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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, . ** ', 9204270205 PDR ADOCK I ,* 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.

" THE 19.91 ANNUAL. RE!>ORT IS. PRINTl'D *-ON tlECYCLED PA.PER. THE COVER '-STOCK CONTAINS 100% POST * -CONSUMER WASTE. PAPER THE INSl'?E PAGES CONTAINS AT LEAST 10% POST CONSUMER WASTE. FINANCIAL HIGHLIGHTS Percent Increase 1991 -1990 -;

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 Share of Common Stock* . $ 1.54 Average Shares of . Common Stock _ *outs tanding 50,581,689 Common Stock Book Value Per Share $ 13.42 Construction Expendl.tures

<3 1 $181.8 million -Internally Generated

• Funds c 4 J $ 96.l million Electric Sales *_ 11,441,466 mwh Customers (yea r end) _ 373,502 _ Average Annual Residential Usage Gas Sales Gas Transpor.t ed . Total Gas and Transportation Sales Gas Customers (year end) Average Annual . Residential Usage* 9,843-kwh 15.52 million mcf 2.61.million mef 18.13 million mcf 87,351 80.24 mcf $ 1.54 0.0 47,534,272 Q.4 .... $ 12.84 4-5 -$187.8 million. (3.2) $112.6 .million (14.6) 11,081,211 mwh 3.3 *368,277 1.4' 9,524 kwh 3.3 16.07 million tilcf (3.4) 2.19 million mcf -18.9 18.26 million mcf * (0.7) 85,044 2.7 83.29 mcf -(3 .. 7) {l) lnclude5 $0.25 for the a

accounting for unbilled re.,enues.

(2) an $0.89 write-off of subsidiary joint venture investments.

(3) Excludes Aliowance

!or Funds l.Jsed During Construction.

(4)."Ne t 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 BY RECYCLING OFFICE PAPER , EMPLOY* EES AT TWO COMPANY LOCATIONS CUT TRASH DISPOSAL COSTS BY MORE THAN $2,SOO AND KEPT MORE THAN 64 TONS OF PAPER OUT OF LANDFILLS. MORE OFFICE WORKERS WILL RECYCLE PAPER IN 1992. COAL FUELED NEARLY HALF (45%) OF THE ELECTRICITY DELMARVA POWER MADE IN 1991. SINCE COMPANY PLANTS BURN LOW SULFUR-CONTENT COAL, THE COMPANY CAN MEET NEW FEDERAL CLEAN AIR STANDARDS WITH LESS ADDITIONAL EXPENSE THAN MANY OTHER UTILITIES. DEAR STOCKHOLDER

-1991 was a good year. Teams of creative, committed, and caring employees again produced excellent results. For example, the Companys customer favorability rating of 82 % continued to be the highest among 23 utilities surveyed by our pollster; a new , on-budget, 109-megawatt combustion turbine began generating tricity ahead of schedule; time accidents-four-were the fewest in the Company's history; environmental stewardship programs drew extraordinary responses from customers; progress in reducing customer outages exceeded goals; power plant and customer service workers handled a sur -prising 8. 7% jump in peak electricity demand with few problems; and customer pation in energy management and conservation programs was ahead of plan. 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 struction costs. The plishments of 1991 are detailed on the following pages. We would like to use the remainder of this letter to discuss our plans to:

• succeed in a changing industry

• provide energy to a growing service territory at the lowest reasonable price for customers and with a fair return for. stockholders.

PREPARING FOR CHANGE Over the last decade , changes to the utility industry have been significant.

For example, ers have become more edgeable and influe{ltial.

Clean air, drinkable water, pristine wetlands, and beautiful beaches have become important to the people of the service territory.

Deregulation , transmission access, and utility generators are altering the industry's traditional structure.

The labor force is becoming increasingly diverse in race, age, and gender. And more change is ahead. How has Delmarva Power prepared for the '90s? We have developed several strategies that employ flexibility and balance. * *

• *

• Delmarva Power focuses on satisfying customers and nizes that customers are the ultimate judge of value. People at the Compan y work hard , through face-to-face contact and surve y s , to learn about ers' changing needs. Then, with that information, employees strive to balance improving service and reducing costs. An example of this is the use of computers in some Company vehicles.

These computers help workers organize jobs so tomers can be informed more precisely as to when service workers will arrive. This improves productivity

• and reduces tomer irritation. The 82 % favorability rating in the 1991 customer survey reflects the success of our customer focus. These efforts are discussed further on pages 9 to 11.' The Company's " Serving & Conserving Delmarva" 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 valuabl e wetlands to the recycling of coal ash. Customers who know about " Serving & Conserving Delmarva" consistently give the Company higher marks in the annual survey than those who do not. More information about environmental appears on pages 13 and 14. Delmarva Power takes an open but conservative approach to changes within the industry For example, 27 bidders responded to our request for proposals to provide us with 150 megawatts of electricity in the middle 1990s. The Company was pleased with the number of outside bidders that offered proposals.

However , we are concerned that many of the bids may not be price competitive.

Evaluators will weigh both price and reliability considerations and take a cautious ,' middle path to reach a decision. In the area of work force sity, strategies to develop a participative work culture were started in the early 1980s. These strategies have matured to

• THE BOARD OF DIRECTORS ELECTED HOWARD E. COSGROVE (SEAJED) PRESIDENT AND CHIEF OPERATING OFFICER. THE POSITION HAD BEEN HELD BY NEVIUS M. CURTIS (STANDING)

WHO IS ALSO CHAIRMAN OF THE BOARD OF DIRECTORS AND CHIEF EXECUTIVE OFFICER. MR. CURTIS WILL CONTINUE IN THOSE POSfTlONS BUT ANNOUNCED THAT HE PLANNED TO RETIRE FROM THEM DURING THE LAST HALF OF 1992. Mr. Cosgrove began his career with Delmarva Power in 1966 as an industrial engineer in the marketing depa11ment.

From 1975 through 1979, he was manager of financial planning and analysis.

In late 1979, he was elected vice president of finance and accounting and chief financial officer. In 1984, Mr. Cosgrove was elected senior vice president of operations and engineering.

He was elected executive vice president in 1985. Since 1986, he has been a member of the Board of Directors.

Mr. Cosgrove received a Bachelor of Science degree in Mechanical Engineering from the University of Virginia and a Masters of Business Administration degree from the University of Delaware.

He also completed the Advanced Management Program at Harvard University.

= A MORE THAN 95% OF EMPLOYEES REMAINED INJURY FREE IN 1991. ONE REASON FOR THIS EXCELLENT PERFORMANCE IS THE " ACTIONS PREVENT ACCIDENTS" PROGRAM, WHICH INCREASES AND REWARDS INDMDUAL AWARENESS, COMMITMENT , AND ACTION DIRECTED TOWARD PREVENTING ACCIDENTS.

AS A RESULT OF THIS PROGRAM, MACHINIST FRED BRAMBLE DESIGNED AN AUTOMATIC "FEED" SYSTEM THAT ALLOWS POWER PLANT WORKERS TO DO THEIR JOBS SAFER AND FASTER. help make Delmarva Power a true quality company. Looking ahead, a Company-wide tee, composed of people that represent various ranks , races, ages, and genders, is working to enhance this participative work style for the purpose of ing productivity MEETING ENERGY NEEDS Delmarva Power is in a tion cycle. This means that , over the next few years , the Company will be financing as well as building facilities-.

The economic ment of the Delmarva Peninsula during the mid to late 1980s has been dratnatic.

Since 1984, the demand for electric i ty at peak four times greater than peak growth for the entire decade between 1975 and 1984. The 1991 electricity peak and sales increases over the previous year, 8.7% and 3.3% respectively, demonstrated that, even with a recession, the service territory's economy is still growing. While growth in the 1980s increased revenues , it also depleted generating reserves. Generating capacity dropped from 3 7 .1 % beyond peak demand in 1984 to 3.3% at the end of 1988. About 15% to 20% is normal for the industry. In the mid-l 980s, Delmarva Power developed a plan , called Challenge 2000 , to take on the challenges of growing energy needs. As opposed to one big , new power plant , Challenge 2000 provides a blend of options including conservation, power purchases, and small power plants to meet load growth in bite-sized pieces. This mizes costs. The plan, called " Save Some , Buy Some, Build Some," also provides flexibility, meaning various aspects can be accelerated or slowed as conditions change. Through 1991, this strategy yielded a pre-summer reser_ve level of 18.3%, but the than-expected 1991 summer peak now leaves reserves at 8.8%. All aspects of the Challenge 2000 program continue.

Part of Challenge 2000 includes the planned 1993 completion of a new 160-megawatt cycle unit at Hay Road and a 150-megawatt power plant for the middle 1990s. Under the currerit plan , through a competitive bidding process , the second plant inay be built by one of the * * *

• 2 7 power project developers who recently submitted proposals to the Company. The cost of new power plants , energy management equipment, and transmission and distribution equipment need to be included in charges to customers. ally, these costs were not included in the 1991 rates. A major effort of 1991 was to seek base rate increases to cover these costs , along with the cost of inflation since the last rate increase requests were filed in the early 1980s. ADJUSTING PRODUCT PRICES Core utility earnings declined substantially in 1991. For a complete look at earnings see page 18. Some might ask why rate cases were not filed earlier. The answer is " regulatory lag ," the period between the time a company can demonstrate that earnings have deteriorated and the time rate relief is granted. This is typically about a year. Thus , core earnings could be expected to decline in that period , as they did. A key part of our presentation to regulators was that the Company is in a construction

.cycle designed to serve the healthy economy of the service territory We asked regulators to grant the rate relief necessary to attract the lowest cost capital in all financial markets. Since the last round of rate cases in the early 1980s, customer favorability has increased from 46% to 82%. Operation and . maintenance expenses per kilowatt-hour (other than fuel) have remained relatively flat while the industry average has increased 37%. Even with the proposed rate increases, the price of electricity will be substantially lower than it was in 1983. Delmarva Power has had a good track record and has asked regulators to act cordingly Their positive response, in the form of modest rate relief to support increa.sed customer demand, is ____ .,_

• DElMARVA POWER PRINTED A 1992 "SERVING & CONSERVING DElMARVA" CALENDAR TO PROVIDE CUSTOMERS WITH ENERGY*SAVING ADVICE. THE CALENDAR ALSO BENEFITIED THE ENVIRONMENT.

THE COMPANY AND PEOPLE WHO PURCHASED THE CALENDAR DONATED $22,600 TO THE , NATURE CONSERVANCY, AN INTERNATIONAL NATURE PRESERVE AND WILDUFE PROTECTION GROUP. THE PROCEEDS FROM SALES OF THE CALENDAR WILL HELP TO FUND NATURE CONSER* YANCY PROJECTS IN DELAWARE, MARYLAND, AND VIRGINIA.

DElMARVA POWER FORESTERS HAVE TURNED MORE THAN 8,000 ACRES ELECTRIC TRANSMISSION UNE RIGHT*OF*WAY PROPERTY INTO WILDLIFE HABITATS FOR ANIMALS AND PLANTS. MORE THAN 465 BLUEBIRD AND WOOD DUCK HOUSES HAVE BEEN PLACED ON DElMARVA POWER RIGHT*OF*WAY PROPERTY.

THESE STRUCTURES PROVIDE NESTING SITES FOR THESE BIRDS.

... ABOUT 225 LOW-INCOME CUSTOMERS IN DELAWARE AND MARYLAND RECEIVED WATER HEATER WRAPS, LOW*FLOW SHOWER HEADS , WEATHER STRIPPING AlllD CAULKING FROM DELMARVA POWER'S Y.E.S. PROGRAM. THE NEW PROGRAM OFFERS CUSTOM* ERS AN OPPORTUNITY TO REDUCE THEIR ENERGY USE. critical to the Company's financial health and progress.

Based on a rate settlement agreement in Maryland and assuming reasonable decisions by regulators in other tions, the rate increases should provide sufficient additional revenue in 1992 to offset ___ ... the absence of the one-time increase of $.25 per share included in 1991 earnings.

However, while we are seeking rate increases, we are also concerned about the effects of recession on our customers.

Individual residential customers may be facing personal cutbacks.

Businesses in our service territory use energy and need to keep their products competitive.

To keep rate increase requests at a minimum, we have worked hard to contain costs and improve productivity Delmarva Powers average prices for electricity and natural gas still rank low in the region. Finally, the 1991 performance of the nonutility nesses shows the previous year's problems are behind us. rently, we are working to grow remaining subsidiary assets, but the impact on future earnings should be small. A more detailed discussion about nonutility subsidiaries can be found on pages 23 and 24.

SUMMARY

• These are the challenges ahead and the strategies developed to* meet them. To succeed, we will need the energy, creativity, and dedication of skilled employees.

Their performance in 1991 demonstrates they have those tools. We thank them and look forward to working with them in 1992. Sincerely , Nev Curtis Chairman & Chief Exe c utive Officer Howard Cosgrove President

& Chief Operating Officer February 6 , 1992 * * *

.... 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 NEW AND DISTRIBUTIO:NSMISSION AND C EQUIPMEN OSTS, ALONG T. THESE INFLATION SINC;ITH THE COST OF WHEN BASE THE EARLY 1980s LAST FILED WRAE TE REQUESTS WERE ' RE NOT I IN 1991 RAT NCLUDED ES.

A TO HELP IMPROVE RELIABILITY FOR CUSTOMERS, GAS DIVISION EMPLOYEES ARE REPLACING OLD NATURAL GAS PIPES. THE PIPE REPLACEMENT PROJECT , WHICH BEGAN IN 1986, IS A 10-YEAR PLAN THAT WILL REPLACE ABOUT 90 MILES OF UNCOATED , UNWRAPPED STEEL PIPE INSTALLED PRIOR TO 1948 WITH NEW POLYETHYLENE PIPE. TO DATE , ABOUT 59 MILES OF PIPE HAVE BEEN PLACED. BOY SCOUT ADDISON YANITO AND HUNDREDS OF OTHER CHILDREN LEARNED ABOUT ENERGY TION AND ENVIRONMENTAL TION THROUGH "SCOUTING FOR ENERGY" ACTIVITY KITS SPONSORED BY THE COMPANY. FINANCIAL RESULTS Delmarva Power earnings increased to $1.69 per share from $.60 per share in 1990. There were three main reasons for the increase:

• a one-time accounting change for unbilled revenues that added $.25 per share

• the absence of last year's writeoff and operating losses from nonutility subsidiaries, which had decreased 1990 earnings by $1.10 per share *a 3.3% increase in electric sales. Core utility earnings declined to $1.66 per share from $1.70 in 1990. This decrease was pected and reflects the cost of the Company's increased investment in additional facilities to meet customers' growing energy needs, inflation since the last base rate increases in the early 1980s , and compliance with environmental ments. These higher costs were partly offset b y the Company'.s accounting method change for revenues that remain unbilled at the end of a calendar month. The one-time acco unting change, effective as of January 1, 1991 , more closely matches revenues with expenses. Non utilit y subsidiaries earned $.03 per share, compared to a

• loss of $1.10 in 1990. The positi ve earnings in 1991 resulted from gains on the sales of assets. Further details are on pages 23 and-24. To reverse deteriorating earnings caused by growing core utility expenses, the Company filed a series of rate cases in 1991. See page 38 for a complete discus-sion of rate case filings. With rate cases pending , the Board of Directors decid e d to sustain the divid e nd lev e l at 38 1 h¢ per quarter or an indi-cated annual rate of $1.54. In addition, Delmarva Power

• bonds held strong ratings , A+ by Standard & Poor'.s, A+ by Duff and Phelps, and A2 by Moody's Investor Service. During 1991, Moody's Company's credit ratings for senior secured debt from Al to A2. This change was the result of the agency's uncertainty about future rate relief necessary to

• support higher capital requirements and associated

'-

• financings and higher operating costs. The price of common stock increased 17.2%, to $21 1/4 at the end of l,?91 from $18 1/s at the end of 1990. CUSTOMER FOCUS Serving a diverse population requires Delmarva Power to be responsive to customers' changing needs. By improving productivity and containing costs , the Company has kept prices stable since the early 1980s. For example , the 1991 price of electricity for a typical Delaware residential I customer was 11 % lower than in 1983 or about 30% lower when adjusted for inflati on. Even with the proposed base rate increase, the monthly bill for a typical Delaware residential customer using 750 kilowatthours per month would be about 8% l ower than it was in 1983. Delmarva Power prices remained regionally competitive. Electric price comparisons (fo r all customer categories in cents per kilowatt-hour for 12 months ended November 30, 1991) are as follows: New York, 12.64; Philadelphia , 9.49; Newark, NJ, 9.15; Baltimore , 7.55; Delmarva Peninsula , 6.51; Norfolk, Va., 6.26. Natura l gas price comparisons (in cents per 100 cubic-feet for 12 months ended November 30, 1991) are as follows: New York , 72.76; Philadelphia , 70.26; Newark, N.]., 57.42; Baltimore, 56.90; Wilmington, Del., 46.03; and Norfolk, Va., 44.27. Each year the Company missions a residential customer opinion survey to see how our performance is measured by the community we serve. For 1991, the survey found that 82 % of the customers surveyed gave the Company a favorable rating compared with 46% in 1982. Service reliability, reasonable rates, and customer service were the top reasons customers gave the Company_ a favorable rating. In other surveys designed to evaluate day-to-day Company activities, more than eight out of 10 customers gave Delmarva Power's customer service employees favorable ratings. Near l y nine out of 10 customers MORE THAN 26,000 STRIPED BASS FINGERLINGS (ROCKFISH), HARVESTED FROM THE COMPANY'S POND AT THE VIENNA POWER PLANT, WERE RELEASED INTO THE NANTICOKE RIVER IN 1991. EMPLOYEE VOLUNTEERS HAVE HELPED TO RAISE OVER 105,000 ROCKFISH IN THE PAST SIX YEARS. HAY ROAD UNIT #3, A 109-MEGAWATT COMBUSTION TURBINE (CT), WAS COMPLETED AND PLACED IN SERVICE ON TIME AND UNDER BUDGET. WITH THIS ADDITIONAL GENERATING CAPACITY , THE COMPANY WAS ABLE TO MEET THE RECORD PEAK DEMAND FOR ELECTRICITY OF 2,430 MEGAWATTS.

THROUGH CONTRIBUTIONS OF STOCKHOLDERS AND CUSTOMERS , THE GOOD NEIGHBOR ENERGY FUND CONTRIBUTED OVER $1.5 MILLION DURING THE LAST EIGHT , YEARS TO MORE THAN 16 , 000 CUSTOMERS HAVING TROUBLE PAYING ENERGY BILLS. DELMARVA POWER TEAMS ARE FINDING WAYS TO UTILIZE 300,000 TONS OF COAL ASH PRODUCED EACH YEAR AT ITS EDGE MOOR AND INDIAN RIVER POWER PLANTS. FOR MANY YEARS, MUCH OF THE ASH, A COMBUS110N BY-PRODUCT, WAS PLACED INTO LANDFILLS, BUT SOME OF IT IS NOW BEING USED ON VARIOUS CONSTRUCTION AND ENVIRONMENTAL PROJECTS.

... " OPERA T IONS LOG ," A NEW COM* PUTER SYSTEM , ALLOWS CUSTOMER SERVICE REPRESENTATIVES TO IN* STANTLY PASS ON INFORMATION FROM CUSTOMER OUTAGE CALLS T O OPERATIONS EMPLOYEES. THE QUICK , UP-TO-DATE DETAILS FROM THE SYSTEM SPEED OUR RESPONSES TO OU T AGES. .... --.. TO FINANCE ONGO I NG CONSTRUC*

TION, DELMARVA POWER SOLD 3.5 MILLION SHARES OF NEW-ISSUE COMMON STOCK. THIS SALE DID NOT HAVE A NEGATIVE PRICE EFFECT ON SHARES HELD BY CURREN T STOCKHOLDERS. who lost power during storms felt the Company deserved positive ratings for its ability to restore service. The Company continues to develop a more participative work style where people closest to problems solve the problems.

As the participative skills process has matured and as Delmarva Power has strived to create a work environment that ' appreciates and incorporates cultural diversity , more employees at all levels have had opportunities to advance new ideas and to improve existing methods of performing their work. Working in teams, employees set high goals and suggest innovations that are efficient and cost effective. For example , Delmarva Power can now figure out in less than a week how much it owes in annual Maryland property taxes. This calculation had taken two to three months before a team of eight employees from the accounting and engineering groups created a new time-saving computer system . The construction drafting group created an index to save time when someone is looking for a specific drawing. The engineering and construction departments are using a new , more accurate measurement device that takes about one-tenth the time of the old method to check equipment for its susceptibility to lightning damage. These checks help to improve electric service reliability.

As a result of ongoing debt . refinancing efforts , the Company will save $2.6 million in annual interest expense. Working together , employees achieved six of the eight goals of the Corporate Performance tive.Plan. Through the ment of the plan's wellness goal over the last four years, ism has decreased by nearly one day per employee per year. Delmarva Power's absenteeism rate is one of the lowest among utilities in the region. Employees are also working together to continually improve the health and safety of individuals.

About 500 employees improved their health by exercising larly through a Company-wide health program. In 1991, more than 95% of employees remained injury-free. Employees also set *

• __J

• *

• all-time records for the fewest lost-time injuries ( 4) and the fewest lost work days (43). The 1991 performance was a significant improvement over 1990 results when workers experienced 21 lost-time accidents and 299 lost work days. One reason for 1991 's excellent safety mance is the Actions Prevent Accidents program , which increases and rewards individual commitment , awareness , and action directed toward ing accidents.

ENERGY SUPPLY The Company'.s Challenge 2000 plan continued to assure ers an adequate , reliable supply of electricity at competitive prices. Challenge 2000 uses a flexible approach that blends customer energy conservation and load management programs (" Save Some"), power purchases

(" Buy Some"), and new power plants ("Build Some"). This approach enables Delmarva Power to quickly respond to changes in demand, technology, and governmental regulations.

Between 1984 and 1991 , electricity demand at peak periods increased nearly 50%. '" Save Some, Buy Some, Build Some," has enabled the pany to keep up with the growing demand for electricity and to keep prices about 10% below 1983 levels. As part of "Build Some ," Hay Road Unit #3, a 109-megawatt combustion turbine (CT), was completed and placed in service on time and under budget. With this additional generating capacity, the Company's pre-summer capacity reserve margin increased to about 18%. This represents a significant improvement over the past two years. The Company is also ing a combined-cycle unit at Hay Road and plans to place it in service by the summer of 1993. The unit will use exhaust heat from the three existing CTs to cleanly and efficiently generate 160 megawatts of electricity Under " Buy Some ," the pany will purchase 48 megawatts of peaking-unit generation from Star Enterprise of Delaware City, Delaware , for 26 years beginning

<Ill MORE THAN 3,000 VOLUNTEERS, INCLUDING ESTHER PEREZ AND ABOUT 200 OTHER EMPLOYEES, CLEANED UP 18 TONS OF TRASH ALONG DELAWARE SHORELINES DURING A BEACH CLEAN-UP DAY. THE EVENT WAS CO-SPONSORED BY DELMARVA POWER AND THE DELAWARE DEPARTMENT OF NATURAL RESOURCES AND ENVIRONMENTAL CONTROL. THE WILDLIFE HABITAT ENHANCE* MENT COUNCIL RECOGNIZED DELMARVA POWER WITH A SPECIAL AWARD FOR ITS ENVIRONMENTAL WORK ALONG THE NANTICOKE RIVER. THE COMPANY ALSO RECEIVED A GOVERNOR'S SALUTE TO EXCELLENCE AWARD FROM THE STATE OF MARYLAND CHESAPEAKE BAY CRITICAL AREA COMMISSION FOR FUNDING A MARSH RESTORA* TION PROJECT IN ST. MICHAELS.

BY IMPROVING PRODUCTIVITY AND CONTAINING COSTS, THE COMPANY HAS KEPT PRICES STABLE SINCE THE EARLY 1980S. EVEN WITH PROPOSED RATE INCREASES, THE PRICE OF ELECTRICITY WILL BE LOWER THAN IT WAS IN 1983. THE COMPANY IS CONSTRUCTING A COMBINED-CYCLE UNIT AT HAY ROAD AND PLANS TO PLACE IT IN SERVICE BY THE SUMMER OF 1993. THE UNIT WILL USE EXHAUST HEAT FROM THREE EXISTING COMBUS* TION TURBINES TO CLEANLY AND EFFICIENTLY GENERATE 160 MEGAWATIS OF ELECTRICITY.

MEMBERS OF THE SHAREHOLDER SERVICES DEPARTMENT ASSISTED 3,936 INVESTORS WHO CALLED THE COMPANY'S TOLL-FREE NUMBER, (800) 365-6495.

EMPLOYEES HANDLE CALLS TO THE SPECIAL TELEPHONE LINE FROM 8 A.M. TO 5 P.M., MONDAY THROUGH FRIDAY. EMPLOYEES HAVE RECYCLED MORE THAN 4,000 POUNDS OF ALUMINUM CANS AND DONATED THE PROCEEDS TO COMMUNITY PROFIT AGENCIES.

injune 1992. Star's generating unit, adjacent to its oil refinery, was selected in 1989 from among 10 proposals because it posed the least opmental risk and the lowest cost to customers.

The unit, formerly owned by the pany, was purchased by Star at the end of 1991 and will be operated under contract by Delmarva Power. Also, as part of "Buy Some," the Company received 2 7 proposals from power project developers to supply fhe Company with 150 megawatts of electricity by the mid-1990s.

During the next few months, Delmarva Power will evaluate the 2 7 proposals.

The evaluation will determine if purchasing power from one of these posed projects would benefit the Company's customers more than a Delmarva Power-built generat-ing unit. If none of the bids shows an advantage for tomers and investors , Delmarva Power will build a natural gas-fired, 150-megawatt combined-cycle unit. "Save Some" coi;:tsists o( energy management and energy vation programs. Based on the amount of electricity demand they can trim at summer peak, Delmarva Power's " Save Some" programs are among the best in region. As of the end of 1991, more than 4 3, 000 residential customers and 72 large commercial and trial customers are participating in Energy For Tomorrow (EFT) and Peak Management (PM), respectively.

ln exchange for credits . on their electricity bills, during peak summer periods , residential customers who participate in EFT allow the Company to cycle their central air conditioners , heat pumps , and electric water heaters. Large commercial and industrial customers who in PM reduce their use to prearranged levels when notified by the Company With these two programs , Delmarva Power can now reduce load by approximately 80 megawatts during peak periods. Forty-eight commercial and industrial customers have joined the Companys indoor lighting * * *

• * -* program. To da t e, this " Save Some" program has reduced peak demand for electricity by two megawatts.

Participants reduce their energy needs and cost by converting to efficient indoor lighting.

The program offers customers surveys of their facilities, written recommendations that identify where lighting quality and efficiency can be improved , and rebates, ranging from $100 to $10 , 000, that provide an additional incentive to make changes. Delmarva Powers goal for the lighting program is to reduce peak load by 10 to 20 megawatts by the year 2000 . Delmarva Power will continue to market existing " Save Some" programs, to expand energy efficiency programs, such as Cool Storage and Shifting, and to explore other proposed energy conservation programs through a collaborative process with r e gulators and customers. ENVIRONMENTAL STEWARDSHIP

" Serving&:

Conserving Delmarva" is the Company's environmental stewardship program that seeks to balance the obligation to serve customers with the responsibility to protect and.

the e nvironment of the Delmarva Peninsula.

As part of " Serving &: Conserving Delmarva," the Company has begun a one-year 1 pilot program to use and evaluate natural gas vehicles.

Five of the Company$ fleet vehicles have been converted to operate on compressed natura l gas. As an*alternative to gasoline, compressed natural gas is expected to reduce operating costs. And because it is burning , non-toxic , and corrosive, it does not contribute to smog. A key part of the 1991 program was the Company$ efforts to create greater customer ness and use of energy-saving products and to inf o_rm customers of the association between saving energy and the environment.

For example, Delmarva Power offered 1 , 000 compact fluorescent light bulbs , 1,000 low-flow shower heads , and 1 , 000 water heater blankets in prize drawings.

About 78 , 000 customers registered for these giveaways.

11 , 300 " Serving&:

Conserving Delmarva" 1992 calendars were sold. The Com*pan y contributed

$22 , 600 to The Nature Conservanc y from the calendar sales proc e eds. Delmarva Power started a pilot program to help low-income . ........ ,,,a f CLEAN o. GAS .........

"& .... FIELDMAN FRANK McQUAY FUELS ONE OF THE FIVE COMPANY VEHICLES THAT HAVE BEEN CONVERTED TO OPERATE ON COMPRESSED NATURAL GAS. AS AN ALTERNATIVE TO GASOLINE, COMPRESSED NATURAL GAS IS EXPECTED TO REDUCE OPERATING COSTS AND POLLUTANTS.

WORKERS HANDLED EMERGENCY SITUATIONS WITH EXPERTISE. EARLY JULY , CREWS BATTLED 104 MILE-PER-HOUR WIND GUSTS AND UPROOTED TREES TO RESTORE ELECTRIC SERVICE TO ABOUT 10,000 CUSTOMERS IN DELAWARE.

THE CENTREVILLE CUSTOMER SERVICE TEAM MADE SOME IMPRESSIVE GAINS IN 1991, ACCORDING TO A RECENT SURVEY. FOR EXAMPLE, 99% OF CUSTOMERS GAVE THE TEAM A POSITIVE RATING ON RESOLVING PROBLEMS, COMPARED TO 87% IN 1990.

\ TWICE A MONTH , A TEAM OF EMPLO Y EE VOLUNTEERS SERVED MEALS TO HUNDREDS OF NEEDY . PEOPLE AT WILMINGTON

'S EMMANUEL DINING ROOM. T AS PART OF ITS " SERVING & CONSERV-ING DELMARVA" PROGRAM, THE ' COMPANY AWARDED 1,000 COMPACT FLUORESCENT LIGHT BULBS. ABOUT 40 , 000 CUSTOMERS REGISTERED TO WIN THE ENERGY-SAVING BULBS. BASED ON THE LARGE CUSTOMER RESPONSE , THE COMPANY WIL L OFFER COMPACT FLUORESCENT LIGHT BULBS IN A 1992 PRIZE DRAWING. customers better manage their energy use and become aware of how energy conservation helps protect the environment.

The Y.E.S. (Your Energy Savings)" program, is designed to help customers increase the comfort of their homes and reduce the amount of money they spend on energy. About 225 program participants received a free energy efficiency education and free installation of energy-saving products and materials.

The Company has constructed a 500-foot smokestack at the River power plant to solve an infrequent air pollution problem. Emissions from the Indian River plant near Millsboro , Delaware , had the potential to exceed national air quality regulations about six to ten times a year when the wind blew from a particular direction. The stack was completed ahead of schedule and below budget. Customers who are aware of the " Serving & Conserving Delmarva" program are more likely to give the Company a ' positive rating, according to the 1991 Customer Opinion Survey. At a recent roundtable sion, area environmentalists and opinion leaders applauded our environmental efforts. Delmarva Power employee involvement is vital to the success of " Serving & Conserving Delmarva." This year, employees collected 18 tons of trash along Delaware's coastline areas and offered educational information at Earth Day events throughout the Delmarva Peninsula. Since Delmarva Power bums low-sulfur fuels j.n most of our power plants, the Company should be able to comply with the Clean Air Act's emission reductions the year 2000 , with relatively little expense compared to many other utilities.

However , when the Company adds new power plants, meeting the emissions cap may have a greater cost impact. FUTURE GROWTH The economy of the Delmarva Peninsula was solid in 1991 compared to other parts of the * * *

• * ** country. The region's diverse blend of industries (chemicals, food processing, automobiles , agriculture, finance , plastics , and recreation) makes the demand for electricity and natural gas here less affected by fluctuations in the national economy than in many other areas of the U.S. In fact , after a week of sweltering temperatures in July, Delmarva Power customers set a new peak demand for electricity of 2 , 4 30 megawatts.

This was an 8.7% increase from the previous mark. Total electric sales increased by 3.3% compared to last year .: and the number of electric customers increased by 1.4% to 373,502. Natural gas and transportation sa l es decreased 0.7% compared to 1990 due to a mild winter. The number of natural gas customers increased by 2.7% to 87,351. The Company anticipates that the local economy will remain stable in 1992. Rapid growth in the finance, insurance , and rea l estate markets, which drove the De l marva Peninsula's boom in the 1980s, has disappeare

d. Work force reductions, designed to restructure for ness, have been announced at several large ,_ local chemical companies.

In contrast, the Hewlett-Packard Company plans to 350,000 square-foot research and manufacturing center that will boost Delaware's economy in 1992. With the slow recovery from the recession and the restructuring of the local chemical industry, the Company expects electricity sales to grow only 1.8% annually 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 residential space heating sales growing the fastest at 4.5% and industrial sales lagg i ng at 1.1 %. Growth of the summer peak demand for ity is expected to average 1.7% per year through 2001.Growth of the winter peak will average 2.6% per year for the same period. Similar slow sales growth is expected for natural gas. Although a return to normal winter weather in 1992 is expected to push natural gas PRODUCTION TEAMS RAN COM* PANY POWER PLANTS EFFICIENTLY.

THE EQUIVALENT AVAILABILITY RATE IN 1991 WAS 84. 1 % COMPARED TO THE MOST RECENT INDUSTRY AVERAGE OF 80.4%. DURING JULY, WHEN THE DEMAND FOR ELECTRIC*

ITY IS HIQH, COMPANY PLANTS HAD AN EVEN BETTER AVAILABILITY OF 96.3%. DELMARVA POWER PROVIDED $3,000 TO CLASSROOM TEACHERS IN THE SERVICE AREA WHO CONDUCTED SPECIAL CLASSROOM PROJECTS THAT TEACH STUDENTS ABOUT ENERGY AND THE ENVIRON* MENT. THE SALISBURY METER DEPARTMENT BEGAN A SOLVENT RECOVERY SYSTEM THAT RE-USES CHEMICALS THAT TEST AND CLEAN PROTECTIVE RUBBER GLOVES AND OTHER EQUIPMENT.

MEMBERS OF THE SYSTEM OPERA* TIONS DEPARTMENT SAVED THE COMPANY $1.2 MILLION IN ENERGY PRODUCTION COSTS BY PURCHASING EXCESS POWER FROM PHILADELPHIA ELECTRIC COMPANY. .... EMPLOYEES, SUCH AS TOM JACKSON FROM VIENNA POWER PLANT , SET ALL-TIME RECORDS FOR THE FEWEST LOST-TIME INJURIES (4) AND THE FEWEST LOST WORK DAYS (43). TOM AND OTHER VIENNA POWER PLANT EMPLOYEES ALSO COMPLETED EIGHT YEARS WITH NO LOST*TIME INJURIES.

MARYLAND DELAWARE

• Washington, D.C. VA ... THE DELMARVA PENINSULA'S DIVERSE BLEND OF INDUSTRIES MAKES THE DEMAND FOR ELECTRICITY AND NATURAL GAS HERE LESS AFFECTED BY FLUCTUATIONS IN THE NATIONAL ECONOMY THAN IN MANY OTHER AREAS OF THE U.S. ... MARKETING GENERAL MANAGER LOUISE MORMAN PRESENTED THIS " BIG" $8 , 444 CHECK TO PRESTON TRUCKING COMPANY. PRESTON WAS ONE OF THE FIRST COMPANIES IN MARYLAND TO PARTICIPATE IN DELMARVA POWER'S COMMERCIAL AND INDUSTRIAL LIGHTING PROGRAM. THIS PROGRAM OFFERS CUSTOMERS REBATES AS AN INCENTIVE TO IMPROVE LIGHTING EFFICIENCY IN THEIR FACILITIES.

-volume up 9 .2 % over last year's total. For the long term, firm sales are expected to grow at an average annual rate of 1.2%. According to the 1990 U.S. Census, the strong population growth on the Delmarva Peninsula that occurred in the 1980s will continue through the '90s. For Delmarva Power, that means more energy-consuming households will rely on the Company for service. The peninsula population is expected to increase more than 10% by 2000 and then increase another 8% by 2010. SERVICE AREA The Delmarva Peninsula stands out as one of the most distinctive geographical features on the East Coast. And it is centrally located be-tween major East Coast "' markets. The peninsula within overnight access to approximately

'h of the nations tion and 1 h of the total U.S. effective buying income. Delmarva Power provides electric service throughout most of the 5,700 mile Delmarva Peninsula, which includes the entire state of Delaware , portions of nine Eastern Shore Counties of Maryland and the two Eastern Shore Counties of Virginia.

In addition , the Company distributes gas service in a 275 square-mile area of northern Delaware.

To serve this region, Delmarva Power maintains an electric system with 2,645 megawatts of generation capacity, 1,32 4 miles of transmission lines , 10,606 miles of distribution lines and a natural gas system with 1,286 miles of gas main . Delmarva Power owns and operates four fossil fuel power plants within the service territory.

The Company shares Detmarva Power ownership of two coal plants and two nuclear plants outside the service territory. Our 373,502 electric customers and 87 ,351 natural gas ers are served by 2 , 817 employees working in 13 customer service l ocations on the peninsula.

Division headquarters are in Christiana , Delaware; Harrington, Delaware; and Salisbury, Maryland.

Corporate headquarters is in Wilmington, Delaware.

• * *

• *

• EARNINGS PER SHARE OF COMMON STOCK $2.oor--------------

1.50 1.00 0.50 0.00 DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $2.00 r----------

---

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 4 2 0 81 82 83 84 85 86 87 88 89 90 91 81 82 83 84 85 86 87 88 89 90 91 UTILITY CONSTRUCTION EXPENDITURES UTILITY EXTERNAL FINANCINGS (i n millions) (in mill i ons)

$200r--------------

150 1-----------

-........ t---83 84 85 86 87 88 89 90 91 92'93' *Forecast 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 CONSTRUCTION COSTS. THESE CHARTS REFLECT KEY FINANCIAL INFORMATION ABOUT THE COMPANY. FINANCIAL SECTION FINANCIAL REVIEW AND ANALYSIS REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS 26 CONSOLIDATED FINANCIAL STATEMENTS 32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 48 CONSOLIDATED STATISTICS 50 SELECTED FINANCIAL DATA DIRECTORS COMMITTEES, OFFICERS, AND INVESTMENT INFORMATION STOCKHOLDER INFORMATION 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. DIVIDENDS Core Utility Operations Cumulative effect of a change in accounting 1991 $1.41 for unbilled revenues (See Note 1 -Unbilled Revenues) 0.25 Nonutility Subsidiaries Total 0.03 $1.69 1990 1989 $1.70 $1.69 (1.10) 0.11 $0.60 $1.80 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 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 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, 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 weather, the sluggish economy, and more customers ing gas directly from gas producers and pipelines.

In total, gas sales and gas transported decreased by 0. 7% in parison to 1990. In I990., gas revel}ues decreased by $6.9 million in comparison to 1989 mainly as a result of 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 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 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 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 From Prior Year in Electric Fuel and Net Purchased Power Expenses [Dollars in Millions) 1991 Average Cost of Electric Fuel and Net Pm;-chased Power Increased kWh Output. Deferral of Energy Costs Total $ (7.8) 11.l 21.1 $24.4 1990-$(10.5) _o.o 12.4 $ 1.9 The 1991 Cost of Electric Fud and Net Purchased Power" decreased from 1990 mainly due to lower oil and 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 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 Higher oil prices mitigated the overall decrease in the 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 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 * * . I *

• *

• 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 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%

margin that was expected under normal weather 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 years if weather. conditions are the next ten years; the Company expects its peak load to grow at an average al).nual rate of

• 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 The strategy can be characterized as "Save Some, Buy Some, Build Some." The plan is 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 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 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 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 .4 2 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 average interest rate of 7.92% and 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 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 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 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 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

.. 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 The Company's forecast of internally generated funds reflects an 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 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 ratio. The Company's ratio of pre-tax earnings to fixed interest charges (computed according to Securities and Exchange Commission tions) was 2.6 for 1991. As of December 31, 1991, the Company's senior debt was rated A2 by Moody's Investor 22 DELMARVA POWER & LIGHT COMPANY *

• el I I ' I _J

• 1* 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 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 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 portfolio and certain other subsidiary assets. The Company expects that the cash requirements of the subsidiaries I -, over the next several years will be met by cash flows from subsidiary operations, borrowings, and asset sales. DELMARVA POWER & LIGHT COMPANY 23 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 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 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 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 on the Company's results of operations.

However, the total amount of assets and liabilities on the consolidated balance sheet is expected to iµcrease.1 See Note 2 to the Consolidated Financial Statements for additional information.

\ 24 DELMARVA POWER & LIGHT COMPANY , I * * *

• *

• REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS REPORTS OF MANAGEMENT AND INDEPENDENT ACCOUNTANTS REPORT OF MANAGEMENT Management is responsible for the information and representations contained in_ the Company's financial statements.

Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best.estimates and judgments of the expected effects of events and tions. Delmarva Power & Light Company_ maintains a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the _protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified personnel.

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

Nevius M. Curtis Chairman and Chief Executive Officer Paul S: Gerritsen Vice President and Chie£ Financial Officer REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Stockholders Delmarva Power & Light Company Wilmington, Delaware We have audited the accompanying consolidated balance sheets and statements of capitalization of Delmarva.

Po":'er &: Light Company and Subsidiary Companies as of December 31, 1991and1990, and the related dated statements of income, changes in common holders' equitY, and cash flows for each of the three years in the period ended December 31, 1991. These financial statements are the responsibility of the Company's management.

Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards.

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

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

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

We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above -present fairly, in all material respects, the consolidated financial position of Delmarva Power &:_Light Company and Subsidiary Companies as of December 31, 1991 and 1990, and 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 generally accepted accounting principles.

As discussed in Note .1 to the consolidated financial statements, the Company changed its method of counting for unbilled revenues 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 OPERATING REVENUES Electric Gas Steam OPERATING EXPENSES Electric fuel and net purchased power Gas purchased . Operation and maintenance Depreciation

• Taxes other than income taxes *Income taxes

• OPERATING INCOME OTHER INCOME* Write-off of joint venture investments Equity in losses of joint ventures Allowance for equity funds used during construction Income taxes* on other income Other INCOME BEFORE INTEREST CHARGES INTEREST CHARGES. Debt Other Capitalized interest_

EARNINGS Income before cumulative effect of a change in accounting principle Cumulative effect of a change in accounting for unbilled revenues Net income Dividends on preferred stock Earnings_

applicable to common stock AVERAGE SHARES OF COMMON_ STOCK OUTSTANDING (Thousands)

EARNINGS PER AVERAGE 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 per share DIVIDENDS DECtARED PER SHARE 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.

26 . DE.LMARVA POWER & LIGHT COMPANY 1991 $751,076 71,i22 22,509 844,807 252,072 38,140 245,497 88,720 . 35,430 46,241 . 706,100 138,707 4,199 2,992 1,574 8,765 147,472 (i8,458 2,087 (3,579) 66,966' 80,506 12,730 93,236 7,977 $85,259 50,581 $1.44 0.25 $1.69 $1.54 $80,506 $1.44 -1990 $708,476 79,836 22,926 811,238 227,617 46,576' 224,141 82,439 34,939' 49,152 664,864 146,374 (62,534) (12,772) 2,845 24,596 2,470 (45,395) . 100,979 64,308 (2,999) '63,668 37,311 37,311 8,784 $28,527 47,534 $ 0,60 $ 0.60' $ 1.54 $35,152 $ o.ss 1989 $678,396 86,742 24,569 789,707 225,758 52;653 216,583-76,327 31,829 47,136 650,286 139,421 (1,929). (2,667) 3,730 3,002 8,095 10,231 149,652 62,222 1,943 (5,821) 58,344 9,1,308 7,427 $83,881 46,687 $ 1.80 $ 1.80 $ 1.51 $94,388 $

• • • * -*

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 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 ORIGINAL COST Electric Gas Steam Common Less: Accumulated depreciation Net utility plant in service Construction work-in-progress Leased nuclear fuel, at amortized cost OTHER PROPERTY AND INVESTMENTS Investment in leveraged leases Other investments Other property, net Funds held by trustee CURRENT ASSETS Cash and cash equivalents Accounts receivable:

CustOmers Accrued unbilled revenues Other Inventories, at-average cost: Fuel (coal, oil, and gas) ' Materials and supplles Prepayments . Deferred income taxes, net DEFERRED CHARGES AND OTHER ASSETS Unamortized debt expense Deferred recoverable plant costs Other Total See Notes to Consolidated Financial Statements.

28 DELMARVA POWER & LIGHT COMPANY

• 1991 1990 $2,264,200

$2,112,198 146,264 . 134,311 108 24,982 129,613 123,198 2,540,185 2,394,689 .

812,419 1,690,333 1,582,270 86,699 . 95,911 39,885 42,774 1,816,917 1,720,955 78,771 83,852 . 6,511 6,296 53,425 54,228 17,800 14,962 . 156,507 159,338 46,841 27,129 62,407 62,055

• 21,371 12,864 8,059 44,425 49,271 36,435 36,939 7,290 6,572 7,762 9,862 239,395 199,887 9,954 8,983 10,225 11,920 30,720 24,632 50,899 45,535 $2,263,718

$2,125,715

• -

CONSO_LIDATED BALANCE SHEETS

• CAPITALIZATION AND LIABILITIES (Dollars Jn Thousands)

As of December 31 1991 1990 CAPITALIZATION (See Statements of Capitalization)

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 341,276 . 330,493 Deferred investment tax credits 54,407 57,251 Long-term capital lease obligation 29,337 -32,354. Other 22,993 23'.135 448,013 443,233 Commitments and Contingencies (Notes 12, 16, 17, and 18) Total $2,263,718

$2,125,715 . See accompanying Notes to Consolidated Financial Statements.

DELMARVA POWER & LIGHT 29 CONSOLll;>ATED STATEMENTS OF CAPITALIZATION CONSOLIDATED STATEMENTS OF CAPITALIZATION

' (Dollars in Thousands)

As of Dece!)1ber 31 COMMON STOCKHOLDERS' EQUITY Total Common Equity m 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 (1991and1990) 240,000 and 240,000 Call price per share 3.70%-4.56%

5.00%-7.88%

Adjustable-6.28%

c 2 J Auction rate--1.86%

C 2 l LONG* TERM DEBT .. First Mortgage Bonds:

• 5J2,800 and 512,800

• 160,850 and 160 0 850 450,000 and 450,000 Maturity 1994 1997 1998-2002 2003-2004 2008 Interest Rates 4%% -6%% 7%-8314% 6.6%-8% 9 5/s% 2014-2021 7.15%-10 1/s% Other Bonds, due 2011-2017, 7.15%-7.50%

Pollution Control Notes: Series 1973, due 1992-1998, 5.60%-5.75%

Series 1976, *due 1992-2006, 7 1/s%-7 1 14°tb Medium Term Notes, due 2002, 9.27% Medium Term Notes, due 2004, 8.30% Medium Term Notes, due 2020-2021, 9.68% First Mortgage Notes, 9.65% C 3 l Other Obligations, due 1992-2001, 10.22%, Unamortized premium and discount, net Subtotal Less: Long-Terffi Debt due within one y'ear Total Long-Term Debt Total Capitalization Variable Rate Demand C 4 l Total Capitalization with Variable Rate Demand Bonds $103-$105

$103-$104

$103 . $100 (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

• 1991 1990 $706,583 $614,692 24,000 24,000 51,280 51,280 16,085 16,085 45,000 45,000 136,365 136,365 25,000 25,000 25,000 25,000

• 150,000 158,100 43,200 77,150 50,000 81,900 273,500 226,000 566,700 593,150 54,500 53;500 . 6,800 6,950 34,500 34,500 41,300" 41,450 4,000 4,000 35,000 61,000 39,000 100,000 43,000 9,322 9,788 971 1,610 (568) (750) 772,225 741,748 2,079 716 770,146 741,032 1,613,094 1,492,089 41,500 41,500 $1,654,594

$1,533,589

• ** I, I

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

Commo"n Additional . For the Three Years Ended Shares Par 111 Paid-in Retained December 31, 1991 Outstanding Value Capital 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 C 2 l 824,428 .1,854 13,381 15,235 Expense& (31) (31) Preferred stock: ' Issuance Redemptions -and (182)

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 Cash dividends declared:

Common stock ($1.54) * (73,225) (73,225) Preferred stock (8,784) (8,784) Issuance of common stock: DRIP c 2 J 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 C 2 l 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 ' , (1) The Company's common stock has a par value $2.25 per share and 90,0P0,000 shares are authorized.

(2) Dividend Reinvestment and Common Share Purchase Plan. -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 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 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 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 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 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 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 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 the cost is recovered through customer rates. 2. INCOME TAXES COMPONENTS OF CONSOLIDATED INCOME TAX EXPENSE (Dollars in 1991 1990 1989 Operation:

Federal: Current $32,021 $30,764 $22,534 Deferred l8,746 / 8,940 11,720 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 income tax expense $51,769 $24,556 $44,134 Investment tax credits 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 current income taxes, under "Other income." ' -As of 31, 1991, the Company had $2.2 million of alternative 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

$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 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 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 .

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 carrying amounts and tax bases of existing 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 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 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, 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 Outstanding:

• . Beginning of year balance 306,750 $17 1/2-$21 11. 190,100 $17 1/i-$17 3/4 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 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 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 * *1 I ** *

• *

• 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 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 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 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 of 13 year, 8.30% MTN and $15 million of 30 year, 8.96% MTN. In November 1991,.$11.5

' 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. 5) 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 $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 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 1991 1990 1989 Cash paid during the year for: 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 The Company

$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 funding the projects' losses. 9. GAINS ON SUBSIDIARY TRANSACTIONS In 1991, the sale of purchase options on the residual values of assets 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 income by $4,753,000

($.10 per share). The gains on these transactions are reported in "Other 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) Accumulated benefit obligation Vested Nonvested Effect of estimated foture compensation increases Projecte.d benefit obligatiqn Plan assets at fair value ' Excess of plan.assets over projected benefit obligation Unrecognized prior service cost

• Unrecognized net gain Unrecognized net asset Prepaid pension cost COMPONENTS OF NET PENSION COST (Millions of Dollars) Service cost-benefits earned duri.ng period Interest cost on projected benefit obligation Actual return on plan assets Net amortization and deferral Net pension cost ASSUMPTIONS Discount rates used to determine projected bt;nefit obligation as of December 31 Rates of increase in compensation levels Expected long-term rates of return on assets 11. POST-RETIREMENT BENEFITS I 1991 $ 9.8 21.9 (96.3) 64.5 $ (O.l) 1991 7.00% 6.50% 8.00% 1991 1990 $206.0 $170.7 20.7 19.8 226.7 190.5 110.2 88.8 336.9 279.3 , 448.6 363.3 111.7 84.0 10.0 6.0 (75.5) (40.6) (43.1) (46.4) $ 3.1 $ 3.0 1990 1989 $ 10.9 $ 9.5 20.9 19.1 7.2 (57.6) (41.1) 28.4 $ (2.1) $ (0.6) 1990 1989 7.75% 7.25% 6.50% 6.50% 8.00% 8.00% , 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 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),

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, 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 struction in _1992. Also, in order to ensure adequate supplies of fuel, the Company has certain commitments lpng-term fuel supply contracts.

Excluding nuclear fuel discussed below; the Company's commitments under its 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 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 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)

Interest on nuclear fuel capital lease Interest on other capital leases

• Amortization of nuclear fuel capital' lease . Amortization of other capital leases Operating leases 1991 1990 1989 $ 1,633 $ 1,550 $ 345 405 457 10,242 7,832 351 663 864 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 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 capacity to the Company over a 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 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 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 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 requirement.

The Company's resale rate filing on December 20, 1991 would also provide for recovery of the 1 NRC minimum funding requl.rement.

42 DELMARVA POWER & LIGHT COMPANY * *

• 1_. *

• NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

16. NUCLEAR POWER PliANTS PEACH BOTTOM On March 31, 1987, the NRC ordered the shutdown of Peach Bottom-for a variety of 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 Company (also a co-owner of Peach Bottom) also filed a 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 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 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 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: (Millions of Dollars) Type and Source of Coverage Public Liability Private Price.Anderson Assessment OJ Nuclear Worker Liability

<5 l Property Damage: <51 Peach Bottom <7 l Salem <sJ All Units <9 J Replacement Power: Nuclear Electric Insurance Limited (NEIL) <101 Aggregate Maximum Coverage $ 200 7,607 $ 7,807(4) $ 200 $ 1,200 $ 1,200 $ 1,250 $ 3.5 (ll) Retrospective Assessment for a Single Incident 1 2 1 $ 19.7 (J) $ 1.0 $ $ 1.1 $ 1.1 $ 1.1 (1) Retrospective premium program under the Price-Anderson liability of the Atomic Energy Act of 1954 as amended by the 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 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 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 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 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 Revenues and Gains: Landfill and waste hauling Management services Sawmill o.perations Other revenues Investment income Gain on sale of: Options on leverage leases Interest in joint venture -Costs and Expenses:

Operating expenses Equity in losses of joint ventures Write-off of joint venture investments Interest expense Capitalized interest Income (loss) before income taxes Income tax (benefit)

Nedncome (loss) Earnings (loss) per.share of common stock attributed to subsidiaries CONSOLIDATED CONDENSED SUBSIDIARY BALANCE SHEETS (Dollars In Thousands)

I ' At December 31 Assets 1991 1990 Current assets: Cash and cash equivalents

$ 14,601 $ 8,610 Deferred income taxes 2,093 3,589 Other 2,546 1 319 19,240 13,518 Noncurrent assets: Investment in: Leveraged leases 78,771 83,852 Limited partnerships 4,650 5,'.J-46 joint ventures 1,861 850 .. Property, plant & equipment:

Landfill & waste hauling 24,555 23,786 Oil gas exploration 3,898 4,390 Real estate & other 2,134 2,319 Other assets 2.969 2 148 Total $138,078 $136,309 46 DELMARVA POWER & LIGHT COMPANY $ 6,154 2,939 1,728 1,122 4,445 16,388 16,449 1,704 -(143) 18,010 (1,622) (2,900) $ 1,278 $ 0.03 $ . 3,066 4,968 2,044 2,812 4,214 17,104 17,932 12,772 . 62,534 1,720 (373) 94,585 (77,481) (25,195) $(52,286)

$ (1.10) and Stockholder's Equity Current liabilities:

Debt due within one year Other N oncurrent liabilities:

Long-term debt Deferred income taxes Other Stockholder's*

Equity Total 1989 $ 3,007 3,370 3,11'4 4,770 5,605 19,866 13,697 2,667 1,929 2,280 (2,019) -18,554 -1,312 (3,702) $ 5,014 $ 0.11 At December 3 1 1991 1990 $ 11,211 $ 7,441 11,72.9 13 789 22,940 21,230 810 1,469 70,110 69,256 4,725 6141 75,645. 76 866 39,493 -. 38,213 $138,078 $136,309 * * *

• ** NOTES TO 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 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 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.31 192,592 25,408 9,217 . 7,283 52,476 0.13 $ 844,807 $ 138,707 $ 93,236 $ 85,259 50,581 $1.69 1990 March 31 $ 219,341 $ 40,281. $ 24,677 $ 22,497 47,195 $0.48 June 30 184,730 28,263 12,186 9,969 47,421 0.21 September 30 227,933 51,820 35,104 32,919 47,646 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 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 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 Residential

$35,636 $38,487 $42,908 $40,303 $39,614

• I (Thousands)

Commercial 16,370 16,939 18,816 16,404 15,491 Industrial 14,395 16,498 17,546 12,208 10,941 Interruptible 3,412 , 6,714 6,714 8,309 11,136 Other customers 140 105 92 66 160 Unbilled revenues, net 194 Gas transported 710 602 174 2 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 gas transported 18,129 18,263 17,322 16,156 15,411 I 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 316,948 292,688 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

---

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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 OPERATING DATA Operating Revenues Operating Income Income Before Cumulative Effect of a Change in Accounting Principle Cumulative Effect of a Change in Accounting for Unbtlled Revenues Net Income Electric Sales (kWh 000) Gas Sales (mcf 000) Gas Transported (mcf 000) 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 <1 l ,

Term Debt m Preferred Stock <3 l 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

<4 l Internally Generated Funds (IGF) <5 l IGF as a Percent of Construction Expenditures . Capacity Reserve at Time of Summer Peak 1991 $ 844,807 $ 138,7..07

$ 80,506 $ 12,730 $ 93,236 11,441,466 15,519 2,610 1990 1989 1988 1987 $ 811,238 $ _789,707 $ 768,322 $ 712,479 $ 146,374 $ 139,421 $ 129,494 -$ 124,967 $ . 37,311 $ 91,308 $ 84,721 $ 79,803 $ . 37,311 $ 91,308 $ 84,721 $ 79,803 11,081,211 10,828,839 10,225,043 9,565,276 16,069 16,645 16,154 15,411 2,194 677 2 (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 . 50 DELMARVA POWER & LIGHT COMPANY . 1 *

• *

• 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 rated (a n 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 S 1 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, yo u can 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 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 1991 Declared High Low *first Quarter $.38 1/1 $19 1/a . $16 5/a Second Quarter .38 1/2

• Third, Quarter* .38 '1/i Fourth Quarter .38 1/2 SHAREHOLDER SERVICES Carol C. Conrad, Assistant Secretary Delmarva Power &: Light Company

• 800 King S_treet, PO. Box 23J Wilmington, Delaware 19899 * . 19 1/4 . 20 1/a 21 5/s (302)429-3355

.or toll free (_800) 365-6495 $TOCK SYMBOL 17 7/s 18 1/4 19'%. Common Stock , DEW-listed on the New York ?nd Philadelphia Stock Exchanges

.. ANNUAl MEETING The Annual M.eeting will be held.on April 28 , 1992 , at 11:00 a.m. in the." Clayton Hall , University

• of Delaware, Newark , Delaware. .

• COMMISSIONS Federal Energy Regulatory Commission Martin L Chairperson

• 941 North Capitol Street, N.E. Washington , D.C. 20246 Delaware Public Service Commission

• Nancy M. Norling -Chairperson 1560 $. duPont Highway PO. Box 457 Dover, Delaware 19903-0457 . . . . . . . . Mar:yhlnd Public Service Commission

• Frank 0. Heintz -Chairperson

• American Building 231 East Baltimore Street Baltimore, 212.02-3486 Virginia State Corporation Commission Preston C. Shannon -Chairperson PO. Box 1197. Richmond , .Virginia 23209 Dividend *Price 1999 De.dared High . First Quarter . $.38.1/2 $21 3 ia *

• Second Quarter. .38 1/2 .* 20 Third. Quarter .38 1/i 19 % Fourth Quarter .38% 19 1/a TRANSFER AGENTS AND REGISTRARS First Mortgage Bond Trustee Bank . . . . 55 Water Street, Suite .1820 . *.New York, New York 10041

• Preferred Stock Wilmir.gton Trust Compariy Corporate Trust Division Rodney Squa;e North Wilmington , Delaware .19890 Common Stock Wilmington Trust Company Corporate Division

• Rodney Square North . Wilinihgtc_:m , Delaware 19890 MaI).ufactm;efs Hanover Trust Company Stock Transfer Department

• P.O. Box 24935 . Church Street Station New York , New York 10249 ADDITIONAL REPORTS .. Low* $19 1/a 18 1/a

• 17 17 1/a To suppleme*nt inforll).ation in* this Annual Report; a Fin.anciai and Statistical Review (1981-1991)-and the *Form 10-K.are available upon request Please write to: Shareholder Ser0ces , Delmarva Power, 800 Kir:ig .Stree t, PO. Box 23t Wilmington; Delaware 198.99. . '

. De l marva Power 800 K i ng S t reet P.O.Box 231 Wilmington, DE 19899 * . BUlKRA1E _ _____. . U.S. FOSTAGE PAID Fffi'v\JTN0

.68 **