
<PAGE>
CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
As of December 31,
(Dollars in Thousands) 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stockholders' Equity
- ---------------------------
Total common stockholders' equity (1) $ 884,169 $ 862,195
---------------------------
Cumulative Preferred Stock
- --------------------------
Par value $1 per share, 10,000,000 shares authorized,
none outstanding
Par value $25 per share, 3,000,000 shares authorized,
7 3/4% Series, 1,600,000 shares outstanding (2) 40,000 40,000
Par value $100 per share, 1,800,000 shares authorized:
Current call
Series Shares outstanding price per share
- -----------------------------------------------------------------------------------------------
3.70%-5% 320,000 $103.00-$105.00 32,000 32,000
6 3/4% 200,000 (3) 20,000 20,000
7.52% 150,000 $103.50 15,000 15,000
Adjustable--5.54%, 5.54% (4) 160,850 $103.00 16,085 16,085
Auction rate--3.32%, 2.71% (4) 450,000 $100.00 45,000 45,000
---------------------------
168,085 168,085
---------------------------
Long-Term Debt
- --------------
First Mortgage Bonds:
Maturity Interest Rates
- -------------------------------------------------------------------------
1994 4 5/8% -- 25,000
1997 6 3/8% 25,000 25,000
2002-2003 6.40%-6.95% 120,000 120,000
2014-2015 7.30%-8.15% 81,000 81,000
2018-2022 5.90%-8.50% 208,200 208,200
2032 6.05% 15,000 15,000
---------------------------
449,200 474,200
Other Bonds, due 2011-2017, 7.15%-7.50% 54,500 54,500
Pollution Control Notes:
Series 1973, due 1995-1998, 5.75% 6,375 6,500
Series 1976, due 1995-2006, 7 1/8%-7 1/4% 3,200 3,300
Medium Term Notes, due 1998, 5.69% 25,000 25,000
Medium Term Notes, due 1999, 7 1/2% 30,000 30,000
Medium Term Notes, due 2002-2004, 8.30%-9.29% 39,000 39,000
Medium Term Notes, due 2007, 8 1/8% 50,000 50,000
Medium Term Notes, due 2020-2021, 8.96%-9.95% 61,000 61,000
First Mortgage Notes, 9.65% (5) 7,606 8,244
First Mortgage Note, 8% (6) 4,588 --
Term Loan, due 1997, 6.56% (7) 45,000 10,000
Other Obligations, due 1995-2000, 9.56% 1,126 1,307
Unamortized premium and discount, net (638) (697)
Current maturities of long-term debt (1,399) (25,986)
---------------------------
Total long-term debt 774,558 736,368
---------------------------
Total capitalization 1,826,812 1,766,648
---------------------------
Variable Rate Demand Bonds (8) 71,500 41,500
---------------------------
Total capitalization with Variable Rate Demand Bonds $1,898,312 $1,808,148
===========================
</TABLE>
(1) 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 1, 2003, at $100 per share.
(4) Average rates during 1994 and 1993, respectively.
(5) Repaid through monthly payments of principal and interest over 15
years ending November 2002.
(6) Repaid through monthly payments of principal and interest using a
15-year principal amortization, with the unpaid balance due in September
1999.
(7) Refer to Note 12 to the Consolidated Financial Statements for
additional information.
(8) Classified under current liabilities as discussed in Note 12 to the
Consolidated Financial Statements.
See accompanying Notes to Consolidated Financial Statements.
35
Delmarva Power & Light Company
<PAGE>
CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in Thousands)
Common Additional Unearned
Shares Par Paid-in Retained Treasury Compen-
Outstanding Value(1) Capital Earnings Stock sation Total
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance as of January 1, 1992 52,668,964 $118,505 $346,509 $241,569 -- -- $706,583
Net income 98,526 98,526
Cash dividends declared
Common stock ($1.54) (82,570) (82,570)
Preferred stock (8,349) (8,349)
Issuance of common stock
DRIP (2) 1,336,871 3,008 26,471 29,479
Stock options 129,500 292 2,256 2,548
Other issuance 8,518 19 154 173
Expenses of common and preferred
stock issuances (414) (414)
Reacquired shares (12,490) (259) (259)
Shares granted (3) 12,490 259 (259) --
Amortization of unearned
compensation 72 72
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1992 54,143,853 121,824 374,976 249,176 -- (187) 745,789
Net income 111,076 111,076
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 (2) 1,246,380 2,804 26,519 29,323
Stock options 139,050 313 2,689 3,002
Expenses (2,627) (2,627)
Reacquired shares (31,490) (748) (748)
Shares granted (3) 31,490 748 (748) --
Amortization of unearned
compensation 260 260
Refinancing of preferred stock (273) (951) (1,224)
- --------------------------------------------------------------------------------------------------------------------------------
Balance as 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 (2) 703,726 1,584 13,199 14,783
Other issuance 8,997 20 171 191
Reacquired shares (36,840) (794) (794)
Shares granted (3) 36,840 794 (794) --
Amortization of unearned compensation 289 289
Other 10 (9) 1
- --------------------------------------------------------------------------------------------------------------------------------
Balance as of December 31, 1994 59,542,006 $133,970 $484,377 $267,002 -- $(1,180) $884,169
================================================================================================================================
</TABLE>
(1) The Company's common stock has a par value of $2.25 per share and
90,000,000 shares are authorized.
(2) Dividend Reinvestment and Common Share Purchase Plan (DRIP)--As of
December 31, 1994, 2,114,810 shares were reserved for issuance through
the DRIP.
(3) Shares of restricted common stock granted under the Company's Long
Term Incentive Plan.
See accompanying Notes to Consolidated Financial Statements.
36
Delmarva Power & Light Company
<PAGE>
1. Significant Accounting Policies
- ----------------------------------
Nature of Business
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.
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
broad 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, and the transmission and wholesale (resale) sale of electricity.
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,
1994, was as follows: DPSC, 64%; MPSC, 22%; VSCC, 3%; and FERC, 11%.
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 commissions having jurisdiction over the
Company's utility business. In accordance with the provisions of Statement of
Financial Accounting Standards (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
"regulatory assets" are included on the Company's balance sheet under "Deferred
Charges and Other Assets." As of December 31, 1994, the Company had $210,368,000
of regulatory assets which included the following: deferred debt refinancing
costs--$26,530,000; deferred recoverable plant costs--$12,693,000; deferred
recoverable income taxes--$149,206,000 (refer to Note 3 to the Consolidated
Financial Statements); and other regulatory assets--$21,939,000. The costs of
these assets are either being recovered through customer rates or are probable
of being recovered through customer rates. Generally, the costs of these assets
are recognized in operating expenses over the period the cost is recovered from
customers.
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 subsidiaries are reported in
the consolidated statements of income as "Other Income." Refer to Notes 5 and 19
to the Consolidated Financial Statements for financial information about the
Company's subsidiaries.
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 recorded by the Company through an accrual.
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 are generally adjusted
to match fuel costs included in customer billings (fuel revenues). The
difference between fuel revenues and actual fuel costs incurred is reported on
the balance sheet 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.
37
Delmarva Power & Light Company
<PAGE>
Depreciation Expense
The annual provision for depreciation on utility property is computed on the
straight-line basis using composite rates by classes of depreciable property.
The relationship of the annual provision for depreciation for financial
accounting purposes to average depreciable property was 3.6% for 1994, 3.7% for
1993, and 3.6% for 1992. Depreciation expense includes a provision for the
Company's share of the estimated cost of decommissioning nuclear power plant
reactors based on amounts billed to customers for such costs. Refer to Note 8 to
the Consolidated 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 as a reduction of
interest charges and the equity funds component of AFUDC is reported as other
income. AFUDC was capitalized on utility plant construction at the rates of 9.3%
in 1994 and 9.6% in 1993 and 1992.
Cash Equivalents
In the consolidated financial statements, the Company considers highly liquid
marketable securities and debt instruments purchased with a maturity of three
months or less to be cash equivalents.
Leveraged Leases
As of December 31, 1994, the Company's portfolio of leveraged leases, held by a
nonutility subsidiary, consisted of five aircraft which are leased to three
separate airlines. The Company's investment in leveraged leases includes the
aggregate of rentals receivable (net of principal and interest on nonrecourse
indebtedness) and estimated residual values of the leased equipment less
unearned and deferred income (including investment tax credits). Unearned and
deferred income is recognized at a level rate of return during the periods in
which the net investment is positive.
Funds Held by Trustee
Funds held by trustee generally includes deposits in the Company's external
nuclear decommissioning trusts and unexpended, restricted, or tax-exempt bond
proceeds. Earnings on such trust funds are also reflected in the balance.
2. Base Rate Matters
- --------------------
On August 16, 1994, the Company filed an application with the DPSC for a $13.5
million "limited issue" increase in electric base rates. The Company
subsequently revised the amount of the proposed increase to $11.1 million. The
proposed increase, when netted with fuel savings related to reduction in load by
a resale customer (ODEC) beginning in 1995, is $6.4 million or 1.3%. This
"limited issue" increase is designed to recover costs specific to the Company's
compliance with the Clean Air Act Amendments of 1990, the 1% increase in the
marginal federal income tax rate to 35% during 1993, demand side management and
conservation programs, and an increase in funding for nuclear decommissioning
based on the current Nuclear Regulatory Commission (NRC) minimum funding
requirements. The DPSC staff and other parties to the case have recommended that
no revenue increase be granted due to the Company's current return earned from
its Delaware electric operations. However, the DPSC staff has suggested that if
the DPSC decides to consider a "limited issue" approach, an alternative to
approving a rate increase would be to instead authorize a $9 million increase if
monthly or quarterly 1995 earnings fall below certain levels. The Company
expects a DPSC decision on the case by the end of February 1995.
38
Delmarva Power & Light Company
<PAGE>
On September 1, 1994, the Company filed an application with the MPSC for a $3.9
million "limited issue" increase in electric base rates. The proposed increase,
when netted with ODEC related fuel savings, is $2.2 million or 1.1%. This
"limited issue" increase is designed to recover costs similar to those in the
Delaware "limited issue" case, except for demand side management and
conservation program costs which are recoverable from Maryland customers through
a surcharge. The MPSC staff's testimony proposes a rate decrease of $9.6
million, reflecting a historical test year, a lower return on equity, and
certain adjustments which are beyond the scope of the limited-issue filing. On
February 3, 1995, the Hearing Examiner issued his report recommending no change
in current rates. The Company expects a MPSC decision on the case by the end of
the first quarter of 1995.
Electric base rate increases which became effective in 1993 and were in effect
for all of 1994 are summarized in the following table. Electric base rates were
increased during 1993 pursuant to the Company's filings with regulatory
commissions for recovery of higher costs associated with completion of Hay Road
Unit 4, postretirement benefit costs under SFAS No. 106, and other items
including general inflation.
<TABLE>
<CAPTION>
Annualized Base Effective
Jurisdiction Revenue Increase Date
- -----------------------------------------------------------------
<S> <C> <C>
Retail Electric
Delaware (1) $24.9 million or 5.8% 06/01/93
Maryland (2) $7.8 million or 4.3% 04/01/93
Virginia (3) $1.3 million or 5.4% 10/05/93
Resale (FERC)(4) $1.5 million or 1.5% 06/03/93
</TABLE>
(1) Included an 11.5% return on equity. Net of fuel savings from Hay
Road Unit 4, customer rates increased 3.7%.
(2) Although a return on equity was not specified, the Company believes that
the implied return on equity approaches 12%. Net of fuel savings from
Hay Road Unit 4, customer rates increased 2.3%.
(3) Reflects an 11.05% return on equity.
(4) The settlement agreement did not specify a return on equity.
On October 18, 1994, the DPSC approved a $3.1 million or 3.1% increase in gas
base rates, including an 11.5% return on equity. The rate increase was designed
to recover higher operating costs and investment levels than were reflected in
the previous rates. The increase became effective November 1, 1994, at which
time lower fuel rates also became effective. The reduced fuel rates, when
combined with the base rate increase, resulted in a net average decrease of
1.75%.
3. Income Taxes
- ---------------
The Company and its wholly owned subsidiaries file a consolidated federal income
tax return. Income taxes are allocated to the Company's utility business and
subsidiaries based upon their respective taxable incomes, tax credits, and
effects of the alternative minimum tax, if any.
Effective January 1, 1993, the Company adopted SFAS No. 109, "Accounting for
Income Taxes," which replaced the deferred method of income tax accounting with
the liability method. Under the liability method, deferred income tax assets and
liabilities represent the tax effects of temporary differences between the
financial statement and tax bases of existing assets and liabilities and are
measured using presently enacted tax rates. The principal effects on the
Company's financial statements of adopting SFAS No. 109 were increased net
deferred tax liabilities which were offset by an asset, "deferred recoverable
income taxes." This asset represents expected future recovery of the net
deferred tax liabilities over the lives of the related assets through rates
charged to utility customers. Deferred recoverable income taxes were $149.2
million and $144.5 million as of December 31, 1994 and 1993, respectively. In
1993, net deferred tax liabilities and deferred recoverable income taxes
increased $17.4 million in recognition of an increase in the federal income tax
rate from 34% to 35%.
Deferred income tax expense under SFAS No. 109 represents the net change during
the reporting period in the net deferred tax liability and deferred recoverable
income taxes.
Investment tax credits (ITC) from regulated operations are being amortized over
the useful lives of the related utility plant. ITC associated with leveraged
leases are being amortized over the lives of the related leases during the
periods in which the net investment is positive.
39
Delmarva Power & Light Company
<PAGE>
Components of Consolidated Income Tax Expense
- ---------------------------------------------
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operation
Federal: Current $50,276 $50,264 $30,819
Deferred 5,592 7,710 11,597
State: Current 11,268 10,839 6,755
Deferred 928 1,832 2,638
Investment tax credit
adjustments, net (1,898) (2,515) (2,417)
--------------------------------------
Total operation 66,166 68,130 49,392
--------------------------------------
Other income
Federal: Current 2,789 9,398 7,559
Deferred (2,008) (9,398) (3,482)
State: Current 349 287 1,369
Deferred 317 (1,315) (4)
--------------------------------------
Total other income 1,447 (1,028) 5,442
--------------------------------------
Total income tax expense $67,613 $67,102 $54,834
======================================
</TABLE>
Reconciliation of Effective Income Tax Rate
- -------------------------------------------
The amount computed by multiplying income before tax by the federal
statutory rate is reconciled below to the total income tax expense.
<TABLE>
<CAPTION>
1994 1993 1992
(Dollars in Thousands) Amount Rate Amount Rate Amount Rate
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Statutory federal income
tax expense $61,574 35% $62,362 35% $52,142 34%
Increase (decrease) due to
Depreciation not normalized 1,797 1 1,676 1 1,959 1
ITC amortization/flow-through (1,938) (1) (2,832) (2) (2,780) (2)
State income taxes, net of
federal tax benefit 8,361 4 7,567 4 7,099 5
Other, net (2,181) (1) (1,671) -- (3,586) (2)
---------------------------------------------------------------------
Total income tax expense $67,613 38% $67,102 38% $54,834 36%
=====================================================================
</TABLE>
Components of Deferred Income Taxes
- -----------------------------------
The tax effect of temporary differences which give rise to the Company's net
deferred tax liability are shown below:
<TABLE>
<CAPTION>
As of December 31,
(Dollars in Thousands) 1994 1993
- ---------------------------------------------------------------------------
<S> <C> <C>
Deferred Tax Liabilities
Utility plant basis differences
Accelerated depreciation $296,651 $292,655
Other 98,437 97,530
Leveraged leases 47,080 49,339
Deferred recoverable income taxes 64,130 62,124
Other 44,418 30,630
-------------------------
Total deferred tax liabilities 550,716 532,278
-------------------------
Deferred Tax Assets
Deferred ITC 17,763 17,316
Other 36,794 28,218
-------------------------
Total deferred tax assets 54,557 45,534
-------------------------
Total deferred taxes, net $496,159 $486,744
=========================
</TABLE>
Valuation allowances for deferred tax assets were not material as of December
31, 1994 and 1993.
40
Delmarva Power & Light Company
<PAGE>
4. Early Retirement Offer
- -------------------------
In the third quarter of 1994, the Company completed a voluntary early retirement
offer (ERO) for all management and union employees at least 55 years old with at
least 10 years of continuous service by December 31, 1994. The ERO was accepted
by 10.5% of the Company's workforce (296 people), which represented an 82%
participation rate among eligible employees. In accordance with SFAS No. 88,
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits," the Company expensed the costs
associated with the ERO of $17.5 million ($10.7 million after taxes or $0.18 per
share).
5. Other Income, Net of Income Taxes
- ------------------------------------
Effective January 1, 1993, the contract for operation and maintenance of the
Delaware City Power Plant (owned by Star Enterprise) was transferred from the
parent company to a nonutility subsidiary. Thus, beginning in 1993, revenues and
expenses associated with the contract were included in the operating results of
the Company's nonutility subsidiaries as reported in Note 19 to the Consolidated
Financial Statements. In 1992, the revenues and expenses associated with the
contract were reflected in the Consolidated Statement of Income as "other
income, net of income taxes."
On July 27, 1988, the Company, Atlantic City Electric Company, and Public
Service Electric and Gas Company filed lawsuits against PECO Energy Company
(PECO) to recover replacement power and other costs incurred as a result of the
shutdown of Peach Bottom by the NRC on March 31, 1987. The Company's share of
costs resulting from the shutdown were charged against earnings during the
period of the shutdown (March 1987 through November 1989). On March 31, 1992,
the Peach Bottom co-owners reached a settlement agreement under which PECO paid
$18.5 million to the Company. The settlement agreement increased 1992 net income
by $11.4 million ($0.21 per share).
6. Purchase of Conowingo Power Company
- --------------------------------------
On May 24, 1994, the Company entered into an agreement with PECO to buy its
Maryland retail electric subsidiary, Conowingo Power Company (COPCO), for $150
million. The Company plans to finance the acquisition of COPCO with
approximately 50% long-term debt and 50% common equity. The MPSC has approved
the Company's proposal to recover, through Maryland retail rates, the $47
million acquisition premium (purchase price in excess of book value) and a
carrying charge, over 20 years beginning at the time of the next Maryland base
rate case. The purchase price also reflects COPCO's deferred asset of about $25
million for costs to be collected pursuant to a rate phase-in plan. The MPSC has
approved recovery, from COPCO customers, of this deferred asset and a carrying
charge over 10 years beginning in 1996.
In conjunction with the COPCO acquisition, the Company signed a contract with
PECO which provides for the purchase of electric capacity and energy from the
PECO system beginning on the later of the closing date of the COPCO acquisition
or February 1, 1996, and ending on May 31, 2006. The base amount of the capacity
purchase, which is subject to certain possible adjustments, will start at 205
megawatts (MW) and will increase annually to 259 MW in 2006. If the COPCO
acquisition closes prior to February 1, 1996, the Company has agreed in another
contract that it will purchase COPCO's electric power requirements from PECO on
an interim basis until February 1, 1996.
The acquisition and purchased power agreements are contingent on various
regulatory approvals. The purchased power agreements are conditioned upon
closing of the COPCO acquisition. The DPSC and MPSC approved the Company's
filings for regulatory approval on November 22, 1994, and January 18, 1995,
respectively. The Company expects the VSCC and FERC will approve the Company's
filings by mid-1995.
41
Delmarva Power & Light Company
<PAGE>
7. Jointly Owned Plant
- ----------------------
The Company's balance sheet includes its proportionate share of assets and
liabilities related to jointly owned plant. The Company's share of operating and
maintenance expenses of the jointly owned plant is included in the corresponding
expenses in the Consolidated Statements of Income. The Company is responsible
for providing its share of financing for the jointly owned facilities.
Information with respect to the Company's share of jointly owned plant as of
December 31, 1994, was as follows:
<TABLE>
<CAPTION>
Megawatt Construction
Ownership Capability Plant in Accumulated Work-in-
(Dollars in Thousands) Share Owned Service Depreciation Progress
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Nuclear
Peach Bottom 7.51% 157 MW $124,913 $62,641 $9,836
Salem 7.41% 164 MW 204,958 86,203 8,094
Coal-Fired
Keystone 3.70% 63 MW 17,642 6,937 641
Conemaugh 3.72% 63 MW 27,627 7,853 3,792
Transmission Facilities Various 4,564 2,037 --
-------------------------------------------
Total $379,704 $165,671 $22,363
===========================================
</TABLE>
8. Nuclear Decommissioning
- --------------------------
The Company records a liability for its shares 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 rate-making purposes, the Company estimates its share of future
nuclear decommissioning costs based on NRC regulations concerning the minimum
financial assurance amount for nuclear decommissioning. The Company is presently
recovering through electric rates nuclear decommissioning costs based on the
1990 NRC minimum financial assurance amount of approximately $50 million.
Subsequently, the NRC minimum financial assurance amount increased to $118
million primarily due to higher estimated costs for disposing of low level
radioactive waste. Based on prior decisions by regulatory commissions, the
Company expects that rates charged to electric customers will be adjusted to
provide for recovery of the Company's current estimate of nuclear
decommissioning costs of $118 million over the remaining lives of the plants. As
discussed in Note 2 to the Consolidated Financial Statements, the Company has
filed in the Delaware and Maryland retail electric jurisdictions applications
for base rate increases which include recovery of each jurisdiction's share of
the updated nuclear decommissioning cost estimate of $118 million.
The Company's accrued nuclear decommissioning liability, which is reflected in
the accumulated reserve for depreciation, was $32.4 million as of December 31,
1994. The provision reflected in depreciation expense for nuclear
decommissioning was $2.4 million in 1994, $2.3 million in 1993, and $2.2 million
in 1992. External trust funds established by the Company for the purpose of
funding nuclear decommissioning costs had an aggregate balance of $20.7 million
as of December 31, 1994. 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.
9. Investments
- --------------
As of December 31, 1994, the Company had $36.6 million of investments in
securities which were included in the following balance sheet classifications:
cash and cash equivalents--$2.2 million; funds held by trustee--$32.8 million;
other investments and nonutility property, net--$1.6 million. These securities,
based on the Company's intent and criteria established by SFAS No. 115,
"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 different from book value as of December 31, 1994. Gains and
losses from the sale of investment securities were not material to the Company's
operating results in 1994, 1993, or 1992. As of December 31, 1994, the Company's
investments in debt securities other than those considered to be cash
equivalents had the following maturities: $11.4 million due in 1995-2000; and
$7.6 million due in 2001-2004.
42
Delmarva Power & Light Company
<PAGE>
10. Common Stock
- ----------------
Refer to the Consolidated Statements of Changes in Common Stockholders' Equity
for information concerning issuances and redemptions of common stock during
1992-1994.
The Company's Restated Certificate and Articles of Incorporation and the
Mortgage and Deed of Trust securing the Company's outstanding bonds contain
restrictions on the 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, 1994, approximately
$231.3 million was available for payment of common dividends.
Prior to January 1, 1993, the Company had a nonqualified stock option plan for
certain employees. Options were priced at the actual market value on the grant
date. Effective January 1, 1993, the Company's Board of Directors declared that
no new stock options will be granted and that the performance-based restricted
stock program will be the program under the Long Term Incentive Plan which is in
effect. Changes in stock options are summarized below.
<TABLE>
<CAPTION>
1994 1993 1992
Number Option Number Option Number Option
of Shares Price of Shares Price of Shares Price
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning-of-year
balance 53,050 $17 1/2-$21 1/4 192,100 $17 1/2-$21 1/4 270,200 $17 1/2-$21 1/4
Options granted -- -- -- -- 59,900 $20 1/2
Options exercised -- -- 139,050 $17 1/2-$21 1/4 129,500 $17 1/2-$21 1/4
Options forfeited -- -- -- -- 8,500 $21 1/4
End-of-year balance 53,050 $17 1/2-$21 1/4 53,050 $17 1/2-$21 1/4 192,100 $17 1/2-$21 1/4
Exercisable 53,050 $17 1/2-$21 1/4 53,050 $17 1/2-$21 1/4 132,200 $17 1/2-$21 1/4
</TABLE>
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 1, 1993,
the Company used the proceeds and cash on-hand to redeem $28.28 million of
preferred stock previously issued by the Company, including $18.28 million of
the 7.88% series and $10.0 million of the 7.84% series.
On August 4, 1992, the Company issued 1,600,000 shares of 7 3/4%, cumulative
preferred stock, $25 per share par value, for $40 million.
12. Debt
- --------
Substantially all utility plant of the Company now or hereafter owned is subject
to the lien of the Mortgage and Deed of Trust.
The Company redeemed its 4 5/8% First Mortgage Bonds, $25 million principal
amount, at maturity on October 1, 1994.
On October 12, 1994, the Delaware Economic Development Authority issued on
behalf of the Company $30 million of Variable Rate Demand Gas Facilities Revenue
Bonds, due on demand or at maturity on October 1, 2029. The bonds may bear
interest at a daily rate, weekly rate, short-term interest rate, or fixed rate
as determined from time to time in accordance with the indenture. Proceeds from
the bonds are being used to finance enhancements to and expansion of the
Company's gas system.
The Company's debt obligations included Variable Rate Demand Bonds (VRDB) in the
amounts of $71.5 million as of December 31, 1994 and $41.5 million as of
December 31, 1993. 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 $71.5 million
balance of VRDB outstanding as of December 31, 1994 matures in 2017 ($26
million), 2028 ($15.5 million), and 2029 ($30 million). Average annual interest
rates on the VRDB were 3.0% in 1994.
43
Delmarva Power & Light Company
<PAGE>
On August 17, 1994, a nonutility subsidiary of the Company borrowed $4,640,000
at 8% from a bank to partially finance the purchase of an office building.
Monthly payments of principal and interest, based on a 15-year principal
amortization, are due through September 1999 when the loan matures.
As of December 31, 1994, the Company had $75 million of bank lines of credit,
including $45 million of such credit lines under which the Company may convert
short-term borrowings to a term loan maturing on July 26, 1997, (or earlier at
the discretion of the Company). As of December 31, 1994, $45 million of short-
term borrowings by the Company were classified as long-term debt ("Term Loan")
in recognition of the long-term financing capability provided by the credit
lines. The Company is generally required to pay commitment fees for its credit
lines. The lines of credit are periodically reviewed by the Company, at which
time they may be renewed or cancelled.
Maturities of long-term debt and sinking fund requirements during the next five
years are as follows: 1995--$1,649,000; 1996--$1,726,000; 1997--$26,815,000;
1998--$32,546,000; 1999--$31,728,000.
As of December 31, 1994, the fair market value of the Company's long-term debt
was $752,461,000 in comparison to the book value of $774,558,000. As of December
31, 1993, the fair market value of the Company's long-term debt was $833,502,000
in comparison to the book value of $736,368,000. The fair market value of the
Company's long-term debt was estimated using discounted cash flow calculations,
based on interest rates available to the Company for debt with similar terms,
maturities, and credit worthiness.
13. Commitments
- ---------------
The Company currently estimates its commitments for construction of utility
plant, excluding AFUDC, and purchases under fuel supply contracts, excluding
nuclear fuel, to be approximately $207 million in 1995 and $214 million in 1996.
The Company has a 26-year agreement with Star Enterprise effective through May
31, 2018, to purchase 48 MW of capacity supplied by the Delaware City Power
Plant. As discussed in Note 6 to the Consolidated Financial Statements, the
Company also has agreements to purchase capacity and energy from PECO beginning
upon the closing of the COPCO acquisition. Under the terms of these agreements,
the Company's expected commitments for capacity and energy charges are as
follows: 1995--$52.9 million; 1996--$56.6 million; 1997--$61.9 million; 1998--
$65.1 million; 1999--$71.8 million; after 1999--$604.8 million; total--$913.1
million.
The Company's share of nuclear fuel at Peach Bottom and Salem is financed
through a nuclear fuel energy contract which is accounted for as a capital
lease. Payments under the contract are based on the quantity of nuclear fuel
burned by the plants. The Company's obligation under the contract is generally
the net book value of the nuclear fuel financed, which was $30.3 million as of
December 31, 1994.
The Company leases an 11.9% interest in the Merrill Creek Reservoir. The lease
is considered an operating lease and payments over the remaining lease term,
which ends in 2032, are $161.8 million in aggregate. The Company also has long-
term leases for certain other facilities and equipment. Minimum commitments as
of December 31, 1994, under the Merrill Creek Reservoir lease and all other
noncancellable lease agreements (excluding payments under the nuclear fuel
energy contract which cannot be reasonably estimated) are as follows: 1995--$6.1
million; 1996--$6.0 million; 1997--$6.0 million; 1998--$6.0 million; 1999--$5.9
million; after 1999--$145.1 million; total--$175.1 million. Approximately 92% of
the minimum lease commitments shown above are payments due under the Merrill
Creek Reservoir lease.
Rentals Charged to Operating Expenses
The following amounts were charged to operating expenses for rental payments
under both capital and operating leases:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Interest on capital leases $1,560 $1,296 $1,432
Amortization of capital leases 11,456 10,243 10,554
Operating leases 14,552 15,176 14,063
-----------------------------------
$27,568 $26,715 $26,049
===================================
</TABLE>
44
Delmarva Power & Light Company
<PAGE>
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 than the maximum tax deductible
contribution. Pension plan assets consist primarily of equity securities and
public bond securities.
The following schedules show the funded status of the plan, the components of
pension cost, and assumptions.
<TABLE>
<CAPTION>
Reconciliation of Funded Status of the Plan As of December 31,
(Dollars in Thousands) 1994 1993
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated benefit obligation
Vested $265,597 $236,209
Nonvested 19,311 25,721
---------------------------
284,908 261,930
Effect of estimated future compensation increases 67,947 123,562
---------------------------
Projected benefit obligation 352,855 385,492
Plan assets at fair value 502,588 521,897
---------------------------
Excess of plan assets over projected benefit obligation 149,733 136,405
Unrecognized prior service cost 19,155 19,255
Unrecognized net gain (129,842) (108,183)
Unrecognized net transition asset (33,141) (36,455)
---------------------------
Prepaid pension cost $5,905 $11,022
===========================
</TABLE>
<TABLE>
<CAPTION>
Components of Net Pension Cost Year Ended December 31,
(Dollars in Thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Service cost--benefits earned during period $10,939 $13,152 $12,606
Interest cost on projected benefit obligation 26,574 26,411 24,261
Actual return on plan assets 3,349 (58,247) (39,104)
Net amortization and deferral (52,601) 14,748 (1,715)
----------------------------------------------
Net pension cost $(11,739) $(3,936) $(3,952)
==============================================
</TABLE>
<TABLE>
<CAPTION>
Assumptions 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Discount rates used to determine projected
benefit obligation as of December 31 8.25% 7.25% 7.25%
Rates of increase in compensation levels 5.50% 6.50% 6.50%
Expected long-term rates of return on assets 8.25% 8.25% 8.25%
</TABLE>
The net pension cost excludes the expense recorded in 1994 under SFAS No. 88 for
the Company's early retirement offer. Prepaid pension cost as of December 31,
1994, was reduced by the early retirement offer. Refer to Note 4 to the
Consolidated Financial Statements for additional information.
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 1, 1994. Also, the discount rate was increased from
7.25% to 8.25%, effective October 1,1994.
45
Delmarva Power & Light Company
<PAGE>
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 retirement. Effective January 1, 1993, the Company
adopted SFAS No. 106, "Employers' Accounting for Postretirement Benefits Other
Than Pensions," which requires accrual accounting for postretirement benefits
other than pensions. As permitted by SFAS No. 106, the Company elected to
amortize its transition obligation (the accumulated postretirement benefit
obligation as of January 1, 1993) over 20 years. Prior to adoption of SFAS No.
106, the Company expensed postretirement benefits other than pensions as paid.
The amount expensed in 1992 was $4,496,000.
The Company's policy is to fund its obligation to the extent that SFAS No. 106
costs are reflected in customer rates, including amounts which are capitalized.
Plan assets held in external trust funds consist primarily of investments in
bond mutual funds.
The following schedules show the funded status of the plan, the components of
the cost of postretirement benefits other than pensions, and assumptions.
<TABLE>
<CAPTION>
Reconciliation of Funded Status of the Plan As of December 31,
(Dollars in thousands) 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO)
Active employees fully eligible for benefits $9,319 $17,380
Other active employees 12,638 20,351
Current retirees 58,445 43,118
--------------------------
80,402 80,849
Plan assets at fair value 15,140 5,825
--------------------------
APBO in excess of plan assets 65,262 75,024
Unrecognized transition obligation (65,110) (68,728)
Unrecognized net loss (256) (4,939)
--------------------------
Accrued/(prepaid) postretirement benefit cost $(104) $1,357
==========================
</TABLE>
<TABLE>
<CAPTION>
Annual Cost of Postretirement Benefits Other Than Pensions Year ended December 31,
(Dollars in thousands) 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost--benefits earned during period $2,127 $2,206
Interest cost on projected benefit obligation 5,520 5,613
Actual return on plan assets 100 --
Amortization of the unrecognized transition obligation 3,617 3,617
Other, net (481) --
--------------------------
Net postretirement benefit cost $10,883 $11,436
==========================
Assumptions 1994 1993
- ---------------------------------------------------------------------------------------------
Discount rates used to determine APBO as of December 31 8.25% 7.25%
Expected long-term rates of return on assets 8.25% 8.25%
Rates of increase in compensation levels 5.50% 6.50%
Health-care cost trend rate 11.00% 12.00%
</TABLE>
The health-care cost trend rate, or the expected rate of increase in health-care
costs, is assumed to decrease to 10.5% in 1995 and gradually decrease to 5.5% by
2005. Increasing the health-care cost trend rates of future years by one
percentage point would increase the accumulated postretirement benefit
obligation by $2.9 million and would increase annual aggregate service and
interest costs by $0.2 million.
46
Delmarva Power & Light Company
<PAGE>
16. Environmental Matters
- -------------------------
The Company is subject to regulation with respect to the environmental effects
of its operations, including air and water quality control, solid and hazardous
waste disposal, and limitation on land use by various federal, regional, state,
and local authorities. The Company has incurred, and expects to continue to
incur, capital expenditures and operating costs because of environmental
considerations and requirements. The disposal of Company-generated hazardous
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 two federal superfund sites and is
alleged to be a third party contributor at two other federal superfund sites.
The Company also has three former coal gasification sites and the Company is
currently participating with the State of Delaware in evaluating two of the
three sites for extent of contamination and risk to the environment. The Company
has accrued a liability for clean-up and other potential costs related to the
PRP and coal gasification sites. The Company does not expect such costs to have
a material effect on the Company's financial position or results of operations.
17. Contingencies
- -----------------
Nuclear Insurance
In the event of an incident at any commercial nuclear power plant in the United
States, the Company could be assessed for a portion of any third party claims
associated with the incident. Under the provisions of the Price Anderson Act, if
third party claims relating to such an incident exceed $200 million (the amount
of primary insurance), the Company could be assessed up to $23.7 million for
third party claims. In addition, Congress could impose a revenue raising measure
on the nuclear industry to pay such claims.
The co-owners of Peach Bottom and Salem maintain nuclear property damage and
decontamination insurance in the aggregate amount of $2.8 billion for each
station. The Company is self-insured, to the extent of its ownership interest,
for its share of property losses in excess of insurance coverages. Under the
terms of the various insurance agreements, the Company could be assessed up to
$4.7 million in any policy year for losses incurred at nuclear plants insured by
the insurance companies.
The Company is a member of an industry mutual insurance company, which provides
replacement 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 present maximum share of
any assessment is $1.4 million per year.
Other
On October 20, 1994, the Company and Star Enterprise signed a settlement
agreement resolving Star Enterprise's claims that it had allegedly been
overcharged under a contract with the Company. The settlement did not have a
material effect on the Company's financial position or results of operations.
The Company is involved in certain other 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.
18. Supplemental Cash Flow Information
- --------------------------------------
<TABLE>
<CAPTION>
Cash Paid during the Year for Year Ended December 31,
(Dollars in Thousands) 1994 1993 1992
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest, net of capitalized amount $57,837 $58,154 $62,127
Income taxes, net of refunds $67,922 $72,384 $46,310
</TABLE>
47
Delmarva Power & Light Company
<PAGE>
19. 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 which 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.
<TABLE>
<CAPTION>
Condensed Subsidiary Statements of Income
(Dollars in Thousands) 1994 1993 1992
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues and Gains
Landfill and waste hauling $14,186 $11,745 $ 9,021
Operating services 22,468 22,118 3,038
Other revenues 4,923 2,117 998
Leveraged leases (1) 272 835 61
Other investment income 1,293 821 1,279
--------------------------------------
43,142 37,636 14,397
--------------------------------------
Costs and Expenses
Operating expenses 38,499 36,424 15,765
Interest expense, net 370 -- 319
Income taxes 1,921 (596) (2,176)
--------------------------------------
40,790 35,828 13,908
--------------------------------------
Net income $ 2,352 $ 1,808 $ 489
======================================
Earnings per share of common stock
attributed to subsidiaries $0.04 $0.03 $0.01
</TABLE>
(1) On an after-tax basis, leveraged leasing, including gains on sales of
equity and residual value interests, contributed $242,000, $1,754,000,
and $1,813,000 to earnings in 1994, 1993, and 1992, respectively.
<TABLE>
<CAPTION>
Condensed Subsidiary Balance Sheets
(Dollars in Thousands) As of December 31, Liabilities and As of December 31,
Assets 1994 1993 Stockholders' Equity 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Current assets Current liabilities
Cash and Debt due
cash equivalents $8,631 $15,929 within one year $489 $193
Other 5,702 7,489 Other 6,873 11,903
------------------------- ------------------------
14,333 23,418 7,362 12,096
------------------------- ------------------------
Noncurrent assets
Investment in Noncurrent liabilities
Leveraged leases 49,595 50,914 Long-term debt 5,225 1,114
Other 4,354 4,623 Deferred income taxes 53,592 55,008
Landfill & waste hauling Other 2,342 1,975
------------------------
property, plant & equipment 25,424 27,420 61,159 58,097
------------------------
Other 9,558 4,210 Stockholders' equity 34,743 40,392
------------------------- ------------------------
88,931 87,167
-------------------------
Total $103,264 $110,585 Total $103,264 $110,585
========================= ========================
</TABLE>
48
Delmarva Power & Light Company
<PAGE>
20. Segment Information
- -----------------------
Segment information with respect to electric and gas operations was as follows:
<TABLE>
<CAPTION>
(Dollars in Thousands) 1994 1993 1992
- ----------------------------------------------------------------------------------
<S> <C> <C> <C>
Electric Operations
Operating revenues $883,115 $875,663 $780,175
Operating income 153,409 154,412 134,260
Depreciation 102,746 94,549 89,421
Construction expenditures 133,884 142,238 192,493
Gas operations
Operating revenues 107,906 94,944 83,869
Operating income 9,747 9,727 9,451
Depreciation 6,777 6,380 5,864
Construction expenditures 20,235 17,753 14,888
Identifiable assets, net
Electric 2,314,448 2,267,050 2,042,496
Gas 188,813 160,618 142,740
Assets not allocated 166,524 164,811 189,557
</TABLE>
21. Quarterly Financial Information (Unaudited)
- -----------------------------------------------
The quarterly data presented below reflect all adjustments necessary in the
opinion of the Company for a fair presentation of the interim results. Quarterly
data normally vary seasonally with temperature variations, differences between
summer and winter rates, the timing of rate orders, and the scheduled downtime
and maintenance of electric generating units.
<TABLE>
<CAPTION>
Earnings Earnings
Applicable Average per
Quarter Operating Operating Net to Common Shares Average
Ended Revenue Income Income Stock Outstanding Share
(Dollars in Thousands) (In Thousands)
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1994
March 31 $292,394 $ 53,770 $ 39,641 $ 37,377 59,022 $0.63
June 30 218,465 33,994 20,776 18,453 59,402 0.31
September 30 260,601 42,921 29,366 27,008 59,542 0.46
December 31 219,561 32,471 18,527 16,102 59,542 0.27
------------------------------------------------------------------------------------
$991,021 $163,156 $108,310 $ 98,940 59,377 $1.67
====================================================================================
1993
March 31 $248,007 $ 46,278 $ 34,414 $ 31,911 55,135 $0.58
June 30 214,638 31,239 18,758 16,279 58,036 0.27
September 30 275,385 59,015 44,279 41,789 58,372 0.72
December 31 232,577 27,607 13,625 11,095 58,687 0.19
------------------------------------------------------------------------------------
$970,607 $164,139 $111,076 $101,074 57,557 $1.76
====================================================================================
</TABLE>
In the third quarter of 1994, the Company expensed the costs associated with the
early retirement offer (Note 4 to the Consolidated Financial Statements) which
decreased net income by $10.7 million ($0.18 per share).
In the fourth quarter of 1994, the Company reduced the rate of salary increase
assumed for computation of pension cost, effective January 1, 1994. This change
increased net income and earnings per share in the fourth quarter by $2.1
million and $0.03, respectively.
49
Delmarva Power & Light Company
<PAGE>
Appendix to Management's Discussion and Analysis of Financial
Condition and Results of Operations
Descriptions of Graphs
"Electric Operation & Maintenance Expenses per kWh sold"
- --------------------------------------------------------
On page 26 of the 1994 Annual Report to Stockholders, a graph titled "Electric
Operation & Maintenance Expenses per kWh sold" is displayed. Electric operation
and maintenance expenses, expressed in cents per kilowatt-hour (kWh) sold, are
graphed for Delmarva Power, a regional average of electric utilities, and a
national average of electric utilities. The y-axis is scaled in cents,
beginning at 1.00, increasing by increments of 0.25, and ending at 2.75. The x-
axis consists of the years 1989, 1990, 1991, 1992, 1993, and 1994. The
following data points, cents per kWh sold, are plotted as lines on the graph.
<TABLE>
<CAPTION>
1989 1990 1991 1992 1993 1994
---- ---- ---- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C>
(Cents per kWh sold)
Delmarva Power 1.55 1.60 1.68 1.73 1.59 1.69
Regional Average 1.83 1.93 1.95 1.98 2.07 (1)
National Average 2.11 2.28 2.42 2.52 2.57 (1)
</TABLE>
(1) Data not available
and not graphed.
"Regional Electric Price Comparison"
- ------------------------------------
On page 27 of the 1994 Annual Report to Stockholders, a graph titled "Regional
Electric Price Comparison" is displayed. The graph compares electric prices for
Delmarva Power to a regional average of electric utilities. The price
comparisons are based on 1993 average electric prices per kWh and are made for
the residential, commercial, and industrial customer classes.
For each of the customer classes (residential, commercial, and industrial), two
side-by-side vertical, rectangular bars are displayed. The bar on the left
represents the Delmarva Power price and the bar on the right represents the
regional average price. The y-axis is scaled in cents, beginning at zero,
increasing by increments of two cents, and ending at twelve cents. The prices
graphed are as follows:
<TABLE>
<CAPTION>
Delmarva Regional
Power Average
-------- --------
<S> <C> <C>
Residential 8.80 10.09
Commercial 7.18 8.71
Industrial 4.69 6.65
</TABLE>
-1-
<PAGE>
Appendix to Management's Discussion and Analysis of Financial
Condition and Results of Operations
Descriptions of Graphs
"Internally Generated Funds & Construction Expenditures"
- --------------------------------------------------------
On page 28 of the 1994 Annual Report to Stockholders, a graph titled "Internally
Generated Funds & Construction Expenditures" is displayed. The y-axis is scaled
in millions of dollars, beginning at zero, increasing by increments of $30
million, and ending at $210 million. The x-axis consists of the years 1992,
1993, 1994, 1995 (forecast), and 1996 (forecast). For each year, two side-by-
side vertical, rectangular bars are displayed. The bar on the left is
internally generated funds and the bar on the right is construction
expenditures. The graphed data are as follows:
<TABLE>
<CAPTION>
1992 1993 1994 1995* 1996*
---- ---- ---- ----- -----
<S> <C> <C> <C> <C> <C>
(millions of dollars)
Internally Generated
Funds 130 109 124 126* 141*
Construction
Expenditures 207 160 154 129* 134*
*Forecast
</TABLE>
-2-
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statements
of Delmarva Power & Light Company on Form S-3 (File Nos. 33-39756, 33-63582, and
33-53855) and on Form S-8 (File No. 33-33810) of our report, which includes an
explanatory paragraph regarding the Company's changes in 1993 in its method of
accounting for income taxes and postretirement benefits other than pensions,
dated February 3, 1995, on our audits of the consolidated financial statements
of Delmarva Power & Light Company and its subsidiary companies, as of
December 31, 1994 and 1993 and for each of the three years in the period ended
December 31, 1994, which report is incorporated by reference in this Annual
Report on Form 10-K.
Coopers & Lybrand L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 23, 1995
<TABLE> <S> <C>
<PAGE>
<ARTICLE> UT
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND STATEMENT OF INCOME FROM THE COMPANY'S 1994
ANNUAL REPORT TO STOCKHOLDERS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-END> DEC-31-1994
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 2,046,996
<OTHER-PROPERTY-AND-INVEST> 139,708
<TOTAL-CURRENT-ASSETS> 237,519
<TOTAL-DEFERRED-CHARGES> 245,562
<OTHER-ASSETS> 0
<TOTAL-ASSETS> 2,669,785
<COMMON> 133,970
<CAPITAL-SURPLUS-PAID-IN> 483,197
<RETAINED-EARNINGS> 267,002
<TOTAL-COMMON-STOCKHOLDERS-EQ> 884,169
0
168,085
<LONG-TERM-DEBT-NET> 774,558
<SHORT-TERM-NOTES> 10,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 1,399
0
<CAPITAL-LEASE-OBLIGATIONS> 19,660
<LEASES-CURRENT> 12,571
<OTHER-ITEMS-CAPITAL-AND-LIAB> 799,343
<TOT-CAPITALIZATION-AND-LIAB> 2,669,785
<GROSS-OPERATING-REVENUE> 991,021
<INCOME-TAX-EXPENSE> 66,166
<OTHER-OPERATING-EXPENSES> 761,699
<TOTAL-OPERATING-EXPENSES> 827,865
<OPERATING-INCOME-LOSS> 163,156
<OTHER-INCOME-NET> 5,456
<INCOME-BEFORE-INTEREST-EXPEN> 168,612
<TOTAL-INTEREST-EXPENSE> 60,302
<NET-INCOME> 108,310
9,370
<EARNINGS-AVAILABLE-FOR-COMM> 98,940
<COMMON-STOCK-DIVIDENDS> 91,436
<TOTAL-INTEREST-ON-BONDS> 57,604
<CASH-FLOW-OPERATIONS> 224,587
<EPS-PRIMARY> 1.67
<EPS-DILUTED> 1.67
</TABLE>
