ML18096A647

Delmarva Power 1991 Annual Rept.

ML18096A647
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1991
From:	Cosgrove H, Curtis N DELMARVA POWER & LIGHT CO.
To:
Shared Package
ML18096A644	List: ML18096A642 ML18096A645 ML18096A646 ML18096A647
References
NUDOCS 9204270205
Download: ML18096A647 (56)

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TEAMS OF CREATIVE AND COMMITTE.D EMPLOYEES WORKE*D. TOGETHE.R TO

. PRODUCE ANOTHER YEAR OF EXCELLENT RESULTS. TEAMWORK IS A KEY STRATEGY

,. FOR CONTINUED.SUCCESS IN THE 1990s.

• 9204270205 PDR ADOCK I

FINANCIAL HIGHLIGHTS 1991 - 1990 Percent Increase

- ; (De~rease)

Revenues $844 .8 million $811.2 million . 4.1

• Net Income $ 93.2 million $ 37.3 million 149.9 Earnings Per Share of Commori Stock - $ 1.69 (I) " $' 0.60 (Z) ' 181.7 Dividends Declared P~r Share of Common Stock * . $ 1.54 $ 1.54 0.0 Average Shares of .

Common Stock _

• outstanding 50,581,689 47,534,272 .... Q.4 Common Stock Book Value Per Share $ 13.42 $ 12.84 4-5 Construction Expendl.tures <31 $181.8 million - - $187.8 million. (3 .2)

Internally Generated

• THE 19.91 ANNUAL. RE!>ORT IS. PRINTl'D Funds c4J $ 96.l million $112 .6 .million (14.6)

• -ON tlECYCLED PA.PER. THE COVER Electric Sales *_ 11,441,466 mwh 11,081,211 mwh 3.3

'- STOCK CONTAINS 100% POST * -

CONSUMER WASTE. PAPER ~OR THE El~ctric , Customers INSl'?E PAGES CONTAINS AT LEAST (year end) _ 373,502 _ *368,277 1.4' 10% POST CONSUMER WASTE.

Average Annual Residential Usage 9,843 -kwh 9,524 kwh 3.3 Gas Sales 15.52 million mcf 16.07 million tilcf (3.4)

Gas Transpor.ted . 2.61.million mef 2.19 million mcf -18.9  ;

Total Gas and Transportation Sales 18.13 million mcf 18.26 million mcf * (0.7)

Gas Customers (year end) 87,351 85,044 2.7 Average Annual

. Residential Usage

• 80.24 mcf 83.29 mcf - (3 . 7)

{l) lnclude5 $0.25 for the cumulauv~ effect'<~[ a ch<i~ge*in accounting for unbilled re.,enues.

(2) l~cl~d~s an $0.89 write-off of subsidiary joint venture investments.

(3) Excludes Aliowance !or Funds l.Jsed During Construction.

(4)."Net cash-provided by operating activities less common and preferred 'dividends.

THROUGHOUT 1991, WORKERS HANDLED OUTAGES WITH SPEED AND SKILL. PROGRAMS THAT STRESS THE IMPORTANCE OF SERVICE RELIABILITY HELPED TO DECREASE TOTAL AVERAGE CUSTOMER OUTAGE TIME BY NEARLY 20 MINUTES COMPARED TO 1990.

2 LETTER TO STOCKHOLDERS Preparing Far Change Meeting Energy Needs Adjusting Product Prices Summary 8 FINANCIAL RESULTS 9 CUSTOMER FOCUS 11 ENERGY SUPPLY 13 ENVIRONMENTAL STEWARDSHIP 14 FUTURE GROWTH 16 SERVICE AREA 17 FINANCIAL SECTION

DEAR STOCKHOLDER The accom-plishments of

- 1991 was a good year. Teams of 1991 are creative, committed, and caring detailed on the employees again produced following pages.

excellent results. For example, We would like to the Companys customer

~ use the remainder BY RECYCLING OFFICE PAPER, EMPLOY* favorability rating of 82 %

EES AT TWO COMPANY LOCATIONS CUT of this letter to continued to be the highest TRASH DISPOSAL COSTS BY MORE discuss our plans to:

among 23 utilities surveyed by THAN $2,SOO AND KEPT MORE THAN 64 TONS OF PAPER OUT OF LANDFILLS. our pollster; a new, on-budget,

• succeed in a changing industry MORE OFFICE WORKERS WILL RECYCLE 109-megawatt combustion PAPER IN 1992.

• provide energy to a growing turbine began generating elec- service territory at the lowest tricity ahead of schedule; lost- reasonable price for customers time accidents-four-were the and with a fair return for .

fewest in the Company's history; stockholders.

environmental stewardship programs drew extraordinary PREPARING FOR CHANGE responses from customers; progress in reducing customer outages exceeded goals; power plant and customer Over the last decade, changes to the utility industry have been significant. For example, custom-ers have become more knowl-edgeable and influe{ltial. Clean service workers air, drinkable water, pristine handled a sur-wetlands, and beautiful beaches prising 8. 7%

have become increas~ngly jump in peak important to the people of the electricity service territory. Deregulation, demand with few

~ transmission access, and non-COAL FUELED NEARLY HALF (45% ) OF problems; and customer partici-utility generators are altering the THE ELECTRICITY DELMARVA POWER pation in energy management MADE IN 1991. SINCE COMPANY industry's traditional structure.

and conservation programs was PLANTS BURN LOW SULFUR-CONTENT The labor force is becoming COAL, THE COMPANY CAN MEET NEW ahead of plan.

increasingly diverse in race, age, FEDERAL CLEAN AIR STANDARDS WITH LESS ADDITIONAL EXPENSE THAN Earnings performed as expected, and gender. And more change MANY OTHER UTILITIES.

$1.69 per share, at a time when is ahead.

the Company is building new How has Delmarva Power power plants and is pursuing prepared for the '90s? We have rate increases to recover con-developed several strategies that struction costs.

employ flexibility and balance.

• Delmarva Power focuses on satisfying customers and recog-nizes that customers are the Company higher marks in the annual survey than those who do not. More information about THE BOARD OF DIRECTORS ELECTED HOWARD E. COSGROVE (SEAJED)

PRESIDENT AND CHIEF OPERATING OFFICER. THE POSITION HAD BEEN ultimate judge of value. People environmental ~ctivities appears HELD BY NEVIUS M. CURTIS (STANDING) at the Company work hard, on pages 13 and 14. WHO IS ALSO CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF through face-to-face contact and EXECUTIVE OFFICER. MR. CURTIS WILL surveys, to learn about custom- Delmarva Power takes an open CONTINUE IN THOSE POSfTlONS BUT ers' changing needs. Then, with but conservative approach to ANNOUNCED THAT HE PLANNED TO that information, employees changes within the industry For RETIRE FROM THEM DURING THE LAST HALF OF 1992.

strive to balance improving example, 27 bidders responded to our request for proposals to Mr. Cosgrove began his career with service and reducing costs. An Delmarva Power in 1966 as an example of this is the use of provide us with 150 megawatts industrial engineer in the marketing computers in some Company of electricity in the middle depa11ment. From 1975 through 1979, 1990s. The Company was he was manager of financial planning vehicles. These computers help and analysis. In late 1979, he was workers organize jobs so cus- pleased with the number of elected vice president of finance and tomers can be informed more outside bidders that offered accounting and chief financial officer.

precisely as to when service proposals. However, we are In 1984, Mr. Cosgrove was elected senior vice president of operations workers will arrive. This improves concerned that many of the bids and engineering. He was elected productivity *and reduces cus- may not be price competitive. executive vice president in 1985. Since tomer irritation. Evaluators will weigh both price 1986, he has been a member of the Board of Directors.

and reliability considerations and The 82 % favorability rating take a cautious,' middle path to Mr. Cosgrove received a Bachelor of Science degree in Mechanical Engineering in the 1991 customer survey reach a decision.

from the University of Virginia and a reflects the success of our Masters of Business Administration customer focus. These efforts In the area of work force diver- degree from the University of Delaware.

are discussed further on sity, strategies to develop a He also completed the Advanced Management Program at Harvard pages 9 to 11.' participative work culture were University.

started in the early 1980s. These The Company's "Serving & strategies have matured to Conserving Delmarva" environ~

mental stewardship program balances our obligation to serve customers with the responsibility to preserve the environment of the Delmarva Peninsula. Program activities range from the donation of ecologically valuable wetlands

• to the recycling of coal ash.

Customers who know about "Serving & Conserving Delmarva" consistently give the

help make Delmarva Power a true quality company. Looking ahead, a Company-wide commit-Generating capacity dropped from 3 7 .1 % beyond peak demand in 1984 to 3.3% at the tee, composed of people that end of 1988. About 15% to 20%

represent various ranks, races, is normal for the industry.

= ages, and genders, is working to enhance this participative work In the mid- l 980s, Delmarva Power developed a plan, called style for the purpose of improv-Challenge 2000 , to take on the ing productivity challenges of growing energy needs. As opposed to one big, MEETING ENERGY NEEDS new power plant, Challenge Delmarva Power is in a construc- 2000 provides a blend of options tion cycle. This means that, over including conservation, power the next few years, the Company purchases, and small power will be financing as well as plants to meet load growth building facilities-. in bite-sized pieces. This mini-mizes costs.

The economic develop-ment of the Delmarva The plan, called "Save Some ,

Peninsula during the Buy Some, Build Some," also mid to late 1980s has provides flexibility, meaning been dratnatic. Since various aspects can be accelerated 1984, the demand for or slowed as conditions change.

electricity at peak Through 1991, this strategy yielded a pre-summer reser_ve level of 18.3%, but the higher-four times greater than-expected 1991 summer A

than peak growth for peak now leaves reserves at 8.8%.

MORE THAN 95% OF EMPLOYEES the entire decade between 1975 REMAINED INJURY FREE IN 1991.

and 1984. The 1991 electricity All aspects of the Challenge 2000 ONE REASON FOR THIS EXCELLENT PERFORMANCE IS THE " ACTIONS peak and sales increases over the program continue. Part of PREVENT ACCIDENTS " PROGRAM, previous year, 8.7% and 3.3% Challenge 2000 includes the WHICH INCREASES AND REWARDS respectively, demonstrated that, planned 1993 completion of a INDMDUAL AWARENESS, COMMITMENT, AND ACTION DIRECTED TOWARD even with a recession, the service new 160-megawatt combined-PREVENTING ACCIDENTS. AS A RESULT territory's economy is still cycle unit at Hay Road and a OF THIS PROGRAM, MACHINIST FRED growing. 150-megawatt power plant for BRAMBLE DESIGNED AN AUTOMATIC "FEED" SYSTEM THAT ALLOWS POWER the middle 1990s. Under the PLANT WORKERS TO DO THEIR JOBS While growth in the 1980s currerit plan, through a competitive SAFER AND FASTER. increased revenues , it also bidding process , the second depleted generating reserves . plant inay be built by one of the

• 2 7 power project developers who recently submitted proposals to the Company.

have deteriorated and the time rate relief is The cost of new power plants, ____

granted. This is .,_

energy management equipment, typically about a year.

and transmission and distribution Thus, core earnings equipment need to be included could be expected to decline in DElMARVA POWER PRINTED A in charges to customers. Gener- 1992 "SERVING & CONSERVING that period, as they did.

DElMARVA" CALENDAR TO ally, these costs were not included PROVIDE CUSTOMERS WITH in the 1991 rates. A major effort A key part of our presentation to ENERGY*SAVING ADVICE. THE of 1991 was to seek base rate regulators was that the Company CALENDAR ALSO BENEFITIED THE ENVIRONMENT. THE COMPANY increases to cover these costs, is in a construction .cycle designed AND PEOPLE WHO PURCHASED THE along with the cost of inflation to serve the healthy economy of CALENDAR DONATED $22,600 TO since the last rate increase the service territory We asked THE, NATURE CONSERVANCY, AN requests were filed in the INTERNATIONAL NATURE PRESERVE regulators to grant the rate relief AND WILDUFE PROTECTION early 1980s. necessary to attract the lowest GROUP. THE PROCEEDS FROM cost capital in all financial SALES OF THE CALENDAR WILL markets. HELP TO FUND NATURE CONSER*

ADJUSTING PRODUCT PRICES YANCY PROJECTS IN DELAWARE, Core utility earnings declined Since the last round of rate cases MARYLAND, AND VIRGINIA.

substantially in 1991. For a in the early 1980s, customer complete look at earnings see DElMARVA POWER FORESTERS favorability has increased from HAVE TURNED MORE THAN 8,000 page 18.

46% to 82% . Operation and . ACRES O~ ELECTRIC TRANSMISSION UNE RIGHT*OF*WAY PROPERTY maintenance expenses per Some might ask why rate cases INTO WILDLIFE HABITATS FOR kilowatt-hour (other than fuel) were not filed earlier. The ANIMALS AND PLANTS.

have remained relatively flat answer is "regulatory ~

while the industry average has MORE THAN 465 BLUEBIRD AND lag," the period increased 37%. Even with the WOOD DUCK HOUSES HAVE BEEN between the time PLACED ON DElMARVA POWER proposed rate increases, the price a company can RIGHT*OF*WAY PROPERTY. THESE of electricity will be substantially STRUCTURES PROVIDE NESTING demonstrate lower than it was in 1983. SITES FOR THESE BIRDS.

that earnings Delmarva Power has had a good track record and has asked regulators to act ac-cordingly Their positive response, in the form of modest rate relief to support increa.sed customer demand, is

critical to the Company's financial health and progress.

but the impact on future earnings should be small. A more detailed discussion about nonutility Based on a rate settlement subsidiaries can be found on agreement in Maryland and pages 23 and 24.

assuming reasonable decisions by regulators in other jurisdic-

SUMMARY

tions, the rate increases should provide sufficient additional These are the challenges ahead and the strategies developed to*

___... revenue in 1992 to offset meet them. To succeed, we will the absence of need the energy, creativity, and the one-time dedication of skilled employees.

increase of $.25 Their performance in 1991 per share included in 1991 demonstrates they have those earnings. tools. We thank them and look forward to working with them However, while we are seeking in 1992.

ABOUT 225 LOW-INCOME CUSTOMERS IN DELAWARE AND MARYLAND RECEIVED WATER HEATER WRAPS, LOW*FLOW SHOWER HEADS, WEATHER rate increases, we are also concerned about the effects of recession on our customers.

Individual residential customers may be facing personal cutbacks.

Sincerely, STRIPPING AlllD CAULKING FROM Businesses in our service territory DELMARVA POWER' S Y. E.S. PROGRAM.

use energy and need to keep THE NEW PROGRAM OFFERS CUSTOM*

ERS AN OPPORTUNITY TO REDUCE their products competitive. To Nev Curtis THEIR ENERGY USE. keep rate increase requests at a Chairman & Chief Executive Officer minimum, we have worked hard to contain costs and improve productivity Delmarva Powers average prices for electricity and natural gas still rank low in Howard Cosgrove the region. President & Chief Operating Officer Finally, the 1991 performance of February 6, 1992 the nonutility subsld~ary busi-nesses shows the previous year's problems are behind us. Cur-rently, we are working to grow remaining subsidiary assets,

A MAJOR EFFORT .

TO SEEK BAS OF 1991 WAS E RATE IN COVER THE C CREASES TO OSTS OF PLANTS, ENERGY NEW POWER EQUIPMENT MANAGEMENT UPGRADED ~AND NEW AND DISTRIBUTIO:NSMISSION AND C EQUIPMEN OSTS, ALONG T. THESE INFLATION SINC;ITH THE COST OF WHEN BASE THE EARLY 1980s LAST FILED WRAETE REQUESTS WERE

' RE NOT I IN 1991 RAT NCLUDED ES.

FINANCIAL RESULTS Delmarva Power earnings loss of $1.10 in 1990. The positive earnings in 1991 resulted from gains on the sales increased to $1.69 per share of assets. Further details are from $.60 per share in 1990.

discu~sed on pages 23 and-24.

There were three main reasons for the increase: To reverse deteriorating earnings caused by growing core utility

• a one-time accounting change expenses, the Company filed a for unbilled revenues that added series of rate cases in 1991. See

$.25 per share page 38 for a complete discus-A

• the absence of last year's write- sion of rate case filings.

TO HELP IMPROVE RELIABILITY off and operating losses from FOR CUSTOMERS, GAS DIVISION nonutility subsidiaries, which With rate cases pending, the EMPLOYEES ARE REPLACING OLD NATURAL GAS PIPES. THE PIPE had decreased 1990 earnings by Board of Directors decided to REPLACEMENT PROJECT, WHICH BEGAN $1.10 per share sustain the dividend level at IN 1986, IS A 10-YEAR PLAN THAT 38 1h¢ per quarter or an indi-WILL REPLACE ABOUT 90 MILES OF *a 3.3% increase in electric sales.

UNCOATED, UNWRAPPED STEEL PIPE cated annual rate of $1.54.

INSTALLED PRIOR TO 1948 WITH NEW POLYETHYLENE PIPE. TO DATE, ABOUT 59 MILES OF PIPE HAVE BEEN RE-PLACED.

Core utility earnings declined to

$1.66 per share from $1.70 in 1990. This decrease was ex-pected and reflects the cost of the Company's increased investment In addition, Delmarva Power bonds held strong ratings, A+ by Standard &

Poor'.s, A+ by Duff and Phelps, and A2 in additional facilities to meet by Moody's Investor customers' growing energy Service. During needs, inflation since the last 1991, Moody's base rate increases in the early 1980s, and compliance with Company's stric~er environmental require-credit ratings ments. These higher costs were for senior partly offset by the Company'.s secured debt accounting method change for from Al to A2.

revenues that remain unbilled at This change was the end of a calendar month. The the result of the

~ ~ one-time accounting change, BOY SCOUT ADDISON YANITO AND agency's uncertainty effective as of January 1, 1991 ,

HUNDREDS OF OTHER CHILDREN about future rate LEARNED ABOUT ENERGY CONSERVA- more closely matches revenues relief necessary to TION AND ENVIRONMENTAL PROTEC- with expenses.

TION THROUGH "SCOUTING FOR support higher ENERGY" ACTIVITY KITS SPONSORED Nonutility subsidiaries earned capital requirements BY THE COMPANY.

$.03 per share, compared to a and associated

MORE THAN 26,000 STRIPED BASS FINGERLINGS (ROCKFISH),

financings and HARVESTED FROM THE COMPANY'S POND AT THE VIENNA POWER higher operating costs. 12.64; PLANT, WERE RELEASED INTO THE Philadelphia, 9.49; Newark, NANTICOKE RIVER IN 1991.

The price of common stock NJ, 9.15; Baltimore, 7.55; EMPLOYEE VOLUNTEERS HAVE increased 17.2%, to $21 1/4 at the HELPED TO RAISE OVER 105,000 1

Delmarva Peninsula , 6.51; ROCKFISH IN THE PAST SIX YEARS.

end of l,?91 from $18 /s at the Norfolk, Va., 6.26.

end of 1990.

HAY ROAD UNIT #3, A 109-Natural gas price comparisons MEGAWATT COMBUSTION TURBINE CUSTOMER FOCUS (in cents per 100 cubic-feet for (CT), WAS COMPLETED AND PLACED IN SERVICE ON TIME AND UNDER Serving a diverse population 12 months ended November 30, BUDGET. WITH THIS ADDITIONAL requires Delmarva Power to be 1991) are as follows : New GENERATING CAPACITY, THE responsive to customers' York,72.76; Philadelphia , 70.26; COMPANY WAS ABLE TO MEET THE RECORD PEAK DEMAND FOR changing needs. Newark, N.]., 57.42; Baltimore, ELECTRICITY OF 2,430 MEGAWATTS.

56.90; Wilmington, Del., 46.03 ;

• By improving productivity and and Norfolk, Va., 44.27.

THROUGH CONTRIBUTIONS OF containing costs , the Company STOCKHOLDERS AND CUSTOMERS, has kept prices stable since the Each year the Company com- THE GOOD NEIGHBOR ENERGY early 1980s. For example, the missions a residential customer FUND CONTRIBUTED OVER $1.5 MILLION DURING THE LAST EIGHT 1991 price of electricity for a opinion survey to see how our

, YEARS TO MORE THAN 16,000 typical Delaware residential performance is measured by the CUSTOMERS HAVING TROUBLE I

customer was 11 % lower than community we serve. For 1991, PAYING ENERGY BILLS.

in 1983 or about 30% lower the survey found that 82 % of the customers surveyed gave DELMARVA POWER TEAMS ARE when adjusted for inflation.

FINDING WAYS TO UTILIZE 300,000 Even with the proposed base the Company a favorable rating TONS OF COAL ASH PRODUCED rate increase, the monthly bill compared with 46% in 1982. EACH YEAR AT ITS EDGE MOOR AND Service reliability, reasonable INDIAN RIVER POWER PLANTS. FOR for a typical Delaware residential MANY YEARS, MUCH OF THE ASH, customer using 750 kilowatt- rates, and customer service were A COMBUS110N BY-PRODUCT, WAS hours per month would be about the top reasons customers gave PLACED INTO LANDFILLS, BUT SOME 8% lower than it was in 1983 . the Company_a favorable rating. OF IT IS NOW BEING USED ON VARIOUS CONSTRUCTION AND ENVIRONMENTAL PROJECTS.

Delmarva Power prices re - In other surveys designed to mained regionally competitive. evaluate day-to-day Company Electric price comparisons activities, more than eight out (fo r all customer categories of 10 customers gave Delmarva in cents per kilowatt-hour for Power's customer service 12 months ended November 30, employees favorable ratings.

1991) are as follows: New York, Nearly nine out of 10 customers

" OPERATIONS LOG," A NEW COM*

who lost power during storms felt the Company deserved positive ratings for its ability to measurement device that takes about one-tenth the time of the old method to check equipment PUTER SYSTEM, ALLOWS CUSTOMER restore service. for its susceptibility to lightning SERVICE REPRESENTATIVES TO IN*

STANTLY PASS ON INFORMATION damage. These checks help to The Company continues to FROM CUSTOMER OUTAGE CALLS TO improve electric service reliability.

OPERATIONS EMPLOYEES. THE QUICK, develop a more participative UP-TO-DATE work style where people closest As a result of ongoing debt .

DETAILS FROM to problems solve the problems. refinancing efforts, the Company THE SYSTEM SPEED OUR As the participative skills will save $2.6 million in annual RESPONSES process has matured and as interest expense.

TO OUTAGES.

Delmarva Power has strived to Working together, employees create a work environment that

' achieved six of the eight goals of appreciates and incorporates the Corporate Performance Incen-cultural diversity, more tive.Plan. Through the achieve-employees at all levels

. - have had opportunities to advance new ideas and ment of the plan's wellness goal over the last four years, absentee-ism has decreased by nearly one to improve existing day per employee per year.

methods of performing their work. Delmarva Power's absenteeism rate is one of the lowest among Working in teams, employees set utilities in the region.

high goals and suggest innova-tions that are efficient and cost Employees are also working effective . For example , Delmarva together to continually improve Power can now figure out in less the health and safety of individuals.

than a weekhow much it owes About 500 employees improved in annual Maryland property their health by exercising regu-taxes. This calculation had taken larly through a Company-wide two to three months before a health program. In 1991, more team of eight employees from the than 95% of employees remained accounting and engineering injury-free . Employees also set groups created a new time-saving computer system .

TO FINANCE ONGOING CONSTRUC*

TION, DELMARVA POWER SOLD 3 .5 The construction drafting group MILLION SHARES OF NEW-ISSUE created an index to save time COMMON STOCK. THIS SALE DID when someone is looking for a NOT HAVE A NEGATIVE PRICE EFFECT ON SHARES HELD BY CURRENT specific drawing. The engineering STOCKHOLDERS. and construction departments are using a new, more accurate

__J

• all-time records for the fewest lost-time injuries (4) and the Between 1984 and 1991 ,

electricity demand at peak periods

<Ill MORE THAN 3,000 VOLUNTEERS, INCLUDING ESTHER PEREZ AND ABOUT 200 OTHER EMPLOYEES, CLEANED UP 18 TONS OF TRASH fewest lost work increased nearly 50%. ALONG DELAWARE SHORELINES DURING A BEACH CLEAN-UP DAY.

days (43) . The '"Save Some, Buy THE EVENT WAS CO-SPONSORED BY 1991 performance Some, Build Some," DELMARVA POWER AND THE was a significant has enabled the Com- DELAWARE DEPARTMENT OF NATURAL RESOURCES AND improvement over pany to keep up with the ENVIRONMENTAL CONTROL.

1990 results when growing demand for workers experienced 21 electricity and to keep THE WILDLIFE HABITAT ENHANCE*

lost-time accidents and prices about 10% below MENT COUNCIL RECOGNIZED 299 lost work days. One 1983 levels. DELMARVA POWER WITH A SPECIAL AWARD FOR ITS ENVIRONMENTAL reason for 1991 's As part of "Build Some," Hay WORK ALONG THE NANTICOKE excellent safety perfor- RIVER. THE COMPANY ALSO Road Unit #3, a 109-mance is the Actions RECEIVED A GOVERNOR'S SALUTE megawatt combustion TO EXCELLENCE AWARD FROM THE Prevent turbine (CT), was STATE OF MARYLAND CHESAPEAKE Accidents BAY CRITICAL AREA COMMISSION completed and program, which FOR FUNDING A MARSH RESTORA*

placed in service on time TION PROJECT IN ST. MICHAELS.

increases and rewards individual and under budget. With this commitment, awareness, and additional generating capacity, BY IMPROVING PRODUCTIVITY action directed toward prevent-AND CONTAINING COSTS, THE the Company's pre-summer ing accidents. COMPANY HAS KEPT PRICES STABLE capacity reserve margin increased SINCE THE EARLY 1980S. EVEN ENERGY SUPPLY to about 18%. This represents WITH PROPOSED RATE INCREASES, a significant improvement THE PRICE OF ELECTRICITY WILL BE The Company'.s Challenge 2000 LOWER THAN IT WAS IN 1983.

over the past two years.

plan continued to assure custom-The Company is also construct- THE COMPANY IS CONSTRUCTING ers an adequate , reliable supply A COMBINED-CYCLE UNIT AT HAY of electricity at competitive ing a combined-cycle unit at ROAD AND PLANS TO PLACE IT IN prices. Challenge 2000 uses a Hay Road and plans to place it SERVICE BY THE SUMMER OF 1993.

flexible approach that blends in service by the summer of THE UNIT WILL USE EXHAUST HEAT FROM THREE EXISTING COMBUS*

customer energy conservation 1993. The unit will use exhaust TION TURBINES TO CLEANLY AND and load management programs heat from the three existing CTs EFFICIENTLY GENERATE 160

("Save Some"), power purchases to cleanly and efficiently generate MEGAWATIS OF ELECTRICITY.

("Buy Some"), and new power 160 megawatts of electricity plants ("Build Some"). This Under "Buy Some," the Com-approach enables Delmarva pany will purchase 48 megawatts

• Power to quickly respond to changes in demand, technology, and governmental regulations.

of peaking-unit generation from Star Enterprise of Delaware City, Delaware , for 26 years beginning

ing unit. If none of the bids shows an advantage for cus-tomers and investors, Delmarva Power will build a natural gas-fired, 150-megawatt combined-cycle unit.

"Save Some" coi;:tsists o( energy

~

MEMBERS OF THE SHAREHOLDER management and energy conser-SERVICES DEPARTMENT ASSISTED injune 1992 . vation programs. Based on the 3,936 INVESTORS WHO CALLED THE COMPANY'S TOLL-FREE NUMBER, Star's generating amount of electricity demand (800) 365-6495. EMPLOYEES HANDLE unit, adjacent to its they can trim at summer peak, CALLS TO THE SPECIAL TELEPHONE LINE oil refinery, was selected in 1989 Delmarva Power's "Save Some" FROM 8 A.M. TO 5 P.M., MONDAY THROUGH FRIDAY. from among 10 proposals programs are among the best in because it posed the least devel- th~ region.

opmental risk and the lowest As of the end of 1991, more than cost to customers. The unit, 4 3, 000 residential customers and formerly owned by the Com-72 large commercial and indus-pany, was purchased by Star at trial customers are participating the end of 1991 and will be in Energy For Tomorrow (EFT) operated under contract by and Peak Management (PM),

Delmarva Power.

respectively. ln exchange for credits Also, as part of "Buy Some," the . on their electricity bills, during Company received 2 7 proposals peak summer periods, residential from power project customers who participate in developers to supply EFT allow the Company to cycle fhe Company with their central air conditioners, 150 megawatts of heat pumps, and electric water electricity by the heaters. Large commercial and mid-1990s. industrial customers who During the next par~icipate in PM reduce their few months, use to prearranged levels when Delmarva Power notified by the Company With will evaluate the 2 7 these two programs, Delmarva

~

EMPLOYEES HAVE RECYCLED proposals. The evaluation Power can now reduce load by MORE THAN 4,000 POUNDS OF will determine if purchasing approximately 80 megawatts ALUMINUM CANS AND DONATED THE PROCEEDS TO COMMUNITY NON-power from one of these pro- during peak periods.

PROFIT AGENCIES. posed projects would benefit the Forty-eight commercial and Company's customers more than industrial customers have joined a Delmarva Power-built generat-the Companys indoor lighting

• program. To date, this "Save Some" program has reduced peak demand for electricity by begun a one-year pilot program to use and evaluate 1 ......... ~ ,,,af

.........o. GAS CLEAN " &

two megawatts. Participants natural gas reduce their energy needs and vehicles. Five of cost by converting to energy- the Company$

efficient indoor lighting. The fleet vehicles have program offers customers surveys been converted of their facilities, written recom- to operate on mendations that identify where compressed natural lighting quality and efficiency gas. As an*alternative to can be improved, and rebates, gasoline, compressed natural gas ranging from $100 to $10,000, is expected to reduce operating FIELDMAN FRANK McQUAY FUELS ONE OF THE FIVE COMPANY that provide an additional incentive costs. And because it is clean-VEHICLES THAT HAVE BEEN to make changes. Delmarva Powers burning , non-toxic , and non- CONVERTED TO OPERATE ON goal for the lighting program is corrosive, it does not contribute COMPRESSED NATURAL GAS. AS AN ALTERNATIVE TO GASOLINE, to reduce peak load by 10 to 20 to smog.

COMPRESSED NATURAL GAS IS megawatts by the year 2000 . EXPECTED TO REDUCE OPERATING A key part of the 1991 program COSTS AND POLLUTANTS.

Delmarva Power will continue to was the Company$ efforts to market existing "Save Some" create greater customer aware-WORKERS HANDLED EMERGENCY programs, to expand energy ness and use of energy-saving SITUATIONS WITH EXPERTISE. ~N efficiency programs, such as Cool products and to info_rm customers EARLY JULY, CREWS BATTLED 104 MILE-PER-HOUR WIND GUSTS AND Storage and L~ad Shifting, and to of the association between saving UPROOTED TREES TO RESTORE explore other proposed energy energy and preser~ng the ELECTRIC SERVICE TO ABOUT 10,000 conservation programs through a environment. For example, CUSTOMERS IN DELAWARE.

collaborative process with Delmarva Power offered 1,000 THE CENTREVILLE CUSTOMER SERVICE regulators and customers. compact fluorescent light bulbs, TEAM MADE SOME IMPRESSIVE 1,000 low-flow shower heads, GAINS IN 1991, ACCORDING TO ENVIRONMENTAL STEWARDSHIP and 1,000 water heater blankets A RECENT SURVEY. FOR EXAMPLE, 99% OF CUSTOMERS GAVE THE "Serving&: Conserving Delmarva" in prize drawings. About 78 ,000 TEAM A POSITIVE RATING ON is the Company's environmental customers registered for these RESOLVING PROBLEMS, COMPARED stewardship program that seeks giveaways. 11 ,300 "Serving&: TO 87% IN 1990.

to balance the obligation to serve Conserving Delmarva" 1992 customers with the responsibility calendars were sold. The Com-to protect and. pr~serve the *pany contributed $22 ,600 to The

-* environment of the Delmarva Nature Conservancy from the Peninsula. calendar sales proceeds.

As part of "Serving &: Conserving Delmarva Power started a pilot Delmarva," the Company has program to help low-income

~

TWICE A MONTH, A TEAM OF positive rating, according to the EMPLOY EE VOLUNTEERS SERVED 1991 Customer Opinion Survey.

MEALS TO HUNDREDS OF NEEDY

. PEOPLE AT WILMINGTON ' S EMMANUEL customers better manage their At a recent roundtable discus-DINING ROOM. energy use and become aware of sion, area environmentalists and how energy conservation helps opinion leaders applauded our protect the environment. The environmental efforts.

Y.E.S. (Your Energy Savings)"

Delmarva Power employee program, is designed to help involvement is vital to the success customers increase the comfort of "Serving & Conserving

\ of their homes and reduce the Delmarva ." This year, employees amount of money they spend on collected 18 tons of trash along energy. About 225 program Delaware's coastline areas and participants received a free offered educational information energy efficiency education and at Earth Day events throughout free installation of energy-saving the Delmarva Peninsula .

products and materials.

Since Delmarva Power bums The Company has constructed low-sulfur fuels j.n most of our a 500-foot smokestack at the power plants, the Company Indi~ River power plant to solve T

should be able to comply with AS PART OF ITS " SERVING & CONSERV- an infrequent air pollution ING DELMARVA" PROGRAM, THE the Clean Air Act's emission

' problem. Emissions from the COMPANY AWARDED 1,000 COMPACT reductions thrm.~gh the year FLUORESCENT LIGHT BULBS. ABOUT Indian River plant near 2000 , with relatively little 40,000 CUSTOMERS REGISTERED TO Millsboro , Delaware, had the WIN THE ENERGY-SAVING BULBS. expense compared to many potential to exceed national air BASED ON THE LARGE CUSTOMER other utilities. However, when RESPONSE, THE COMPANY WILL OFFER quality regulations about six to the Company adds new power COMPACT FLUORESCENT LIGHT ten times a year when the wind BULBS IN A 1992 PRIZE plants, meeting the emissions blew from a particular direction.

DRAWING. cap may have a greater cost The stack was completed ahead impact.

of schedule and below budget.

Customers who are aware of FUTURE GROWTH the "Serving & Conserving The economy of the Delmarva Delmarva" program are more Peninsula was solid in 1991 likely to give the Company a compared to other parts of the

• country. The region's diverse blend of industries (chemicals, food processing, automobiles, the Delmarva Peninsula's boom in the 1980s, has disappeared.

Work force reductions, designed PRODUCTION TEAMS RAN COM*

PANY POWER PLANTS EFFICIENTLY.

THE EQUIVALENT AVAILABILITY RATE IN 1991 WAS 84. 1% COMPARED TO agriculture, finance , plastics, and to restructure for competitive- THE MOST RECENT INDUSTRY recreation) makes the demand AVERAGE OF 80.4%. DURING JULY, ness, have been announced at WHEN THE DEMAND FOR ELECTRIC*

for electricity and natural gas several large ,_ local chemical ITY IS HIQH, COMPANY PLANTS here less affected by fluctuations companies. In contrast, the HAD AN EVEN BETTER AVAILABILITY in the national economy than in OF 96.3%.

Hewlett-Packard Company plans many other areas of the U.S. to open~ 350,000 square-foot DELMARVA POWER PROVIDED research and manufacturing In fact , after a week of sweltering $3,000 TO CLASSROOM TEACHERS center that will boost Delaware's IN THE SERVICE AREA WHO temperatures in July, Delmarva economy in 1992. CONDUCTED SPECIAL CLASSROOM Power customers set a new peak PROJECTS THAT TEACH STUDENTS demand for electricity of 2 ,4 30 With the slow recovery from the ABOUT ENERGY AND THE ENVIRON*

MENT.

megawatts. This was an 8 .7% recession and the restructuring increase from the previous of the local chemical industry, THE SALISBURY METER DEPARTMENT mark. Total electric sales the Company expects electricity BEGAN A SOLVENT RECOVERY increased by 3.3 % sales to grow only 1.8% annu- SYSTEM THAT RE-USES CHEMICALS

• compared to last year and the number of electric customers increased by 1.4%

to 373,502 .

.: ally during 1992 and 1993 . For the next 10 years, Delmarva Power forecasts electricity sales to grow at an average annual rate of 2.0 %, with THAT TEST AND CLEAN PROTECTIVE RUBBER GLOVES AND OTHER EQUIPMENT.

MEMBERS OF THE SYSTEM OPERA*

TIONS DEPARTMENT SAVED THE COMPANY $1.2 MILLION IN Natural gas and residential space heating sales ENERGY PRODUCTION COSTS BY transportation growing the fastest at 4.5% PURCHASING EXCESS POWER FROM sales decreased and industrial sales lagging PHILADELPHIA ELECTRIC COMPANY.

0.7% compared to at 1.1 %. ....

1990 due to a EMPLOYEES, SUCH AS TOM Growth of the summer JACKSON FROM VIENNA POWER mild winter. The PLANT, SET ALL-TIME RECORDS FOR peak demand for electric-number of natural THE FEWEST LOST-TIME INJURIES (4) ity is expected to gas customers AND THE FEWEST LOST WORK DAYS average 1.7% (43). TOM AND OTHER VIENNA increased by 2.7%

per year through POWER PLANT EMPLOYEES ALSO to 87,351. COMPLETED EIGHT YEARS WITH 2001.Growth NO LOST*TIME INJURIES.

The Company antici- of the winter peak will average pates that the local 2.6% per year for the same period.

economy will remain Similar slow sales growth is stable in 1992 . Rapid expected for natural gas.

growth in the Although a return to normal finance, insurance ,

winter weather in 1992 is and real estate expected to push natural gas markets, which drove

MARYLAND volume up 9 .2 % over last year's total. For the long term, firm sales are expected to grow at an which includes the entire state of Delaware, portions of nine Eastern Shore Counties of DELAWARE average annual rate of 1.2%. Maryland and the two Eastern Washington, D.C. Shore Counties of Virginia. In According to the 1990 U.S. Census, addition, the Company distributes the strong population growth on gas service in a 275 square-mile the Delmarva Peninsula that area of northern Delaware.

VA occurred in the 1980s will continue through the '90s. For To serve this region, Delmarva Delmarva Power, that means more Power maintains an electric energy-consuming households system with 2,645 megawatts of will rely on the Company for generation capacity, 1,32 4 miles service. The peninsula population of transmission lines, 10,606 is expected to increase more than miles of distribution lines and a 10% by 2000 and then increase natural gas system with 1,286

... another 8% by 2010 . miles of gas main .

THE DELMARVA PENINSULA'S DIVERSE BLEND OF INDUSTRIES MAKES THE SERVICE AREA Delmarva Power owns and DEMAND FOR ELECTRICITY AND operates four fossil fuel NATURAL GAS HERE LESS AFFECTED The Delmarva Peninsula power plants within the BY FLUCTUATIONS IN THE NATIONAL stands out as one of the service territory. The ECONOMY THAN IN MANY OTHER AREAS OF THE U.S.

most distinctive Company shares geographical ownership of features on the Detmarva Power two coal plants East Coast. And and two nuclear

-~..:'"""'f""'~"'9ConliHin1 In~

it is centrally "' plants outside the located be- service territory.

tween major East Coast Our 373,502 markets. The peninsula electric customers and

... 87 ,351 natural gas custom-MARKETING GENERAL MANAGER ~s within overnight LOUISE MORMAN PRESENTED THIS access to approximately ers are served by 2,817

" BIG" $8 ,444 CHECK TO PRESTON

'h of the nations popula- employees working in 13 TRUCKING COMPANY. PRESTON WAS ONE OF THE FIRST COMPANIES IN tion and 1h of the total customer service locations MARYLAND TO PARTICIPATE IN U.S. effective buying on the peninsula. Division DELMARVA POWER'S COMMERCIAL income . headquarters are in AND INDUSTRIAL LIGHTING PROGRAM.

Christiana , Delaware; THIS PROGRAM OFFERS CUSTOMERS REBATES AS AN INCENTIVE TO Delmarva Power provides Harrington, Delaware; and IMPROVE LIGHTING EFFICIENCY IN electric service throughout Salisbury, Maryland.

THEIR FACILITIES. -

most of the 5,700 square- Corporate headquarters is mile Delmarva Peninsula, in Wilmington, Delaware.

• EARNINGS PER SHARE OF COMMON STOCK

$2.oor--------------

DIVIDENDS DECLARED PER SHARE OF COMMON STOCK

$2.00 r - - - - - - - - - -- - --

EARNINGS PERFORMED AS EXPECTED,

$1.69 PER SHARE, AT A TIME WHEN THE COMPANY IS BUILDING NEW POWER PLANTS AND IS PURSUING RATE INCREASES TO RECOVER 1.50 CONSTRUCTION COSTS. THESE CHARTS REFLECT KEY FINANCIAL INFORMATION ABOUT THE COMPANY.

1.00 0.50 0.00 81 82 83 84 85 86 87 88 89 90 91 81 82 83 84 85 86 87 88 89 90 91 RETURN ON AVERAGE AVERAGE COMMON STOCK COMMON EQUITY MARKET PRICE 16% $24r--------------

14 12 16 1 - - - - - -

10 8 12 6 FINANCIAL SECTION 4

FINANCIAL REVIEW AND ANALYSIS 2

REPORTS OF MANAGEMENT AND 0 INDEPENDENT ACCOUNTANTS 81 82 83 84 85 86 87 88 89 90 91 81 82 83 84 85 86 87 88 89 90 91 26 CONSOLIDATED FINANCIAL STATEMENTS UTILITY CONSTRUCTION EXPENDITURES UTILITY EXTERNAL FINANCINGS (in millions) (in millions) 32 NOTES TO CONSOLIDATED

$250r--------~----- $200r--------------

FINANCIAL STATEMENTS 48 CONSOLIDATED STATISTICS 150 1 - - - - - - - - - - -- ........t - -- 50 SELECTED FINANCIAL DATA 1501---~-----t DIRECTORS COMMITTEES, OFFICERS, AND INVESTMENT INFORMATION STOCKHOLDER INFORMATION

• 83 84 85 86 87 88 89 90 91 92' 93'

• Forecast

FINANCIAL REVIEW AND ANALYSIS RESULTS OF OPERATIONS EARNINGS The earnings per share of common stock attributed to the core utility business and nonutility subsidiaries are shown below. The discussion ofnonutility subsidiary earnings begins on page 23.

1991 1990 1989 Core Utility Operations $1.41 $1.70 $1.69 Cumulative effect of a change in accounting for unbilled revenues (See Note 1 - Unbilled Revenues) 0.25 Nonutility Subsidiaries 0.03 (1.10) 0.11 Total $1.69 $0.60 $1.80 DIVIDENDS On December 23, 1991 , with several rate cases pending, the Board of Directors decided to sustain the quarterly common stock dividend at its current level of 38 1/2 cents per share or an indicated annual level of $1.54 per share.

CORE UTILITY EARNINGS The 29¢ per share decline in 1991 earnings of core utility operations compared to 1990 occurred mainly because customer rates had not yet been raised to recover financing and operating costs associated with new utility plant added to the Company's electric and gas systems. The Company's construction expenditures have risen over the past several years in order to meet customers' growing energy needs and to comply with environmental regulations.

Operation, maintenance, depreciation, and financing costs also normally rise when capital additions are made to utility systems. The new utility plant was partly financed in 1991 by the issuance of common stock. The dilutive effect of the additional common shares outstanding reduced earnings per share by 9¢. The adverse effect on earnings per share of the financing and operating cost increases was partly offset by productivity gains and by additional base electric revenues attributed to a 3.3% increase* in 1991 kilowatt-hour (kWh) sales.

After excluding the effect of two unusual items on 1989 earnings per share, 1990 core utility earnings per share decreased in comparison to 1989. This decrease was primarily due to financing and operating expenses associated with plant added to the Company's electric and gas systems. Replacement power costs related to the shutdown of the Peach Bottom Atomic Power Station (Peach Bottom) decreased 1989 earnings per share by 18.5¢, and a one-time credit adjustment for previously expensed spare parts .at certain jointly-owned generating plants increased 1989 earnings per share by 5¢.

As discussed in Note 6 to the Consolidated Financial Statements, the Company requested rate increases in several regulatory jurisdictions during 1991. The Delaware Public Service Commission is expected to render a decision during the first quarter of 1992 on the Company's request for a $24.6 million annual rate increase. In Maryland, an annua_l retail electric base rate increase of $5.5 *million, effective January 1, 1992, was approved in December 1991. In the Company's resale jurisdiction, a request for a $5.0 million annual rate increase has been filed. Furthermore, the Company has requested a $4.8 million annual increase in Delaware gas base rates. Timely and adequate rate relief will be necessary over the next several years since the Company expects continued downward pressure on utility earnings from costs associated with new utility plant to be added in the near future.

18 DELMARVA POWER & LIGHT COMPANY

FINANCIAL REVIEW AND ANALYSIS

• ELECTRIC REVENUES AND SALES As discussed in "Utility. Revenues" in Note 1 to the Consolidated Financial Statements; customer rates are set through fuel adjustment clauses and base rate proceedings. Thus, the two basic components of electric and gas utility rev-enues are "fuel revenues" and "base revenues." Fuel revenues generally do not affect net income since the expense recognized for fuel costs is adjusted to m3tch the fuel costs Q_illed to customers (fuel revenues). The amount of under or over-recovered fuel costs is deferred until it is subsequently recovered from or returned to utHity customers.

Total 1991 electric revenues increased $42.6 million from 1990 due to a $20.4 million increase in base revenues and a

$22.2 million increase in fuel revenues. The increase in 1991 base electric revenues was primarily due to a 3.3% rise in total kWh sales. the major factors driving sales growth con_tinued to be growth in the total number of customers and increased usage per customer. The total number of electric customers increased by l.4% in* 1991 in comparison to 2.0% in 1990 and 2.7% in 1989. Customer growth has slowed over the past several years due to weaker economic conditions. The residential and commercial customer sales classes accounted for about two-thirds of 1991 electric -

revenues and provided most of the increase in base electric revenues. Residential and c"ommercial sales grew in 1991 at rates of 5.0% and 4.0°,( respectively. f.. 1.2% decrease in industrial sales, attributed to the economic downturn, was tempered by the diverse mix of industrial customers served by the Company.

Total 1990 electric revenues increased $30.1 million.. from 1989 due to a $10.5 million increase in base revenues and a

$19.6 million increase in fuel revenues. The 1990 increase in base electric revermes was primarily due to a 2.3%

increase in total kWh sales. Residential sales growth. of 1.1%in1990 was relatively low compared to recent prior years due tci milder winter weather. The1990 commercial sales growth rate-of 3.6% slowed from 1989 due to dimin-ished growth in the financial services industry. Industrial sales growth of 3.9% was surprisingly strong.in I990 as

• economic conditions had started to weaken.

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 gas producers and pipelines. Gas revenues decreased by $8.6 million in 1991 due to decreases in base revenues and fuel revenues of $1.2 million and $7.4 million, respectiv~ly. Fuel revenues decreased since rates charged to customers to recover gas fuel costs were reduced in 1991 to reflect lower prices paid for purchased gas. The decrease in base revenues was attributed to a 3.4% decline in sales (excluding transportation) due to mild wint~? weather, the sluggish economy, and more customers transport-ing gas directly from gas producers and pipelines. In total, gas sales and gas transported decreased by 0. 7% in com-parison to 1990.

In I990., gas revel}ues decreased by $6.9 million in comparison to 1989 mainly as a result of th~ Company crediting

$6.2 million to customers' bills in order to return over-recovered gas fuel costs. The $6.2 million bill credit did not affect net income, since fuel costs also decreased by $6.2 million. Gas sales decreased 3.5% in 1990 due to milder winter weather and some customers transporting gas from producers and pipelines. In total, 1990 gas sales and gas transported increased by 5.4% in comparison to 1989. . .

DELMARVA POWER & LIGHT COMPANY 19

FINANCIAL REVIEW AND ANALYSIS OPERATION, MAINTENANCE, AND DEPRECIATION E:>(PENSES Operation and maintenance expenses increased by $21.4 II).illion in 1991 in comparison_ to 1990 mainly due to increased <osts for operating and maintaining the electric transmission and distribution systems to serve the Company's growing number of customers, higher expenses at the jointly-owned nuclear power plants, and higher administrative ~nd general expenses. Future increases in operation and maintenance expenses are expected due to additions of new utility plant to serve..customers' growing energy needs, aging of existing utility plant, and normal*

inflationary pressures. Depreciation expense increased $6.3 million in 1991 primarily due to additions to electric utility plant "'.hich included the installation of a third combustion turbine at Hay Road in June 1991. Continued increases in depreciation expense are expected as new utility plant is added.

• 1990 operation and maintenance expenses increased by $7.6 million over 1989 expenses primarily due to higher

• payroll and other costs of sefving the growing number of customers connected to the Company's electric and gas syst~ms. Expenses decreased at Peach Bottom .since costs related to .the restart effort were incurred in 1989. Offsetting the Peach B<;>ttom decrease in expenses was an increase due to a one-time $3.9 million credit in 1989 for previously expens~d spare parts at certain jointly-owned generating units. Depreciation expense increased $6.1 million in 1990 due mainly to additions to the 'electric system.

ELECTRIC FUEL AND NET PURCHASED POWER EXPENSES .

The components of the changes in electric fuel and net purchased power expenses are shown in the table below.

Comparative Increase (D~crease) From Prior Year in Electric Fuel and Net Purchased Power Expenses

[Dollars in Millions) 1991 1990-Average Cost of Electric Fuel and Net Pm;-chased Power $ (7.8) $(10.5)

Increased kWh Output. 11.l _o.o Deferral of Energy Costs 21.1 12.4 Total $24.4 $ 1.9 The 1991 "~verage Cost of Electric Fud and Net Purchased Power" decreased from 1990 mainly due to lower oil and . I gas prices and a decrease in the cost qf purchased power. In November 1991, Unit 2 at the Salem Nuclear Generating Station was shut down due to equipment failure as discussed in ,Note 16 to the Consolidated Financial Statements.

The Company does not expect the shutdown to have a material impact on the cost of fuel in 1992. In 1991, the Company's total kWh output was, provided by coal generation (45%), nuclear generation (15%), oil generation (15%), gas-generation.(?%), and purchased power (18%).

The 1990 "Average Cost of Electric Fuel and Purchased Power" decreased from 1989 prim~rily due to increas'ed low cost nuclear generation and a decrease in the cost of purchased power. Nudear generation increased in 1990 mainly due to greater availability of the Peach Bottom units which were shut down during most of 1989 (as discussed in Note 16 to the Consolidated Financial State~ents). Higher oil prices mitigated the overall decrease in the ave~age fuel cost.

UTILITY FINANCING COSTS Interest charges on debt oCthe core utility business were $67.0 million in 1991, $62.8 million in 1990, and $59.1 million in 1989. The increase~ were primarily due to higher average debt balances required to f}nance the Company's increased investment in utility plant. The increases in interest charges were moderated by lower interest rates on

.variable rate demand bonds, lower average amounts of short-term debt outstanding, and lower interest rates on refinancing borids. Dividends on preferred stock decreased $0.8 million in 1991, mainly due to lower dividend rates paid on the auction rate preferred stock series. In 1990, dividends on preferred stock increased $1.4 million, since

$45 million* of preferred stock was issued in August 1989 to finance the Company's investment in utility plant.

20 DELMARVA POWER & LIGHT COMPANY

FINANCIAL REVIEW AND ANALYSIS

• Bebt and equity financing costs capitalized on utility capital expenditures totaled $7.6 million in 1991, $5.5 million in 1990, and $7.5 million in 1989. The variances between years in capitalized financing costs are principally the result of fluctuations in the average balance of construction work-in-progress (CWIP). Average 1991 CWIP balances were higher than 1990 mainly due to greater average cumulative expenditures on the new Hay Road No. 3 ,combus-tion turbine, the combined cycle addition to the Hay Road combustion turbines, and the new stack for the India!!

River plant. Average 1990 CWIP balances were lower than 1989 chiefly due to completion of the first two combus-tion turbines at Hay Road in 1989.

• CAPACITY AND LOAD On June 1, 1991, the Company.placed the.Hay Road No. 3 combustion turbine into service, which added 109 megawatts (MW) of capacity to the electric system. On July 23, 1991, the Company recorded an all'-time peak load of 2,430 MW, an increase of 8. 7% over the 1990 peak load of 2,235 MW The peak load was much higher than expected due to abnormally hot weather. The Company's generating capacity of 2,645 MW at the time of the peak provided an 8.8% reserve margin, or about one-half of the 19% reserv~ margin that was expected under normal weather condi-tions. On a long-term basis, the Company's objective is to meet the PJM Interconnection reserve requirements which are expected to range between 15% to 20% for the Company. Since the 1991 peak load was-increased substantially by the hot weather, the Company d9es not expect its peak load to grow bey.and the 1991 level over the next fe~ years if weather. conditions are norm.al.--Ove~ the next ten years; the Company expects its peak load to grow at an average al).nual rate of 1~7%.

• The Challenge 2000 Plan is the Company's strategy for providing reliable electric service at competitive rates to customers. The plan combines customer-oriented conservation alternatives, called demand-side options, and the use of various generation technologies, called supply-si.de opti~ns. The strategy can be characterized as "Save Some, Buy Some, Build Some." The plan is flexibl~ and can be adapted to lower or higher than anticipated load growth. As of December 31, 1991, the demand side ("Save Some") of Challenge 2000 had enrolled over 43,000 residential custom-ers and about 110 commercial.and industrial customers which provide the Company with th.e ability to reduce its peak load by 180 MW or about 7%. The supply side of the Challenge 2000 Plan combines the use of power purchases

("Buy Some") and the construction of new generating capacity ("Build Some"). In 1992, the Company will begin to purchase 48 MW of capacity from the Delaware City Power Plant that was sold to Star Enterprise in December 1991, as discussed in Note 13 to the Consolidated Fip.ancial Statements. In 1993, the Company plans to place in-service a 160 MW combined cycle addition to the Hay Road combustion turbines. In 1996, the purchase of .150 MW of base-load capacity is planned. The Company is evaluating 27 bids received. from _parties interested in supplying all or a portion of the 150 MW of capacity in 1996.

• LIQUIDITY AND CAPITAL RESOURCES . . . .. .

The Company's primary capital resources are internally generated funds (nercash provided by operating activities less

. common and preferred dividends) and external financings. These resources provide capital for the Company's utility construction.program and other capital requirements, such as repayment of maturing debt and capital lease obligati_ons.

In 1991, internally generated funds represented 53% of utility construction expenditures in *comparison to 60% for 1990, and 61%for1989. During 1989 through 1991, the difference between utility construction expenditures and internally generated funds was primarily funded through external financings. The Company raised $119.3 million in 1991, $93.8 million in 1990, and $66.6 million in 1989 from external financings (neFof refinancings) .

The Company raised $87.9 million in 1991, compared to $16.8 million in 1990, and $15.2 million in 1989 from the

• issuance of common equity. Common stockholders' equity as a percentage of total capitalization (including long-term

• debt due within one year and variable rate demand bonds) increased fr~m 40.1 % as of December 31, 1990 to 4 2. 7%

as ofDecember 31, 1991. Book value per share of common stock increased from $12.8:1' as of December 31, 1990 to

$13 .42 as. of Decerp.ber 31, 1991.

DELMARVA POWER & LIGHT COMPANY 21

FINANCIAL REVIEW AND ANALYSIS During 1991, -the Company issued $117.0 million of long-term debt at ~n average interest rate of 7.92% and repur-chased $85.6 million oflong-term debt which had an average intt;rest rate of 10.92%. Although these long-term debt -

financings (discussed under "Long-Term Debt" .of Note 3 to the Consolidated Financial Statements) increased long-term debt by $31.4 million, annualized interest requirements did not increas*e due to* the lower rates of the riew debt.

Long-term debt and variable rate demand bonds as a percent of total capitalization decreased from 51.0% as of December 31, 1990 to 49.1% as of December 31, 1991.

Capital resources available to the Company for short-term financing needs include commercial paper, loan participa-tio~ agreements, and lines of credit. As of December 31, 1991, $75 million in lines of credit were availabie for the short-term financing needs of the Company.

In 1991, the total of internally generated funds and external financings (net ohefinancings) exceeded utility con-struction expenditures, which :vas the main caus.e of the $19.7 million increase in cash arid cash equivalents.

During 1990, the Company began financing its share of nuclear fuel for the Salem and Peach B9ttom nuclear plants through a nuclear fuel energy contract which is considered a capital lease. In 1990, the Company received

$18.7 million from the transactions, and capital lease obligations increased by'$47.5 million. The balances of the long-term portion of capital lease obligations as of December 31, 1991 and 1990 were $29.3 million and $32.4 million, respectively.

Capital requirements for 'the period 1992-1993 are estimated to be $470 million, including $434 million for utility construction (excluding AFUDC). These. estimates include $29 million of capital expenditures related to compliance with provisions of the Clean Air Act (CAA). An additional $91 million of rnpital expenditures during 1994-2000 are ftlso included in the Company's current plan for compliance with the CAA. In addition to these capital expenditures, the Company expec_ts that more costly, lower sulfur fuels may be burned in its generating units in order to comply with the CAA. The Company's plan for compliance with. the CAA may change since various alternatives continue to be evaluated and many regulations associated with the CAA have not yet been promulgated.

In 1990, the Ne\\'.Jersey Department of Environmental Protection issued Public Service Electric and Gas (PSE&G),

, the Salem nuclear:-pl~J:it operator, a draft permit th<cit would require construction of cooling towers and a shutdown of the plant during the construction period. PSE&G is opposing t4e draft permit. If the cooling towers are constructed, the Company would incur substantial replacement power costs during the construction period and estimated capital costs of $40 million or tno~e .. The Company's forecasts of 1992-1993 capital expenditures do not include possible additional costs for the construction -of cooling towers for Salem.

'The Company anticipates that $210 million will be generated internally during 1992-1993, which represents 45% of estimated capital requirements and 48% of estimated utility construction expenditures. The balance is expected' to be externally financ~d. The Company's forecast of internally generated funds reflects an averag~ annual electric sales_

growth rate"of 1.8% during 1992-1993 in comparison to growth rates of 3.3% in 1991, 2.3% in 1990, and 5.9% in 1989. The Company's forecast of internally generated funds also includes expected on-going rate relief to recover

• additional costs related to new ut\lity facilities to be constructed.

The Company estimates its external financing requirements to b.e $260 million_ during i992-1993. The Company's preliminary plans to satisfy its estimated need for external.financings during.1992-1~93 include issuing $100 million of long-term debt, $50 million of preferred stock, and $110 million (market value) of common stock.

The Company's planned financing mix should result in a capital structure that is within the target ranges of 44-49%

debt, 8-10% preferred stock, and 42-46% common stock. The planned financing mix is also expected to result in continued improvement of the Company's debt to equity ratio and fixed charge cov~rage ratio. The Company's ratio of pre-tax earnings to fixed interest charges (computed according to Securities and Exchange Commission regula-tions) was 2.6 for 1991. As of December 31, 1991, the Company's senior debt was rated A2 by Moody's Investor el I I

22 DELMARVA POWER & LIGHT COMPANY I

_J

FINANCIAL REVIEW AND ANALYSIS

• Service, A+ by Standard & Poors, and A+ by Duff & Phelps. Moody's doWngraded the credit rating of the Company's senior debt from Al to A2 during 1991 due to increased capital requirements and the need for additional financing and rate relief. The Company's objective is to maintain its financial parameters within the ranges that warrant a strong "A" bond rating. The Company will need to obtain timely and adequate rate relief from the regulatory commissions in order to maintain its current bond ratings.

NONUTILITY SUBSIDIARIES Information on the Company's nonutility subsidiaries in addttion to the following discussion can be found in the following Notes to the Consolidated Financial Statements:_Note 1 (Significant Accounting Policies); Note 8 (Write-off of Subsidi<l;ry joint Venture Investments); Note 9 (Gains on Subsidiary Transactions); and Note 20 (Consolidated Condensed Financial Statements of Subsidiaries).

• Nonutility subsidiaries earried $.03 per share in 1991."Gains from sales of purchase options on leveraged lease~,

which contributed $.07 to 1991 earnings per share, were partly offset by operating losses from the Pine Grove Landfill and accruals for potential settlements of litigation. In 1990, the nonutility subsidiaries had reported a loss of

$1.10 per share which was principally due to a write-off of joint venture investments and to the operating losses of the projects that were written off. As discussed in Note 8, in December 1990, the Company wrote off its $62,534,000 investment in the Redding Power, Burney Forest Products, and Glendon Energy.joint venture projects which reduced 1990 net income by.$42,497,000 ($.89 per share) .. The losses on the operations of these projects during 1990 reduced earnings per share by $.18. Since the investment in these projects was written off in 1990 and the Company is no '*

longer funding th,e projects' losses, losses from the projects' 199i operations were not recorded in accordance with

• the equity method of accounting. In August 1991, the bank which had financed Redding Power took title to the project in consideration for the outstanding loan balance. The Burney Power Plant continues to operate and all fuel requirements are being provided by outside suppliers. The sawmill, which was intended 'to produce finished lumber and provide fuel for the power plant, has been sub-leased. In addition, the outstanding bank debt at Burney was restructured in 1991. The restructured debt provides the project greater flexibility in meeting its debt obligations._

Total subsidiary revenues (including gains) were $16.4 million in 1991 compared to $17.1 million in 1990. The

. decrease was mainly due to the disposition of certain operations, partly offs"et by a $4.4 million pre-tax gain on sales of purchase options on leveraged leases and a $3 .1 million in.crease* in landfill and waste hauling revenues. Revenues

.from man.agement services decreased _b.y $2.0 million due _to the.disposition of the Redding Po')'er project which had been managed by the subsidiaries. Subsidiary investment income declined $3.1 million in 1991 due to interest income that was accrued in 1990 on loans to joint ventures that were subsequently written off in December 1990.

Also, revenues from a sawmill operation decreased by $2.0 million since the operation was discontinued in 1990.

Revenues from the subsidiarie~' landfill and waste hauling businesses increased by $3.1 million due to higher tonnage received by the Pine Grove Landfill and the acquisition of a waste hauling business in late 1990. The start-up loss incurred by the Pine Grove Landfill in 1990 was reduced considerably in 1991 as sales volume and revenue grew.

The subsidiaries financed their 1991 investments, which were primarily construction costs of the Pine Grove Landfill, mainly from the sales proceeds of purchase options on leveraged leases, internally generated funds from the landfill

• operation, and tax benefit payments. The subsidiaries receive tax benefit payments resulting from inclusion of their income or*loss in the Company's consolidated tax return. Subsidiary debt increased from $8.9 million as of Decembei:

31, 1990 to $12.0 million as of December 31, 1991.ihis net increase was attributed to a call during 1991 on an $8.0 million equity letter of credit (classified as an accrued liability as of December 31, 1990), partly offset by $4.9 million of loan repayments. About $11.1 million of the subsidiary debt balance is now structured as a step-down revolving

. credit agreement, which terminates in December 1993. This agreement is collateralized by the leveraged lease 1* I portfolio and certain other subsidiary assets. The Company expects that the cash, requirements of the subsidiaries over the next several years will be met by cash flows from subsidiary operations, borrowings, and asset sales.

DELMARVA POWER & LIGHT COMPANY 23

, I FINANCIAL REVIEW AND ANALYSIS After excluding the December .1990 write-off of joint venture investments, the subsidiaries 1990 loss per share was

$.21 in comparison to earnings per share of $.11in1989. The 1989 earnings of the subsidiaries included a $5.6 million pre-tax gain on the sale of a partial interest in the Burney project which increased net income by $4.8 million

($.10 per share). The 1989 earnings also reflected the write-off of a $1.9 :r:nillion investment which reduced net income by $L3 million ($.03 per sh~re). After excluding these items, the remaining decrease in subsidiary earnings from 1989 to 1990 was attributed to larger operating losses from Redding Power and Burm;y Forest Products, investment tax credits recorded on these projects in 1989, a_nd a start-up loss on the 1990 operations of the Pine Grove Landfill.

IMPACT OF ACCOUNTING STANDARDS In December 1990, the Financial Accounting Standards Board (FASB) issued Statement of Financial Ac.counting Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106), which becomes effective in 1993. SFAS No. 106 require~ employers, if obligated or committed to provide postretirement benefits other than pensions, to recognize their obligation on an accrual basis. The Company currently expenses these costs as paid. (See Note 11 to the Consolidated Financial Statements.) The Company's preliminary estimate of its postretirement benefit transition obligation is $100 million, and the estimated increase in annual expense, including 20 year amortization of the transition obligation, is $13 million.

In February 1992, the FASB issued SFAS No. i09, "Accounting for Income Taxes," which becomes effective in 1993 and supersedes SFAS No. 96 (issued in _1987). Similar to SFAS No. 96, the new accounting standard requires the use of the liability method of acc01~nting fq\incom:e taxes. The Company has not determined the exact impacts SFAS.No .

109 will have on its financial statements. However, the analyses done on the very similar SFAS No. 96 indicate that SFAS No. 109 should not have a material ~ffect on the Company's results of operations. However, the total amount of assets and liabilities on the consolidated balance sheet is expected to iµcrease. 1See Note 2 to the Consolidated Financial Statements for additional information.

\

24 DELMARVA POWER & LIGHT COMPANY

REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS

• REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS REPORT OF MANAGEMENT Management is responsible for the information and REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders representations contained in_ the Company's financial Delmarva Power & Light Company statements. Our financial statements have been prepared Wilmington, Delaware in conformity with generally accepted accounting We have audited the accompanying consolidated balance principles, based upon currently available facts and sheets and statements of capitalization of Delmarva.

circumstances and management's best.estimates and Po":'er &: Light Company and Subsidiary Companies as judgments of the expected effects of events and transac-of December 31, 1991and1990, and the related consoli-tions.

dated statements of income, changes in common stock-Delmarva Power & Light Company_ maintains a system holders' equitY, and cash flows for each of the three years of internal controls designed to provide reasonable, but in the period ended December 31, 1991. These financial not absolute, assurance of the reliability of the financial statements are the responsibility of the Company's records and the _protection of assets. The internal control management. Our responsibility is to express an opinion system is supported by written administrative policies, a on these financial statements based on our audits.

program of internal audits, and procedures to assure the We conducted our audits in accordance with generally selection and training of qualified personnel.

accepted auditing standards. Those.standards require Coopers & Lybrand, independent acco~ntants, are that we plan and perform the audit to obtain reasonable engaged to audit the financial statements and express assurance about whether the financial statements are free their opinion thereon. Their audits are conducted in of material misstatement. An audit includes examining, accordance with generally accepted auditing standards, on a test basis, evidence supporting the amounts and which include a review of selected internal controls to disclosures in the financial statements. An audit also determine the nature, timing, and extent of audit tests to includes assessing the accounting principles used and be applied. _ significant estimates made by management, as well as evaluating the overall financial statement presentation.

The Audit Committee of the Board of Directors, com- We believe that our audits provide a reasonable basis for posed of outside directors only, meets with management, our opinion.

internal auditors, and independent accountants to review acco.unting, auditing, and financial reporting,matters. . In our opinion, the financial statements referred to above The independent accountants are appo.inted by the.Board - present fairly, in all material respects, the consolidated on recommendation of the Audit Committee, subject to financial position of Delmarva Power &:_Light Company stockholder approval. and Subsidiary Companies as of December 31, 1991 and 1990, and th~ consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1991 in conformity with Nevius M. Curtis Paul S: Gerritsen generally accepted accounting principles.

Chairman and Vice President and Chief Executive Officer Chie£ Financial Officer As discussed in Note .1 to the consolidated financial statements, the Company changed its method of ac-counting for unbilledrevenues in 1991.

2400 Eleven Penn Center Philadelphia, Pen?sylvania February 7, 1992 DELMARVA POWER & LIGHT COMPANY 25

CONSOLIDATED STATEMENTS OF INCOME CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)

For the Years Ended December 31 1991 1990 1989 OPERATING REVENUES Electric $751,076 $708,476 $678,396 Gas 71,i22 79,836 86,742 Steam 22,509 22,926 24,569 844,807 811,238 789,707 OPERATING EXPENSES Electric fuel and net purchased power 252,072 227,617 225,758 Gas purchased . 38,140 46,576' 52;653 Operation and maintenance 245,497 224,141 216,583-Depreciation

• 88,720 82,439 76,327 Taxes other than income taxes . 35,430 34,939' 31,829

• Income taxes 46,241 49,152 47,136

. 706,100 664,864 650,286

• OPERATING INCOME 138,707 146,374 139,421 OTHER INCOME*

Write-off of joint venture investments (62,534) (1,929).

Equity in losses of joint ventures (12,772) (2,667)

Allowance for equity funds used during construction 4,199 2,845 3,730 Income taxes* on other income 2,992 24,596 3,002 Other 1,574 2,470 8,095 8,765 (45,395) 10,231 INCOME BEFORE INTEREST CHARGES 147,472 . 100,979 149,652 INTEREST CHARGES.

Debt (i8,458 64,308 62,222 Other 2,087 2~359 1,943 Capitalized interest_ (3,579) (2,999) (5,821) 66,966' '63,668 58,344 EARNINGS Income before cumulative effect of a change in accounting principle 80,506 37,311 Cumulative effect of a change in accounting for unbilled revenues 12,730 Net income 93,236 37,311 9,1,308 Dividends on preferred stock 7,977 8,784 7,427 Earnings_ applicable to common stock $85,259 - $28,527 $83,881 AVERAGE SHARES OF COMMON_ STOCK OUTSTANDING (Thousands) 50,581 47,534 46,687 EARNINGS PER AVERAGE SHARE OF COMMON STOCK:

Before cumulative effect of a change in accounting principle $1.44 $ 0,60 $ 1.80 Cumulative effect of a change in accounting for unbilled revenues 0.25

, Total earnings per share $1.69 $ 0.60' $ 1.80 DIVIDENDS DECtARED PER SHARE $1.54 $ 1.54 $ 1.51 PRO fORMA AMOUNTS ASSUMING RETROACTIVE APPLICATION OF NEW AC:COU.NTING METHOD FOR' UNBILLED REVENUES:

Net income Earnings per average share of com!non stock See accompanying Notes to Consolidated Financial Statements.

$80,506

$1.44

$35,152

$ o.ss

$94,388

$ l.~6 -*

26 . DE.LMARVA POWER & LIGHT COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOWS

• - CONSOLIDATED STATEMENTS OF CASH FLOWS (DoUars in Thousands)

For the Years Ended December 31 1991 1990 1989 CASH FLOWS FROM OPERATING ACTIVITIES Net income $93,i36 $37,311 $91,308 Adjustments to reconcile net income to net cash__provided by operating activities:

Depreciation and amortization 99,313 93,118 82,856 Allow~nce for equity funds used during construction ' (4,199) (2,845) (3,730)

Investment tax credit adjustments, net c2;844) . (3,199) (3,220)

Deferred income. taxes, net 12,870 (128) 37,358 Net change in:

Accrued unbilled revenues (21,371)

Accounts receivable (5,157) (1,629) (11,797)

Inventories . (171) (16,255) 4,464 Accounts payable ', (12,428) 8,190 1,254 Other current assets &: liabilities* 22,338 6,449 (17,508)

Equity in net losses of joint ventures ' 12,772 2,667 Write-off of joint venture ,investments 62,534 1,929 Other, net (462) (1,862) (2,109)

Net cash provided by operating activities 181,125 194,456 183;472 CASH FLOWS FROM INVESTING ACTIVITIES Construction' expenditures, excluding AFUDC (181,820) (187,823) (175,843)

Capitalized interest (3,579) (2,999) (5,821)

Change in working capital for construction_ 14,538. 389 (2,782)

Proceeds from sales of ownership inti;:rests in:

Utility plant and inventory 4,733 Nuclear fuel - Salem 18,706 Nonutility joint venture 12,113 Cash flows from leveraged leases:

Sale of purchase options 5,375 Other 4,750 (1,649) (7,280)

Investment in subsidiary projects and operations (4,504) (20,495) (27,257)

Decrease in marketable securities 14,808 17,132 Funds held by trustee (2,036) (8,974) (4,545)

Other, net (1,189) 894 2,083 Net cash used by investihg activities (163,732) (187,143) (192,200)

CASH FLOWS FROM FINANCING ACTIVITIES Dividends: Common (77,097) (72,881) (69,738)

Preferred (7,947) (9,024) (7,036)

Issuances: Long-term debt 117,000 94,111 29,000 Common stock 87,900 16,792 15,235 Preferred stoek 45,000 Redemptions: Long-term debt (86,794) (15,573) (15,637)

Preferred stock (877) (13,515)

Principal.portion of capital lease payments (10,593) (8,495) ' (864)

Net change in short-term debt (12,250) (6,200) 8,500 Other, net (7,900) (2,331) 478 Net cash provided/(used) by financing activities 2,319 . (4,478) (17,577)

Net change in cash and cash equivalents 19,712 2,835 (26,305)

Beginning of year cash and cash equivalents 27,129 24,294 . 50,599 End of year cash and cash equivalents $46,841 $27,129 $24,294

• I

• Other than deot classified as current, preferred stock redeemable within one year, and current deferred income laxes.

See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY 27

CONSOLIDATED BALANCE SHEETS ASSETS (Dollars in Thousands)

As of December 3 l UTILITY PLANT~AT ORIGINAL COST 1991 1990 Electric $2,264,200 $2,112,198 Gas 146,264 . 134,311 Steam 108 24,982 Common 129,613 123,198 2,540,185 2,394,689 Less: Accumulated depreciation . 84~,852 812,419 Net utility plant in service 1,690,333 1,582,270 Construction work-in-progress 86,699 . 95,911 Leased nuclear fuel, at amortized cost 39,885 42,774 1,816,917 1,720,955 OTHER PROPERTY AND INVESTMENTS Investment in leveraged leases 78,771 83,852 .

Other investments 6,511 6,296 Other property, net 53,425 54,228 Funds held by trustee 17,800 14,962

. 156,507 159,338 CURRENT ASSETS Cash and cash equivalents 46,841 27,129 Accounts receivable:

CustOmers 62,407 62,055 Accrued unbilled revenues 21,371 Other 12,864 8,059 Inventories, at-average cost:

Fuel (coal, oil, and gas) 44,425 49,271

' Materials and supplles 36,435 36,939 Prepayments . 7,290 6,572 Deferred income taxes, net 7,762 9,862 239,395 199,887 DEFERRED CHARGES AND OTHER ASSETS Unamortized debt expense 9,954 8,983 Deferred recoverable plant costs 10,225 11,920 Other 30,720 24,632 50,899 45,535 Total $2,263,718 $2,125,715 See accompanyi~g Notes to Consolidated Financial Statements.

28 DELMARVA POWER & LIGHT COMPANY

CONSO_LIDATED BALANCE SHEETS

• CAPITALIZATION AND LIABILITIES (Dollars Jn Thousands)

As of December 31 CAPITALIZATION (See Statements of Capitalization) 1991 1990 Common stock $ 118,505 $ 107,751 Additional paid-in capital 346,509 271,694 Retained earnings 241,569 235,247 Total common stockholders' equity 706,583 614,692.

Preferred stock 136,365 136,365 Long-term debt 770,146 741,032 1,613,094 1,492,089

• CURRENT LIABILITIES Short-term debt 11,050 15,300 Long-term debt due within one year 2,079 716 Variable rate demand bonds 41,500 41,500 Accounts* payable 53,155 56,183 Taxes accrued 13,170 8,938 Interest accrued 14,101 13,744 Dividends declared 20,459 18,588 Current capital lease obligation 12,747 12,747 Deferred energy costs 3,026 (8,605)

Other 31,324 31,282, 20i,611 )90,393

• DEFERRED CREDITS AND OTHER LIABILITIES

• Deferred income taxes, net Deferred investment tax credits Long-term capital lease obligation Other Commitments and Contingencies (Notes 12, 16, 17, and 18) 341,276 54,407 29,337 22,993 448,013

. 330,493 57,251

- 32,354.

23'.135 443,233 Total $2,263,718 $2,125,715

. See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT COMPANY~ 29

CONSOLll;>ATED STATEMENTS OF CAPITALIZATION CONSOLIDATED STATEMENTS OF CAPITALIZATION (Dollars in Thousands)

As of Dece!)1ber 31 COMMON STOCKHOLDERS' EQUITY 1991 1990 Total Common Stockhol~ers' Equity m $706,583 $614,692 CUMULATIVE PREFERRED STOCK Par value $1 per share, 10,000,000 shares authorized, none issued Par value $25 per share, 3,000,000 shares authorized, none issued Par value $100 per share, 1,800,000 shares authorized Series* Shares outstanding Call price per share (1991and1990) 3.70%-4.56% 240,000 and 240,000 $103-$105 24,000 24,000 5.00%-7.88%

• 5J2,800 and 512,800 $103-$104 51,280 51,280 Adjustable-6.28% c2J

• 160,850 and 1600 850 $103 16,085 16,085 Auction rate--1.86% C2l 450,000 and 450,000 . $100 45,000 45,000 136,365 136,365 LONG* TERM.. DEBT First Mortgage Bonds:

Maturity Interest Rates 1994 4%% 25,000 25,000 1997 -6%% 25,000 25,000 1998-2002 7%-8314% 150,000 158,100 2003-2004 6.6%-8% 43,200 77,150 2008 9 5/s% 50,000 81,900 2014-2021 7.15%-10 1/s% 273,500 226,000 566,700 593,150 Other Bonds, due 2011-2017, 7.15%-7.50% 54,500 53;500 Pollution Control Notes:

Series 1973, due 1992-1998, 5.60%-5.75% . 6,800 6,950 Series 1976, *due 1992-2006, 7 1/s%-7 114°tb 34,500 34,500 41,300" 41,450 Medium Term Notes, due 2002, 9.27% 4,000 4,000 Medium Term Notes, due 2004, 8.30% 35,000 Medium Term Notes, due 2020-2021, 9.68% 61,000 39,000 100,000 43,000 First Mortgage Notes, 9.65% C3l 9,322 9,788 Other Obligations, due 1992-2001, 10.22%, 971 1,610 Unamortized premium and discount, net (568) (750)

Subtotal 772,225 741,748 Less: Long-Terffi Debt due within one y'ear 2,079 716 Total Long-Term Debt 770,146 741,032 Total Capitalization 1,613,094 1,492,089 Variable Rate Demand B~nds C4 l 41,500 41,500 Total Capitalization with Variable Rate Demand Bonds $1,654,594 $1,533,589 (1) Refer to Consolidated Statements of_Changes in Common Stockholders' Equity for additional information.

(2) Average rate during 1991. * .

(3) Repaid through monthly payments of principal and interest over 15 years ending November 2002.

(4) Classified under current liabilities as discussed in Note. 5 to the Consolidated Financial Statements.

See accompanying Notes to Consolidated Financial Statements.

30 DELMARVA POWER & LIGHT COMPANY

CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY

• CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Dollars in Thousands)

. For the Three Years Ended December 31, 1991 Commo"n Shares Outstanding Par 111 Value Additional Paid-in Capital Retained Earnings Total BALANCE AS OF JANUARY 1, 1989 46,170,002 $103,883 $241,727 $267,567 $613,177 Net Income 91,308 91,308 Cash dividends declared:

Common stock ($1.51) (70,517) (70,517)

Preferred stock (7,427) (7,427)

Issuance of common stock:

DRIP C2l 824,428 .1,854 13,381 15,235 Expense& (31) (31)

Preferred stock: '

Issuance (182) (7~)

Redemptions -and Retirements -*. 2,656 (978) 1,678 BALANCE AS OF DECEMBER 31, 1989 46,994,430 105,737 256,951 '279,953. 642,641 Net Income c 37,311 3~,31I Cash dividends declared:

Common stock ($1.54) * (73,225) (73,225)

Preferred stock (8,784) (8,784)

Issuance of common stock:

DRIP c2J 891,328 2,006 14,723 16,729 Stock options* -. 3,600 8 55 63 Expenses (29) (29)

.

• Redemption of preferred stock ' (6) (8). (14)

BALANCE AS OF DECEMBER 31, 1990 47,889,358 1:07,751 271,694 235,247 614,692 Net Income 93,2_36 93,236 Cash dividends declared:

Common stock ($1.54) (78,937) (78,937)

Preferred stock , (7,977) (7,977)

Issuance of common stock:

Public Offering 3,500,000 7,875 56,000 63,875 DRIP C2l 1,126,802 2,535 18,640 21,175 1 Stock options 150,450 339 2,471 - 2,810 Other issuance 2,354 5 35 40 Expenses ' (2,331). (2,331)

BALANCE AS OF DECEMBER 31, 1991 52,668,964 $118,505 $346,509 $241,569 $706,583 I,

I (1) The Company's common stock has a par value ~f $2.25 per share and 90,0P0,000 shares are authorized.

(2) Dividend Reinvestment and Common Share Purchase Plan. -

S~e accompanying Notes to Consolidated Financial Statements .

DELMARVA POWER & LIGHT COMPANY 31

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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 one million. The Company also provides gas service in an area consisting of about 275 square miles with a population of approximately .452,000 in northern Delaware, including the City of Wilmington. In addition, the Company has wholly-owned subsidiaries engage-cl in nonutility activities.

FINANCIAL STATEMEN'(S The consolidated financial statements include the. accounts of the Company and its wholly-owned subsidiaries, Delmarva Energy Company, Delmarva Industries, Inc., Delmarva Services Company and Delmarva Capital Invest-ments, Inc. and its subsidiaries. Delmarva Capital Investments, Inc. accounts for its 20% to 50%. investments in joint ventures with the equity method.

• The results of operations of the Company's nonutility'subsidiaries are reported in the consolidated statements of income as "Other income" with the exceptions of interest charges and capitalized interest, which are reported in those I

respective classifications. Refer to Notes 8, 9, and 20 for financial information about the Company's subsidiaries.

In conformity with generally accepted accounting principles, the accounting-policies reflect the financial effects of rnte regulation and decisions issued by regulatory commissions having jurisdiction over the Company's utility business.

For purposes of the Statement of Cash Flows, the Company considers highly liquid marketable securities and debt in?truments purchased with a maturity of three months or less to be cash equivalents.

Certain reclassifications, not affecting income, have been made to amounts reported in prior years to 'conform .to the presentations used_in 1991.

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. Other amounts billed to customers (base revenues) are dependent on rates determined in base rate proceedings before regulatory commis-sions. See Note 6 to the Consolidated Financial Statements for a discussion of current base rate proceedings.

UNBILLED REVENUES .

Prior to 1991, the Company reeorded revenues as billed to its customers on a monthly-cycle billing basis. At' the end of _each month, there was an amount of unbilled electric and gas service that had been rendered froni the last meter reading to the month-end. In December 1991, effective as ofJanuary 1, 1991, the Company began recording base revenues for services provided but riot yet billed to more closely match revenues with expenses. The effect of the change on 1991 income before the cumulative effect of a change in accounting principle was not material. The

.cumulative effect of the one-time change in accounting for unbilled revenues increased 1991 net income by

$12,730,000 (~0.25 per share).

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.

32 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• The Company's share -of nuclear fuel costs relating to jointly-owned nuclear generating stations is charge~ to fuel .

expense on a unit of production basis, which includes a factor for spent nuclear fuel disposal costs pursuant to the Nuclear Waste Policy Act of 198L The Company is collecting future storage and disposal costs for spent fuel as authorized by the regulatory commissions in each jurisdiction and is paying such amounts quarterly to the United States Department of Energy. See Note li for a discussion of the Company's financing arrangements for nuclear fueL DEPRECIATION EXPENSE The annual provisi()n 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. 7% for 1991, 3.6% for 1990, and 3. 7.% for 1989. The Company's share of the estimated cost of decommissioning (decontaminating and removing) nuclear plant is included in depreciation expense. See Note 15 to the Consolidated Financial Statements on nuclear decommissioning.

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. Deferred income taxes are provided on timing differences between the tax and financial accounting recognition of certain income and expenses. Investment tax credits from regulated operations utilized to reduce federal income taxes are deferred and generally amortized over the useful'lives of the related utility plant. Investment tax credit:S of the Company's subsidi;:tries (excluding leveraged leases) are accounted for by the flow-through method .

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION AND CAPITALIZED INTEREST Allowance for Funds Used During Constru(:tion (AFUDC) is included in the ~ost of utility plant and represents the cost of borrowed and equity funds used to finance construction of new.utility facilities. Capitalized interest includes interest capitalized on qualifying nonregulated _assets of the Company's subsidiaries and allowance for borrowed funds used during construction. Capitalized interest on nonregulated assets is included in the cost of "Other property and investments." On the income statement, capitalized interest is .recorded as a reduction of interest charges and allowance for ~quity funds used during construction is reflected as "Other income."

AFUDC was capitalized on utility plant construction at the rates of 9.9% in 1991, 9.8% in 1990, and 10.0% in 1989.

LEVERAGED LEASES The Company's net investment in leveraged leases includes the aggregate of rentals receivable (net of principal and interest on nonrecourse indebtedness) and estimated residual values of the lflased 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 including any earnings on such trust funds.

UNAMORTIZED DEBT DISCOUNT, PREMIUM AND EXPENSE These items are amortized on a straight-line basis over the lives of the iong-term debt issues to which they pertain .

• The amortization-is included in other interest charges. ,

DELMARVA POWER & LIGHT COMPANY 33

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEFERRED CHARGES The Company defers expense recognltion of cert~in costs in accordance with the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." The deferred charge is subsequently amortized to expense on a straight-line basis over the period ~hat the cost is recovered through customer rates.

2. INCOME TAXES COMPONENTS OF CONSOLIDATED INCOME TAX EXPENSE (Dollars in Thousand~) 1991 1990 1989 Operation:

Federal: Current $32,021 $30,764 $22,534

/

Deferred 8,940 11,720 l8,746 State: Current 6,664 6,992 4,762 Deferred 1,460 2,875 4,314 Inv:estment tax credit adjustments, net (2,844) (3,199) (3,220)

Income taxes on operations 46,241, 49,152 47,136 Other income:

/ !

Federal:

• Current (5,017) (9,888) (17,351)

Deferred 2,320 (14,862) 14,352 State: Current (102) 15 51 Deferred (193) 139 (54)

.Income taxes on other income (2,992) (24,596) (3,002)

Income taxes on cumulative effect ,/

of a change in accounting for unbilled revenues 8,520 T~tal income tax expense $51,769 $24,556 $44,134 Investment tax credits utili~ed to reduce federal iricome taxes payable amounted to $879,000 in 1990 and $3,808,000 in 1989. The 1989 investment tax credits utilized include $3,429,000 for the completion of two nonregulated power plants that were considered transitional property under the Tax Reform Act of 1986 .. Investment tax credits of the Company's subsidiary operations, which are accounted for on the flow-through method, are refleeted in the above table as a reduction of fed~ral current income taxes, under "Other income." ' -

As of D~cember 31, 1991, the Company had $2.2 million of alternative mi~imum tax credits available for carry forward as a reduction of taxes payable in years th?.t the regular corporate tax liability exceeds the minimum tax.

The Company has not provided deferred income taxes of approximat~ly $91 million, based on current income tax rates, related to ci'.imulative timing differences of $228 million before the adoption of full tax normalization for . .

ratemaking purposes by regulatory authorities. The Company is collecting the unnormalized taxes in its rate jurisdic-tions dther dn a_levelized basis over the life of the related plant facilities or when actually paid to taxing authorities .

34 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• RECONCILIATION OF EFFECTIVE INCOME TAX RATE The following is a reconciliation of the. di.fference between income tax expense and the amount computed by multi-plying income before tax by the federal statuto-ry rate:

1991 1990 1989 (Dollars in Thousands) Amount Rate Amount Rate Amount Rate Statutory federal income tax expense $49',302 34%* $21,035 34% $46,050 34%

• Increase (decrease) in taxes

. resulting from: .

Exclusion of AFUDC for income tax purposes (l,328) (1) (899) (1) (1,445) (1)

Depreciation not normalized 2,103 1 509 1 1,358 1 ITC amortization/flow:through (3,456) (2) (4,229) (7) (7,160) (5)

State income taxes,

!}et of federal tax benefit 6,120 4 6,614 - 11 5,989 4 Other, net (972) (1) 1,526 2 (658)

Income tax"expense $51,769 35% $24,556 40% $44,134 33%

COMPONENTS OF DEFERRED INCOME TAXES The components of deferred income taxes relate t9 the following tax effects of timing differences between book and tax income:

(Dollars in Thousands) 1991 1990 1989 Depreciation $ 3,119 $24,909 $33,648

.~eferred energy costs (4,805) 857 4,512 Capitalized overhead costs (2,871) (2,171) (2,261)

Deferred recoverable plant costs_ (448) (448) (448)

Pollution control amortization (831) (844) (914)

ADR repair allowance 2,112 2,803 3,789 Unbilled revenues 4,932 (1,707) (2,734)

Alternative minimum tai 3,848 (6,146)

Write-off of joint venture investments 6,170 (20,261) (656)

Other, net 1,644 2,880 2,422 Total $12,870 $ (128) $37,358 ACCOUNTING STANDARDS In February 1992, the Financial Accountipg Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 199, "Accounting for Income Taxes." SFAS No. 109 becomes effective in 1993 and supersedes SFAS No. 96 (issued in,1987). It requires the use of the liability method which recognizes deferred income taxes for the tax consequ*ences of temporary differences by applying statutory tax rates applicable to future years to differences.

between the financial stat~nient carrying amounts and tax bases of existing ass~ts and liabilities. *Also, deferred tax assets and liabilities are adjusted currently for the effects of changes in tax laws or rates. SFAS No. 109 reduces the complexity of SFAS No. 96 and eases certain restrictions on the recognition of deferred tax assets.

The ~ompany has not determined the exact impacts SFAS No. 109 will have on its financial statements. However, the

• • analysis done on the very similar SFAS No. 96 indicates that SFAS No. 109 should not have a materiai effect on the Company's results of operations, since the Company is primarily a regulated enterprise. The total amount_ of assets.

and liabilities on the consolidated balance s~eet is expected to increase. The expected increase is due to recognition of additional tax liabilities for the tax benefits flowed through to customers partially offset by the reduction of

• existing accumulated deferred income taxes as a result of reduction in the federal income tax 'i.-ates, ~nd for other temporary differences. Generally, the increased deferred tax liabilities a11d assets will be offset by corresponding regulatory assets and liabilities. .

. DELMARVA POWER & LIGHT COMPANY 35

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

3. CAPITALIZATION COMMON STOCK

1) In April 1991, the Company registered an additional 6,0p0,000 shares of common .stock with the Securities and Exchange Commission to provide for the continued issuance of stock through the Dividend Reinvestment and Common Share.Purchase Plan (DRIP). As of December 31, 1991, 5,401,787 shares of common stock were reserved for issuance through the DRIP

2) The Company has a nonqualified stock option plan for certain employees. Options are priced at* the actual market value on the grant date. As of December 31, 1991, 321,900 shares were available to be granted under the nonqualified stock option plan. Changes in stock options are summarized below: I 1991 1990 Number Option Number Option of Shares Price of Shares Price *1 Outstanding:

• . Beginning of year balance 306,750 $17 1/2-$21 11. 190,100 $17 1/i-$17 3/4 I Options granted 117,750 $18 1/s 120,250 $21 1/4 Options exercised 150,450 $17 1/2-$17 31. 3,600 $17 1/i-$17 3(4 End of year balance 274,050 $17 1/2-$21 11. 306,750 $171/2-$21 1/4 Exercisable '156,300 $17 1/2-$21 11. 186,500 $17 1/i-$17 3/4 RETAINED EARNINGS The current first mortgage bond indenture restricts the amount of consolidated retained earnings avaVable for cash dividend payments on common stock to $35,000,000 plus accumulations after June 30, 1978. The amount available at December 31, 1.991 was approximately $162,242,000.

PREFERRED STOCK

1) The annual preferred dividend ~equirements on all outstanding preferred stock at December 31, 1991 are "'

$7,594,000, (Preferred dividend requirements on the Adjustable and Auction Rate Series were computed based on the averag'e rate during December 1991.) If preferred dividends are in arrears, the Company may not declare common stock dividends or acquire its common stock. The series of preferred stock currently outstanding may be redeemed at the option of the Company at any time, in whole or in part at the various redemption prices fixed for each series (ranging from $100 to $105 at December 31, 1991).

2) In December 1989, the Company retired 17,200 shares of its $100 par value 7.88% Series Preferred Stock.

3) During 1989, the Company reacquirecl_ 119,150 shares of its $100 par value Adjustable Rate Preferred Stock for

$9,2©4,000. _These shares were ret~red.in December 1989, and the excess of the par value-over the acquisition cost wa:s credited to paid-in-capital.

4) In August 1989, the Company issued 450,000 shares of $100 par value Auction Preferred Stock. The dividend is based on the rate determined every 49 days by auction procedures. The weighted average dividend rate was 4.86% in 1991, 6.41%in1990, and 6.82% ii;i 1989.

5) All shares of the 9% series, which were subject to mandatory redemption provisions, had been redeemed as of December 31, 1990. The Company redeemed 8,766 and 16,000 shares of the 9% series at $100 per share during 1990 and 1989, respectively.

LONG* TERM DEBT

1) Annual .sinking fund requirements for the First Mortgage Bonds may be reduced by an amount not exceeding 60% of the bondable value of property additions. For the years 1989-1991, property additions satisfied the sinking fund requirements. Substantially all utility plant of the Company now or hereafter owned is subject to the lien of the related Mortgage and Deed of Trust.

36 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• 2) In January 1991, the Company issued $7 million of 9.95% unsecured Medium Term Notes, which mature on December 1, 2020. The proceeds from the Medium Term Notes were used to fund the Company's on-going construction program and for other general purposes relating to the Company's utility business.

3) On July 2, 1991, the Company issued, through the Delaware Economic Development Authority, $59 million of 5ax-exempt reveriue bonds. The issue consisted of $20 million of 7.30% Gas Facilities Revenue Bonds (Series A Bonds) which matlire on July 1, 2021, $34.5 million of 7.15% Pollution Control Refunding Revenue Bonds (Series B Bonds) which mature on July 1, 2018, and $4.5 million of 7.~5%' Gas Facilities Refunding Revenue Bonds (Series C Bonds) which mature on July 1, 2021. the proceeds from the Series A Bonds are being used to finance additions to the Company's gas system. On August 2, 1991, the proceeds' from the Series Band C Bonds

_ were used to refinance $39 milli~n of revenue bonds that were due in 2001 to 2011 and had interest rates of 11 %% and 12%: The Series A, B, arid C Bonds are collateralized by $59 million, in total, of First Mortgage Bonds issued by the Company and held by the Trustee. Accordingly, these series are classified in the Consolida_ted Statement of Capitalization as First Mortgage Bonds.

On_ August 2, 1991 the Company issued, through the Delaware Economic Development Authority, $1 million of 7.15% Electric Facilities Refunding Revenue bonds (Series D Bonds) which mature on July 1, 2011. On Septem-ber 4, 1991 the proceeds froin the Series D Bonds were used to refinance $1 milliori of revenue bonds that were due in 2011 and were originally issued at an interest rate of 12%.

4) In November 1991, the Company issued, in total, $50 million of unsecured Medium Term Notes (MTN) which included $35 mill~on of 13 year, 8.30% MTN and $15 million of 30 year, 8.96% MTN. In November 1991,.$11.5 '

• 5) million of the proceeds were used to repurchase a 'like amount of outstanding 10 1/s% First Mortgage Bonds, due in 2016. The remaining proceeds from the MTN were primarily used in December 1991 to refund $33,950,000 of 10% First Mortgage Bonds, due in 2004.

On February 4, 1992, the Company issued $50 million of 8.5% First Mortgage Bonds which mature on February 1, 2022. The Company plans to use the proceeds in March 1992 to repurchase tl;i.e remaining $48.5 million or' 10 1/s% First Mortgage Bonds, due in 2016._

• 6) Maturities of long-term debt and sinking fund requirements during the next five years are as follows: 1992-

$6,089,000; 1993-$6,184,000; 1994-$31,449,000; 1995-$6,455,000; 1996-$6,516,000. The Company expects that the sinking fund requirements (discussed in ,item 1 above) of $4,010,000 per year will be satisfied by property additions during the next 5 years.

7) The annual interest requirements on long-term debt at December 31, 1991 a~e $63,656,000.

4. SHORT-TERM DEBT As of December 31, 1991, the Company had bank lines of credit of $75 million. The Company is generally required to pay commitment fees for these lines. Such lines of credit are periodically reviewed by the Company, at which time they may be renewed or cancelled.

As of December 31, 1991, the subsidiaries had an $11.1 million step-down revolving credit agreement with several banks. This agreement, which terminates in December 1993, is collateralized by the leveraged lease portfolio and certain other subsidiary assets .

DELMARVA POWER & LIGHT COMPANY 37

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. VARIABLE RATE DEMAND BONDS

~ .

A total of $41.5 million of Variable Rate Demand Bonds were outstanding as of December 31, 1991and1990.

Although Variable Rate Demand Bonds are classified as current liabilities, the Company intends to use the Variable

, Rate Demand Bonds as a source of long-term financing by setting the bonds' interest rates at market .rates and, if advantageous, by utilizing one of the fixed rate/fixed term conversion options of the bonds. The bonds are due on

• demand or at maturity in the years 2014 to 2017. Average annual interest rates on the Variable Rate-Demand Bonds were 4.51 % for .1991, 6.09% for 1990, and 6.S3% for 198.9.

6. REGULATION AND RATE MATTERS The Company is subject to fegulation 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 t~rms 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 trans/llission and sale at wholesale (resale) of electric energy :;ind the production, transportation and pricing of natural gas purchased by the Company's gas division. The percentage of operating revenues regulated by each Commissiop for th.e year ended December 31, 1991 was as follows: DPSC 62%,

MPSC 21 %, VSCC 3%, and FERC 11 %. N onregulated steam operating revenues were 3% of total revenues.

1) On May 31, 1991, partly based on forecasted data, the Company filed an application with the DPSC for an annual $30.9 million base rate increase in its Delaware retail electric jurisdiction. During the rate case, the Company reduced its requested rate increase to $24.6 million mainly due to updating for actuai data. The DPSC is expected to render a decision on the case in the first quarter of 1992. The cost recovery of approximately $9 million of assets is at issue in the c_ase, and an unfavorable decision on this issue by the DPSC could result in a write-off in 1992. As permitted by Delaware law, the Company increased its Delaware retail electric rates by

$24.6 million or 5.9% annually, effective as ofJanuary 1, 1992, subject to refund.

2) On August 30, 1991, the Company requested an annual $11.8 million increase in Maryland retail e_lectric base .

rates, partly based on forecasted data. Updated actual data provided during the rate case indicated a $9.2 million rnte increase request. On December 30, 1991," the MPSC.approved a settlement agreement for a- $5.5 million m 3.3% rate increase, effective as* ofJanuary 1, 199_2, which was three months earlier than expected .

. 3) On December 20, 1991, the Company filed an application with the FERC requesting an annual increase in resale electric base rates of $5.0 million, or approximately 5.3%. The rate filing is the first request by the Company to raise resale electric base ra.tes in ,four years. The Companys proposal to put temporary rates into effect ori.

Feqruary 19, 1992, subject to refund, was recently approved by the FERC. * *

4) The Company filed an application for a $4.8 million or 6:5% annual increase ir;t Delaware gas base rates on July 2,

-

• 199). As permitted by Delaware law, the Company increased gas base rates effective February :2, 1992, subject to refund. The present schedule for the gas case indicates a DPSC decision in the third quarter of 1992.

. 38 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• 7. SUPPLEMENTAL CASH FLOW INFORMATION (Dollars in Thousand~).

Cash paid during the year for:

1991 1990 1989 Interest, net of capitalized amount $65,788 $62,440 $55,839 Income taxes, net of refunds $37,397 $21,635 .$1.6,877 During 1990, the Company incurred a capital lease obligation of $47,489,000 as a.result of financing Peach Bottom and Salem nuclear .fuel through a nuclear fuel energy ~oritract. The Company receiv~d $18, 706p00 of proceeds from the 1990 sale of its interest in the Salem nuclear fuel. Refer to Note 12 to the Consolidated Financial Statements for additional information about the nuclear fuel energy contract.

8. WRITE-OFF OF SUBSIDIARY JOINT VENTURE INVESTMENTS In 1987; the Company beg;n investing in Reddiii.g Power and Burney Forest Products which are located in northern California. These investments have been accounied for with the equity method. Each joint venture project consisted of a wood-burning power plant and a sawmill that was intended to provide fuel for the power plant and to produce finished lumber. Substantial operating losses from the projects were recorded in 1989 and 1990 primarily due to

• unfavorable conditions in the timber a:id lumper markets. _Both projects were in default on their loans by December 1990.

In 1987, the Comp*any also began investing in a_ waste-to-energy, joint venture project (Glendon Energy) planned to be locatedin Pennsylvania. An environmental permit issued by the Pennsylvania Department of EnVironmental Resources contained a condition which, based on legislation adopted well after the project was underway, restricted the siting of the facility. The Company's appeal of the siffng condition was denied by the Environmental Hearing Board in December 1990.

Due to the-circumstances discussed above, in December 1990, management determined that the future. cash flows*of

• thes,e projects would not be sufficient to recover the book value of the Company's investment. Accordingly, in December 1990's accounting, the Company recorded a $62,534,000 pre-tax charge to earnings ($42,497,000 after-tax or $.89 per share) to write off the investments in these joint venture projects. In accordance* with the equity method of accounting, 1991 losses from these projects have not been recorded since the investments were written off in December 1990 and the Company is no lon~er funding the projects' losses.

9. GAINS ON SUBSIDIARY TRANSACTIONS In 1991, the sale of purchase options on the residual values of assets o~ed through leveraged lease arrangements increased net income by $3,685,000 ($.07 per share). In 1989, the sale of a partial interest in the Burney Forest Products joint venture increased ~et income by $4,753,000 ($.10 per share). The gains on these transactions are reported in "Other in~ome."

DELMARVA POWER & LIGHT COMPANY

• 39 .

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. 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. There were no pension contributions in 1991, 1990 or 1989.

The following table reconciles the plan assets and liabilities to the funded status 0°£ the plan as of December 31, 1?91 and 1990. Pension plan assets consist primarily of equity and bond securities.

ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS (Millions of Dolla!s) 1991 1990 Accumulated benefit obligation Vested $206.0 $170.7 Nonvested 20.7 19.8 226.7 190.5 Effect of estimated foture compensation increases 110.2 88.8 Projecte.d benefit obligatiqn 336.9

, 279.3 Plan assets at fair value ' 448.6 363.3 Excess of plan.assets over projected benefit obligation 111.7 84.0 Unrecognized prior service cost

• 10.0 6.0 Unrecognized net gain (75.5) (40.6)

Unrecognized net ~ransition asset (43.1) (46.4)

Prepaid pension cost $ 3.1 $ 3.0 COMPONENTS OF NET PENSION COST I

(Millions of Dollars) 1991 1990 1989 Service cost-benefits earned duri.ng period $ 9.8 $ 10.9 $ 9.5 Interest cost on projected benefit obligation 21.9 20.9 19.1 Actual return on plan assets (96.3) 7.2 (57.6)

Net amortization and deferral 64.5 (41.1) 28.4 Net pension cost $ (O.l) $ (2.1) $ (0.6)

ASSUMPTIONS 1991 1990 1989 Discount rates used to determine projected bt;nefit obligation as of December 31 7.00% 7.75% 7.25%

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

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

11. POST-RETIREMENT BENEFITS

, The Company provides health care and life insurance benefits for retired. employees and their spouses. Substantially all of the Company's employees may become eFgible for these benefits if they reach normal retirement age while still working for the Company. The Company recognizes the cost of providing these benefits by expensing t~e costs as paid. These costs totalled $4,176!000, $3,386,000, and $3,177,000 forl991, 1990 and 1989, respectively.

40 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• In- December 1990, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting.

Standards No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions" (SFAS No. 106), w~jch becomes effective in 1993. SFAS No. 106 requires employers, if obligated or committed to provide postretirement benefits other t,han pensions, to recognize their obligation on au-accrual basis. The cost of the postretirement benefit obligation is to be a'ttributed to the period of employee service ending on the date the employee fir.st becomes eligible for the postretirement benefits. The Company's preliminary estimate of its postretirement benefit obligation, mea-sured as ofJanuary 1, 1991,_is approximately $100 n;iillion, and the estimated annual expense under SFAS No. 106 will be approximately $13 million higher in 1993 than the expense for actual benefits paid. These amounts may be affected by the related ratemaking treatment the regulatory commissions decide to be £!ppropriate, which may not be.

known until 1993 or later. The Company's estimate of its obligation and expense under SFAS No. 106 are based on an assumed 20-year amortization of the transition obligation and on a.healthcare cost trend rate of 15% currently, which decreases gradually to 6% over a 20 year period. A liability will be recorded for the amount of the SFAS No. 106 obligation that has been accrued but not paid or funded.

12. COMMITMENTS

. The Company estimates that approximately $233,500,000, excluding AFUDC, will be expended for utility con-struction in _1992. Also, in order to ensure adequate supplies of fuel, the Company has certain commitments un~er lpng-term fuel supply contracts. Excluding nuclear fuel discussed below; the Company's commitments under its long-term fuel supply contracts are $72,958,000 in 1992, $62,858,000 in 1993, $39,158,000 in 1994, $34,858,000 in 1995, and $31,658,000 in 1996 .

• During 1990, the Company entered into a nuclear fuel energy contract in order to finance its share of nuclear fuel for Peach.Bottom and Salem. Payments under the nuclear fuel energy contract, which is accounted for as a capital* lease, are based on the quantity of nuclear fuel consumed by Peach Bottom and Salem. The Company's obligation under the contract is ge~erally the net book value of the nuclear fuel financed:'

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 $173 million in aggregate.

The Company also leases certain distribution facilities, transportation equipment, and various other facilities and equipment under long-term lease agreeme1;ts. Minimum commitments as of December 31, 1991 under al~ non-cancellable lease agreements (excluding payments under the nuclear fuel energy contract which cannot be reasonably estimated) are as follows: 1992-$6,799,000; 1993-$6,497,000; 1994-$6,220,000; 1995-$6,195,000; 1996-$6,226,000; after 1996-$160,176,000; total - $192,113,000. Approxill).ately 90% of the minimum commitments shown above are payments due under the Company's Merrill Creek Reservoir lease.

Rentals charged to operating expenses were as follows:

' (Dollars in Thousands) 1991 1990 1989 Interest on nuclear fuel capital lease $ 1,633 $ 1,550 $

Interest on other capital leases

• 345 405 457 Amortization of nuclear fuel capital' lease 10,242 7,832

. Amortization of other capital leases 351 663 864 Operating leases 14,507 - 10,'575 8,829

$27,078 $21,025 $10,150 DELMARVA POWER & LIGHT COMPANY 41

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. DELAWARE CITY POWER PLANT In December 1991, the Company sold to Star Enterprise the Delaware City Power Plant and related inventory for their net book values of $2.6 million and $2.1 million, respectively. Prior to the sale, the Company had operated the Delaware City Power Plant which had provided electricity and steam to an adjacent refinery owned by Star Enter-prise. The power plant also provided 40 megawatts of capacity for the Company's electric system. The sale of the plant resulted from Star Enterprise exercising a long-standing contractual option to purchase the plant at net book value. The plant contributed $0.03 to earnings per share in 1991. Pursuant to a contract between the Company and Star Enterprise, the Company will operate the plant for _a fee, from January 1992 to June 1995.

The Company and Star Enterprise also have an *agreement which provides for the sale of 48 megawatts of the plant's a

capacity to the Company over 26 year period beginning in June 1992. Under the terms of the agreement, the Company will incur a capacity charge based on the plant's availability and an energy 'charge based on kWh deljvered.

If the plant is not av~ilable, there is no minimum capacity charge. The maximum capacity charge for a twelve month period is $3.4 million, if the plant's availability exceeds 85 percent.

14. JOINTLY-OWNED PLANT The Company's balance sheet includes its pr~portionate 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 corre-

. sp.onding expenses in the statem.ents 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 pecember 31, 1991 is _as follows: '

• Megawatt Construction Ownership , Capability Plant in Accumulated Work in (Dollars in Thousands) Share ' Owned Servlce Depredation. Progress Nuclear:

,Peach Bottom .7.51% 157MW $117,652 $ 47,785 $ 5,041 Salem 7.41% 164MW 185,221 72,466 8;896 Coal-Fired:

Keystone 3.70% 63MW 14,688 6,058 .1,301 Co,nemaugh 3.72% 63MW 14,941 6,879 403 Transmission Facilities Various 4,464 1,726 Total $336,966 $134,914 $15,641

15. NUCLEAR DECOMMISSIONING In compliance ~ith regulations of the Nuclear Regulatory Commission (NRC), the Company has a plan to fund its share of the future costs of decommissioning (decontaminating and removing) the Peach Bottom and Salem nuclear

- reactors over the remaining life of the piants. The Company has established external trust funds ($9.2' million balance at December 31, 1991} to begin to externally fund its share of future decommissioning costs. The trust fund balances are included in "Funds held by trustee" on the balance sheet. The Company's accrued liability for decommissioning the Peach Bottom and Salem nuclear reactors, which is reflected in the accumulated reserve for depreciation, was

$22.0 million as of December 31, 1991.

The Company estimates its share of future decommissioning costs to be $53.5 million, which is the NRC miriimum

. funding requirement. The Company i's currently collecting in its Delaware and Maryland jurisdic.tioris a sufficient

• amount from its customers to satisfy the NRC minimum fu~ding requirement. The Company's resale rate filing on December 20, 1991 would also provide for recovery of the1NRC minimum funding requl.rement.

42 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1_. 16. NUCLEAR POWER PliANTS ~

PEACH BOTTOM On March 31, 1987, the NRC ordered the shutdown of Peach Bottom-for a variety of pro~lems including operator inattentio11. The Company has a 7.51 % ownership interest in Peach Bottom which is operated by Philadelphia Electric* Company (PE). Peach Bottom has two generating units, Unit 2 and Unit 3, which the NRC allowed to be' res.tarted in April 1989 and November 1989, respectively. Since the Company did not recover replacement power costs attributed to the shutdown from its customers, 1989 net income was reduced by $13.9*million (18.5¢ per share).

On July 27, 1988, the Company ahd Atlantic Electric Company, as co-owners, filed a lawsuit against PE in the D:S.

District Court of New jersey to recover losses incurred during-the period that Peach Bottom was shut down by the NRC. The lawsuit' charges PE )Vi.th brea.ch of contract and negligerice for failing to manage and operate the nuclear plant in a sqfe and efficient manner. The amount of relief the Company*is seeking in the lawsuit is unspecified.

Public Service Electric and G~s Company (also a co-owner of Peach Bottom) also filed a simil~r lawsuit against PE.

These suits continued to-be in the discovery phase as of December 31, 1991. The suits are expected to reach the trial stage in mid-1992.

SALEM The Company has a*7.4 l % ownership interest in Salem Units 1 and 2? which are operated by Public Service Electric and Gas Company. On November 9, 1991, a turbine overspeed condition caused significant equipment damage at Salem Unit 2. The Company's,share of equipment repair costs is estimated to be $5 to $6 million, which is expected to be covered by insurance. Salem Unit 2 had been scheduled to begin reducing power in December 1991 in prepara-tion for a three-month refueling and mai!1tenance outage scheduled to beginjanuary 4, 1992. The unit-is now expected to return to service*by mid-summer 1992. During the outage, the Company expects to incur replacement power costs of $150,000 to $200,000 per week. The Company's insurance for replacement power costs, which provides coverage for the incident, begins after the first 21 weeks of ap. outage or about April 1992. Insurance coverage is then available in the amount of $225,000 per week for 52 weeks and reduced amounts for two years thereafter. Due to the Company's insurance coverage and the previously scheduled three-month refueling and maintenance outage, the Company expects to incur incremental replacemenrp.ower costs for about eight weeks. The anticipated net replacement power costs and equipment repair costs are not expected to have a material effect on the Comp~ny's financial position or results of operations.

• 17. ENVIRONMENTAL MATTERS 'll The Company is subject to regulation with respect to the environmental and ecological effects of its operations, -

including air and water quality control 1 solid 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 ~xpenditures and operating costs because cl environmental and.ecological considerations and requirements. Federal and state statutes authorize governmental agencies to compel responsible parties to remediate or clean up certain abandoned or uncontrolled hazardous waste sites. Although the Company has received notification of its status as a potentially responsibit;, party at several such sites, the Company does not expect remediation and other potential costs related to the sites to have a material effect 9n the Company's financial position or results of operations .

DELMARVA POWER & LIGHT COMPANY 43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

18. CONTINGENCIES

1) NUCLEAR INSURANCE _

The insurance coverages applicable to the nuclear power units are as follows:

Aggregate Retrospective (Millions of Dollars) Maximum Assessment for a Type and Source of Coverage Coverage Single Incident 121 Public Liability Private $ 200 Price.Anderson Assessment OJ 7,607 $ 19.7 (J)

$ 7,807(4)

Nuclear Worker Liability <5l $ 200 $ 1.0 Property Damage: <51 Peach Bottom <7l $ 1,200 $

Salem <sJ $ 1,200 $ 1.1 All Units <9 J $ 1,250 $ 1.1 Replacement Power:

Nuclear Electric Insurance Limited (NEIL) <101 $ 3.5 (ll) $ 1.1 (1) Retrospective premium program under the Price-Anderson liability pro~isions of the Atomic Energy Act of 1954 as amended by the Price-Anderson Amendments Act of 1988. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States.

(2) The Company's share of the maximum retrospective assessment for a single incident based on the Company's ownership share of the.nuclear power units.

(3) The maximum retrospective assessment of $66.15 million per nuclear reactor is subject to periodic inflation indexing. The Company owns a joint and undivided interest in the Peach Bottom and Salem nuclear power facilities. In the event that all other co-owners are unable to fund their share of the retrospective assessment, the Company's maximum retrospective assessment would be $264.6 million.

(4) Limit ofliability under the Price-Anderson Act for each nuclear incident. If claims from a nuclear incident exceed the $7.8 billion limit, Congress could impos: a revenue raising measure on the nuclear industry to pay claims.

(5) American Nuclear Insurers provide coverage against the potential liability from workers claimihg exposure to the hazard of nuclear radiation.

(6) The Company is a sel.f insurer, to the extent of its ownership interest, for any property loss in excess of the stated amounts.

(7) For property damage to the Peach Bottom nuclear power facilities, the Company and its-co-owners have private insurance up to $1.2 billion .

. (8) For property damage to the'Salem nuclear power faeilities, the Company and its co-owners have $500 million of insurance with Nuclear Mutual Limited (NML), a utility-owned insurance company, and $700 million with private insu,rers.

(9) All units are insured by Nuclear E~ectric Insurance Limited (NEIL II) for losses in excess of $500 million.

(10) A utility-owned mutual insurance company provides coverage against extra expense incurred in obtaining replacement power during prolonged accident~! outages of nuclear power units.

(11) Maximum weekly indemnity for 52 weeks which commences after the first 21 weeks of an outage. Also provides $2.4 million weekly for the second 52 week period and $1.2 million weekly for a third 52 week period.

2) OTHER The Company is involved in certain other legal and administrative proceedings before various courts and governmen-tal agencies concerning rates (Note 6 to the Consolidated Financial Statements), fuel contracts, tax filings, and other matters. The Company expects that the ultimate disposition of these proceedings will l).ot have a material effect on the Company's financial position or results of operations. -

44 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

• • 19. SEGMENT INFORMATION Segment information with respect to electric, gas and steam operations was as follows:

(Dollars in Thous~nds) 1991 1990 1989 Operating Revenues:

Electric $751,076 $708,476 $678,396 Gas 71,222 79,836 86,742 Steam 22,509 22,926 . 24,569 Total $844,807 $811,238 $789,707 Operating Income:

Electric $129,295 $137,210 $129,260 Gas 7,ll5 7,263 8,390 Steam 2,297 1,901 1,771 Total $138,707 . $146,374 $139,421 Net Utility Plant: (1) (2)

Electric $1,704,422 $1,6:?1,655 $1,500,822 Gas il2,421 98,992 86,728 Steam 74 308 428 1,816,917 1,720,955 1,587,978 Other Identifiable Assets:

Electric 187,819 167,771 139,393

• Gas 18,203 17,966 19,547 Steam 2,590 3,432. 4,592 208,612 189,169 163,532 Assets Not Allocated: (3) 238,189 215,591 277,151 Total Assets $2,263,718 $2,125,715 $2,028,661 Depreciation Expense:

Electric $83,363 $77,395 $71,171 Gas 5,247 4,758 4,220 Steam llO 286 936 Total $88;120 $82,439 $76,327 Construction Expenditures: (4)

Electric $163,399 '$171,581 $161,708 Gas 18,302 16,176 14,135 Steam ll9 66 \

Total $181,820 .$187,823 $175,843 (1) Includes construction work-in-progress and' allocation of common utility property.

(2) Stated net of the respective accumulated provisions for depreciation.

(3) Includes assets of the Company's subsidiaries. See Note 20.

(4) Excludes allowance for funds used during construction.

Operating income by segments is reported in accordance with generally accepted accounting and ratemakillg principles within the utility industry and, accordingly, includes each segment's proportionate share of taxes on income and general corporate expenses.. . r .

DELMARVA POWER & LIGHT COMPANY 45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

20. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF SUBSIDIARIES The following presents consolidated condensed financial information of the Company's nonregulated wholly-owned subsidiaries, Delmarva Energy (ompany, Delmarva Industries, Inc., and Delmarva Capital Investments, Inc.

Delmarva Services, a subsidiary which leases real estate to the Company's utility business, is excluded from these statements since its income is derived from intercompany transactions which are eliminated in consolidation.

CONSOLIDATED CONDENSED SUBSIDIARY STATEMENTS OF _INCOME (Dollars In Thousands) :1991 1990 1989 Revenues and Gains:

Landfill and waste hauling $ 6,154 $ . 3,066 $

Management services 2,939 4,968 3,007 Sawmill o.perations 2,044 3,370 Other revenues 1,728 2,812 3,11'4 Investment income 1,122 4,214 4,770 Gain on sale of:

Options on leverage leases 4,445 Interest in joint venture - 5,605 16,388 17,104 19,866 Costs and Expenses:

Operating expenses 16,449 17,932 13,697 Equity in losses of joint ventures 12,772 2,667 Write-off of joint venture investments . 62,534 1,929 Interest expense 1,704 1,720 2,280 Capitalized interest - (143) (373) (2,019) -

18,010 94,585 18,554 -

Income (loss) before income taxes (1,622) (77,481) 1,312 Income tax (benefit) (2,900) (25,195) (3,702)

Nedncome (loss) $ 1,278 $(52,286) $ 5,014 Earnings (loss) per.share of common stock attributed to subsidiaries $ 0.03 $ (1.10) $ 0.11 CONSOLIDATED CONDENSED SUBSIDIARY BALANCE SHEETS (Dollars In Thousands) I At December 31 Liabilitie~ and At December 3 1 Assets 1991 1990 Stockholder's Equity 1991 1990 Current assets: Current liabilities:

Cash and Debt due cash equivalents $ 14,601 $ 8,610 within one year $ 11,211 $ 7,441 Deferred income taxes 2,093 3,589 Other 11,72.9 13 789 Other 2,546 1 319 22,940 21,230 19,240 13,518 Noncurrent assets: Noncurrent liabilities:

Investment in: Long-term debt 810 1,469 Leveraged leases 78,771 83,852 Deferred income taxes 70,110 69,256 Limited partnerships 4,650 5,'.J-46 Other 4,725 6141 joint ventures 1,861 850 .. 75,645. 76 866 Property, plant & equipment:

Landfill & waste hauling 24,555 23,786 Oil ~ gas exploration 3,898 4,390 Real estate & other 2,319 Stockholder's* Equity - .

2,134 39,493 38,213 Other assets 2.969 2 148 Total $138,078 $136,309 Total $138,078 $136,309 46 DELMARVA POWER & LIGHT COMPANY

NOTES TO CONSO~IDATED FINANCIAL STATEMENTS.

21. QUARTERLY FINANCIAL INFORMATION (IJNAUDITED)

.The quarterly data presented below reflect all adjustments necessary in the opinion of the Company for a fair pre-sentation 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 ~nd maintenance of electriC generating units.

Earnings Earnings (Loss) (Loss)

Net Applicable Average PE!r Quarter Operating Operating Income to Common Shares Average Ended* Revenue Income (toss) Stock Outstanding Share (Dollars in Thousands) (In Thousands)

.1991 .

• March 31 $ 218,805 $ 36,700 $ 25,024 ~ 22,943 48,149 $0.48 Adjustment* (4,715) "(2,858) 9 872 9,872 0.20 March 31 Restated 214,090 33,842 34,896 32,815 48,149 0.68 June 30 195,834. 27,985 . 12,957 10,957 49,586 0.21 Adjustment** 6,680 4134 4134 4134 0.09 June 30 Restated 202,514 32,119 17,091 15,091 49,586 0.30 September 30 238,411 49,060 33,754 31,792 52,115 0.62 Adjustment* ,(2,800) (1,722) (1,722) (1,722) (0.04)

September 30 Restated 235,611 . 47,338 32,032 30,070 52,115 0.58

• December.31 1990 March 31 June 30 September 30 192,592

$ 844,807

$ 219,341 184,730 227,933 25,408

$ 138,707

$ 40,281.

28,263 51,820 9,217

$ 93,236

$ 24,677 12,186 35,104

. 7,283

$ 85,259

$ 22,497 9,969 32,919 52,476 50,581 47,195 47,421 47,646 0.13

$1.69

$0.48 0.21 0.69 December 31 179,234 26,010 (34,656) (36,858) 47 875 (0.78)

$ 811,238 $ 146,374 $ 37,311 $ 28,527 47 534. $0.60

'*As discussed under "Unbilled Revenues" in Note' 1 tot-he Consolidated Financial Statements, in December 1991, the Company changed its method of accounting fQr unbilled revenues, effective January 1, 1991. As sho-\.\rn above, the first three quarters of 1991 were. restated to reflect the effects of the accounting change. The adjustment to restate the first quarter of 1991 includes an increase in net tncome of $12, 730,000 ($0.25 per share) for the 011e-time cumulative

~ffect of the accounting change. The change in accounting for unbilled revenues did not have a _material effect on net income and earnings per share in the fourth quarter of 1991.

As discussed in Note 8, in the fourth quarter of 1990, net income was decreased by $42,497,000 (89¢ per share) due to _the write-offof the Company's investment fn certain joint venture subsidiary projects .

/

DELMARVA POWER & LIGHTCOMPANY* 47

CONSOLIDATED STATISTICS 10 YEARS OF REVIEW 1991 1990 1989 1988 1987 ELECTRIC Residential $275,888 $259,113 $251,490 $247,950 $231,439 REVENUES Commercial 218,558 209,174 197,362 191,104 176,355 (Thousands) Industrial 144,272 140,288 133,451 130,094 119,109 Resale, etc. 104,819 93,179 _90,206 90,220 ' 79,180 Unbilled revenues, net (73)

Miscellaneous revenues 7,612 6 722 5,887 8 185 6,284 Total electric revenues $751,076 $708,476 $678,396 $667,553 $612,367 ELECTRIC SALES . Residential 3,236,616 3,081,943 3,049,882 2,944,477 2,732,018 (1,000 Kilowatt- Commercial 3,098,599 2,979,738 2,875,681 2,734,069 2,536,399 Hours) Industrial 3,105,338 3,142_,439 3,025,653 2,729,409 2:,611,218 Resale, etc. 2,000,913 1,877,091 1,877,623 1,817,088 1,685,641 Total eleqric sales 11,441,466 11,081,211 10,828,839 10,225,043 9,565,276 ELECTRIC Residential 330,632 326,175 319,696 311,577 303,158 CUSTOMERS Commercial 41,539 40,766 40,104 38,629 36,783 (End ~f Period) Industrial 753 774 798 825 842 Resale, etc. 578 562 562 547 525 Total electric customers 373,502 368,277 361,160 . 35t,578 341,308 GAS REVENUES (Thousands)

Residential Commercial Industrial Interruptible Other customers Unbilled revenues, net Gas transported

$35,636 16,370 14,395 3,412 140 194 710

$38,487 16,939 16,498

, 6,714 105 602

$42,908 18,816 17,546 6,714 92 174

$40,303 16,404 12,208 8,309 66 2

$39,614 15,491 10,941 11,136 160

• I Miscellaneous revenues 365 / 491 492 1,323 - 891 Total gas revenues $71,222 $79,836 $86,742 $78,615 $78,233 GA.S SALES Residential 6,410 6,484 6,795 6,797 6,364 (Million Cubic Feet) Commercial 3,653 _/ 3,452 3,562 3,333 2,992

. Industrial 4,398 4,418 4,245 3,229 2,693 Interruptible 1,004 1,678 2,010 2,774 3,320 Other customers 54. 37 33 21 42 Total sales 15,519 16,069 16,645 16,154 15,411 Gas transported 2,610 2 194 677 2  !

Total gas sales and -1 I

gas transported 18,129 18,263 17,322 16,156 15,411 GAS CUSTOMERS Residential 80,874 78,893 77,021 74,762 73,803 (End of Period) Commercial 6,313 5,983 5,689 5,322 5,027 Industrial 154 154 159 162 156 Interruptible 9 13 13 16 15 Other customers 1 1 1 1 1 Total gas customers 87,351 85 044 82,883 80,263 .79,002 STEAM SERVICE Electricity delivered (1,000 kilowatt-hours) 339,0d9 316,948 343,~98 292,688 35'!,842 Steam delivered (1,000 pounds) 6,007,426 6,996,248 7,443,971 6,928,792 6,134,946 48 DELMARVA POWER & LIGHT COMPANY

CONSOLIDATED STATISTICS Ten Year

-

• Ave(age Annual Compound%

1986 1985 1984 1983 1982 1981 Rate of Growth

$217,393 $212,254 $205,910 $193,021 $183,258 $164,919 5.28 %

169,157 168,957 156;507 140,809 137,434 123,099 - 5.91 %

- 127,900 135,141 128,833 126,703 127,441 129,601 1.08 %

80,291 79,399 79,235 -68,991 73,469 73,602 3.60 %

7,499 9,830 13 678 12,728 13 168 12,898 (5.14)%

$602,240 $605,581 $584,163 $542,252 $534 770 $504,119 4.07 %

2,496,099 2,256,922 2,249,270 2,136,265 2,026,398 1,996,647 4.95  %

2,370,775 2,165,685 2,073,457 1,844,,324 1,729,863 1,660,147 6.44  %

2,753,902 2,606,466 2,569,572 2,600,492 2,255,673 *2,454,685 2.38  %

1,585,019 1,501,447 1,415,934 1,297,395 1,237,508 1,283,845 4.54  %

9,205,795 8,530,520 8,308,233 7,878,476 7,249,442 7,395,324 4.46  %

293,452 283,911 275,175 267,357 260,371 255,646. 2.61 %

35,089 33,189 31,548 30,525 29,966 29,450 3.50 %

853 893 929 949 741 788 (0.45)%

517 492 502 434 434 434 2.91 %

. 329,911 318 485 308 154 299,265 291,512 286,318 2.69 %

$43,145 . $39,224 $ 40,933 $36,694 $36,505' $34,123 . 0.43 %

18,523 17,901 18,663 16,527 l5,792 14,344 1.33 %

16,995 19,762 22,940 23,232 20,112 22,259 (4.27)%

11,464 17,419 18,098 17,026 11,733 11,711 (11.60) %

142 130 160 115 53 61 8.66 %

1533 820 784 764 552 572 (4.39)%

$91,802 . $95,256 $101,578 $94 358 $84 747 $83,070 (1.53) %

6,201 5,622 - 6,213 5,640 6,062 6,193 0.34 %

2,906 2,742 2,971 2,677 2,768 2,704 3.05 %

3,338 3,579 4,245 4,378 4,108 4,809 (0.89)%

3,471 3,734 3,769 3,723 2,656 2,802 (9.75)%

36 31 41 31 10 12 16.23 %

15,952 15,708 "17,239 16,449 15,604 16,520 (0.62)%

15,952 15 708 17 239 16 449 15 604 16 520 0.93 %

. 72,685 70,804 70,183 69,608 69,092- 68,608 1.66 %

4,693 4,417 4,233 . 4,075 4,057 3,967 4.76 %

158 160 165 160 166 167 *(0.81)%

14 15 19 19 18 16 (5.59)%

1 1 1 1 1 1 I 0.00 %

77 551 .75 397 74 601 73 863 73 334 72 759 1.84 %

370,802 335,308 298,203 309,043 322,804 343,063 (0.12)%

6,627,130 6,794,105 6,922,416 6,965,904 7,778,929 7,673,420 . (2.42)%

~

DELMARVA POWER & LIGHT COMPANY 49

SELECTED, FINANCIAL DATA SELECTED FINANCIAL DATA (Dollars in Thousands)

For the Years Ended December 31 1991 1990 1989 1988 1987 OPERATING DATA Operating Revenues $ 844,807 $ 811,238 $ _789,707 $ 768,322 $ 712,479 Operating Income $ 138,7..07 $ 146,374 $ 139,421 $ 129,494 - $ 124,967 Income Before Cumulative Effect of a Change in Accounting Principle $ 80,506 $ . 37,311 $ 91,308 $ 84,721 $ 79,803 Cumulative Effect of a Change in Accounting for Unbtlled Revenues $ 12,730 Net Income $ 93,236 $ . 37,311 $ 91,308 $ 84,721 $ 79,803 Electric Sales (kWh 000) 11,441,466 11,081,211 10,828,839 10,225,043 9,565,276 Gas Sales (mcf 000) 15,519 16,069 16,645 16,154 15,411 Gas Transported (mcf 000) 2,610 2,194 677 2 COMMON STOCK DATA Earnings Per Share of Common Stock:

Before Cumulative Effect of a Change in Accounting Principle Cumulative Effect of a Change in Accounting for Unbilled Revenues Total Earnings P.er Share D!vidends Declared Per Share of Common Stock

• Average Shares Outstanding (000)

Year-End Stock Price Book Value.Per Share CAPITALIZATION Variable Rate Demand Bonds <1l ,

Long~Term Debt m Preferred Stock <3l Common Stockholders' Equity Total Capitalization CAPITALIZATION RATIOS

, Variable Rate Demand Bonds Long-Term Debt Preferred Stock Common Stockholders' Equity Total Capitalization OTHER INFORMATION Total Assets Long-Term Capital Lease Obligation Construction Expenditures <4l Internally Generated Funds (IGF) <5l IGF as a Percent of Construction Expenditures

. Capacity Reserve at Time of Summer Peak (1) Variable rate demand bonds were reclassified from long-term debt to current liabilities as of December 31, 1988. The Company intends to use the bonds as a source of long-term financing as discussed in Note 5 to the Consolidated Financial Statements.

(2) Includes long-term debt due within one year.

(3) Includes preferred stock with mandatory redemption.

(4) Excludes allowance for funds used during "construction.

(5) Net cash provided by operating activities less common and prefE;rred dividends .

. 1 50 DELMARVA POWER & LIGHT COMPANY

DIRECTORS

• DIRECTORS AS OF FEBRUARY 1, 1992 ELWOOD P. BLANCHARD, JR. Vice Chairman of the Board of Directors and member of the Office of the Chairman of E. I. du Pont de Nemours & Company (a diversified chemical, energy, and specialty products company), Wilmington ,

Delaware, and Chairman of the Board of DuPont Canada, Mississauga, Ontario, Canada, Term expires in 1994. JOHN I

R. COOPER Former Director of Environmental Affairs of E. I. du Pont de emours & Company (a diversified chemi-cal, energy, and specialty products company), Wilmington, Delaware, Term expires in 1993. HOWARD E. COSGROVE President and Chief Operating Officer of the Company, Term expires in 1992. NEVIUS M. CURTIS Chairman of the Board and Chief Executive Officer of the Company, Term expires in 1993 .

SARAH I. GORE Human Resources Associate, W L Gore & Associates Inc. (a high technology manufacturing company), Newark, Delaware, Term expires in 1994. H. RAY LANDON Executive Vice President of the Company, Term expires in 1994. DONALD W. MABE Former President and Chief Executive Officer of Perdue Farms Incorpo-rated (an integrated poultry company), Salisbury, Maryland, Term expires in 1993. JAMES T. MCKINSTRY Director and Partner, Richards, Layton & Finger (a law firm), Wilmington, Delaware, Term expires in 1992 .

• JAMES O. PIPPIN, JR. Director, President, and Chief Executive Officer of the Centreville National Bank of Maryland, Centreville, Maryland, Term expires in 1992. DAVID D. WAKEFIELD Chairman and President of]. P Morgan Delaware (a commercial banking subsidiary ofj.P. Morgan and Co. Incorporated) , Wilmington, Delaware, Term expires in 1993. LIDA W. WELLS Director and President of Wells Agency, lnc. (a general real estate and development agency),

Milford, Delaware, Term expires in 1992.

DELMARVA POWER & LIGHT COMPANY S1

COMMITTE(S, OFFICERS AND INVESTMENT INFORMATION COMMITIEES AND OFFICERS AUDIT COMMITTEE john R. Cooper, Chairperson; James T. McKinstry;james 0. Pippin, Jr.; Lida W. Wells COMPENSATION COMMITTEE Elwood P. Blanchard, Jr., Chairperson; David D. Wakefield, Vice Chairperson; Sarah I. Gore; Donald W. Mabe EXECUTIVE COMMITTEE Nevius M. Curtis, Chairperson; David D. Wakefield, Vice Chairperson; Elwood P. Blanchard, Jr.; Howard E. Cosgrove; James T. McKin,stry INVESTMENT COMMITTEE David D. Wakefield, Chairperson; Elwood P. Blanchard, Jr.; Nevius M. Curtis; Donald W. Mabe; James 0. Pippin, Jr.

NOMINATING COMMITTEE Lida W. Wells, Chairperson; Nevius M. Curtis; James 0. Pippin, Jr.

NUCLEAR OVERSIGHT COMMITTEE James T. McKinstry, Chairperson; john R. Cooper; Howard E. Cosgrove OFFICERS AS OF FEBRUARY 1, 1992 Nevius M. Curtis, Chairman of the Board and Chief Executive Officer; Howard E. Cosgrove, President and Chief Operating Officer; H. Ray Landon, Executive Vice President; Paul S. Gerritsen, Vice President and Chief Financial Officer; Donald E. Cain, Vice President, Administration; Kenneth K. Jones, Vice President, Planning; Ralph E. Klesius, Vice President, Engineering; Wayne A. Lyons, Vice President, Division Operations; Frank]. Perry, Jr., Vice President, Production; Thomas S. Shaw, j.r., Vice President and President, Delmarva Capital Investments, Inc.; Dale G. Stoodley, Vice President and General Counsel; Jack Urban, Vice President, Gas Division; Donald P. Connelly, Secretary; Richard H. Evans, Vice President, Corporate Communications; Barbara S. Graham, Treasurer; James P.

Lavin, Comptroller-Corporate and Chief Accounting Officer; Dennis R. McDowell, Comptroller-Operating; Duane C. Taylor, Vice President, Information Systems; D. Wayne Yerkes, Vice President, Northern Division DIVIDEND REINVESTMENT AND COMMON STOCK PURCHASE PLAN More than 30 percent of the Company's common shareholders of record are now participating in the Dividend Reinvestment and Common Stock Purchase Plan. If you are not participating, you may want to consider the benefits of joining this plan. Under the plan, you can inve~t your cash dividends and also invest additional cash, up to

$100,000 per calendar year, to purchase additional shares of common stock without a service fee.

Shares of common stock to be purchased under the plan may be either newly issued shares or shares purchased in the open market, depending on the financing needs of the Company.

You may obtain a prospectus with the plan description and an enrollment authorization card by writing to Delmarva Power & Light Company, Shareholder Services, PO. Box 231, Wilmington, DE 19899.

DUPLICATE MAILINGS You may be receiving more than one copy of the Annual Report because of multiple accounts within your household.

The Company is required to mail an Annual Report to each name on the shareholder list unless the shareholder requests that duplicate mailings be eliminated. To eliminate duplicate mailings, please send a written request to Shareholder Services, and enclose the mailing labels from the extra copies.

52 DELMARVA POWER & LIGHT COMPANY

STOCKHOLDER INFORMATION QUARTERLY COMMON ST<;>CK DIVIDENDS AND PRICE RANGES The Company's common stock is listed ori the New York an.d Philadelphia Stock Exchange:; and h~s unlisted trading privileges on the Cincinnati, Midwest and Pacific. Stock Exchanges ..

The Company had 55,359 holde_rs of common stock as of De.cember 31, 1991.

• Dividend Price Dividend *Price 1991 Declared High Low 1999 De.d ared High Low*

• first Quarter 1

$.38 /1 $19 /a .

1 5

$16 /a . First Quarter . $.38 .1/2 $21 ia *

• 3

$19 1/a Second Quarter .38 1/2 19 1/4 17 7/s Second Quarter . .38 1/2 .* 20 18 1/a *

• Third, Quarter * .38 '1/i . 20 1/a 18 1/4 Third.Quarter .38 1/i 19 % 17 Fourth Quarter .38 1/2 21 5/s 19 '% . Fourth Quarter .38 % 19 1/a 17 1/a SHAREHOLDER SERVICES TRANSFER AGENTS AND REGISTRARS Carol C. Conrad, Assistant Secretary First Mortgage Bond Trustee Delmarva Power &: Light Company

• Ch.emic~l Bank . . .

800 King S_treet, PO. Box 23J

. 55 Water Street, Suite .1820 .

Wilmington, Delaware 19899 * . *.New York, New York 10041 Telepho~e (302)429-3355.or toll free (_800) 365-6495

• Preferred Stock

$TOCK SYMBOL Wilmir.gton Trust Compariy Common Stock, DEW-listed on the New York ?nd Philadelphia Corporate Trust Division Stock Exchanges .. Rodney Squa;e North Wilmington , Delaware .19890 ANNUAl MEETING Common Stock The Annual M.e eting will be held .o n April 28 , 1992, at 11:00 Wilmington Trust Company a.m. in the." Clayton Hall, University* of Delaware, Newark, Corporate Tru~t Division

• Delaware. .

Rodney Square North

• REGULATO~Y COMMISSIONS .Wilinihgtc_:m, Delaware 19890 Federal Energy Regulatory Commission MaI).ufactm;efs Hanover Trust Company Martin L Allday~ Chairperson *

• Stock Transfer Department

• 941 North Capitol Street, N.E. P.O. Box 24935 .

Washington , D.C. 20246 Church Street Station Delaware Public Service Commission New York, New York 10249

• Nancy M. Norling - Chairperson ADDITIONAL REPORTS 1560 $. duPont Highway To suppleme*nt inforll).ation in* this Annual Report; a PO. Box 457 Fin.anciai and Statistical Review (1981-1991)-and the Dover,. Delaware 19903-0457 . . ..

• Form 10-K.are available upon request Please write to:

Mar:yhlnd Public Service Commission

• Shareholder Ser0ces, Delmarva Power, 800 Kir:ig .Street, Frank 0. Heintz - Chairperson

• PO. Box 23t Wilmington; Delaware 198.99.

American Building 231 East Baltimore Street Baltimore, Maryl~nd 212.02-3486 Virginia State Corporation Commission Preston C. Shannon - Chairperson PO. Box 1197 .

Richmond, .Virginia 23209

. Delmarva Power BUlKRA1E 800 King Street _ _____. . U.S. FOSTAGE P.O.Box 231 PAID Wilmington, DE 19899 Fffi'v\JTN0.68