ML18095A880

Delmarva Power 1990 Annual Rept.

ML18095A880
Person / Time
Site:	Salem, Hope Creek
Issue date:	12/31/1990
From:	Curtis N DELMARVA POWER & LIGHT CO.
To:
Shared Package
ML18095A877	List: ML18095A876 ML18095A878 ML18095A879 ML18095A880 ML18095A881
References
NUDOCS 9104190192
Download: ML18095A880 (56)

Text

• D o I N G O U R PDR ADuu ... I

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.. -Re\Tenues * .,:r, t:' _

• Net fntome * * £arnjngs Per Share of Co nun on Srock -+":r--;..,.;

Divideods Dedared Per. Shl!;e.of Co1iimon Stock ,, $1.54 ,

• Average Shares of Coomion

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Common St:0ck Book Vahle /'Per Share ln.ter.r::al}y

.Geneta-re<f Eleccric (year end) Averag¢AnnuaLResidenri

.al 368,277 . 9: 524 .kWh

...

16.07 million m,cf 2.19 tniUfon ri";cf' J 8.26 million mcf 85,044 83.29

• Chairman's Letter to Stockholders

.... 2 'Jhe decline in earnin<J3 wa:J primari/'J cau:JeJ b'J one-lime fo:J:Je:J in fhe :Jub:Jidiar'J bu:Jine:J:Je:J

... :Jhe core bu:Jine:J:Je:J are :Jiron'! and fhe Compan'J i:J po:Jilioned well lo meef fhe competitive chal/en'Je:J o/ fhe 90 " 1990 Financial and Operational Review .... 6 "_A-/1 o/ f he:Je people pro'Jram:J are de:Ji'Jned lo creafe a work environment which maximize:J producfivif'J and <jua/it'J fhrou'Jh emp/o'Jee involvement. " Customers Appreciate Good Service .... 10 'Jhe co:Jf of eleclricil'J

/or mo:Jf cu:Jfomer:J wa:J onl'J mar<Jinall'J hi<Jher in 1990 ... Price:J /or ener'J'J conlinue lo be among fhe mo:Jf competitive in fhe re<Jion. " Balance and Flexibility are Keys to the Future .... 14 ":Jhe combined c'Jc/e plant wi/l 'Jenerale efeclricil'J

/,.om fhe wa:Jfe heal o/ fhe three fia'J Road 'Ja:J furbine:J

... .Jt wi/I be ::Delmarva cleane:Jf, mo:Jf economical unit. " mor e lhan 465 /,fu e bird houJ eJ ha ve :lJelni.ar u a progratn.

2 Cliairm.an efetter lo Stockhold e r j The 1990 financial performance of the Company was unsatisfactory.

However, we expect to be back on track in 1991. The decline in earnings from $1.80 to$ 0.60 per share was primarily caused by one-rime losses in the Company's unregulated subsidiary businesses.

These losses were the result of unanticipated changes in the marker conditions in California affecting our burning power plants there and unexpected changes in siring laws in Pennsylvania affecting a solid waste-to-energy project. This situation is summarized on pages 8 and 9 of this report and derailed in the fourth quarter 1990 report to you. We have faced the problem. The Company's management has written off 89 cents per share from 1990 earnings to cover losses from the investment in these projects.

The dividend rate, however, was maintained.

I, along with other managers of your Company, regret these losses. Ir has been an agonizing year of trying to manage, then mitigate them. But, action has been taken, and it's rime to move on. Because of these experiences and the need to commit all generated cash to the utility businesses as they enter another construction cycle, we will focus on the electric and natural gas businesses for the foreseeable future. These core

• businesses at Delmarva Power are strong, and the Company is positioned well to meet the competitive challenges of the 90's. The remainder of this letter will focus on the strengths of the core businesses and how the Company is prepared for the 90's. CORE COMPANY PERFORMANCE Performance in the gas and electric businesses in 1990 was solid. The customer opinion rating rose for the eighth consecutive year. Employees achieved seven of eight goals in the gainsharing program. Power plants ran generally better than plants of similar size and age nationwide. The price of electriciry and natural gas remained essentially the same. Delmarva Power's service territory, the Delmarva Peninsula, is not dominated by any one industry.

Rather, the diverse blend of industries (chemicals, food processing, automobiles, plastics, ag riculture , and recreation) makes the peninsula less susceptible to wide fluctuations in the national economy compared with some other areas in the country. Several strategies developed in the 80's have worked to position this Company well for the 1990's. CJ.airman o/ tf.e Board, ar e ke'I th e /uture. 3 ba: H ouer Ifi e pa:Jl :J ix g e ar:J for 4 CHALLENGE 2000 With the high cost of new power plants, the need to keep prices to customers competitive, and the widely fluctuating growth in the 80's on the Delmarva Peninsula, the Company recognized that a series of single, large power plant projects was not the solution.

Rather, the Company developed a ible, integrated plan, named Challenge 2000, which calls for a blend of ing energy and managing growth in mand, purchasing power, and adding new plants in both small and intermediate increments to provide customers with energy in the future at the lowest able price. So far it has worked well. The progress and plans of Challenge 2000 are detailed in the text of this report. SERVING & CONSERVING DELMARVA This is Delmarva Power's environmental stewardship program. It provides a balance to the Company's ligation to serve customers through Challenge 2000 and to protect and serve the environment of the Delmarva Peninsula.

This program was launched in 1990 at a ceremony marking the Company's contribution of 341 acres of ecologically-valuable Delaware Bay wetlands to The Nature Conservancy, an internationally known wildlife tection organization.

For years, Delmarva Power has had ronmental protection programs, such as managing of rights-of-way for wildlife habitat, raising striped bass by employee volunteers at the Vienna power plant , and removing PCB contaminated capacitors ahead of federal deadlines.

Serving & Conserving Delmarva includes ongoing and future programs.

Environmental protection of our service territory was the top issue of public concern identified by customers in the annual customer opin-ion survey. PARTICIPATION A major strategy of the 80's was to move Delmarva Power's work culture to a more participatory style in order to generate new ideas from the people working closest to situations.

This

• was designed to help provide the Com-pany with a better edge as the electric and natural gas utility industry moves more toward competition in the 90's. Delmarva Power employees have sponded well. All employees are on at least one team. Teams often set for them-selves challenges higher than supervisors or managers would have dictated. amples of cost savings include meter ers reducing the cost per reading by 11 %; power plant workers unloading coal cars faster, saving large demurrage charges; and purchasing department employees recycling used resources.

OTHER STRATEGIES A major effort

• for Delmarva Power in the 80's was to make the price of electricity more com-petitive in the region.

• Delmarva Power now has some of the lowest prices in the region and has plished this by converting from a nately oil-generating Company to a dominately coal-generating Company; by instituting major cost-cutting programs; and by seeking increased cost-cutting and efficiency ideas from its employees through participative programs.

Another strategy in the l 980's was called the " window of opportunity." In the l 980's when no major power plant was under construction, funds were used to refurbish support facilities which had come inadequate or deteriorated over time. Now that the Company expects to be building power plants in the mid and late 90's , suitable support facilities are in place. CHALLENGES AHEAD As we move into a building cycle, increased funds will be required both to build the new tion, transmission, and distribution ties needed by existing and new customers and to provide for programs to manage demand or conserve energy needed under Challenge 2000. This will lead to tional external financings and also modest rate increase requests during the next cade. A major challenge will be to chronize new rates with the completion of new facilities and the implementation of demand management projects in order to provide our stockholders a fair return on their investments. At the same time, there will be a need to keep rates as low as possible to position the Company well as competition creases and to make it possible for our commercial and industrial customers to compete effectively in domestic and ternational markets. In addition , there will be increasing sure from our customers for the Com-pany to take more of a leadership role in quality oflife issues in our communities.

In other words, what's ahead is what you would expect-to provide gas, ity, and energy-related services to our customers in a safe, reliable, courteous, and environ men tally-acceptable manner at the lowest rates consistent with an adequate return to investors.

Essentially, that is our mission statement.

We intend to accomplish it. The employees at your Company are dedicated and really do a super job of producing and distributing energy and serving customers.

I appreciate their forts and look forward to working with them in 1991. Sincerely ,

Nev Curtis February 8, 1991 one-lime fo:He:J in fhe ... :Jhe core bu:Jine:J:Je:J are :Jiron'} anJ fhe well lo meel fhe compefilive chal/en'}e:J

/) I ' " Of fhe 90 :J. 5 6 1990 -:J.inancia/

and Operational K!eview Earnings were $0.60 compared to $1.80 per share in 1989. The decrease in earnings is primarily attributable to a write-off of the investment in non-regulated subsidiary projects in California and Pennsylvania.

Quarterly dividends remained at 38.5 cents per share per quarter or $1.54 on an annual basis. The dividend was not increased because of concerns related to the general slowdown in the economy, the financial requirements to support the utility construction program, and the la ck of earnings from the subsidiaries.

At the same time, dividends were not decreased because it is expected that earnings from the electric and gas business will support the current dividend level subject to reasonable regulatory actions in the future. Total electric sales increased 2.3 % over last year. The number of electric customers increased 2% to 368,277. Residential and commercial sales growth rates (1.1% and 3.6% respectively) were lower than previous years due to a weaker economy and milder winter weather. Industrial sales growth of 3.9% was strong despite the softening economy. The number of natural gas customers increased 2.6% to 85,044. Total natural gas and transportation sales increased 5.4% over last year.

• The Company's bond ranngs remained Al by Moody's Investors Service, A+ by Standard & Poor's, and A+ by Duff & Phelps. In 1990, internally-generated funds represented 60% of $188 million of utility construction expenditures.

External financings provided $95 million of capital. In 1991, construction expenditures are expected to be $190 million and external financings are expected to be $104 million. A more thorough discussion of the Company's financial position can be found on pages 21-27. ENERGY SUPPLY & DEMAND On July 5, 1990 a new record peak demand for electricity was set at 2,235 megawatts, 1 % higher than the previous summer peak set in August, 1988. Installed capacity is 2,503 megawatts and reserve margin, 12%. Sources of electricity in 1990 were 50% coal, 10% oil, 4% natural gas, 1 7% nuclear fuel and 19% interchange.

The availability rate of Delmarva Power's wholly-owned and

• operated coal, oil, and natural gas plants in 1990 was 78.3%. From the customer point of view, the average total outage time per customer for the year , excluding major storms, was 103.8 minutes, well below the goal of 120 minutes. This equates to a reliability rate of 99.98%. 'J/i e Co1npan'J beg-an an incenliue program Lo e n co urage co 1nm e r c ia/ and inJuJfria/

cwfomerJ fo u Je parli c ipanl wa.1 lhe cfitt/e office co mplex in norfh e rn 'JJe/aware. 7 f o creafe a work environm.enf which m.axim.ize:J producf ivif 'f 8 In Delmarva Power's natural gas business, supplies were adequate.

TEAM EFFECTIVENESS As the tici pa ti ve work culture matures at Delmarva Power, evidence mounts that teamwork pays off in generating new ideas to cut costs or improve service. In the employee gainsharing program, the Corporate Performance Incentive Plan (CPIP), employees achieved seven of eight goals. Through the Actions Prevent Accidents program, more than 200 employees nominated actions they had taken on their own to prevent accidents.

Actions included installing a steel cover over an opening in a slurry tank, building a guard on a pump, and building a special dolly to transport equipment.

Also, a Workforce Diversity Committee, made up of employees of different races, sexes, and job levels, continued its work to improve cultural understanding in an effort to encourage increased cooperation and efficiency within the workforce.

All of these people programs are designed to create a work environment which maxi-mizes productivity and quality through employee involvement.

In that way, we believe Delmarva Power can best meet the rapidly changing work and economic vironment of the 90's for the benefit of customers and stockholders.

The Company signed a two-year contract with its northern division union, the International Brotherhood of Electrical Workers Local 1238. The contract calls for modest wage increases and provides more flexibility for the Company to deal with the dramatically rising health care costs. SUBSIDIARIES The performance of the subsidiaries was the principal reason for the decrease in earnings compared to the previous year. The largest losses are attributable to the subsidiaries' investment in two wood-burning power plants and adjoining mills in Redding, and Burney, California.

The sawmills provide a significant tion of the fuel for the plants and also produce finished lumber. The power plants operated well. However, the price of logs in the northern California lumber market was high because of tal and regulatory actions to curtail ging, the continued foreign demand for logs, and the demand for wood fuel by other similar projects in the region. At the

• same time, domestic demand for finished

• lumber was low because of depressed housing starts.

• The investment in a solid tric energy generating facility planned for Glendon, Pennsylvania, ran into lems when more restrictive siting tion was adopted which did not include grandfathering provisions.

This project was well into the planning stages before passage of the new legislation.

As a result, the Company's management decided to write off 89 cents per share from 1990 earnings to cover losses from the investment in these projects.

This decision, though difficult to make, should result in the elimination of an adverse impact of these projects on future ings. However, despite the write-off, management intends to work aggressively to recover as much of these investments as possible.

In other aspects of the subsidiaries, the financial projects, leases, and small real estate projects are performing as expected.

CLEAN AIR ACT The exact impact of the Clean Air Amendments of 1990 on Delmarva Power is unclear at this time because the regulations defining the law have not yet been developed by the government.

However, it does appear that the Company's wholly-owned plants will not be affected by the 1995 sulfur dioxide reduction requirements.

The installation of flue gas desulfurization (FGD) ment in at least one unit of the owned Conemaugh planrwill be required.

Delmarva Power owns a 3.72% share of this plant. Some nitrous oxide control equipment may be needed on Company facilities by 1995. Sulfur dioxide limits for the year 2000 can be met through a combination of lower sulfur fuels and the possibility of FGD systems on some Company units. However , depending on the strategies eventually selected , the effect on rates should be on the order of a 5% increase by the year 2000. On another air quality issue, the shell for the 500-foot smokestack at Indian River has been completed and the project is on schedule to meet the 1992 completion date. The stack is required by the federal government to solve an infrequent air pollution problem at the plant when the wind blows from a certain direction.

conj fru c lion. 9 1 0 Cu J loni e r:i Appr ec iat e (food S e r v i ce The Company's customer favorability rating increased for the eighth tive year. In the 1990 survey, 82% of customers surveyed gave the Company a favorable rating. In 1982, the rating was 46%. Reliability and responsive customer service were top reasons given for a favorable rating. Environmental protection was listed as the top public issue concerning the people of the service territory.

In addition to the annual customer opinion survey, special surveys were taken of customers losing power during storms. An interesting finding was that most customers will say in a general survey that four to six hours is an acceptable length of time for a storm-caused power outage. However, when asked right after a storm, the acceptable length of time is closer to two to three hours. The post-storm surveys showed that nearly nine out of ten customers on a system-wide basis felt that the Company deserved a positive raring for its efforts and eight out of ten customers said the Company did an "extremely good" job in handling power outages. Customers said that crews were doing the best and fastest job they could under the circumstances and were polite and courteous.

Delmarva Power spends a considerable effort through surveys and face-to-face meetings to understand better customer needs and expectations.

They are planning tools for the more efficient use of resources.

ENERGY PRICES One of the most important customer concerns is the price of energy. The Company's prices for energy continue to be among the most competitive in the region. The Company realizes that many industrial customers use electricity as a raw material and need the lowest prices possible to make a profit and remain in or move into the service territory.

For residential customers, reasonable prices are important to their quality of life. Electric price comparisons (for all customer categories in cents per kilowatt hour) are: New York , 12.1; Philadelphia, 9.6; Newark, NJ , 9.0; Baltimore, 6.8; Delmarva Peninsula, 6.3; and Norfolk, VA, 6.2. Natural gas prices (in cents per 100 cubic feet) are: New York, 71. 7; Philadelphia, 69 .8; Baltimore, 58.4; Norfolk, VA, 56.1; Wilmington, DE, 49.0; and Newark, NJ , 48.4. r e:J lor e efec lri c il'I north of o n e o/ lh e m o:J f i nl erue :J f o ,.,n:i eve r l o I.it par! o/ lh e Je r u i ce l e rril o r'I. ff in/orm.alion al /air!> and t>how!J around th e t>e r v i ce l e rril o r'J. 1 2 RATE MATTERS The cost of el e ctricity for most customers was only marginally higher in 1990. This was caused by creases in fuel charges. The Company has not sought electric base rate increases in Delaware since July, 1982, in Maryland since June, 1984 , in Virginia since March, 1984 and for wholesale customers since July , 1987. However, the Company has requested fuel charge increases in Delaware for 1991 ranging from about 5% for residential customers using 750 kilowatt hours of electricity per month co 8% to 12% for most larger customers.

Similar increases are expected for Maryland, Virginia, and wholesale customers.

In the natural gas business, the Company returned $6.2 million to customers in the form of bill credits. Fuel costs were lower than expected because of refunds from pipeline suppliers through the settlement oflitigacion, strategic purchases on the spot market by Delmarva Power, and greater-than-expected sales to firm customers.

CUSTOMER INFORMATION The Company produced "Bright Ideas For Your Home ," a video cape designed to provide new homeowners with useful tips on how to use energy more efficiently in their homes. The video, which is mailed to all new cu s tomers and shown at sumer fairs, earned first prize for customer service in the Edison Electric Inscicute's 1990 Marketing Achievement Award competition from among 381 entrants.

The cape has been viewed by more than 25,000 customers.

The Company concluded its " Famous Tips" Campaign designed to provide ful energy information about several ics including air conditioning , energy costs , lighting, and power surges. It began a "Serving & Conserving Delmarva" campaign which included the slogan found on the cover of the annual report, "Doing our part for our part of the world." Ocher publications include the monthly residential customer newsletter, "Energy News You Can Use ," the quarterly letter for customers older than 60, " Silver Bulletin," and the quarterly commercial customer newsletter, "Energy Exchange." Employees talked with more than 35 , 000 customers at fairs and trade shows within the service territory.

For several years, customer service , community relations, and marketing representatives have worked one-on-one with customers hav-*

• ing difficulty paying their energy bills. They have provided customers with formation about saving energy, credit tensions, budget billing, installment ments, load limiters , and community sources of funds. Given the importance customers and the general public place on the wise use of energy and environmental protection , significant customer information work in these areas is scheduled for 1991. COMMUNITY PROGRAMS Through contributions of stockholders and tomers, the Good Neighbor Energy Fund contributed more than $1.5 million ing the last eight years to customers ing trouble paying energy bills. ees, through the highly successful Radio Watch program, continued to summon aid to people in the community by using radios in their vehicles and, through the Gatekeeper program, linked 61 older tomers they observed in distress with propriate community services.

Employees contributed

$303,215 to the United Way, surpassing their 1990 paign goal by 16%. About 60% of Delmarva Power's employees volunteered their personal time to help others in the commumty . SERVING CUSTOMERS To service a diverse area encompassing urban, rural, and recreational settings, Delmarva Power maintains an electric system with 2,503 megawatts of generation capacity, 1,324 miles of transmission lines, and 9 , 166 miles of distribution lines. The natural gas system has 1 ,203 miles of gas main. Delmarva Power owns and operates four major fossil-fuel plants within the service territory and shares ownership of two coal plants and two nuclear plants outside the servJCe terntory.

The electric customers and natural gas customers are served by 2,755 employees through 13 customer service locations throughout the peninsula; division headquarters in Salisbury, MD , Harrington, DE, and Christiana, DE, and corporate headquarters rn Wilmington, DE. higher in 1990 ... conlinue lo be among fhe rno3l cornpelilive in I " lhe region. 1 3 14 Bala n ce a nd : J lex ib;/il'I a r e J(e'l:i lo lh e :J.ulur e For years, Delmarva Power's Challenge 2000 plan to provide customers with energy at affordable prices has emphasized balance through a tion of programs to encourage energy conservation at the peak, to buy energy , and to build new facilities.

This concept of balance is also fundamental in the environmental stewardship program put together this year under an umbrella theme of "Serving & Conserving Delmarva." This program seeks a balance in the obligation to serve customers while preserving and protecting the environment of the Delmarva Peninsula.

Flexibiliry is also crucial. When growth exceeded expectations in the l 980's, Delmarva Power was in a position to accelerate the first two combustion turbines at its Hay Road power station and its residential and commercial "Save Some" energy conservation programs.

If growth slows, as predicted, the Company can also slow down its plans for the future. This section looks ahead in the areas of Serving & Con s erving Delmarva , Challenge 2000 , and growth.

SERVING & CONSERVING DELMARVA This is Delmarva Power's environmental stewardship program. It includes existing and planned environmental activities. More importantly, it provides a focus for employee and community attention co these efforts and a symbol for the Company's concern about the quality oflife in its service territory.

There are four basic pares in chis program: protecting the environment, saving energy, using and recycling waste , and enhancing wildlife. The campaign and identifying logo were announced at a ceremony in Little Creek, Delaware, marking the Company's contribution of 341 acres of ecologically-valuable wetlands at Pore Mahon, Delaware, co The Nature Conservancy, an international wildlife protection organization. In addition co providing nutrients at the head of the marine food chain in the Delaware Bay , these wetlands also provide valuable habitat for horseshoe crabs and migrating shorebirds .

• Ocher programs co enhance wildlif e include the special care of more than 8,000 acres of land under rights-of-way for wildlife and plane habitat, th e raising of more than 100,000 striped bass over che past six years by employee volunteers at the Vienna pow e r ::Delaware, Jonal e J loJl.e natur e CoMeruanc'J aJ par/ of i/.e 2:Je/ntarva progrant.

1 5 plant wd/ g.enerate JeoaJ g.aj turbinej ... I " econornica unit. 1 6 plant, the building of 16 osprey nesting platforms to provide alternative nesting sites to this threatened species instead of nesting on transmission poles, and the installation of 465 bluebird and 11 wood duck houses. Through recycling, the Company has found uses for about 25% of the waste ash generated at power plants as a base rial for highways, backfills for building foundations, and material for artificial reefs to attract marine life in the Atlantic Ocean. Waste oil is burned in power plants. Scrap metals and paper are tinely recycled.

An employee program to recycle aluminum cans has begun. Under protecting the environment, the Company responded to customer cern by voluntarily adopting standards to limit electromagnetic fields around mission lines and substations even though the scientific comm unity is unsure if these fields are a health hazard. It removed PCB contaminated capacitors ahead of federal deadlines.

As part of the Company's energy-saving program, a new program to inform tomers about the energy-saving value of compact fluorescent lights, including the distribution of 1,000 of these lights free to customers, was developed to begin in the first quarter of 1991. Similar programs are being planned for water heater wraps and low-flow showerheads.

Also, the Company is beginning a pilot program to equip four of its vehicles to use compressed natural gas as a fuel. A corporate-wide Environmental dinating Committee and several mittees of employees have been lished to find more ways Delmarva Power can use its resources to protect and hance our part of the world. CHALLENGE 2000 Delmarva Power is in the midst of its Challenge 2000 plan which is designed to provide energy in the future at competitive prices. It is a flexible, multi-faceted approach also known as "Save Some, Buy Some, Build Some." Substantial progress was made in 1990 and is expected to continue into the decade. By the end of 1991, the Company plans to have a total of more than 40,000 tomers participating in its "Save Some" programs-the residential Energy For Tomorrow program, the commercial and industrial Peak Management program, and the recently-introduced commercial and industrial program to encourage efficient lighting.

The residential Energy For Tomorrow program allows the Company to manage by remote control the routine cycling of central air conditioners, heat pumps, and electric water heaters. This is done to reduce the demand for electricity as the load approaches a peak. Surveys show high customer satisfaction and that customers rarely know when the pany is managing the cycling. This curred two times in 1990 and five times in 1989. Large commercial and industrial customers who participate in the Peak Management program reduce their use through auxiliary generation and load reduction to pre-arranged levels when notified.

Customers in the commercial and industrial indoor lighting program receive financial incentives to convert to energy-efficient lighting.

So far, more than 14 million square feet of commercial and industrial building space has been veyed for consideration in this program. New energy demand management grams are planned in the areas of cial and industrial air conditioning, cool storage, and load shifting.

Ar the peak, the Company plans to be ab l e to reduce the demand for electricity by 163 megawatts in 1991 and 209 watts in 1995. For comparison, a new 105-megawatt combustion turbine unit costs $41 million. In the "Buy Some" portion of Challenge 2000, the Company decided not to go ahead with a proposal to buy 100 watts of coal-fired electricity from

• Duquesne Light Company after the Delaware Public Service Commission denied a Company request to approve entry into the contract.

However, the Company signed a contract to purchase 48 megawatts of electricity from Star terprise of Delaware City, DE, beginning in 1992. The Company began a feasibility study with Star Enterprise, which owns the finery at Delaware City, Mission Energy Co., and Texaco Syngas, Inc., to build a 150-megawatt power plant burning ified coke. The coke is a high-energy waste product of the refinery. Results of the study are expected in 1991. The joint effort has been named the Delaware Clean Energy Project. The Company also plans to ask for bids to supply 150 megawatts of capacity in 1996. In "Build Some," the Company secured permits and set the foundation during 1990 for a third, 105-megawatt tion turbine scheduled for completion in 1991 at its Hay Road faci li ty. Siring permits for a 150-megawatt combined cycle plant at Hay Road were also secured. The combined cycle plant will generate electricity from the waste heat of the three Hay Road gas turbines.

This plant is scheduled for completion in 1993. It will be Delmarva Power's cleanest, most nomical unit. The Company is also working on plans for a baseload plant of about 300 watts to be completed near the turn of the century. power planl:J ha:J been nJ.aferia/in the re:Jloralion of i/ii:J ntu:Jeun'l in 2Jelaware.

17 of lhe 5700 *<juare-m.le J:>e/m.arva and ihe [a,,fern SI.ore counlie!>

of prouiJe:J naluraf ga:J in a 275 :J<juare-18 All of these efforts are planned to achieve a minimum 15% reserve margin. In the natural gas business, employees are in the midst of a multi-year plan to replace 90 miles of uncoated, unwrapped steel pipe installed prior to 1968 with new polyethylene pipe. GROWTH The economy of the Delmarva Peninsula continues to be strong-not as strong as the boom years of the mid to late 1980's but not as slow as predicted for the economy of the nation as a who l e. While an economic slowdown is predicted for most of the nation in 1991, the Delmarva Peninsula's diverse blend of industries (chemicals, food processing, automobiles, agriculture, plastics and recreation) makes the demand for electricity and natural gas here less affected by tuations in the nationa l economy than in many other areas of the nation. These industries have performed well during the growth slowdowns of the past and are expected to continue to do so. In the six years since 1984, sales of tricity have grown 33% compared to 30% in the entire decade between 1975 and 1984. During that period, demand for electric i ty at peak periods has grown 3 7 .6% compared to 12.5% between 1975 and 1984. Delmarva Power's generating serves dropped from 3 7 .1 % beyond peak demand in 1984 to 3.3% at the end of 1988. This growth was fueled by the Delaware Financial Center Development Act which encouraged more than 30 banks and financial services companies to move operations to Delaware, the building boom in the coastal tourist areas of the service territory especially around Kent Island, MD, growth in the Salisbury, MD, area and the strong national economy. The Company predicts that any reces-sion-oriented industrial sales declines in 1991 will be partially offset by continued growth in the commercial and residential sectors, especially residential space ing. This will yield an essentially flat growth year. However, a 2.8% average annual electricity sales growth rate is dicted for 1992 to 1995 because of known new commercial and industrial facilities and expansions planned, such as the opening of a Hewlett-Packard research and manufacturing center in northern Delaware; increases in residential cal heating demand; and a general nomic rebound. In the area of growth at the peak, the Company forecasts flat growth in 1991 and about a 1.3% average annual peak growth through 1995. Without the ergy conservation programs, growth at the peak would have increased 1.8% nually through 1995. The outlook for firm gas sales is an average annual growth rate ofabout 1.9% per year through 1995.

Selected Jinancia!

':Data .. 20 Review anJ Anal'l.ii.i

...........................

21 Accountant.i

...........

.......... 28 Statem.ent.i

........................

29 Jinancia!

Statem.ent.i

........ 35 Con.ioAdated Stati.iticJ

...... 48 eeJ and O/focerJ .... 50 Stockholder .Jn/ormalion

... 52

• EARNINGS PER SHARE OF COMMON STOCK $2.00 --------------

---1.60 ----1-----1.20 -----....---1 -0.80 -O.OO 80 81 82 83 84 85 86 87 88 89 90 RETURN ON AVERAGE COMMON EQUITY 16%--------------

14 12 10 8 -6 4 0 80 81 82 83 84 85 86 8 7 88 89 90 UTILITY CONSTRUCTION EXPENDITURES (in millions)

$250------------

---

150 ______ __, -100 _____ ...... --1 --50 0 83 '84 '85 '86 '87 '88 '89' 90' 91" 92" 93* *Fo recasr Jinancia/

Seclion DIVIDENDS DECLARED PER SHARE OF COMMON STOCK $2.00 -------------

1.60--------------

1.20 0.80 c-0.40 O.OO 80 81 82 83 84 85 86 87 88 89 90 AVERAGE COMMON STOCK MARKET PRICE $24-------------

20 16 --1-----I I I I I --->-----1 2 8 4 --'--'-------0 80 81 82 83 84 85 86 87 88 89 90 UTILITY EXTERNAL FINANCING (in millions)

$200-------------0 83 84 85 86 87 88 89 90 91* 92 93" *Forecast Selected

':Data (Dollars in Thousands)

For the Years Ended December 31 1990 1989 1988 1987 1986 Operating Data Operating Revenues $ 811,238 $ 789,70 7 $ 768,322 $ 712,479 $ 714,863 Operating Income $ 146,374 $ 139,421 $ 129,494 $ 124,967 $ 134,738 Net Income $ 37,311 $ 91,308 $ 84,721 $ 79,803 $ 96,123 Electric Sales (kWh 000) 11,081,211 10 , 828 , 839 10,225 , 043 9,565,276 9,205,795 Gas Sales (mcf 000) 16,069 16,645 16,154 15,411 15 , 952 Gas Transported (mcfOOO) 2,194 677 2 Common Stock Data Earnings Per Share of Common Stock $ .60 $ 1.80 $ 1.70 $ 1.60 $ 1.94 Dividends Declared Per Share of Common Stock $ 1.54 $ 1.51 $ 1.4 7 $ 1.42 \-2 $ 1.36 Average Shares Outstanding (000) 47,534 46,687 45,892 45,717 45,717 Year-End Stock Price $ 18 $ $ 1 7-li.I $ 18 $ 22 Book Value Per Share $12.84 $13.67 $13.28 $13.01 $12.85 Capitalization Variable Rate Demand Bonds i'I $ 41,500 $ 41,500 $ 75,000 $ $ Long-Term Debt (2) 741,748 663 , 084 641 , 291 670,738 666,979 Preferred Stock 1 3 1 136,365 137,242 105,783 106,583 107,383 Common Stockholders

' Equity 614,692 642,641 613,177 594,975 587,44 T oral Capitalization

$1,534 , 305 $1,484,467

$1,435,251

$1,372,296

$1 , 361, Capitalization Ratios Variable Rate Demand Bonds 3% 3% 5% 0% 0% Long-Term Debt 48% 45% 45% 49% 49% Preferred Stock 9% 9% 7% 8% 8% Common Stockholders' Equity 40% 43% 43% 43% 43% Total Capitalization 100% 100% 100% 100% 100% Other Information T oral Assets $2,134,320

$2 , 028,661 $1 , 907 , 790 $1,807,831

$1,747 , 324 Construction Expenditures 141 $ 187,823 $ 175,843 $ 171,102 $ 142,239 $ 102,597 Internally Generated Funds (IGf)1 5 1 $ 112,551 $ 106,698 $ 10 7 ,413 $ 130, 77 8 $ 163 , 193 IGF as a Percent of Construction Expenditures 60% 61% 63% 92% 159% Capacity Reserve at Time of Summer Peak 12.0% 10.1% 3.3% 9.3% 23.9% (I )Variabl e rate demand b o nd s were r e cla ss ifi e d fr o m long-term d e bt to curr e nt li a biliti es a s of D ece mb e r 3 1 , 1 9 88. The C ompan y intend s to u se th e bond s as a so urce of l on g-t e rm finan c ing a s di sc u sse d in Nore 5 on pag e 4 0. (2)lnclud es L o n g-Term D e bt due w ithin one y ear. (3)1nclud es pr e ferr e d sto c k with mandatory r e d e mpti o n. (4)Exclud es All o w a nce for Fund s Us e d During C o nstruction. (S)N e t cash pr ov ided by op e rating activiti es less c ommon and preferred divid e nd s. 20 'J)./marva Power & ofighl Compan'I

• RESULTS OF OPERATIONS

• Earnings The earnings per share of common srock amibured ro rhe core uriliry business and nonuriliry subsidiaries are shown below. Core Uriliry Nonuriliry Subsidiaries Tora! Core Utility Earnings 1990 $1.70 (1.10) $0.60 1989 $1.69 .11 $1.80 1988 $1.60 .10 $1.70 Earnings per share of rhe core uriliry for 1990 remained approximarely rhe same as 1989 despire rhe absence of replacemenr power cosrs relared to rhe shurdown of rhe Peach Borrom Atomic Power Srarion (Peach Borrom) rhrough November 1989. Peach Bocrom replacemenr power costs had decreased 1989 earnings per share by 18.5¢ since these costs were nor recovered rhrough customer rates. Also, 1989 earnings per share had been increased by 5¢ due ro a one-time credit adjustmenr for previously expensed spare parts at certain jointly-owned generaring planrs. After excluding the effecr of these two unusual items on 1989 earnings per share, 1990 core utiliry earnings per share decreased in comparison ro 1989. This decrease was primarily due ro higher operation and mainrenance expenses, depreciation and net financing costs. A substanrial portion of rhese cost increases resulted from capiral addirions ro rhe Company's electric system. New facilities continue to be added ro the electric sys tem in order to meet the growing demand for e lectricirywithin the service terrirory.

Additional revenue from a 2.3% increase in 1990 kilowacr-hour (kWh) sales partly offser the effecr of rhe higher expenses.

Looking forward ro 1991 , rhe Company anricipates rhar kWh sales will grow ar a slower rare due ro weaker economic conditions.

Also, cosrs are expecred ro conrinue to increase due ro capiral addirions and normal inAarionary pressures.

Thus, core uriliry earnings may decline unril adequare rate relief is obrained.

Core uriliry earnings per share for 1989 increased 9¢ from 1988 primarily due ro increased residenrial and commercial kWh sales which resulted from cusromer growth and a srrong 1989 economy in the service territory.

Core uriliry earnings per share also increased due ro rhe effecr of rhe one-time credir adjusrmenr for previously expensed spare parts at certain jointly-owned generaring planrs. These earnings increases were partly offset by rhe effecr of higher Peach Bocrom replacemenr power costs (which decreased earnings per share by 18.5¢ in 1989 compared to 13.5¢ in 1988) and increased depreciation and inrerest expenses.

Nonurility Subsidiary Earnings In 198 7, the Company began investing in two wood-burning power planrs and rheir associared sawmills (Redding Power and Burney Foresr Producrs).

The sawmills were intended ro provide fuel for rhe power planrs and ro produce finished lumber. These joinr venrure projects, which are locared in northern California, generated pre-rax losses of $12.8 million in 1990 due to conrinued unfavorable condirions in the rimber and lumber marker s. Environmenral efforts and regularory acrions to curtail logging in rhe region, conrinued foreign demand for rimber and rhe demand for wood fuel by orher projecrs in rhe region have resulred in high log and fuel costs. Ar rhe same rime, finished lumber prices are low due ro lower demand for lumber from rhe housing indusrry.

Borh projects are in defaulr on rheir l oans and rhe Redding Power lender has filed for foreclosure on rhe projecr. The Redding Power sawmill has been sh ur down , and acrions are und erway ro shur down and se cure rhe power planr. Ar Burney Foresr Producrs, n egoriarions are underway ro resrrucrure rhe bank debr. The Company is considering shucring down rhe sawmi ll and purchasing all fuel requiremenrs of the power planr. In 198 7, the Company also began invesring in a wasre-ro-energy projecr (Glendon Energy) planned to be locared in Pennsylvania.

An environmenral permir issued by rhe Pennsylvania Deparrmenr of Environmenral Resources conrains a co nd ir i on which, based on l egislar i on adopred well afrer rhe projecr was underway , rescricr s rhe siring of rhe faciliry.

In 1990 , rhe Company's appeal of rhe siring condirion was denied. The projecr also needs ro obrain acceprable financing in order to be feasible. 21 RESULTS OF OPERATIONS (CONTINUED) 22 Due co rhe circumstances discussed above, management believes iris probable rhar the future cash flows of these projects will nor be sufficient to recover the book value of rhe Company's investment.

Accordingly, in December I 990's accounting, the Company recorded a $62,534,000 pre-tax charge ro earnings ($42,497,000 after-tax or $.89 per share) co write off the investments in these joint venture projects.

After excluding the 1990 write-off of these joint venture investments, subsidiary earnings per share decreased from $.11 in 1989 co a $.21 loss in 1990. Earnings per share generated by subsidiaries in 1989 included a gain on rhe sale of a partial interest in Burney Forest Products which had resulted in pre-tax income of$5.6 million and after-tax income of$4.8 million or $.10 per share. Prior year subsidiary earnings also reflected a $1.9 million pre-tax ($1.3 million after-tax) write-off of an investment in a municipal waste water treatment venture. The remaining decrease in subsidiary earnings was mainly due to largeroperaring losses from Redding Power and Burney Forest Products, investment tax credits recorded on these projects in 1989 , and a larger operating loss from a solid waste landfill located in Pine Grove, Pennsylvania which starred up in mid-1989.

Although the Pine Grove landfill is incurring operating losses, cash flows are positive. In comparing 1989 co 1988 subsidiary earnings, rhe gain from the sale of partial interest in Burney Forest Products and investment tax credits recorded in 1989 were offset by the 1989 write-off of rhe investment in the municipal waste water treatment venture, srarr-up losses on the Redding Power and Pine Grove projects, and lower investment income from leveraged leases and marketable securities.

Dividends On December 20, 1990, rhe Board of Directors decided to maintain rhequarrerlydividend at 38 Yi cents per share. The dividend was nor increased in December because of concerns related to rhe general slowdown in rhe economy, rhe financial requirem co support the utility construction program and rhe lack of earnings from rhe subsidiaries.

At the same rime, dividends nor decreased because it is expected that earnings from the electric and gas business will support rhe current dividend level , subject to reasonable regularory actions in rhe future. Electric Revenues and Sales 1990 electric operating revenues increased

$30.1 million from 1989 due co a $19.6 million increase in fuel revenues a nd a $10.5 million increase in non-fuel (base) electric revenues.

Fuel revenues generally do nor affect net income since fuel costs recovered through fuel adjustment clauses are adj us red to march amounts recovered through revenues.

The$ I 0.5 million increase in 1990 base electric revenues was principally due to a 2.3% increase in total kWh sales. The residential and commercial sales classes continued to provide most of rhe increase in electric base revenues.

Residential 1990 sales growth of I. I% was lower than previous years due to a weaker economy and milder winter weather. Commercial sales growth of3.6% was strong, particularly after considering rhar rhe financial services industry is growing at a slower rare. Industrial sales growth of3.9% was also strong despite rhe softening economy. The service territory's diverse mix of industrial customers should help lessen rhe impact of an economic downturn on industrial sales. Total 1989 electric revenues increased

$I 0.8 million from 1988 due to a $15.2 million increase in base revenues which was partially offset by a $4.4 million decrease in fuel revenues.

The increase in base revenues was primarily due to a 5.9% increase in kWh sales. Although about half of rhe roral kWh sales increase was contributed by the industrial sales class, most of rhe base revenue increase was attributed to rhe residential and commercial sales classes. Growth rares of 3.6% and 5.2% in 1989 residential and commercial kWh sales, respectively, were attributed to strong economic conditions in the service territory.

However, the growth rates were more moderate than the vigorous growth rares reported in 1988 due ro milder weather and a slowdown in new residential and commercial construction.

The unusually large increase in industrial kWh sales, which grew by 10.9%, was mainly due to resumption of production by a steel mill and another major customer temporarily running rwo plants.

RESULTS OF OPERATIONS (CONTINUED)

• Gas Revenues, Sales and Transportation Gas revenues decreased by $6.9 million in 1990 mainly due to a $7.4 million decrease in fuel revenues.

In October 1990, the Company credited firm gas customers' bills by $6.2 million in order to return over-recovered gas fuel costs. The over-recovery was principally due to unexpected refunds received by the Company from its gas suppliers.

The $6.2 million bill credit did not affect net income since fuel costs are adjusted to match fuel revenues.

Base revenues (revenues other than fuel and transportation revenues) remained relatively unchanged from 1989. Total gas sales decreased 3.5% primarily due to milder winter weather and some customers transporting gas directly from gas producers and pipelines.Transportation revenues were $0.6 million and $0.2 million in 1990 and 1989, respectively.

In total, gas sales and gas transported increased by 5.4% in comparison to 1989. Gas revenues increased

$8.1 million in 1989 due to a $6.2 million increase in fuel revenues and a $1.9 million increase in base revenues.

Base gas revenues increased primarily due to a 3.0% total sales increase which was mainly a result of higher industrial and commercial sales. Industrial sales benefited from higher customer production levels and the resumption of production by a steel mill. Commercial sales increased primarily due to customer growth. Electric Fuel and Net Interchange Expenses The components of the changes in electric fuel and net interchange expenses are shown in the table below. Comparative Increase (Decrease)

From Prior Year in Electric Fuel and Net Interchange Expenses (Dollars in Millions)

Average Cost of Electric Fuel and Net Interchange Increased kWh Output Deferral of Energy Costs Total 1990 $(10.5) 0.0 12.4 $ 1.9 1989 $ 17.9 14.3 (33.9) $ (1.7) The average cost of 1990 electric fuel and net interchange decreased from 1989 primarily due to increased low cost nuclear generation and a decrease in the cost of interchange energy. Nuclear generation increased in 1990 mainly due to greater availability of the Peach Bottom units which were shut down during part of 1989 (as discussed in Note 13). Increased oil prices due to Iraq's August 1990 invasion of Kuwait partly offset the benefit of increased nuclear generation.

The potential effects of ongoing higher oil prices on the Company and its customers should be mitigated by the Company's balanced mix of fuel sources to generate electricity.

In 1990, the Company's total kWh output was provided by coal generation (50%), nuclear generation (17%), oil generation (10%), gas generation (4%), and interchange energy (19%). Any under or over-recovery of fuel costs from the Company's customers is generally recovered from or refunded to customers through fuel adjustment clauses. The Company has received regulatory approval on an interim basis for an increase in electric fuel rates charged to Delaware customers, effective January I, 1991. The 1991 Delaware electric fuel rate increase is intended to recover projected increases in 1991 electric fuel costs and previous under-recoveries of electric fuel costs. The 1989 average cost of electric fuel and net interchange increased from 1988 mainly due to increased oil prices and increased interchange purchases of electricity.

More electricity purchases were necessary in 1989 due to outages at the Company's fired generating plants and increased energy demand by customers.

The timely mid-1989 installation of two I 05 megawatt combustion turbines, which primarily burn gas, helped satisfy the increased energy demands. Nuclear generation increased moderately since the Peach Bottom units , which were shut down during 1988, were restarted and available for part of 1989 . 23 RESULTS OF OPERATIONS (CONTINUED)

AMENDMENTS TO THE CLEAN AIR ACT 24 Operation, Maintenance, and Depreciation Expenses Operation and maintenance expenses increased by $7 .6 million in 1990 primarily due to higher payroll and other costs related to serving the Company's growing number of customers.

Expenses decreased at Peach Bottom since costs related to the restart effort were incurred in 1989. Offsetting the Peach Bottom decrease in expenses was an increase due to last year's one-rime $3.9 million credit adjustment for previously expensed spare parts at certain jointly-owned generating units. The Company anticipates that its cost control programs will help to minimize future increases in operation and maintenance expenses which are expected to occur mainly due to the aging of the Company's existing plant, additions of new uriliry plant and normal inflationary pressures.

Also, 1991 operation and maintenance expenses will increase by $1.9 million since the Company began expensing the retail portion of the lease cost for rhe Merrill Creek Reservoir in July 1990. Depreciation expense increased

$6.1 million in 1990 due to capital additions to the electric system. Continued increases in depreciation expense are expecred as the Company adds electric plane to serve the growing demand for elecrriciry in the service territory.

Operation and maintenance expenses increased

$4.4 million in 1989 mainly due to outage expenses at the Company's generating planes and increased payroll expenses.

A $2.5 million increase in steam expenses, which are billed and reflected in increased steam revenues, also contributed to the increase.

These increases were partly offset by lower expenses related to the preparation for the restart of Peach Bottom and a one-time $3.9 million credit adjustment for previously expensed spare parts at the jointly-owned generating plants. Depreciation increased

$5.0 million in 1989 principally due to an increase in electric utiliry plane which resulted from installation of rwo 105 megawatt combustion turbines and additions to the transmission and distribution system. Utiliry Financing Costs Interest charges on debt of the core uriliry business were $53.1 million in 1988, $59.1 million in 1989, and $62.8 millio 1990. Preferred dividends were $6.9 million in 1988, $7.4 million in 1989, and $8.8 million in 1990. The increases in uriliry debt interest charges and preferred dividends were mainly due to higher average debt and preferred stock balances required to finance rhe Company's increased investment in utiliry plant. The combined total of core uriliry capitalized interest and allowance for equiry funds was $5.5 million in 1988, $7 .5 million in 1989, and $5.5 million in 1990. The variances berween years in capitalized financing costs are principally a result offluctuations in the average balance of construction work-in-progress which was higher in 1989 due to construction of the first rwo combustion turbines at the Hay Road site. On November 15, 1990 , the Clean Air Act Amendments (the Act) were signed into law by President Bush. The Act contains a number of provisions that will impact the Company, including the Acid Rain Control Tide. These provisions are designed to reduce nationwide sulfur dioxide (50 2) emissions by approximately 8.9 million tons and nitrogen oxide (NO x) emissions by approximately rwo million tons below 1980 levels in rwo phases. The Phase I and Phase II reductions are required to be implemented by the years 1995 and 2000, respectively.

The Act will require the Company to reduce 50 2 and NO x emissions from some of its wholly and jointly-owned generating units. The Company is presently reviewing the Act in order to determine its impact on Company operations.

Regulations and rulemakings associated with implementation of the Act have yet to be promulgated.

The Company's strategy is to maintain flexibiliry in order to respond to changing developments.

The Company's wholly-owned planes will not be affected by Phase I 50 2 reduction requirements.

The Company owns a 3.72% share of the Conemaugh Power Plane which is considered an affected Phase I Unit. A flue gas desulfurization system will probably be installed on at least one unit of the Conemaugh Power Plane by 1995. The Company's wholly and jointly-owned units will need to meet a lower 50 2 emission cap in Phase II. Although it is too early to choose a specific compliance plan for Phase II, reductions are likely to occur at the wholly-owned units and at the jointly-owned Keystone Station in which rhe Company owns a 3.70% share. It is anticipated rhar these units will employ some combination of fuel switching, flue gas desulfurizarion, powering, environmental dispatch or allowance trading. In addition to the 50 2 reduction requirements, coal units will reduce NO x emissions through operating changes or the installation of low NOx burners. All affected units will install continuous emission monitors to determine compliance and all units must obtain operating permits. The Company anticipates that. to comply with rheAcrwill be recovered from its customers and, depending on the compliance strategy selected, the Comp electric rares could increase by approximately five percent by the year 2000.

• IMPACT OF ACCOUNTING PRONOUNCEMENTS LIQUIDITY AND CAPITAL RESOURCES Internall y Generated Funds Utility Construction Exp e nditures (excluding AFUDC) (m ill io n s of d o ll ars) $2 50------200 150 -50 1: 0 --r--,--,--,--

89 90 91*92*93* "F o r ccas c 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). SFAS No. 106 requires employers, if obligated or committed to provide posrretirement benefits other than pensions, to recognize their obligation on an accrual basis. The cost of the postretirement benefit obligation is to be attributed co the period of employee service ending on the date rhe employee becomes eligible for rhe posrretirement benefits.

The Company currently expenses these costs as paid (Nore 9). SFAS No. 106 , which becomes effective in 1993, allows employers co recognize the net accumulated posrretirement benefit obligation immediately (as a cumulative effect of a change in accounting) or amortize the transition obligation over the average remaining service period of active plan participants or 20 years, if longer. The Company has nor yet determined the magnitude of the impact that SFAS No. 106 will have on its financial statements or which method of recognizing the accumulated postrerirement benefit obligation will be selected.

The Company plans to petition rhe regulatory commissions for approval to recover in uriliry rares the increase in expense for posrrerirement benefits as a result of adopting SFAS No. 106. Should the regulatory commissions nor approve rhe Company's request, bur rather continue to allow recovery of posrrerirement benefits other than pensions as the costs are p a id , the Company plans to record a regulatory asset in accordance with SFAS No. 71, "Accounting for rhe Effects of Certain Types of Regulation," for rhe unpaid amount. Accordingly, the results of operations should not be materially affected by adoption of SFAS No. 106. See Nore 2 to the Consolidated Financial Statements for a discussion on Statement of Financial Accounting Standards No. 96, " Accounting for Income Taxes," and its anticipated effects on the Company's financial statements.

The Company's primary capital resources are internally genera red funds (net cash provided by operating activities less common and preferred dividends) and external financings.

These resources provide capital for the Company's uriliry construction program and ocher utility capital requirements, such as repayment of maturing debt and capital lease obligations.

In 1990, internally genera red funds represented 60% of $18 7.8 million of utiliry construction expenditures in comparison to 61 % for 1989 and 63% for 1988. External utility financings (net of refinancings) provided $94.8 million of capital. In April 1990, the Company issued $35 million of tax exempt bonds bearing a fixed interest rare of7.6%. In Ma y 1990, the Company refinanced

$15 million of 10 Y-!% tax exempt bonds with new bonds bearing an interest rate of 7.3%. In November 1990 , the Company issued $39 million of30 year Medium Term Notes (MTNs) at an average rare of9.91 % and $4 million of 12 year MTNs at an average rare of9.27%. During 1990 , the Company raised $16.8 million of equity capital through the Dividend Reinvestment and Common Share Purchase Plan. The Company also raised $18.7 million in October 1990 by financing its share of nuclear fuel at the Salem Nuclear Generating Station through a nuclear fuel energy contract which is considered a capital lease. In January 1991, $7 million of 30 year 9.95% MTNs were issued. Capital requirements for the period 1991-1993 are estimated co be $666 million , including

$640 million for utility construction (excludingAFUDC).

The Company anticipates that during this period $2 7 9 million will be generated internall y, which represents 42% of capital requirements and 44% of utility construction expenditures.

Actual internally generated funds and construction expenditures may vary from the above estimates due to , among other factors, the rate of inflation, regulation and legislation, rares ofload growth, licensing and construction delays , economic conditions and the cost and availability of capital. The Company's forecast of internally generated funds reflects lower revenue growth due co a slowing economy. The Company estimates that total electric kWh sales will grow at an average annual rate of2.3% during 1991 to 1993 in comparison to growth rates of 2.3% in 1990, 5.9% in 1989 and 6.9% in 1988. Also, costs resulting from new uriliry facilities added to meet load growth within the service territory are expected to continue increasing.

Thus , the Company anticipates that modest rate relief will be required in order to achieve its forecast of 1991-1993 internally generated funds. The Company's forecasts of 1991-1993 capital expenditures do not include possible additional coses for the construction of cooling cowers for the Salem Nuclear Generating Station. The New Jersey Department of Environmental Protection has issued Public Service Electric and Gas (PSE&G), the Salem operator, a draft permit which would require construction of cooling towers a nd a shutdown of the plant during the construction period. PSE&G is opposing the draft permit. If the cooling towers are constructed, the Company would incur replacement power costs during the construction period and estimated capital costs of $40 million or more. 25 LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)

Ratio of Earning s to Fixed Int e rest Charges (SEC Method) 4-------3 2->---I l ----0 86 87 8 8 8 9 90 CAPACITY 26 As of December 31, 1990, rhe Company's capital structure was comprised of 51.0% long-term debt and variable rate demand bond s, 8.9% preferred stock and 40.1 % common stockholders

' equity. As of December 31, 1989 , the Company's capital structure was comprised of 4 7.5% long-term debt and variable rate demand bonds, 9.2% preferred stock and 43.3% common stockholders

' equity. The Company estimates its long-term external financing requirements to be $104 million in 1991, $148 million in 1992, and $93 million in 1993. The Company plans to satisfy its estimated need for external financings during 1991 to 1993 by issuing $122 million of long-term debt, $50 million of preferred stock, and $173 million (market value) of common stock. The Company's plans include a common stock issuance of up to 3 , 500,000 shares in 1991, another common stock issuance in 1993, and the ongoing issuance of shares through the Dividend Reinvestment and Common Stock Purchase Plan. Certain provisions in the Company's Certificate of Incorporation limit the issuance of preferred stock. The most restrictive of these provisions requires that the proforma ratio of consolidated earnings to fixed charges and preferred stock dividend requirements combined for any twelve consecutive months within the fifteen months preceding an issuance of preferred stock be 1.50 or greater. This ratio was 1.33 for the twelve months ended December 31, 1990. Excluding the Company's December 1990 write-off of joint venture investments , the 1990 ratio would have been 1.88. The Company expects to be restricted from issuing preferred stock in 1991. However, the Company does not plan to issue preferred stock until 1992 when twelve month earnings will no longer reflect the effect of the write-off. The Company's planned financing mix should result in a capital structure over the next three years which is within the target ranges of 44-52% debt, 8-10% preferred stock, and 42-46% common stock. The Company's ratio of pre-tax earnings to fixed interest charges (computed according to SEC regulations) was 2.03 for 1990. Excluding the write-off of joint venture investments, the ratio of pre-tax earnings to fixed intere s t charges was 2.89 for 1990. As of December 31, 1990, the Company's s enior debt was rated Al by Moody's Investor Service, A+ by Standard & Poor's, and A+ by Duff & Phelps. The Compan objective is to maintain its financial parameters within the ranges that warrant a strong " A" bond rating. Capital resources available to the Company for short-term financing needs include commercial paper, loan placement agreements and lines of credit. As of December 31, 1990, the Company had $75 million in lines of credit available for the shortterm financing needs of the utility business.

The short-term debt balance of the core utility business was $8.0 million as of December 31, 1990. The Company's nonutility subsidiaries financed 1990 investments in joint ventures and nonutility operations primarily through the liquidation of marketable securities.

The Company's peak summer load in 1990 was 2,235 megawatts (MW) in comparison to 2,1 7 5 MW in 1989 , an increase of2.8%. The Company's generating capacity of2,503 MW at the time of the 1990 summer peak provided a 12.0% reserve margin which met the Company's generating reserve obligation to the PJM Interconnection.

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 Delmarva Power & Light Company. The Company estimates that its peak load will grow by an average of 1.3% annually over the next five years. The Challenge 2000 Plan is the Company's strategy for providing reliable electric service at competitive rates ro customers.

The plan combines customer-oriented conservation alternatives, called demand-side options, and the use of emerging and existing generation technologies, called supply-side options. The strategy can be characterized as "Save Some , Buy Some, Build Some." The plan is flexible and can be adapted to lower or higher than anticipated load growth. As of December 31, 1990, the demand side ("Save Some") of Challenge 2000 had enrolled over 27,000 residential customers and 61 commercial and industrial customers which provide the Company with the ability to reduce its peak load by 15 5 MW. The Company forecasts a 209 MW peak load reduction through demand side programs by 1995' s summer peak. The supply side of the Challenge 2000 Plan combines the use of power purchases from regulated and nonregulated utilities

("Buy Some") and the construction of new generating capacity ("Build Some") as follows: In 1991, a third combustion turbine, with approximately I 05 MW of capaci , is scheduled for commercial operation at the Hay Road site; in 1992, the Company plans to sell the Delaware City gener plant to Star Enterprise and then purchase the plant's capacity over a 26 year period (See Note 11); and in 1993, a 150 combined cycle addition to the Hay Road combustion turbines is planned. Preliminary plans for the remainder of 1990 s include the purchase of base-load capacity in 1996 and construction, by the Company, of a new base-load unit in 1998.

REPORT OF MANAGEMENT

• Management is responsible for the information and representations contained in the Company's financial statements.

Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.

Delmarva Power & Light Company maintains a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified personnel.

Coopers & Lybrand, independent certified public accountants, are engaged to audit the financial statements and express their opinion thereon. Their audits are conducted in accordance with generally accepted auditing standards which include a review of internal controls.

The Audit Committee ofthe Board ofDirectors, composed ofoutside directors only, meets with management, internal auditors and independent accountants to review accounting, auditing and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the Audit Committee, subject to stockholder approval.

Nevius M. Curtis Chairman, President and Chief Executive Officer Paul S. Gerritsen Vice President and Chief Financial Officer ';J).fmarva Power & J:;'J/.t Company 27 REPORT OF INDEPENDENT ACCOUNTANTS 28 To the Board of Directors and Stockholders Delmarva Power & Light Company Wilmington, Delaware We have audited the accompanying consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company and Subsidiary Companies as of December 31, 1990 and 1989, and the related consolidated statements of income, changes in common stockholders' equiry, and cash flows for each of the three years in the period ended December 31, 1990. These financial statements are the responsibiliry 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, 1990 and 1989, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1990 in conformity with generally accepted accounting principles.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 5, 1991

• ComohJateJ StalemenfJ o/ !)ncome * (Dollars in Thousands)

For the Years Ended December 31 1990 1989 1988 Operating Revenues Electric $708,476 $678,396 $667,553 Gas 79,836 86,742 78,615 Steam 22,926 24,569 22,154 811,238 789,707 768,322 Operating Expenses Electric fuel and net interchange 227,617 225,758 227,426 Gas purchased 46,576 52,653 45,843 Operation and maintenance 224,141 216,583 212,230 Depreciation 82,439 76,327 71,333 Taxes other than income taxes 34,939 31,829 31,261 Income taxes 49,152 47,136 50,735 664,864 650,286 638,828 Operating Income 146,374 139,421 129,494 Other Income Write-off of joint investments (62,534) (1,929) Equity in earnings (losses) of joint ventures (12,772) (2,667) 47 Allowance for equity funds used during construction 2,845 3,730 3,312 Income taxes on other income 24,596 3,002 1,189 Other 2,470 8,095 6,913 (45,395) 10,231 11,461 Income Before Interest Charges 100,979 149,652 140,955 Interest Charges Debt 64,308 62,222 56,086 Other 2,359 1,943 2,356 Capitalized interest (2,999) (5,821) (2,208) 63,668 58,344 56,234 Earnings Net income 37,311 91,308 84,721 Dividends on preferred stock 8,784 7,427 6,889 Earnings applicable to common stock $ 28,527 $ 83,881 $ 77,832 Common Stock Average shares outstanding (thousands) 47,534 46,687 45,892 Earnings per average share $ .60 $ 1.80 $ 1.70 Dividends declared per share $ 1.54 $ 1.51 $ 1.47 See accompanying Notes to Consolidated Financial Statements.

ASSETS (Dollars in Thousands)

As of December 31 1990 1989 Utility Plant-Elecrric $2,112,198

$2,022,732 at Original Cost Gas 134,311 121,920 Sream 24,982 24,913 Common 123,198 113,722 2,394,689 2,283,287 Less: Accumulared depreciarion 812,419 757,598 Ner uriliry plant in service 1,582,270 1,525,689 Consrrucrion work-in-progress 95,911 44,413 Nuclear fuel, ar amorrized cosr 42,774 17,876 1,720,955 1,587,978 Other Property Investment in leveraged leases 83,852 81,804 and Investments Invesrment in joint venrures 6,296 54,633 Orher properry, ner 54,228 56,167 Funds held by rrusree 14,962 5,742 159,338 198,346 Current Assets Cash and cash equivalents 27,129 24,294 Markerable securiries, ar lower of cost or market Accounts receivable:

Customers 62,055 Other 8,059 11,860 Inventories, at average cost: Fuel (coal, oil and gas) 49,271 31,999 *Materials and supplies 36,939 34,412 Prepayments 6,572 6,701 Deferred income taxes, net 9,862 5,525 Deferred energy costs 8,605 7,995 208,492 203,128 Deferred Charges Unamorrized debt expense 8,983 7,984 and Other Assets Deferred recoverable plant costs 11,920 12,966 Orher 24,632 18,259 45,535 39,209 Toral $2,134,320

$2,028,661 See accompanying Notes to Consolidated Financial Statements.

CAPITALIZATION (Dollars in Thousands)

AND LIABILITIES AB of December 31 1990 1989 Capitalization Common stock $ 107,751 $ 105,737 (see Statements Additional paid-in capital 2?1,694 256,951 of Capitalization)

Retained earnings 235,247 279,953 Total common stockholders' equity 614,692 642,641 Preferred stock 136,365 136,442 Long-term debt 741,032 662,544 1,492,089 1,441,627 Current Liabilities Shon-term debt 15,300 23,000 Long-term debt due and preferred stock redeemable within one year 716 1,340 Variable rate demand bonds 41,500 41,500 Accounts payable 56,183 47,847 Taxes accrued 8,938 4,550 Interest accrued 13,744 13,307 Dividends declared 18,588 18,484 Current capital lease obligations 12,747 791 Orher 31,282 20,668 198,998 171,487 ferred Credits and Deferred income taxes, net 330,493 326,327 Orher Liabilities Deferred investment tax credits 57,251 60,450 Long-term capital lease obligations 32,354 2,071 Other 23,135 26,699 443,233 415,547 Orher Commitments and Contingencies (Notes 10 and 14) Total $2,134,320

$2,028,661 See accompanying Notes to Consolidated Financial Statements.

hefmarua Power & J!;g/.i Compang 3 f Cash Flows from Operating Activities Cash Flows from Investing Activities Cash Flows from Financing Activities (Dollars in Thousands)

For the Years Ended December 31 1990 Net income $ 37,311 Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization 93,118 Allowance for equity funds used during construction (2,845) Investment tax credit adjustments, net (3,199) Deferred income taxes, net (128) Net change in: Accounts receivable (1,629) Inventories (16,255) Accounts payable 8,190 Other current assets and liabilities*

6,449 Equity in losses (earnings) of joint ventures 12,772 Write-off of joint venture investments 62,534 Other, net (1,862) Net cash provided by operating activities 194,456 Construction expenditures, excluding AFUDC (187,823)

Capitalized interest (2,999) Proceeds from sales of ownership interests in: Nuclear fuel -Salem 18,706 Nonutility joint venture Merrill Creek Reservoir Investment in leveraged leases (1,649) Investment in joint ventures and nonutility operations (20,495) Decrease in marketable securities 14,808 Funds held by trustee (8,974) Other, net 1,283 Net cash used by investing activities (187,143)

Dividends:

Common (72,881) Preferred (9,024) Issuances:

Long-term debt 94,111 Variable rate demand bonds Common stock 16,792 Preferred stock Redemptions:

Long-term debt (15,573) Preferred stock (877) Principal portion of capital lease payments (8,495) Net change in short-term debt (6,200) Other, net (2,331) Net cash used by financing activities (4,478) Net change in cash and cash equivalents 2,835 Beginning of year cash and cash equivalents 24,294 End of year cash and cash equivalents

$ 27,129 *9rher than debt classified as current, preferred stock redeemable within one year and current deferred income taxes. See accompanying Notes to Consolidated Financial Statements.

• 1989 1988 $ 91,308 $ 84,721 82,856 78,716 (3,730) (3,312) (3,220) (2,658) 37,358 20,361 (11,797) (9,728) 4,464 (2,117) 1,254 (771) (17,508) 16,560 2,667 (47) 1,929 (2,109) (571) 183,472 181,154 (175,843)

(171,102)

(5,821) (2,208) 12,113 39,121 (7,280) (2,330) (27,257) (34,193) 17,132 28,087 (4,545) 180 (699) 7,466 (192,200)

(134,979)

(69,738) (66,852) (7,036) (6,889) 20,000 50,000 18,000 15,235 7,853 45,000 (15,637) (25,499) (13,515) (800) (864) (1,099) 8,500 (6,000) 478 (1, 157) (17,577) (32,443) (26,305) 50,599 $ 24,294 Common Stockholders' Equity Cumulative Preferred Stock (Dollars in Thousands)

As of December 31 Total Common Stockholders' Equity(!)

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 Without Mandatory Redemption:

Series Shares outstanding (1990 and 1989) 3.70%-4.56%

240,000 and 240,000 5.00%-7.88%

5i2,800 and 512,800 Adjustable-6.40%'

2 l 160,850 and 160,850 Auction rate-6.41

%(2) 450,000 and 450,000 Preferred Stock without Mandatory Redemption With Mandatory Redemption:

9.00% Series 0 and 8,766 shares Less: Amount to be redeemed within one year Preferred Stock with Mandatory Redemption First Mortgage Bonds: Maturity 1994 1997 1998-2002 2003-2004 2005(3) 2008-2011 2014-2020 Interest Rates 4Ya% 6%% 7%-11 %% 6.6%-10% 10 WVo 9 WVo-12% 7.3%-10 Ya% Other Bonds, due 2015-2017, 7.3%-7.5%

Pollution Control Notes: Series 1973, due 1991-1998, 5.55%-5.75%

Series 1976, due 1992-2006, 7 Yao/o-7 WVo Medium Term Notes'4 l, 9.26%-9.95%

First Mortgage Notes'5 l, 9.65% Other Obligations, due 1991-2001, 10.98% Unamortized premium and discount, net Subtotal Less: Long-Term Debt due within one year Total Long-Term Debt Total Capitalization Variable Rate Demand Bonds'6J Total Capitalization with Variable Rate Demand Bonds (1) Refer to statement on page 34 for additional information.

(2) Average rate during 1990. (3) Refinanced on May 7, 1990. See Note 3. Call price per share $103-$105

$103 -$104 $106 $100 (4) $4 million matures on December 1, 2002 and $39 million matures on December l, 2020. (5) Repaid through monthly payments of principal and interest over 15 years ending November 2002. (6) Classified under current liabilities as discussed in Note 5. See accompanying Notes to Consolidated Financial Statements.

1990 $ 614,692 24,000 51,280 16,085 45,000 136,365 25,000 25,000 158,100 77,150 81,900 226,000 593,150 53,500 6,950 34,500 41,450 43,000 9,788 1,610 (750) 741,748 716 741,032 1,492,089 41,500 $1,533,589 1989 $ 642,641 24,000 51,280 16,085 45,000 136,365 877 800 77 25,000 25,000 158,100 77,150 15,000 81,900 176,000 558,150 53,500 7,100 34,500 41,600 10,211 245 (622) 663,084 540 662,544 1,441,627 41,500 $1,483,127

lJefmarva Power & ofighl Compan'I 33 (Dollars in Thousands)

Common Additional For the Three Years Ended Shares Par 0 l Paid-in Retained December 31, 1990 Outstanding Value Capital Earnings Total Balance as of January I, 1988 45,717,450

$102,864 $234,890 $257,221 $594,975 Net income 84,721 84,721 Cash dividends declared:

Common stock ($1.47) (67,479) (67,479) Preferred stock (6,889) (6,889) Issuance of common stock: Dividend Reinvestment and Common Share Purchase Plan 452,552 1,019 6,834 7,853 Other expenses (3) (3) Redemption of preferred stock 6 (7) (I) Balance as of December 31, 1988 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, Preferred stock (7,427) (7, Issuance of common stock: Dividend Reinvestment and Common Share Purchase Plan 824,428 1,854 13,381 15,235 Other expenses (31) (31) Preferred stock: Issuance (782) (782) Redemptions and Retirements 2,656 (978) 1,678 Balance as of December 31, 1989 46,994,430 105,737 256,951 279,953 642,641 Net income 37,311 37,311 Cash dividends declared:

Common stock ($1.54)

(73,225) (73,225) Preferred stock (8,784) (8,784) Issuance of common stock: Dividend Reinvestment and Common Share Purchase Plan 891,328 2,006 14,723 16,729 Other 3,600 8 26 34 Redemption of preferred stock (6) (8) (14) Balance as of December 31, 1990 47,889,358 $107,751 $271,694

$235,247 fllThe Company's common stock has a par value of $2.25 per share and 90,000,000 shares are.aurhorized.

See accompanying Nores to Consolidared Financial Statemenrs.

34 'J).f,,.arva Power & .J!ighl Compan'I

1. SIGNIFICANT ACCOUNTING POLICIES Nature of Business The Company is a public utility which provides electric service on the Delmarva Peninsula in an area consisting ofabout 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 442,000 in northern Delaware, including the City ofWilmington.

In addition, the Company has wholly-owned subsidiaries engaged in nonutility activities.

Financial Statements The consolidated financial statements include the accounts of the Company and its wholly-owried subsidiaries, Delmarva Energy Company, Delmarva Industries, Inc., Delmarva Services Company, and Delmarva Capital Investments, 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 respective classifications.

Refer to Notes 8 and 16 for financial information about the Company's subsidiaries.

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

For purposes of the Statement of Cash Flows, the Company considers highly liquid marketable securities and debt instruments 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 1990. Revenues Revenues are recorded at the time billings are rendered to customers on a monthly cycle basis. At the end of each month, there is an amount of unbilled electric and gas service which has been rendered from the last meter reading to the month-end.

Fuel Costs Fuel costs (electric and gas) are charged to operations on the basis of fuel costs included in customer billings under the Company's tariffs, which are subject to periodic regulatory review and approval.

The difference between fuel costs recovered in customer billings and fuel costs actually incurred is generally deferred and reported as deferred energy costs. Depreciation The annual provision for depreciation on utility property is computed on the straight-line basis using composite rates by classes of depreciable property.

The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable propertywas 3.6% for 1990 and 3.7% for 1989 and 1988. Provision for the costs of decommissioning nuclear plant is made to the extent of the net cost of removal allowed for rate purposes (approximately 20% of original plant cost). In July 1990, the Company filed a funding plan with the Nuclear Regulatory Commission which certifies financial assurance for the Company's share of the future costs of decommissioning the Peach Bottom and Salem nuclear 'reactors.

This funding plan is subject to the approval of regulatory commissions which have jurisdiction over the Company. Delmarva has deposited

$6.5 million in an external nuclear decommissioning trust to begin to externally fund its share of the future cost of decommissioning the Peach Bottom and Salem nuclear reactors.

Payments to the trust fund and trust earnings are included in funds held by trustee on the balance sheet. 35

1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 36 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. Nuclear Fuel The Company's share of nuclear fuel costs relating to jointly-owned nuclear generating stations is charged 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 1982. 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 10 for a discussion of the Company's financing arrangements for nuclear fuel. 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 ofthe leased equipmentless 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.

Income Taxes The Company and its wholly-owned subsidiaries file a consolidated federal income tax return. Income taxes are allocated 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.

The principal timing difference arises from accelerated depreciation methods used for income tax purposes.

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 credits of the Company's nonregulated subsidiaries (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 Construction (AFUDC) is included in the cost of utility plant and represents the cost of borrowed and equity funds used to finance construction of new utility facilities.

Capitalized interest includes interest capitalized on qualifying nonregulated assets of the Company's subsidiaries and the allowance for borrowed funds portion of AFUDC. 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 equity funds used during construction is reflected as other income. AFUDC was capitalized on utility plant construction at the rates of9.8% in 1990, 10.0% in 1989, and 10.0% in 1988. Unamortized Debt Discount, Premium and Expense These items are amortized on a straight-line basis over the lives of the long-term debt issues to which they pertain. The amortization is included in other interest charges.

2. INCOME TAXES Income tax expense for 1990, 1989 and 1988 was as follows: (Dollars in Thousands) 1990 1989 1988. Operation:

Federal: Current $30,764 $22,534 $40,693 Deferred 11,720 18,746 2,857 State: Current 6,992 4,762 9,043 Deferred 2,875 4,314 800 Investment tax credit adjustments, net (3,199) (3,220) (2,658) Operation Income Taxes 49,152 47,136 50,735 Other income: Federal: Current (9,888) (17,351) (17,834) Deferred (14,862) 14,352 16,689 State: Current 15 51 (59) Deferred 139 (54) 15 Total income tax expensj! $24,556 $44,134 $49,546 Investment tax credits utilized to reduce federal income taxes payable amounted to $879,000 in 1990, $3,808,000 in 1989 and $1,237,000 in 1988. The 1989 investment tax credits utilized include $3,429,000 for the completion of two nonregulated power plants which 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 reflected in the above table as a reduction of federal current income taxes, under other income. The following is a reconciliation of the difference between income tax expense and the amount computed by multiplying income before tax by the federal statutory rate: (Dollars in Thousands)

Statutory federal income tax expense Increase (decrease) in taxes resulting from: Exclusion of AFUDC for income tax purposes Depreciation not normalized ITC amortization/flow-through State income taxes, net of federal tax benefit Other, net Income tax expense 1990 1989 1988 Amount Rate Amount Rate Amount Rate $21,035 34% $46,050 34% $45,651 34% (899) (1) (1,445) (1) (1,247) (1) 509 1 1,358 1 2,495 2 (4,229) (7) (7,160) (5) (3,388) (3) 6,614 11 5,989 4 6,509 5 1,526 2 (658) (474) $24,556 40% $44,134 33% $49,546 37% The components of deferred income taxes relate to the following tax. effects of timing differences between book and tax income: (Dollars in Thousands) 1990 1989 1988 Depreciation

$24,909 $33,648 $28,612 Deferred energy costs 857 4,512 (4,711) Capitalized overhead costs (2,171) (2,261) (2,558) Deferred recoverable plant costs (448) (448) (433) Pollution control amortization (844) (914) (604) ADR repair allowance 2,803 3,789 2,260 Unbilled revenues (1,707) (2,734) (2,662) Alternative minimum tax (6,146) 2,600 Write-off of joint venture investments (20,261) (656) Other, net 2,880 2,422 (2,143) Total $ (128) $37,358 $20,361 '2:Jefmarva Power & J:;gkt Compan'I 37

2. INCOME TAXES (CONTINUED)

3. CAPITALIZATION 38 In December 1987, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 96, "Accounting for Income Taxes", which will replace the currently utilized deferred method of income tax accounting with the liability method. Under the liability method, deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and tax bases of existing assets and liabilities.

Deferred tax assets and liabilities are adjusted currently for the effects of changes in enacted tax laws or rates. In December 1989, the FASB postponed the required adoption date of SFAS No. 96 until 1992. SFAS No. 96 allows adoption retroactively or prospectively.

The Company currently expects to adopt the standard on a prospective basis in 1992. Since the Company is primarily a regulated enterprise, adoption ofSFAS No. 96 is not expected to have a material effect on the Company's results of operations.

However, the total amount of assets and liabilities ort the consolidated balance sheet is expected to increase.

The expected increase is due to recognition of additional tax !htbiliries fot tax benefits flowed through to customers partially offset by the reduction of existing accumulated deferred itH;!ofiie taxes as a result of the reduction in the federal income tax rates, and for other temporary differences.

Generally, the increased deterred tax liabilities and assets will be offset by corresponding regulatory assets and liabilities.

The Company has not provided deferred income taxes of approximately

$93 million, based on current income tax tares; relarnd to cumulative timing differences of$236 million arising before the adoption offull tax normalization for ratemaking purposes by regulatory authorities.

The Company is collecting the unnormalized taxes in its rate jurisdictions either on a levelized basis over the life of the related plant facilities or when actually paid to taxing authorities.

Common Stock

• In April 1988, the Company registered 3,000,000 of its common shares under a Dividend Reinvestment and Common SH Purchase Plan (the Plan). As of December 31, 1990, 2,168,308 shares had been issued and 831,692 shares of common stock were reserved for issuance under the Plan. In March 1990, the Company registered 750,000 shares ofits common stock under several of the Company's compensation plans. As of December 31, 1990, 3,600 shares had been issued and 7 46,400 shares of common stock were reserved for issuance under these plans. Retained Earnings The current first mortgage bond indenture restricts the amount of consolidated retained earnings available for cash dividend payments on common stock to $35,000,000 plus accumulations after June 30, 1978. The amount available at December 31, 1990 was approximately

$155,920,000.

Preferred Stock The annual preferred dividend requirements on all outstanding preferred stock at December 31, 1990 are $8,689,000.

If preferred dividends are in arrears, the Company may not declare common stock dividends or acquire its common stock. Without Mandatory Redemption These series 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 $106 at December 31, 1990). 1) In December 1989, the Company retired 17,200 shares of its $100 par value 7.88% Series Preferred Stock which was held in treasury at a cost of$1,694,000 as of December 31, 1988. 2) During 1989, the Company reacquired 119,150 shares of its $100 par value Adjustable Rate Preferred Stock o $9,294,000.

These shares were retired in December 1989 and the excess of the par value over the acquisition cost was credited to paid-in capital.

• 3. CAPITALIZATION (CONTINUED)

4. SHORT-TERM DEBT 3) On August 9, 1989, the Company issued 450,000 shares of $100 par value Auction Preferred Stock, Series A. The dividend is cumulative and payable every 49 days based on the rate determined by auction procedures prior to each 49 day dividend period. The weighted average dividend rate was 6.82% and 6.41 % in 1989 and 1990, respectively.

With Mandatory Redemption All shares of the 9% series had been redeemed as of December 31, 1990. The Company redeemed 8,000, 16,000, and 8,766 shares of the 9% series at $100 per share during 1988, 1989, and 1990, respectively.

Long-Term Debt 1) Sinking fund requirements for the First Mortgage Bonds may be reduced by an amount not exceeding sixty percent ( 60%) of the bondable value of property additions.

For the years 1988-1990, 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. 2) On April 4, 1990, the Company issued, in total, $50 million of First Mortgage Bonds to collateralize tax exempt revenue bonds issued by The Delaware Economic Development Authority.

The issue consisted of $35 million of7.6% Exempt Facilities Revenue Bonds which mature on March l, 2020 and $15 million of7.3% Pollution Control Refunding Revenue Bonds which mature on March 1, 2014. The proceeds from the $35 million bond issuance are being used to finance the cost of certain pollution control facilities and additions to the Company's gas system. On May 7, 1990, the proceeds from the $15 million bond issuance were used to refinance 10 Y-1% Pollution Control Revenue Bonds, Collateralized Series 1980A. 3) In November 1990 and January 1991, the Company issued unsecured Medium Term Notes as shown in the table below: Principal Interest Month Issued (In Thousands)

Rates Maturity Date November 1990 $39,000 9.875% -9.95% December l, 2020 November 1990 4,000 9.26% -9.29% December l, 2002 January 1991 7,000 9.95% December 1, 2020 The proceeds from the Medium Term Notes will be used to fund the Company's ongoing construction program and for other general purposes relating to the Company's utility business.

4) Maturities of long-term debt during the next five years are as follows: 1991-$717,000; 1992-$2,100,000; 1993-$2, 151,000; 1994-$27,412,000; 1995-$2,434,000.

5) The annual interest requirements on long-term debt at December 31, 1990 are $63,868,000.

As of December 31, 1990, the Company had unused 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.

Delmarva Power & ofig/.i Compan'J 39

5. VARIABLE RATE DEMAND BONDS 6. REGULATION

7. SUPPLEMENTAL CASH FLOW INFORMATION

8. WRITE-OFF OF SUBSIDIARY JOINT VENTURE INVESTMENTS 40 A total of $41.5 million ofVariable Rate Demand Bonds were outstanding as of December 31, 1990 and 1989, respectively.

Although Variable Rate Demand Bonds are classified as current liabilities, the Company intends to use the Variable Rate Demand Bonds as a source oflong-term financing by setting the bonds' interest rates at market rates and, if advantageous, by utilizing one of rhe fixed rate/fixed term conversion options of the bonds. The bonds are due in the years 2014 to 2017. The Variable Rate Demand Bonds bore interest at an average annual rate of5.58%, 6.53%, and 6.09% in 1988, 1989, and 1990, respectively.

The annual interest requirements on the Variable Rate Demand Bonds at December 31, 1990 are $2,921,000 based on the average rate in December 1990. The Company is subject to regulation with respect to its retail utility sales by the Delaware and Maryland Public Service Commissions (DPSC and MPSC, respectively) and the Virginia State Corporation Commission (VSCC), which have broad powers over rate matters, accounting and terms of service. The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting systems and policies and the transmission and sale at wholesale (resale) of electric energy. The percentage of operating revenues regulated by each Commission for the year ended December 31, 1990 was as follows: DPSC 62%; MPSC 21 %; VSCC 3%; and FERC 11 %. Nonregulated steam operating revenues were 3% of total revenues. (Dollars in Thousands) 1990 1989 1988 Cash paid during rhe year for: Interest, net of capitalized amount $62,440 $55,839 $54,971 Income taxes, net of refunds $21,635 $16,877 $21, 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 contract.

Refer to Note 10 for additional information about the nuclear fuel energy contract.

In 1987, rhe Company began investing in two wood-burning power plants and their associated sawmills (Redding Power and Burney Forest Products).

The sawmills were intended to provide fuel for the power plants and to produce finished lumber. These joint venture projects, which are located in northern California, have generated substantial operating losses since beginning operations in 1989 and 1990 due to continued unfavorable conditions in the timber and lumber markets. Environmental efforts and regulatory actions to curtail logging in the region, continued foreign demand for timber and rhe demand for wood fuel by other projects in the region have resulted in high log and fuel costs. At the same time, finished lumber prices are low due to lower demand for lumber from the housing industry.

Both projects are in default on their loans and rhe Redding Power lender has filed for foreclosure on rhe project. The Redding Power sawmill has been shut down, and actions are underway to shut down and secure the power plant. At Burney Forest Products, negotiations are underway to restructure rhe bank debt. The Company is considering shutting down rhe sawmill and purchasing all fuel requirements.

In 1987, the Company also began investing in a waste-to-energy project (Glendon Energy) planned to be located in Pennsylvania.

An environmental permit issued by rhe Pennsylvania Department of Resources contains a condition which, based on legislation adopted well after rhe project was underway, restricts the siting of the facility.

In 1990, the s appeal of the siting condition was denied. The project also needs to obtain acceptable financing in order to be feasible.

Due to the circumstances discussed above, management believes it is probable that the future cash flows of these projects will not be sufficient to recover the book value of the Company's investment.

Accordingly, in December 1990's accounting, rhe 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.

• 9. PENSION PLAN AND POST-RETIREMENT BENEFITS 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 1990, 1989 or 1988. The following table reconciles the plan assets and liabilities to the funded status of the plan as of December 31, 1990 and 1989. Pension plan assets consist primarily of equity securities and public bond securities. (Millions of Dollars) ACTUARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Accumulated benefit obligation Vested Nonvested Effect of estimated future compensation increases Projected benefit obligation Plan assets at fair value Excess of plan assets over projected benefit obligation Unrecognized prior service cost Unrecognized net gain Unrecognized net transition asset Prepaid pension cost (Millions of Dollars) COMPONENTS OF NET PENSION COST Service cost-benefits earned during 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 benefit obligation as of Dec. 31 Rates of increase in compensation levels Expected long-term rates of return on assets 1990 $ 10.9 20.9 7.2 (41.1) $ ( 2.1) 1990 7.75% 6.50% 8.00% 1990 1989 $170.7 $167.5 19.8 19.0 190.5 186.5 88.8 94.4 279.3 280.9 363.3 380.3 84.0 99.4 6.0 6.5 (40.6) (55.3) (46.4) (49.7) $ 3.0 $ 0.9 1989 1988 $ 9.5 $ 8.5 19.1 17.5 (57.6) (46.9) 28.4 20.7 $ ( 0.6) $( 0.2) 1989 1988 7.25% 7.50% 6.50% 6.50% 8.00% 8.00% The Company provides health care and life insurance benefits for retired employees.

Substantially all of the Company's employees may become eligible 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 the insurance claims as they are paid. These costs totalled $3,386,000, $3, 177,000 and $2,387,000 for 1990, 1989 and 1988, respectively.

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" (SPAS No. 106). SPAS No. 106 requires employers, ifobligated or committed to provide postretirement benefits other than pensions, to recognize their obligation on an accrual basis. SPAS No. 106, which becomes effective in 1993, allows employers to recognize the net accumulated postretirement benefit obligation immediately (as a cumulative effect ofa change in accounting) or amortize the transition obligation over the average remaining service period of active plan participants or 20 years, iflonger.

SPAS No. 106 is not expected to have a material effect on the Company's results of operations since the increase in postretirement benefits should either be recovered in rates or deferred as a regulatory asset for recovery as benefits are paid. The Company has not yet determined the magnitude of the impact that SPAS No. 106 will have on its financial statements or which method of recognizing the accumulated postretirement benefit obligation will be selected.

10. COMMITMENTS

• The Company estimates that approximately

$190, 100,000, excluding AFUDC, will be expended for construction purposes in 1991. The Company also has certain commitments under long-term fuel supply contracts.

On March 30, 1990, the Company entered into a nuclear fuel energy contract with Bayshore Fuel Company in order to finance the Company's share of nuclear fuel for the Peach Bottom Atomic Power Station (Peach Bottom) as of May l, 1990. The contract is accounted for as a capital lease. The book value of the nuclear fuel financed as of May 1, 1990 was $28, 783,000. Priorto May l, 1990, Philadelphia Electric Company, the Peach Bottom operator, provided financingfor the Company's share of the Peach Bottom nuclear fuel and the Company did not have an ownership interest in the Peach Bottom nuclear fuel. On October l, 1990, the Company amended its nuclear fuel energy contract with Bayshore Fuel Company to include the financing of the Company's share of nuclear fuel at the Salem Nuclear Generating Station (Salem). As a result of the financing, the Company received $18,706,000 and the Company's capital lease obligations increased by $18,706,000 on October l, 1990. Future payments under the nuclear fuel energy contract will be based on the quantity of nuclear fuel burned by Peach Bottom and Salem. The Company's obligation under the contract is generally the net book value of the nuclear fuel financed.

Nuclear fuel on the consolidated balance sheets (leased as of December 31, 1990 and owned as of December 31, 1989) is comprised of the following items: Peach Bottom nuclear fuel Salem nuclear fuel Nuclear fuel, at amortized cost December 31, 1990 December 31, 1989 (Dollars in Thousands)

$25,390 $ 17,384 $42,774 17,876 $17,876 In addition to the Company's nuclear fuel energy contract, the Company also leases certain distribution transportation equipment and various other facilities and equipment under long-term lease agreements.

Rentals charged to operating expenses were as follows: 1990 1989 1988 (Dollars in Thousands)

Interest on nuclear fuel capital leases $ 1,550 $ $ Interest on other capital leases 405 457 525 Amortization of nuclear fuel capital leases 7,832 Amortization of other capital leases 663 864 1,099 Operating leases 10,575 8,829 7,243 Total rental expense $21,025 $10,150 $8,867 Minimum commitments as of December 31, 1990 under all non-cancellable lease agreements (excluding payments under the nuclear fuel energy contract which cannot be reasonably estimated) and an agreement providing for the availability of fuel oil storage and oil pipeline facilities are as follows: 1991 -$8,902,000; 1992-$6,713,000; 1993-$6,108,000; 1994-$5,827,000; 1995 -$5,698,000; after 1995 -$167,091,000; total -$200,339,000.

Approximately 89% of the minimum commitments shown above are payments due under the Company's lease of an 11.9% interest in the Merrill Creek Reservoir, located in northern New Jersey. On June 16, 1988, the Company sold its ownership interest in the Merrill Creek Reservoir for $39. l million and began leasing it back over a 44 !t2 year term ending in December 2032. The lease is being accounted for as an operating lease and payments over the entire lease term aggregate to $179 million. 42 ;}).fmarva Power & J:;g/.i Compang

11. DELAWARECITY PLANT 12. JOINTLY-OWNED PLANT 13. PEACH BOTTOM ATOMIC POWER STATION The Company owns and operates an electric generating plant which supplies electricity and steam to an adjacent refinery at Delaware City, Delaware.

The refinery is owned by Star Enterprise, a partnership between Texaco Refining a"nd Marketing, Inc. and Saudi Refining, Inc. On January 19, 1989, Star Enterprise notified the Company of its intent to exercise a standing contractual option which entitles Star Enterprise to purchase the plant on December 31, 1991 at net book value. Pursuant to a contract between the Company and Star Enterprise, the Company will purchase 48 megawatts of the plant's capacity over a 26 year period beginning after Star Enterprise's purchase of the plant. Under the terms of the contract, the Company will incur a capacity charge based on the unit's availability and an energy charge based on kWh delivered.

If the unit is not available, there is no minimum capacity charge. The maximum capacity charge for a twelve month period is $3.4 million, if the unit's availability exceeds 85 percent. Also, the Company may terminate the contract or assume operational responsibility for the facility if the unit's availability is less than 40 percent on a rolling twelve month basis for nine consecutive months. The plant contributed 2.5¢ to earnings per share in 1990 and its net book value was $2.4 million at December 31, 1990. After the plant is sold to Star Enterprise, the Company expects to operate the plant for a fee. The Company's balance sheet includes its proportionate share of assets and liabilities related to jointly-owned plant. Information with respect to the Company's share of jointly-owned plant as of December 31, 1990 is as follows: Megawatt Construction Ownership Capability Plant in Accumulated Work in (Dollars in Thousands)

Share Owned Service Depreciation Progress Nuclear: Peach Bottom 7.51% 157MW $112,466 $ 43,731 $ 4,772 Salem 7.41% 164MW 180,702 64,908 4,875 Coal-Fired:

Keystone 3.70% 63MW 14,087 5,778 376 Conemaugh 3.72% 63MW 14,535 6,443 370 Transmission Facilities Various 4,464 1,636 Total $326,254 $122,496

$10,393 The Company's share of operating and maintenance expenses of the jointly-owned plant is included in the corresponding expenses in the statements of income. The Company is responsible for providing its share of financing for the above owned facilities.

On March 31, 1987, the Nuclear Regulatory Commission (NRC) ordered the shutdown of the Peach Bottom Atomic Power Station (Peach Bottom) for a variety of problems including operator inattention.

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. Subsequent to the shutdown order, PE sought to develop and implement plans for Peach Bottom to operate safely and comply with NRC regulations.

On April 26, 1989, the NRC authorized the restart of Unit 2 which after a gradual power ascension program achieved full power on August 4, 1989. On October 5, 1989, the NRC released PE from the terms and conditions of the shutdown order, which allows both Unit 2 and Unit 3 to operate at full power under normal NRC regulations and review. On November 19, 1989, PE restarted Unit 3 which achieved full power on Januaty 5, 1990. The Company did not recover replacement power costs attributed to the shutdown from its customers.

Accordingly, the Company's results of operations reflect replacement power costs of $13.9 million (18.5¢ per share) in 1989 and $10.0 million (13.5¢ per share) in 1988. On July 27, 1988, the Company and Atlantic Electric Company, as co-owners, filed a lawsuit against PE in the U.S. District Court of New Jersey to recover losses incurred since Peach Bottom was shut down by the NRC. The lawsuit charges PE with breach of contract and negligence for failing to manage and operate the nuclear plant in a safe and efficient manner. The amount of relief the Company is seeking in the lawsuit is unspecified and the actual amount of damages to the co-owners is still being determined.

Public Service Electric and Gas (also a co-owner of Peach Bottom) also filed a similar lawsuit against PE. These suits continue to be in the discovery phase as of December 31, 1990. The suits are not expected to reach the trial stage before the fall of 1991. The Company cannot predict the outcome of these lawsuits.

14. CONTINGENCIES 44 I) Deferred Recoverable Plant Costs In 1982, the Company delayed construction of a planned coal-fired generating unit near Vienna, Maryland.

Due to environmental legislation enacted in Maryland during 1989, the Company no longer plans to construct a generating unit at the site. The Company expects to recover the costs incurred on the cancelled generating unit through the ratemaking process. Accordingly, $11.9 million is deferred as recoverable plant costs. 2) 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 (l) Nuclear Worker Liability (5) Property Damage: (G) Peach Bottom (7> Salem (Bl All units (9> Replacement Power: Nuclear Electric Insurance Limited (NEIL) (lO) Aggregate Retrospective Maximum Assessment for Coverage a Single Incident (z) $ 200 7,607 $19.7(3) $7,807 (4) $ 200 $ 1.2 $1,060 $1,060 $ $1,125 $ 3.5 (11) $ 1.2 1) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954 as amended by the Price-Anderson Amendments Act of 1988. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United Srates. 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 assessmenr of $66.15 million per nuclear reactor is subject to periodic inflation indexing.

The Company owns a joinr and undivided interest in rhe Peach Botrom 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 under the Price-Anderson Act for each nuclear incident.

If claims from a nuclear incident exceed the $7.8 billion limit, Congress could impose a revenue raising measure on the nuclear industry co pay claims. 5) America:n Nuclear Insurers provide coverage against the potential liability from workers claiming exposure to the hazard of nuclear radiation.

6) The Company is a self 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 $1.06 billion. 8) For property damage to the Salem nuclear power facilities, the Company and its co-owners have $500 million of insurance with Nuclear Mutual Limited (NML), a utility-owned insurance company, and $560 million with private insurers.

NML has a maximum retrospective assessment of ten times the annual premium. 9) All units are insured by Nuclear Electric Insurance Limited (NEIL II) for losses in excess of$500 million. Maximum retrospective assessment is seven and a half times the annual premiums.

10) A utility-owned mutual insurance company provides coverage against extra expense incurred in obtaining replacement power during prolonged accidental outages of nuclear power units. 11) Maximum weekly indemnity for 52 weeks which commences afrer the first 21 weeks of an outage. Also provides $2.4 million weekly for a second 52 week period and $1.2 million weekly for a third 52 week period. Maximum retrospective assessment is five times the annual premiums.

3) Other The Company is involved in certain other legal and administrative proceedings before various courts and governmental agencies concerning rates, environmental issues, fuel contracts, tax filings and other matters. In the opinion of management, the ultimate disposition of these proceedings will not have a material effect on the Company's financial position or results of operations.

15. SEGMENT INFORMATION Segment information with respect to electric, gas and steam operations was as follows: (Dollars in Thousands) 1990 1989 1988 Operating Revenues:

Electric $ 708,476 $ 678,396 $ 667,553 Gas 79,836 86,742 78,615 Steam 22,926 24,569 22,154 Total $ 811,238 $ 789,707 $ 768,322 Operating Income: Electric $ 137,210 $ 129,260 $ 120,195 Gas 7,263 8,390 7,456 Steam 1,901 1,771 1,843 Total $ 146,374 $ 139,421 $ 129,494 Net Utility Plant:c 1 &z) Electric $1,621,655

$1,500,822

$1,408,717 Gas 98,992 86,728 91,495 Steam 308 428 1,663 1,720,955 1,587,978 1,501,875 Other Identifiable Assets: Electric 178,395 139,393 109,408 Gas 15,947 19,547 21,758 Steam 3,432 4,592 6,189 197,774 163,532 137,355 Assets Not AllocatedC 3 l 215,591 277,151 268,560 Total Assets $2,134,320

$2,028,661

$1,907,790 Depreciation Expense: Electric $ 77,395 $ 71,171 $ 66,041 Gas 4,758 4,220 4,360 Steam 286 936 932 Total $ 82,439 $ 76,327 $ 71,333 Construction Expenditures:

c 4 l Electric $ 171,581 $ 161,708 $ 150,239 Gas 16,176 14,135 20,237 Steam 66 626 Total $ 187,823 $ 175,843 $ 171,102 (I) 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 16. (4) Excludes allowance for funds used during construction.

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

16. CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF SUBSIDIARIES The following presents consolidated condensed financial information of the Company's nonregulated wholly-owned subsidiaries, Delmarva Energy Company, Delmarva Industries, Inc. and Delmarva Capital Investments, Inc. Delmarva Services, a subsidiary which leases real estate to the Company's utiliry business, is excluded from these statements since its income is derived from intercompany transactions which are eliminated in consolidation.

CONSOLIDATED CONDENSED STATEMENTS OF INCOME (Dollars In Thousands) 1990 1939* 1988 Revenues:

Revenues and investment income $17,089 $14,066 $12,455 Equity in earnings (losses) of joint ventures (12,772) (2,667) 47 Gain on sale of investment 5,605 4,317 17,004 12,502 Costs and Expenses:

Operating expenses 17,917 13,502 6,109 Write-off of joint venture investments 62,534 1,929 Interest expense 1,720 2,280 2,967 Capitalized interest (373) (2,019) 81,798 15,692 9,076 Income (loss) before income taxes (77,481) 1,312 3,426 Income tax (benefit)

(25,195) (3,702) (1,354) Net income (loss) $(52,286)

$ 5,014 Earnings (loss) per share of common stock attributed to subsidiaries

$(1.10) $0.11 $0.10 CONSOLIDATED CONDENSED BALANCE SHEETS (Dollars In Thousands)

At December 31, Liabilities and At December 31, Assets 1990 1989 Stockholder's Equity 1990 1989 Current assets: Current liabilities:

Cash and Debt due cash equivalents

$ 8,610 $ 9,392 within one year $ 7,441 $ 14,504 Marketable securities 16,215 Other 13,789 9,699 Deferred taxes 3,589 21,230 24,203 Other 1,319 5,188 13,518 30,795 Noncurrent liabilities:

Noncurrent assets: Long-term debt 1,469 241 Investment in: Deferred income taxes 69,256 80,871 Leveraged leases 83,852 81,804 Other 6,141 6,092 Joint ventures 6,296 54,060 76,866 87,204 Other property, net 30,495 32,864 Other 2,148 719 122,791 169,447 Stockholder's Equity 38,213 Total $136,309 $200,242 Total $136,309

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

The quarterly data presented below reflect all adjustments necessary in the opinion of the Company for a fair presentation of the interim results. Quarterly data normally vary seasonally with temperature variations, differences between summer and winter rates, the timing of rate orders and the scheduled downtime and maintenance of electric generating units. Earnings Earnings (Loss) (Loss) Net Applicable Average per Quarter Operating Operating Income to Common Shares Average Ended Revenue Income (Loss) Stock Outstanding Share (Dollars in Thousands) (In Thousands) 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 1989 March 31 $209,377 $ 36,383 $23,840 $22,191 46,379 $0.48 June 30 177,887 25,964 14,257 12,698 46,595 0.27 September 30 216,167 50,054 36,244 34,314 46,788 0.74 December 31 186,276 27,020 16,967 14,678 46,985 0.31 $789,707 $139,421 $91,308 $83,881 46,687 $1.80 As discussed in Note 8, in the fourth quarter of 199.0, net income was decreased by $42,497,000 (89¢ per share) due to the write-off of the Company's investment in certain joint venture subsidiary projects.

In the second quarter of 1989, net income was increased by $2,178,000 (4.7¢ per share) due to credit adjustments received from jointly-owned generating plants for previously expensed spare parts. In the fourth quarter of 1989, net income was increased bya $4.8 million gain (10.2¢ per share) on the sale of a partial interest in a joint venture and was decreased bya $1.3 million (2. 7 ct per share) accru"al of a loss provision on a nonregulated investment in a municipal waste water treatment venture. Net income in 1989 was decreased due to Peach Bottom replacement power costs as follows: first quarter-$2,248,000 (4.8¢ per share); second quarter-$3,280,000 (7.0ct per share); third quarter-$2,273,000 ( 4.9¢ per share); fourth quarter-$847,000 (1.8¢ per share): or a total of $8,648,000 (18.5¢ per share). :lJefmarva Power & .J!;'J/.l Companlf 4 7 10 YEARS OF REVIEW 1990 1989 1988 1987 Electric Revenues Residential

$259,113 $251,490 $247,950 $231,439 (thousands)

Commercial 209,174 197,362 191,104 176,355 Industrial 140,288 133,451 130,094 119,109 Other utilities, etc. 93,179 90,206 90,220 79,180 Miscellaneous revenues 6,722 5,887 8,185 6,284 Total electric revenues $708,476 $678,396 $667,553 $612,367 Electric Sales Residential 3,081,943 3,049,882 2,944,477 2,732,018 (1,000 kilowatt-hours)

Commercial 2,979,738 2,875,681 2,734,069 2,536,399 Industrial" 3,142,439 3,025,653 2,729,409 2,611,218 Other utilities, etc. 1,877,091 1,877,623 1,817,088 1,685,641 Total electric sales 11,081,211 10,828,839 10,225,043 9,565,276 Electric Customers Residential 326,175 319,696 311,577 303,158 (end of period) Commercial 40,766 40,104 38,629 36,783 Industrial 774 798 825 842 Other utilities, etc. 562 562 547 525 Total electric customers 368,277 361,160 351,578 341,308 Gas Revenues Residential

$ 38,487 $ 42,908 $ 40,303 (thousands)

Commercial 16,939 18,816 16,404 Industrial 16,498 17,546 12,208 10,941 Interruptible 6,714 6,714 8,309 11,136 Other utilities, etc. 105 92 66 160 Gas transported 602 174 2 Miscellaneous revenues 491 492 1,323 891 Total gas revenues $ 79,836 $ 86,742 $ 78,615 $ 78,233 Gas Sales Residential 6,484 6,795 6,797 6,364 (million cubic feet) Commercial 3,452 3,564 3,333 2,992 Industrial 4,418 4,245 3,229 2,693 Interruptible 1,678 2,010 2,774 3,320 Other utilities, etc. 37 33 -21 42 Total sales 16,069 16,645 16,154 15,411 Gas transported 2,194 677 2 Total gas sales and gas transported 18,263 17,322 16,156 15,411 Gas Customers Residential 78,893 77,021 74,762 73,803 (end of period) Commercial 5,983 5,689 5,322 5,027 Industrial 154 159 162 156 Interruptible 13 13 16 15 Other utilities, etc. 1 Total gas customers 85,044 82,883 80,263 Steam Service Electricity delivered (1,000 kilowatt-hours) 317,315 343,698 292,688 354,842 Steam delivered (1,000 pounds) 6,996,248 7,443,971 6,928,792 6,134,946 48 ;J).f,,.arva Power &

Company Ten Year Average Annual Compound%

1986 1985 1984 1983 1982 1981 1980 Rate of Growth $217,393 $212,254 $205,910 $193,021 $183,258 $164,919 $144,637 6.00% 169,157 168,957 156,507 140,809 137,434 123,099 112,166 6.43% 127,900 135,141 128,833 126,703 127,441 129,601 116,401 1.88 % 80,291 79,399 79,235 68,991 73,469 73,602 63,698 3.88 % 7,499 9,830 13,678 12,728 13,168 12,898 7,025 (0.44)% $602,240 $605,581 $584,163 $542,252 $534,770 $504,119 $443,927 4.79 % 2,496,099 2,256,922 2,249,270 2,136,265 2,026,398 1,996,647 2,046,546 4.18 % 2,370,775 2,165,685 2,073,457 1,844,324 1,729,863 1,660,147 1,648,776 6.10% 2,753,902 2,606,466 2,569,572 2,600,492 2,255,673 2,454,685 2,429,842 2.61 % 1,585,019 1,501,447 1,415,934 1,297,395 1,237,508 1,283,845 1,335,216 3.46% 9,205,795 8,530,520 8,308,233 7,878,476 7,249,442 7,395,324 7,460,380 4.04% 293,452 283,911 275,175 267,357 260,371 255,646 246,887 2.82% 35,089 33,189 31,548 30,525 29,966 29,450 28,162 3.77% 853 893 929 949 741 788 821 (0.59)% 517 492 502 434 434 434 440 2.48 % 329,911 318,485 308,154 299,265 291,512 286,318 276,310 2.91 % $ 43,145 $ 39,224 $ 40,933 $ 36,694 $ 36,505 $ 34,123 $ 26,525 3.79 % 18,523 17,901 18,663 16,527 15,792 14,344 10,342 5.06% 16,995 19,762 22,940 23,232 20,112 22,259 12,404 2.89% 11,464 17,419 18,098 17,026 11,733 11,711 9,293 (3.20)% 142 130 160 115 53 61 46 8.60 % -% 1,533 820 784 764 552 572 430 1.34 % $ 91,802 $ 95,256 $ 101,578 $ 94,358 $ 84,747 $ 83,070 $ 59,040 3.06% 6,201 5,622 6,213 5,640 6,062 6,193 6,321 0.25 % 2,906 2,742 2,971 2,677 2,768 2,704 2,683 2.55 % 3,338 3,579 4,245 4,378 4,108 4,809 3,937 1.16 % 3,471 3,734 3,769 3,723 2,656 2,802 2,738 (4.78)% 36 31 41 31 10 12 14 10.21 % 15,952 15,708 17,239 16,449 15,604 16,520 15,693 0.24% -% 15,952 15,708 17,239 16,449 15,604 16,520 15,693 1.53 % 72,685 70,804 70,183 69,608 69,092 68,608 67,784 1.53 % 4,693 4,417 4,233 4,075 4,057 3,967 3,846 4.52% 158 160 165 160 166 167 155 (0.06)% 14 15 19 19 18 16 16 (2.05)% 1 1 1 1 1 0.00% 77,551 75,397 74,601 73,863 73,334 72,759 71,802 1.71 % 370,802 335,308 298,203 309,043 322,804 343,063 328,420 (0.34)% 6,627,130 6,794,105 6,922,416 6,965,904 7,778,929 7,673,420 7,570,944 (0.79)%

CommitleeJ anJ O/ficerJ AUDIT COMMITTEE John R. Cooper, Chairperson James T. McKinstry James 0. Pippin, Jr. LidaW. Wells COMPENSATION Elwood P. Blanchard, Jr., Chairperson COMMITTEE David D. Wakefield, Vice Chairperson Donald W. Mabe EXECUTIVE COMMITTEE Nevius M. Curtis, Chairperson INVESTMENT COMMITTEE NOMINATING COMMITTEE NUCLEAR OVERSIGHT COMMITTEE OFFICERS AS OF JANUARY 1, 1991 BOARD RETIREMENT 50 David D. Wakefield, Vice Chairperson Howard E. Cosgrove Sally V. Hawkins James T. McKinstry David D. Wakefield, Chairperson Nevius M. Curtis Donald W. Mabe James 0. Pippin, Jr. Sally V. Hawkins, Chairperson Nevius M. Curtis James 0. Pippin, Jr. James T. McKinstry, Chairperson John R. Cooper Nevius M. Curtis Nevius M. Curtis, Chairman of the Board, President and Chief Executive Officer Howard E. Cosgrove, Executive Vice President H. Ray Landon, Executive Vice President Roger D. Campbell, Senior Vice President and President, Delmarva Capital Investments, Inc. 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, Jr.,Vice President, Gas Division Dale G. Stoodley, Vice President and General Counsel Donald P. Connelly, Secretary Richard H. Evans, Vice President, Corporate Communications Barbara Graham, Treasurer James P. Lavin, Comptroller-Corporate Accounting and Chief Accounting Officer Dennis R. McDowell, Comptroller-Operating Accounting Duane C. Taylor, Vice President, Information Systems D. Wayne Yerkes, Vice President, Northern Division Sally V. Hawkins retired as a director after 12 years of service on the Board. Her experience and knowledge as a businesswoman have benefitted the Company greatly. She will be missed.

DIRECTORS AS OF JANUARY 1, 1991 ';J)irecforj Elwood P. Blanchard, Jr. John R. Cooper Howard E. Cosgrove Nevius M. Curtis 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, Term expires in 1991. JOHN R. COOPER Director of Environmental Affairs of E.I. du Pont de Nemours & Company (a diversified chemical, energy, and specialty products company), Wilmington, Delaware, Term expires in 1993. HOWARD E. COSGROVE Executive Vice President of the Company, Term expires in 1992. NEVIUS M. CURTIS Chairman of the Board, President and Chief Execurive Officer of the Company, Term expires in 1993. Sarah I. Gore Sally V. Hawkins H. Ray Landon Donald W. Mabe SARAH I. GORE Human Resources Associate, W. L. Gore & Associates Inc., (a high technology manufacturing company), Newark, Delaware, Term Expires in 1991. SALLY V. HAWKINS Director, President, and Chief Executive Officer of Delaware Broadcasting Company and President and General Manager of Station WILM (radio broadcasting), Wilmington, Delaware, Term expires in 1991. H. RAY LANDON Executive Vice President of the Company, Term expires in 1991. DONALDW. MABE President and Chief Executive Officer of Perdue Farms Incorporated (an integrated poultry company), Salisbury, Maryland, Term expires in 1993. James T. McKinstry James 0. Pippin, Jr. David D. Wakefield Lida W. Wells JAMES T. McKINSTRY Director and Partner, Richards, Layton & Finger (a law firm), Wilmington, Delaware, Term expires in 1992. JAMES 0. PIPPIN, JR. Director, President, and Chief Executive Officer of the Centreville National Bank of Maryland, Centreville, Maryland, Term expries in 1992. DA YID D. WAKEFIELD Chairman and President of Morgan Bank (Delaware), Wilmington, Delaware, Term expires in 1993. LIDA W. WELLS Director and President ofWells Agency, Inc. (a general real estate and development agency), Milford, Delaware, Term expires in 1992. :J>elmarva Power & ofighl Compan'I 51 52 QUARTERLY COMMON STOCK DMDENDS AND PRICE RANGES The Company's common stock is li sted on the New York and Philadelphia Stock Exchanges and ha s unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges. The Company had 53 , 590 holders of common stock as of December 31, 1990. Dividend Price 1990 Declared First Quarter $.38 Yi Second Quarter .38 Yi Third Quarter .38 Yi Fourth Quarter .38 Yi SHAREHOLDER SERVICES Carol C. Conrad, Assistant Secretary Delmarva Power & Light Company 800 King Street, P.O. Box 231 Wilmington, Delaware 19899 Telephone (302) 429-3355 or toll free (800) 365-6495 STOCK SYMBOL High Low $21 % $19 Ys 20 18 Ys 19% 17 19 Ys 17 Ys Common Stock, DEW-listed on the New York and Philadelphia Stock Exchanges.

ANNUAL MEETING The Annual Meeting will be held on April 30, 1991 at 11 :00 a.m. in the Clayton Hall, University of Delaware , Newark, Delaware. REGULA TORY COMMISSIONS Federal Energy Regulatory Commission Martin L. Allday -Chairperson 825 North Capitol Street, N.E. Washington, D.C. 20246. Delaware Public Service Commission Nancy M. Norling -Chairperson 1560 S. duPont Highway Dover, Delaware 19901. Maryland Public Service Commission Frank 0. Heint z -Chairperson American Building 231 East Baltimor e Street Baltimore, Maryland 21201. Virginia State Corporation Commission Theodore V. Morrison, Jr. -Chairperson P.O. Box 1197 Richmond, Virginia 23209. Dividend Price 1989 Declared High Low First Quarter $.37 Yi $17 Second Quarter .37 Yi 19% 1 7 Ys Third Quarter .37 Yi 20 18 % Fourth Quarter .38 Yi 21 Y-1 TRANSFER AGENTS AND REGISTRARS First Mortgage Bond Trustee Chemical B a nk 5 5 Water Street, Suite 1820 New York, New York 10041. Preferred Stock Wilmington Trust Company Corporate Trust Division Rodney Square North Wilmington, Delaware 19890. Common Stock Wilmington Trust Company Corporate Trust Division Rodney Square North Wilmington , Delaware 19890. Manufacrurers Hanover Trust Company Stock Transfer Department P.O. Box 24935 Church Street Station New York, New York 10249. ADDITIONAL REPORTS 18 To supplement information in this Annual Report , a Financial and Statistical Review (1980-1990) and the Form 10-K are available upon request. Please write to: Shareholder Services, Delmarva Power , 800 King Street, P.O. Box 231, Wilmington, Delaware 19899. DUPLICATE MAILINGS

• You may be receiving more than one copy of the Annual R eport because of multiple accounts within your household. The Company is required to mail an Annual Report to each name on the shareholder lis 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.

. D{VIDEND. REINVESTMEITT

.AND COMMON STOCK J?URCHA-SE PUN . :r. . *; . ; ,

tha:n 30 percent of the Company's shareholders of record are .now "' t:.

• participating in the Dividend Reinvestment.and tommon ,§tock Purchase Plan. If you *. are not participating, you.maywant to conside r the benefits of joining this plan. Vhder -' "I . ,, the plan,, you ca:n in " est your cash dividitnd s and also ii'iirest additional cash, up to * *!* $:f5,000_ per caler;idar year, to purchase a shares of stock without a -' . service.fee. *i .. ,

1(:-1, t

• JJ.* .,..,$ ..... ,B ,.,-.. -*. d. "t Shares of common stock to be purchased uncier the plan may be either newly issued < shares }ff sh;res purchased ln the qpen market, depending on needs of ' 'I,:: ' '1t *. Jr' , ' , Company; *

• 1:.:. ',. ,,,;,. " e->* ;r.-/ ** :i\. I You may obtain a_prospectus with the plan description and an enrollment authorization card by writing to Ddmarva Power & Light Company, Shareholder Services; Pp. Box ;Ii f.;;

231, Wilrningion.

DE 19899. .. * . ' . tJ, J,.,. * !-', , :'\.-:.. )_ .....