UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934

For Quarter Ended

September 30, 2002

Commission File Number

1-1405

Delmarva Power & Light Company
(Exact name of registrant as specified in its charter)

Delaware and Virginia
(State or other jurisdiction of
incorporation or organization)

51-0084283
(I.R.S. Employer Identification No.)

800 King Street, P.O. Box 231, Wilmington, Delaware
(Address of principal executive office)

19899
(Zip Code)

202-872-2000
(Registrant's telephone number, including area code)

     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 and (2) has been subject to such filing requirements for the past 90 days.

Yes

[ X ]

No

[  ]

     Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

     All 1,000 issued and outstanding shares of Delmarva Power & Light Company common stock, $2.25 per share par value, are owned by Conectiv.

DELMARVA POWER & LIGHT COMPANY

Table of Contents

Page

Part I. Financial Information:

     Item 1.

Financial Statements

Consolidated Statements of Income for the three and nine months ended September 30, 2002, and September 30, 2001

1

Consolidated Balance Sheets as of September 30, 2002, and December 31, 2001

2-3

Consolidated Statements of Cash Flows for the nine months ended September 30, 2002, and September 30, 2001

4

Notes to Consolidated Financial Statements

5-8

     Item 2.

Management's Discussion and Analysis of Financial Condition and Results of Operations

9-16

     Item 3.

Quantitative and Qualitative Disclosures About Market Risk

16

     Item 4.

Controls and Procedures

16

Part II. Other Information

     Item 6.

Exhibits and Reports on Form 8-K

17

Signatures and Certifications

18-23

Part 1. FINANCIAL INFORMATION

Item 1. Financial Statements

DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in Thousands)
(Unaudited)

Three Months Ended
            September 30,       

Nine Months Ended
            September 30,       

    2002   

    2001   

    2002   

    2001   

OPERATING REVENUES

    Electric

$318,054

$315,569

$802,593

$830,860

    Gain on sale of electric plants

-

-

11,600

221,224

    Gas

23,330

28,393

131,380

186,503

    Other services

    2,663

    6,161

    8,508

     17,392

344,047

350,123

954,081

1,255,979

OPERATING EXPENSES

    Electric fuel and purchased energy and capacity

214,184 

228,024 

525,049 

503,815 

    Gas purchased

17,087 

22,660 

95,637 

148,952 

    Other services' cost of sales

2,711 

6,026 

7,875 

16,255 

    Operation and maintenance

46,093 

46,429 

131,379 

121,247 

    Merger-related costs

9,731 

- 

9,731 

- 

    Depreciation and amortization

21,201 

20,897 

63,040 

74,188 

    Taxes other than income taxes

     9,449 

      8,925 

     26,924 

     26,450 

 320,456 

  332,961 

   859,635 

   890,907 

OPERATING INCOME

   23,591 

    17,162 

     94,446 

   365,072 

OTHER INCOME

     2,045 

     6,555 

      6,957 

     15,382 

INTEREST EXPENSE

    Interest charges

10,637 

13,953 

34,382 

50,545 

    Allowance for borrowed funds used during
        construction and capitalized interest

          64 

        (206)

        (523)

         (520)

   10,701 

    13,747 

    33,859 

     50,025 

PREFERRED DIVIDEND REQUIREMENT ON
    PREFERRED SECURITIES OF A SUBSIDIARY TRUST

     1,422 

     1,421 

      4,266 

       4,265 

INCOME BEFORE INCOME TAXES AND
    EXTRAORDINARY ITEM

13,513 

8,549 

63,278  

326,164 

INCOME TAXES, EXCLUDING INCOME TAXES
    APPLICABLE TO EXTRAORDINARY ITEM

     5,761 

     3,972 

    26,351 

   135,320 

INCOME BEFORE EXTRAORDINARY ITEM

7,752 

4,577 

36,927 

190,844 

EXTRAORDINARY ITEM (Net of Income Taxes of $1,885)

             - 

    (2,790)

              - 

     (2,790)

NET INCOME

7,752 

1,787 

36,927 

188,054 

DIVIDENDS ON PREFERRED STOCK

         409 

         852 

      1,227 

      3,335 

EARNINGS APPLICABLE TO COMMON STOCK

$    7,343 

$        935 

$  35,700 

$184,719 

See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

ASSETS

 September 30,
    2002      

     December 31,
     2001        

Current Assets

    Cash and cash equivalents

$206,698

$174,876

    Accounts receivable, net of allowances
        of $15,777 and $17,270, respectively

178,302

187,309

    Inventories, at average cost

        Fuel (coal, oil and gas)

17,195

16,353

        Materials and supplies

14,848

13,636

    Prepayments

9,640

6,885

    Deferred energy supply costs

                -

       25,525

     426,683

     424,584

Investments

         3,868

        5,192

Property, Plant and Equipment

    Electric transmission and distribution

1,548,308

1,497,259

    Gas transmission and distribution

294,943

284,983

    Other electric and gas facilities

140,372

141,603

    Other property, plant and equipment

         5,256

         5,231

1,988,879

1,929,076

    Less: Accumulated depreciation

     783,976

     749,451

    Net plant in service

1,204,903

1,179,625

    Construction work-in-progress

70,957

76,718

    Intangibles

22,695

24,897

    Goodwill, net

       48,459

       48,459

  1,347,014

  1,329,699

Deferred Charges and Other Assets

    Regulatory assets

        Deferred recoverable stranded costs

63,571

65,702

        Other regulatory assets

39,517

53,702

    Prepaid employee benefits costs

193,899

192,181

    Unamortized debt expense

10,333

10,084

    Other

            717

         2,313

     308,037

     323,982

    Total Assets

$2,085,602

$2,083,457

See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED BALANCE SHEETS
(Dollars in Thousands)
(Unaudited)

CAPITALIZATION AND LIABILITIES

    September 30,
           2002         

      December 31,
             2001        

Current Liabilities

    Long-term debt due within one year

$133,193

$75,461

    Variable rate demand bonds

104,830

104,830

    Accounts payable

56,073

64,407

    Accounts payable to affiliated companies

31,491

20,002

    Taxes accrued

148,590

90,962

    Interest accrued

13,018

11,093

    Other

       66,289

       79,348

     553,484

     446,103

Deferred Credits and Other Liabilities

    Deferred income taxes, net

283,910

290,319

    Deferred investment tax credits

13,795

14,504

    Above-market purchased energy contracts and
        other electric restructuring liabilities

58,065

68,711

    Other

       13,260

       16,258

     369,030

     389,792

Capitalization

    Common stock, $2.25 par value;
      1,000,000 shares authorized; 1,000 shares outstanding

2

2

    Additional paid-in-capital

213,405

213,405

    Retained earnings

     367,454

     364,871

        Total common stockholder's equity

580,861

578,278

    Preferred stock not subject to mandatory redemption

29,583

29,583

    Company obligated mandatorily redeemable preferred securities
        of subsidiary trust holding solely company debentures

70,000

70,000

    Long-term debt

     482,644

     569,701

  1,163,088

  1,247,562

Commitments and Contingencies (Note 7)

Total Capitalization and Liabilities

$2,085,602

$2,083,457

See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Thousands)
(Unaudited)

Nine Months Ended
          September 30,          

        2002   

    2001   

CASH FLOWS FROM OPERATING ACTIVITIES

    Net income

$  36,928 

$188,054 

    Adjustments to reconcile net income to
      net cash provided by operating activities:

        Gain on sales of electric generating plants

(11,600)

(221,224)

        Depreciation and amortization

62,468 

74,244 

        Deferred income taxes, net

(6,167)

(42,554)

        Investment tax credit adjustments, net

(709)

(5,569)

        Deferred energy supply costs

35,418 

(12,984)

        Net change in:

            Accounts receivable

8,555 

106,052 

            Inventories

(2,054)

(15,584)

            Accounts payable

(5,056)

(79,634)

            Taxes accrued

57,628 

164,519 

            Other current assets and liabilities (1)

2,238 

(23,143)

    Other, net

    (8,071)

 (15,733)

    Net cash provided by operating activities

 169,578 

 116,444 

CASH FLOWS FROM INVESTING ACTIVITIES

    Capital expenditures

(66,832)

(75,001)

    Proceeds from sales of electric generating plants

10,000 

528,215 

    Proceeds from other assets sold

324 

8,543 

    Other, net

         338 

     1,689 

    Net cash provided (used) by investing activities

  (56,170)

 463,446 

CASH FLOWS FROM FINANCING ACTIVITIES

    Common dividends paid

(47,489)

(66,294)

    Preferred dividends paid

(1,228)

(3,070)

    Long-term debt issued

46,000 

59,000 

    Long-term debt redeemed

(75,461)

(314,403)

    Preferred stock redeemed

- 

(59,871)

    Costs of issuances and redemptions

(3,296)

(16,737)

    Other, net

       (112)

         (54)

    Net cash used by financing activities

  (81,586)

(401,429)

    Net change in cash and cash equivalents

31,822 

 178,461 

    Cash and cash equivalents at beginning of period

 174,876 

   94,604 

    Cash and cash equivalents at end of period

$206,698 

$273,065 

     (1) Other than debt and deferred income taxes classified as current.

    See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

Note 1. Financial Statement Presentation

The consolidated condensed interim financial statements contained herein include the accounts of Delmarva Power & Light Company (DPL) and its wholly owned subsidiary and reflect all adjustments, consisting of only normal recurring adjustments, necessary in the opinion of management for a fair presentation of interim results. In accordance with regulations of the Securities and Exchange Commission (SEC), disclosures that would substantially duplicate the disclosures in DPL's 2001 Annual Report on Form 10-K have been omitted. Accordingly, DPL's consolidated condensed interim financial statements contained herein should be read in conjunction with DPL's 2001 Annual Report on Form 10-K.

The following information updates the disclosures in Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of DPL's 2001 Annual Report on Form 10-K concerning the Agreement and Plan of Merger among Pepco Holdings, Inc. (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco) (the Conectiv/Pepco Merger Agreement). On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. in a transaction pursuant to the Conectiv/Pepco Merger Agreement, in which Pepco and Conectiv merged with subsidiaries of Pepco Holdings, Inc. (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Pepco and Conectiv and their respective subsidiaries (including DPL) each became subsidiaries of Pepco Holdings, Inc. DPL continues as a wholly-owned, direct subsidiary of Conectiv.

The Maryland Public Service Commission (MPSC) and the Delaware Public Service Commission (DPSC) issued orders on April 11 and 16, 2002, respectively, approving the Conectiv/Pepco Merger. The orders issued by the DPSC and MPSC require approximately $1.5 million of contributions to certain funds. For additional information concerning the terms of the MPSC and DPSC orders, see Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of DPL's 2001 Annual Report on Form 10-K.

DPL's operating results for each of the three and nine months ended September 30, 2002 included costs related to the Conectiv/Pepco Merger of $9.7 million ($5.8 million after income taxes). The $9.7 million of costs included the following: (i) $8.2 million for stock options settled in cash, severances, and retention payments and (ii) $1.5 million for contributions to certain funds based on the terms of orders issued by the MPSC and DPSC, as noted above. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over DPL, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

On April 30, 2002, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections." SFAS No. 145 rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt (an amendment of APB Opinion No. 30)." SFAS No. 4 had required that material gains and losses on extinguishment of debt be classified as an extraordinary item. Under SFAS No. 145, SFAS No. 4 is rescinded effective for fiscal years beginning after May 15, 2002. Due to the rescission of SFAS No. 4, it is less likely that a gain or loss on extinguishment of debt would be classified as an extraordinary item in DPL's Consolidated Statement of Income.

On July 30, 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." The standard requires companies to recognize costs associated with exit or disposal activities when they are incurred rather than at the date of a commitment to an exit or disposal plan. The primary effect of applying SFAS No. 146 will be on the timing of recognition of costs associated with exit or disposal activities. In many cases, those costs will be recognized as liabilities in periods following a commitment to a plan, not at the date of the commitment. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December 31, 2002.

Effective January 1, 2002, DPL implemented SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). Under SFAS No. 142, goodwill that has not been included in the rates of a regulated utility subject to SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation," is no longer amortized. The portion of goodwill included in regulated utility rates ($15.4 million as of September 30, 2002 and $17.5 million as of December 31, 2001) has been reclassified from goodwill to "other non-current regulatory assets" and continues to be amortized as a regulatory asset.

For the three months ended September 30, 2001, net income was $1.8 million and net income adjusted to exclude the $0.2 million charge for goodwill amortization was $2.0 million. For the nine months ended September 30, 2001, net income was $188.1 million and net income adjusted to exclude the $0.6 million charge for goodwill amortization was $188.7 million.

DPL's goodwill balance of $48.5 million as of September 30, 2002 and December 31, 2001 is associated with Conectiv's Power Delivery business segment. Effective January 1, 2002, Conectiv redefined its business segments. Conectiv's Power Delivery business segment, which had previously included the operating results for delivering electricity to DPL's customers, as well as delivering and supplying natural gas at regulated rates to DPL's customers, now also includes the operating results for supplying electricity to DPL's customers. As a result, all material aspects of DPL's operations are conducted in Conectiv's Power Delivery business segment.

Based on the requirements of SFAS No. 142, DPL conducted a test for the impairment of goodwill as of January 1, 2002, by comparing the fair value of its Power Delivery business to its book value carrying amount, including goodwill. The test resulted in no impairment of goodwill, as of January 1, 2002, because the fair value of DPL's Power Delivery business exceeded its book value carrying amount, including goodwill.

Note 2. Related Party Transactions

For background information concerning DPL's contracts with Conectiv Energy Supply, Inc. (CESI) for the purchase of electric energy and capacity, see Note 2 to the Consolidated Financial Statements included in Item 8 of Part II to DPL's 2001 Annual Report on Form 10-K.

DPL's operating expenses and revenues include amounts for transactions with CESI and other Conectiv subsidiaries. DPL purchased electric energy and capacity from CESI in the amounts of $201.7 million and $487.9 million during the three- and nine-months ended September 30, 2002, respectively, and $30.4 million and $51.6 million during the three- and nine-months ended September 30, 2001, respectively. DPL also leased certain assets to other Conectiv subsidiaries, and operating revenues included $2.7 million and $7.9 million for the three- and nine-months ended September 30, 2002, respectively, and $5.3 million and $15.1 million for the three- and nine-months ended September 30, 2001, respectively, for these transactions.

Note 3. Supplemental Cash Flow Information

Nine Months Ended
      September 30,       

    2002                 2001

(Dollars in Thousands)

Cash paid (received) for:

   Interest, net of amounts capitalized

$27,627    

$53,229           

   Income taxes, net of refunds

$(22,201)   

$25,574           

Note 4. Income Taxes

The amounts computed by multiplying "Income before income taxes" by the federal statutory rate is reconciled in the table below to income tax expense on continuing operations.

Three Months Ended September 30,

Nine Months Ended September 30,   

            2002           

         2001          

           2002             

         2001        

Amount

Rate  

Amount

Rate 

Amount

Rate 

Amount

Rate

(Dollars in Thousands)

Statutory federal    income tax expense

$4,730    

35%   

$2,992 

35%

$22,147   

35% 

$114,157 

35%

State income taxes,    net of federal    benefit

735    

6       

518 

6   

3,638   

6    

18,216 

6   

Depreciation

500    

4       

770 

9   

1,500   

2    

2,309 

1   

Regulatory asset basis    difference

-    

-       

-  

-   

- -   

- -     

4,876 

1   

Investment tax credit    amortization

(237)   

(2)     

(238)

(3)  

(709)  

(1)   

(5,569)

(2)  

Other, net

       33    

  -       

       (70)

  (1)  

   (225)  

  -     

      1,331 

   -    

$5,761    

43%   

$3,972 

46%

$26,351   

42% 

$135,320 

41%

Note 5. Gains on Sales of Electric Generating Plants

As disclosed in Note 8 to the Consolidated Financial Statements included in Item 8 of Part II of DPL's 2001 Annual Report on Form 10-K, DPL realized a gain on June 22, 2001 on the sale of ownership interests in fossil fuel-fired electric generating plants (954 megawatts (MW) of capacity), including the Indian River electric generating plant. The $221.2 million pre-tax gain ($129.4 million after taxes) recorded in the second quarter of 2001 is included in operating revenues in the Consolidated Statements of Income for the nine months ended September 30, 2001.

The second quarter 2001 gain on the sale of electric generating plants was recorded net of estimated selling expenses, including anticipated environmental clean-up costs for the Indian River electric generating plant. In the first quarter of 2002, DPL reached an agreement with an insurer to settle DPL's insurance claim for environmental clean-up costs associated with the Indian River electric generating plant. Due to DPL's insurance claim settlement and revised estimates of selling expenses, the gain on the sale of the plants increased by $11.6 million before income taxes ($6.9 million after income taxes) in the first quarter of 2002 and is included in operating revenues for the nine months ended September 30, 2002.

Note 6. Debt

On February 1, 2002, DPL redeemed $27.5 million of 8.5% First Mortgage Bonds, due February 1, 2022.

On behalf of DPL, the Delaware Economic Development Authority issued $46 million of long-term bonds and loaned the proceeds to DPL on May 30, 2002. The bonds issued included $15.0 million of variable rate Exempt Facilities Refunding Bonds, due May 1, 2032, and $31.0 million of 5.2% Pollution Control Refunding Revenue Bonds, due February 1, 2019. The bonds that were issued are not secured by a mortgage or security interest in property of DPL. On June 3, 2002, DPL used the proceeds to redeem $46.0 million of bonds outstanding, including $15.0 million of 6.85% bonds, due May 1, 2022, and $31.0 million of 6.75% bonds, due May 1, 2019.

On June 1, 2002, DPL redeemed $2.0 million of 6.95% Amortizing First Mortgage Bonds.

On October 1, 2002, DPL redeemed $30.0 million of 6.95% First Mortgage Bonds and $12.0 million of 6.59% Medium Term Notes.

Effective with the Conectiv/Pepco Merger, Pepco Holdings, Inc. entered into a $1.5 billion credit agreement for general corporate purposes, including commercial paper back-up. Under the Pepco Holdings, Inc. credit agreement, a borrowing sublimit of $1.0 billion exists for Pepco Holdings Inc. and a borrowing sublimit of $500 million exists for aggregate borrowings by Pepco, DPL, and Atlantic City Electric Company (ACE), limited to $300 million for each such borrower. DPL's previous credit agreement of $105 million was terminated.

Note 7. Contingencies

DPL is subject to regulation with respect to the environmental effect 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. Federal and state statutes authorize governmental agencies to compel responsible parties to clean up certain abandoned or uncontrolled hazardous waste sites. Costs may be incurred to clean up facilities found to be contaminated due to past disposal practices. DPL's liability for clean-up costs is affected by the activities of these governmental agencies and private land-owners, the nature of past disposal practices, the activities of others (including whether they are able to contribute to clean-up costs), and the scientific and other complexities involved in resolving clean up-related issues (including whether DPL or a corporate predecessor is responsible for conditions on a particular parcel).

DPL is currently a potentially responsible party at two federal superfund sites. At one of these sites, DPL has resolved its liability for clean up costs through a de minimis settlement with the government. At this site, DPL may be liable for a claim by the state or federal government for natural resource damages. DPL also is alleged to be a third-party contributor at one other federal superfund site. In addition, DPL has two former coal gasification sites in Delaware and one former coal gasification site in Maryland, each of which is a state superfund site. Also, the Delaware Department of Natural Resources and Environmental Control (DNREC) notified DPL in 1998 that it is a potentially responsible party liable for clean-up of the Wilmington Public Works Yard as a former owner of the property. DPL's current liabilities included $15.0 million as of September 30, 2002 ($14.5 million as of December 31, 2001) for clean-up and other potential costs related to these sites. The accrued liability as of Septemb er 30, 2002 includes $10.0 million for remediation and other costs associated with environmental contamination that resulted from an oil release at the Indian River power plant (which was sold on June 22, 2001) and reflects the terms of a related consent agreement reached with DNREC during 2001. DPL does not expect such future costs to have a material effect on DPL's financial position or results of operations.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Acquisition of Conectiv by Pepco Holdings, Inc.

The following information updates the disclosures in Note 1 to the Consolidated Financial Statements included in Item 8 of Part II of Delmarva Power & Light Company's (DPL) 2001 Annual Report on Form 10-K concerning the Agreement and Plan of Merger among Pepco Holdings, Inc. (formerly New RC, Inc.), Conectiv and Potomac Electric Power Company (Pepco) (the Conectiv/Pepco Merger Agreement). On August 1, 2002, Conectiv was acquired by Pepco Holdings, Inc. in a transaction pursuant to the Conectiv/Pepco Merger Agreement, in which Pepco and Conectiv merged with subsidiaries of Pepco Holdings, Inc. (the Conectiv/Pepco Merger). As a result of the Conectiv/Pepco Merger, Pepco and Conectiv and their respective subsidiaries (including DPL) each became subsidiaries of Pepco Holdings, Inc. DPL continues as a wholly-owned, direct subsidiary of Conectiv.

The Maryland Public Service Commission (MPSC) and the Delaware Public Service Commission (DPSC) issued orders on April 11 and 16, 2002, respectively, approving the Conectiv/Pepco Merger. The orders issued by the DPSC and MPSC require approximately $1.5 million of contributions to certain funds. For additional information concerning the terms of the MPSC and DPSC orders, see Note 7 to the Consolidated Financial Statements included in Item 8 of Part II of DPL's 2001 Annual Report on Form 10-K.

DPL's operating results for each of the three and nine months ended September 30, 2002 included costs related to the Conectiv/Pepco Merger of $9.7 million ($5.8 million after income taxes). The $9.7 million of costs included the following: (i) $8.2 million for stock options settled in cash, severances, and retention payments and (ii) $1.5 million for contributions to certain funds based on the terms of orders issued by the MPSC and DPSC, as noted above. Based on the terms of the settlement agreements and Commission orders in the States having regulatory jurisdiction over DPL, none of the costs related to the Conectiv/Pepco Merger are recoverable in future customer rate increases. Such costs are, and will be, excluded from studies submitted in base rate filings.

Gains on Sales of Electric Generating Plants

As disclosed in Note 8 to the Consolidated Financial Statements included in Item 8 of Part II of DPL's 2001 Annual Report on Form 10-K, DPL realized a gain on June 22, 2001 on the sale of ownership interests in fossil fuel-fired electric generating plants (954 megawatts (MW) of capacity), including the Indian River electric generating plant. The $221.2 million pre-tax gain ($129.4 million after taxes) recorded in the second quarter of 2001 is included in operating revenues in the Consolidated Statements of Income for the nine months ended September 30, 2001.

The second quarter 2001 gain on the sale of electric generating plants was recorded net of estimated selling expenses, including anticipated environmental clean-up costs for the Indian River electric generating plant. In the first quarter of 2002, DPL reached an agreement with an insurer to settle DPL's insurance claim for environmental clean-up costs associated with the Indian River electric generating plant. Due to DPL's insurance claim settlement and revised estimates of selling expenses, the gain on the sale of the plants increased by $11.6 million before income taxes ($6.9 million after income taxes) in the first quarter of 2002 and is included in operating revenues for the nine months ended September 30, 2002.

Related Party Transactions

For background information concerning DPL's contracts with Conectiv Energy Supply, Inc. (CESI) for the purchase of electric energy and capacity, see Note 2 to the Consolidated Financial Statements included in Item 8 of Part II to DPL's 2001 Annual Report on Form 10-K.

DPL's operating expenses and revenues include amounts for transactions with CESI and other Conectiv subsidiaries. DPL purchased electric energy and capacity from CESI in the amounts of $201.7 million and $487.9 million during the three- and nine-months ended September 30, 2002, respectively, and $30.4 million and $51.6 million during the three- and nine-months ended September 30, 2001, respectively. DPL also leased certain assets to other Conectiv subsidiaries, and operating revenues included $2.7 million and $7.9 million for the three- and nine-months ended September 30, 2002, respectively, and $5.3 million and $15.1 million for the three- and nine-months ended September 30, 2001, respectively, for these transactions.

Earnings Results Summary

Earnings applicable to common stock increased $6.4 million to $7.3 million for the third quarter of 2002, from $0.9 million for the third quarter of 2001. After excluding the $2.8 million extraordinary loss from early extinguishment of debt included in earnings for the third quarter of 2001, earnings increased $3.6 million in the third quarter of 2002 primarily due to lower electric fuel costs. Operating results were favorably affected by increased weather-related electric sales and revenue and lower electric fuel, operating and maintenance, and interest costs, partially offset by one-time merger-related costs.

Earnings applicable to common stock decreased $149.0 million to $35.7 million for the nine months ended September 30, 2002, from $184.7 million for the nine months ended September 30, 2001. After excluding after-tax gains from the sale of electric generating plants of $129.4 million and the extraordinary loss from debt extinguishments of $2.8 million for the nine months ended September 30, 2001, earnings decreased $22.4 million primarily due to the sale of electric generating plants on June 22, 2001. Operating results were unfavorably affected by the sale of the plants due to the cost of replacing the electricity produced by the plants and lower interchange sales, partly offset by lower operating and maintenance, depreciation, and interest costs. The adjusted earnings decrease of $22.4 million also includes $9.8 million for the first quarter of 2001 gain on the termination of DPL's membership in a nuclear mutual insurance company, as discussed in Note 9 to the Consolidated Financial Statements included in Item 8 of Part II of DPL's 2001 Annual Report on Form 10-K.

Extraordinary Item

During the third quarter of 2001, DPL repaid $253.7 million of long-term debt and refinanced $59.0 million of long-term bonds. The estimated portion of debt extinguishment costs which may not be recoverable through utility rates was expensed as a $2.8 million extraordinary item, after-taxes of $1.9 million ($4.7 million before taxes).

Electric Revenues

Electric revenues increased by $2.5 million to $318.1 million for the third quarter of 2002, from $315.6 million for the third quarter of 2001. Electric revenues decreased by $28.3 million to $802.6 million for the nine months ended September 30, 2002, from $830.9 million for the nine months ended September 30, 2001. The third quarter increase was primarily attributed to higher customer usage of electricity due to hotter summer weather in 2002, partly offset by lower interchange and resale sales due to the sale of electric generating plants in 2001 and a decrease in retail revenues due to more use of alternative suppliers by customers. The nine-month period decrease was primarily attributed to lower interchange and resale sales due to the sale of electric generating plants, partly offset by an increase in retail revenues due to higher customer usage of electricity during the third quarter of 2002.

Effective October 1, 2003, in accordance with the provisions of the Order of the Delaware Public Service Commission in Docket No. 01-194, dated April 16, 2002, approving the Conectiv/Pepco Merger, DPL will increase retail electric rates by approximately $4.4 million, or 0.9%, on an annualized basis. The overall increase in DPL's regulated electric revenues is dependent on DPL customers retaining DPL as their supplier of energy. Management cannot predict the results of customer choice in the future; however, any such impact could be material. For background information concerning the rate increase which resulted from the Conectiv/Pepco Merger, see Note 10 to the Consolidated Financial Statements included in Item 8 of Part II of Conectiv's 2001 Annual Report on Form 10-K.

On October 15, 2002, the MPSC issued an order approving a settlement with DPL to extend its obligation to provide default service (as known as standard offer service, or SOS) to commercial and industrial customers through July 1, 2004. Absent the settlement, these customers were scheduled to lose their currently effective SOS on July 1, 2003, a year prior to most other customers throughout the State of Maryland.

The gross margin earned from total electric revenues is equal to electric revenues less "electric fuel and purchased energy and capacity." The gross margin earned from electric revenues increased $16.3 million to $103.8 million for the third quarter of 2002, from $87.5 million for the third quarter of 2001. The gross margin earned from electric revenues decreased $49.5 million to $277.5 million for the nine months ended September 30, 2002, from $327.0 million for the nine months ended September 30, 2001. The increase in the third quarter was attributed to the favorable revenue variance discussed above, as well as lower average fuel costs during this period in 2002. The nine-month period decrease in gross margin was attributed to the unfavorable revenue variance discussed above and the higher cost of replacing the electricity produced by DPL's electric generating plants.

Gas Revenues

Three Months Ended
      September 30,         

    Nine Months Ended
        September 30,          

    2002                   2001

        2002               2001

(Dollars in millions)

Regulated gas revenues

$15.5        

$16.3     

$106.9    

$119.6       

Non-regulated gas revenues

      7.8        

       12.1     

      24.5    

     66.9       

Total gas revenues

$23.3        

 $28.4     

$131.4    

$186.5