ML18092B462

Delmarva Power,1986 Annual Rept

ML18092B462
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Site:	Salem, Hope Creek, 05000000
Issue date:	12/31/1986
From:	Curtis N DELMARVA POWER & LIGHT CO.
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ML18092B463	List: ML18092B462 ML18092B465 ML18092B466 ML18092B468 ML18092B469
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l RECORDS FACILITY BRANCH

Employees continue to demonstrate creativity as well as technical skill in accomplishing their jobs.

Stockholders and customers have enjoyed an outstanding year in a prosperous period at Delmarva Power.

Geor9e lt'il/iams, 1-.dEJc,\\Joor Po11cr Plane Moderate increases in sales and investment earnings will help the company meet the challenges ahead.

co1*cr photo: I-arm,.tit. Cuba, Dclau*are

Earnin9s increased to

$2.91 per share and reached a record hi9h.

Delmarva fuwers prices for electricity and natural 9as are amon9 the lowest in the re9ion.

The company works in several ways to help improve the quality of life on the Delmarva Peninsula.

the 0

the tive the the

Percent Increase FINA CIAL HIGHLIGHTS 1986 1985 (Decrease)

Revenues 714.9 million 722.8 million (I. I)

Net Income 96.1 million 96.6 million (0.5)

Earnings Per Share 2.91 2.76 5.4 Dividends Declared 2.045 1.945 5.1 Common Stock Outstanding Average Shares 30,481,925 30,481,925 Common Stock Book Value 19.27 18.43 4.6 Construction Expenditures 102.6 million 94.9 million 8.1 Internally Generated Funds':'

157.2 million 148.9 million 5.6 Electric Sales 9.21 billion kwh 8.53 billion kwh 8.0 Electric Customers (average) 325,832 314,013 3.8 Average Residential Usage 8,605 kwh 8,059 kwh 6.8 Gas Sales 15.95 million mcf 15.71 million mcf 1.5 Gas Customers (average) 76,614 75, 103 2.0 Average Residential Usage 86.3 mcf 79.7 mcf 8.3

':'Net cash flow from operating activities less preferred and common dividends.

the l: H A I R M A Nc1' Curtis Stockholders and customers have enjoyed an outstandin9 year in a prosperous period at Delmarva Power.

• Earnings increased for the sixth consecutive year and reached a record high.

• Dividends increased for the tenth consecutive \\'Car.

• The price of electricity and natural gas decreased throughout the service tenitory.

• Generating plants performed above national averages.

• Customer approval ratings increased for the fourth consecutive year.

• Outside investments continued to increase earnings.

Our report this year is dedicated to Delmarva Power people who not only contributed to this period of prosperity, but who have also prepared themselves through their training, enterprise, and enthusiasm to address a new set of challenges before us. The remainder of my letter addresses those challenges.

3

4 EARN! GS The current level of financial performance cannot be sustained during the next year or two. Regulators, responding to decreased interest rates nationally, have reduced significantly the allowable rates of return for most of our business.

The consequences of these rate reductions will be compounded by the new federal tax act which will cut further into the company's strong cash flow and subsequently, into the ability to earn returns on that cash.

As discussed on pages 15 and 16, these decreases in authorized returns and cash flow can be countered somewhat by anticipated increases in sales on the economically-strong Delmarva Peninsula, modest growth in subsidiaries, and con-tinued tight cost control. Nevertheless, while the company is still financially healthy and we expect to continue our policy of modest dividend increases annually, we also expect earnings to be down in 1987.

Historically, Delmarva Power's earnings growth has tended to be cyclical with periods of prosperity followed by dips and then rebounds.

Such a rebound from a low in 1987 should occur because, by most standards, the company is financially healthy. The construction budget is relatively modest. Cash flow, although reduced, is still good. Growth prospects are strong. The talent of employees is excellent.

FUTURE OPTIONS Another challenge ahead will be to make the best decisions about supplying electricity in the next decade. Recent forecasts showed the next generating plant would be needed in 1994.

Such a new plant would be expensive-about three quarters of a billion dollars. Around the country, large building programs have burdened utilities.

1 listory teaches that large capital investments, such as those in the railroad industry, can be devalued quickly by technological breakthroughs and structural changes within an industry.

In last year's repo1t, this letter told of a new goal adopted by the company to develop a plan which would delay, by at least five years, the in-service date of the next generating unit.

Such a delay could be accomplished, without sacrificing service, through load management tech-niques and cogeneration. That plan has been developed and implementation has begun. The work so far shows a delay is achievable until about the tum of the century.

GROWTH However, significant new events have occurred. There have been two years of substantial growth in the demand for electricity during peak load periods. This has been out of character with the growth patterns of the previous decade.

Since the Arab oil embargo of 1973, peak load growth has occurred at an average rate of about 13 a year. In the summer of 1985, it grew 10.5%

and in the summer of 1986, it grew an additional 2.53. Delmarva Power planners have concluded that the summer peaks of 1985 and 1986 were not aberrations. Peak demand, fueled by a strong economy in the service territory and lower rates, is greater than previously anticipated and is expected to continue to grow.

Thus, in addition to beginning the load management program, we also responded by accelerating the study of various options to supply more power under the general strategy of mini-mizing capital expenses and matching capacity expansion to load growth as much as possible.

FLEXIBILITY While the plans to delay and the plans to build may appear to be contradictory, they are not. Both load management and capacity additions will be needed. Such diverse efforts are part of Delmarva Power's plans to be flexible as the true future demand for electricity becomes clearer and the possible contribution of load control becomes more known. As competition continues to develop in the utility industry, this flexible approach will help Delmarva Power offer the best prices for its products.

With a sufficient amount of owned reserves plus the availability of capacity for purchase from other companies in the region, final decisions in these areas are not needed for a year or two.

While this letter has discussed some of the key challenges that face the company, we should not forget that 1986 was an outstanding year.

The company is doing well and is positioned well financially to meet challenges ahead. It also has the people with the technical skills and creati\\'e spirit who can continue to make progress for you.

I appreciate their efforts and hope you do also as you look at pictures of many of them at \\\\'Ork.

Sincerely, EV CURTIS lchruan I 0. 198 7 Delman-a Poll'er's direcwrs represent a broad range of business and communi~r e.\\pcrtisc. Their titles and affiliations arc listed on page 48.

Charlotte Lee Cannon Oscar L. Carey John R. Cooper Howard E. CosB'ove Sa l~v V. Hawkins Donald W falabe James 0. Pippin, Jr.

William G. Simeral David D. Wakefield Harland M. Wakefield, Jr.

the

FINANCIAL STRENGTH Earnings increased 5.43 to

$2.91 per share. Quarterly divi-dends increased by 5.1 3 to 53 cents for an indicated annual rate of $2. 12. The price of common stock increased from $27Y8 to $33.

The company paid for all of its construction expenses with its mm cash. The AFUDC ratio, a kev indicator for financial analysis, remained low at 3. 7%

of net income. The company's bond rating, in differing terms from the different agencies, is AA.

Electric sales increased 8% O\\'er 1985 le\\'els because of the strong economy on the Delmarva Peninsula. Industrial sales increased 5. 73 with sit,mifl-cant gains in the chemical and refining industries in northern Dela\\\\'are and the poultry business in southern Delaware and Man*land. Commercial sales in-creased 9.53 and residential sales increased I 0.63. The prospects for continued sales growth in the diverse service territory arc discussed on page 15.

FACILITI ES Generating resen'es are 243. The company's 1987 capital budget of $137.8 million is relatively modest, indicating adequate capacity. The company sells po\\\\'er to the PJ M inter-connection and to other companies. This reduced costs to customers by more than

$7.5 million in 1986.

The fuel mix is balanced:

613 coal, 223 oil, and 173 nuclear through nuclear plants partially owned by Delmarva Power but run by other companies.

In 1986, the company completed the acquisition of the Lincoln-Ellendale electric system with its 1,420 customers.

In the gas business, the company signed a contract to connect to the Columbia Gas System, Inc. in late 1987. The use of two suppliers, Columbia and Transco, Inc., will give the company flexibility in meeting future demands of its natural gas customers and an additional source of electrical generating fuel at the Edge Moor Power Plant.

RA TE MA TIERS As a result of declining capital costs and exceeding al"lo\\\\'ed rates of return, regulators cut Delman*a Power's electric rates. In Dela\\\\'are, the reduction was $22.8 million on an interim basis with a final decision due near the end of the first quarter, 1987. In Maryland, the final reduction was $8.8 million, and for wholesale customers regu-lated by the Federal Energy Regulatory Commission, the total Tim Smith Westover reduction was $4 million. Virginia will address rates in 1987.

Pursuant to a Delaware Public Service Commission order, the company made the final distribution to customers of

$28. 1 million remaining from the funds negotiated by the company in 197 5 to allow a contractor to cancel the proposed Summit Nuclear Power Plant.

Earnin9s increased to

$2.91 per share and reached a record hi9h.

Also in Delaware, standards for power plant performance were established. These standards provide rewards and penalties for good and poor performance.

The rate-reduction con-sequences of the new federal tax act have been detern1ined in Maryland but are still pending in the other jurisdictions.

Charles Turner Ocean City Anne Wri9ht Chn"stiana 7

8 T EAMWORK Recognizing the inevitability of increased competition, four years ago the company developed a participative skills program designed to encourage innova-tion from the employees working the closest to a situation and to take increased advantage of teamwork. That program is maturing. By the end of 1986, all employees had been placed on teams and all team leaders had been trained in techniques to encourage participation.

An example of the results of this program is the success of the company's profitable Gas Mainte-nance Plan. For the last three years, the employees who repair gas heaters have taken the initiative to increase the sales of this pro-gram. Through their efforts to organize other employees in marketing, corporate communi-cations, and gas service, sales of this program increased 1% in 1984, 6.2% in 1985, and 12.9%

in 1986.

Walt Robbins Wilmin9ton Boulevard Tommy Stephens

£\\:more Employees continue to demonstrate creativity as well as technical skill in accomplishin9 their jobs.

Another example of employee creativity and skill is the effort to retain a large indus-trial customer which had decided to expand and move outside the service territory. When employees in the marketing, regulatory practice, and economic develop-ment departments heard of the proposed relocation, they put together an innovative rate package that would be fair to current customers and favorable to the industrial customer as an alternative to moving. They worked with the Delaware state government which was also interested in keeping 35 current operating jobs and 75 to 80 new jobs in the state plus the con-struction jobs for a $50 million project. The rate proposal is now pending before the Delaware Public Service Commission.

These kinds of efforts will be important to the company in the future as competition in the utility business continues to develop.

SAFEll' As part of its Right-To-Know program, the company identified, published, and placed in accessible areas a list of all chemicals used in the workplace including those which may be hazardous. Training was given in the safe handling and disposal of these chemicals.

Also, employees from across the company came together to develop standards and procedures for handling asbestos found in the workplace and at customer locations.

On the overall safety pro-gram, the company led its cate-gory in the Southeastern Electric Exchange in fewest fleet acci-dents. It finished second in the occupational injury category.

However, lost-time accidents increased to 13 and lost-work days increased to 157. The company is concerned about these acci-dents and will put increased emphasis on reducing them in 1987.

Mary Ella Sutton Christiana James Dennis Harrin9ton

[d Murra). Gar) Ca/d,.*c/J, \\'a119hn llomer, John bcre/l, &b &ckell. frank f'cathen, fd Simmon" Sa/i,bury f\\more Cmtr<'villc

10 Delmarva Power's prices for electricity and natural gas are among the lowest in the region.

Electric comparisons (in cents per k\\\\'h) are: Ne\\\\' York 12.28; Newark, NJ 9.40; Philadel-phia 9.14; Boston 8.73; Baltimore 6.51; Delmarva Peninsula 6.46.

For natural gas (in cents ccf):

New York 75.89; Philadelphia 62.77; Newark, NJ 62.72; Boston 62.04; Baltimore 60.76; Wilmington 56.62.

Throughout the service territory, the price of electricity is dee! ining. In Delaware, for example, the price of electricity for a residential customer using 750 kilowatt hours of electricity per month has decreased 11. 7%

since 1983.

While the decline in inter-est rates nationally has enabled regulators to reduce rates, Delmarva Po\\\\'er has also worked to reduce prices by refinancing debt, consolidating offices, con-trolling expenses, converting about two thirds of its generating capacity from oil to coal, and con-tinuing to keep the number or employees belo"* the 1982 level.

Together, all of these efforts help customers and put the company in a better position to face developing competition.

SERVICE IMPROVEMENTS In 1986, customer service representatives began programs to allow customers to phone in meter readings and to enable meter readers to read ( electroni-cally) inside meters from the outside. Planning was begun for a computerized, automated dis-patch system to improve re-sponses in the field.

For several years, the com-pany has taken an individualized approach to customers having difficulty, for any rea~on, in paying their bills. Customer ser-vice representatives inform the customer of programs available such as credit extensions, bud-get billing, or hmds available throughout the service territory to help. As a result of this approach, both writeofls and cutoffs are down - a win-win situation for both the customer and the company.

Eric Whalen Christiana Par Ramsey Christiana II

12 E VlRO MENT In ovember, 1986, Delmarva Power crews removed the last distribution capacitor containing the toxic chemical PCB in the insulating fluid. As part of the company's commitment to operate with as I ittle intrusion into the environment as possible, the company began removing such capacitors before federal laws required utilities to do so and completed the task well ahead of the federal deadline of 1988.

The company also em-barked on a study-supported by citizens groups, regulators, and environmental officials - of emerging technologies to correct an infrequent air pollution problem at the Indian River Power Plant. The study was developed with the community as an alternative to an expensive ($40 million), tall smokestack which also would have solved the problem. Initial analyses show that alternatives may not be cheaper but may result in a more effective environmental solution.

BobSporay Wilmin9ton Boulevard Kate DiPietro Christiana The company worked with the University of Delaware to build an artificial reef demonstra-tion project in the Atlantic Ocean off Rehoboth Beach with fly ash -

a waste product from the Indian River Power Plant. The company is also working with the Electric Power Research Institute to use more of this ash as a base for an interstate highway entrance being built near the Edge Moor plant.

The company works in several ways to help improve the quality of life on the Delmarva Peninsula.

Employees at the Vienna Power Plant, working on their own time with facilities built by the company, released striped bass flngerlings they reared into the Nanticoke River for the second consecutive year.

CoMMUNIIT ACTIVITI ES For the second straight year, Delmarva Power employees were honored by President Ronald Reagan at the White House for Radio Watch, a program to summon aid through radios in company vehicles.

The new "Be A Star, Volunteer" program provides 50 employees, chosen through a lottery, a $100 grant for a non-profit community organization where they have given at least 50 hours5.787037e-4 days <br />0.0139 hours <br />8.267196e-5 weeks <br />1.9025e-5 months <br /> of volunteer time.

In other activities, the Good eighbor Energy Fund raised more than $170,000 in customer and stockholder con-tributions to help people having trouble paying their energy bills.

Employees again exceeded their goal in contributions to the United Way.

FORMATION ACTIVITIES In an effort to provide customers with info1mation on how to use energy wisely, the company offers a variety of pro-grams including the monthly customer newsletter, "Energy News You Can Use", the quarterly newsletter for senior citizens, "Silver Bulletin", and the home building efficiency standards, "Super E+." Face-to-face help comes from customer service representatives, marketing depart-ment employees, and volunteer speakers.

Larry Maclaren Christiana Newman Sonnier Salisbury

GROWTH Electric sales increased 83 in 1986 - the highest increase experienced by any of the com-panies in the PJM regional interconnection. 1 lealthy growth is expected to continue for the immediate future because it is coming from diverse sources in the strong economy of the service area.

Unemployment is near an all-time lo"* in Delaware of about 43, substantially below the national average of about 73.

The Financial Center Develop-ment Act of 1981 continues to bring new jobs and oflke-building construction to Dela"*are as banks and insurance companies locate credit card and financial administration operations in Delaware to take advantage of fayorable legislation and tax treatment. These laws have bolstered gro\\\\*th in the com-mercial sector which has seen a 223 increase in jobs in Dela"*are over the past five years com-pared to a national average rate of 133. Tourism and recreation continues to prosper along the Maryland and Virginia coasts.

Population is growing.

From 1978 until 1981, Dela,,*are

" *as losing around 5,000 people a year. Now, Delaware is gaining up to 4,000 new people a year moving into the area. Also, the Eastern Shore of Marvland i~ growing faster than the rest or Maryland. This has helped growth in small retail businesses such as stores and restaurants. Single family housing starts in Delaware have more than doubled from 1982 to 1986. In the service te1Titory, more than 903 of new homes are heated with either electricity or natural gas.

People are also using more electricity in their homes. In 1986, the average monthly use per residential customer increased approximately 73 from 672 kilowatt-hours per month to 717 kilowatt-hours per month.

SuBSJDIARI ES Investments by both the parent and subsidiaries contributed 27 cents to earnings of $2. 91 in 1986 compared to 20 cents per share on earnings of $2.76 per share in 1985 and 12 cents per share on earnings of $2.63 in 1984. Earnings from these busi-nesses are expected to grow modesth-over the next few years.

The philosophy of the sub-sidiary efforts is to seek returns which exceed those of the regulated business but do not detract from the core operation of the energy company. The company confines its investments to areas of its expertise, looks to Mary Sanford Ocean City provide challenging job oppor-tunities to its employees, and ultimately, expects to develop operating businesses.

Moderate increases in sales and investment earnings will help the company meet the challenges ahead.

Broadly, the company in-vests in five areas: gas and oil exploration, liquid cash invest-ments, equipment leasing, tech-nology and energy projects, and real estate. The company has invested in two communica-tions satellites, all or part of five airplanes, a solar project in California, a hydroelectric project in Maine, and a wastewater treatment project in Florida.

It is investigating opportunities outside the service territorv to generate steam from trash.

Walter Evans Horrin9 ton Linda Stevens Christiana 15

16 The company is also work-ing to increase returns on its real estate holdings, especially the land around its computer center under construction at Christiana, Delaware.

G ENERATING OPTIONS One of the biggest challenges over the next few years will be to make the best decisions about supplying electricity during the next decade. Nevv power plants are eno1mously expensive and can be devalued quickly by technological advances.

In 1986, the company developed and began to imple-ment a project to delay 225 megawatts of peak growth by 1996. Th is would be enough to postpone the next major plant until near the tum of the century.

Key ingredients of this project are residential load control and cogeneration. During 1987, members of the task force will be conducting market research to determine incentives necessary for customers to participate.

Initial projects involving cus-tomers are scheduled to begin during the first quarter of 1988.

Equipment purchases for the project are underway.

However, peak load growth continues to exceed projections.

It has increased 13% over the past two years.

Thus, the study of options for supplying electricity in the future has been accelerated in the event peak load growth continues to exceed expectations or some of the load control and cogeneration programs do not progress as anticipated.

Options include purchases from other utilities, restarting, in environmentally acceptable ways, retired units at Edge Moor, or building a new, smaller-than-previously-planned plant using advanced technology.

There is enough generating capacity available in Delmarva Power's svstem and on the East Coast so that no major decision has to be made for the next year or two. The strategy is to study all options, keeping the company as flexible as it can be until future demand and the potential of load control become clearer.

Tom Ashby Exmore Charlie Johnson Salisbury D IVERSE SERVICE T ERRITORY Centrally located within the major East Coast markets, the Delmarva Peninsula has a unique blend of industrial, agricultural, commercial, and recreational activities.

This mixture makes the demands for electricity and natural gas less affected by extreme fluctuations in the national economy than in many other areas of the nation.

Delmarva Power serves 325,832 electric customers throughout most of the 5,700-square-mile Delmarva Peninsula which includes Delaware, portions of nine Eastern Shore counties in Maryland, and two Eastern Shore counties in Virginia. The company also distributes natural gas to 76,614 customers in a 275-square-mile area in northern Delaware. To serve this area, Delmarva Power maintains an electric system with 2,277 mega-watts of generation capacity, 1,306 miles of transmission lines, and 9,285 miles of distribution lines, and a natural gas system with 1,061 miles of gas main.

The company employs 2,586 people.

Lori Meredith Westover

PENNSYLVANIA MARYLAND VIRGINIA Indian R11'er

• Laurel Salisburl' NEW jEHSEY LEGEND

/. 0orate Headquarters Nonhem Division Gen~~ol Office J Southern ryn General

• Cuswmpl Sen* ice Loca1i s

f IN AN c I Al Rf v If w and AN Alys Is R f P 0 R T 0f M A N A G f M f N T R f P 0 R T 0f I N 0 f P f N 0 f N T A C C 0 U N TA N T S CONSOllOATfO flNANCIAl STAHMfNTS N 0 H S to C 0 N S 0 l I 0 A H 0 f I N A N C I A l S TA T f M f N T S CONSOllOAHO STATISTICS SHARfHOlOfR INfORMATION 0 HI Cf RS and 0 I Rf CT 0 RS

Delmarva Power &. Li9ht Campany SELECTED FINANCIAL DATA (Dollars in Thousands)

For the Years Ended December 31 1986 1985 1984 1983 1982 OPERATING Operating Revenues

$ 714,863 $ 722,834 $ 702,593 $ 649,799 $ 636,666 Operating Income 134,738 135,515 133,209 129,138 116,573 Net Income 96,123 96,638 92,110 85,063 73,571 EARNINGS AND DIVIDENDS Earnings Per Share 2.91 2.76 2.63 2.45

2. 13 Dividends Declared on Common Stock 2.045 1.945 1.83 1.68 1.595 Average Shares Outstanding (000) 30,482 30,482 30,248 29,541 28,489 Total Assets 1,742,552 1,672,527 1,591,630 1,533,263 1,509,771 Construction Expenditures11 1 102,597 94,923 79,488 76,056 110,646 Internal Generation121 of Funds 157,176 148,880 100,493 99,730 54,553 CAPITALIZATION Long Term Debt131 666,979 638,090 567,761 567,935 592,615 Preferred Stock without mandatory redemption 103,306 105,000 105,000 105,000 105,000 Preferred Stock with mandatory redemption141 4,077 5,992 47,836 49,383 50,000 Common Equity 587,449 561,811 539,650 503,513 468,073 Total

$1,361,811 $1,310,893 $1,260,247 $1,225,831 $1,215,688 CAPITALIZATION RATIOS Long Term Debt 493 493 453 463 493 Preferred Stock without mandatory redemption 83 83 83 93 93 Preferred Stock with mandatory redemption 03 03 43 43 43 Common Equity 433 433 433 41 3 383 Total 1003 1003 1003 1003 1003 ELECTRIC/ GAS SALES Electric Sales (kwh 000) 9,205,795 8,530,520 8,308,233 7,878,476 7,249,442 Gas Sales (mcfOOO) 15,952 15,708 17,239 16,449 15,604 I I !Excludes Allowance for Funds Used During Construction.

iliNet cash now Ii-om operating activities less preferred and common dividends.

iliJncludes long-term debt due within one year.

t41Jncludes mandatory redemption due within one year.

19

Delmarva Power &_Light Compan_v FINA CIAL REVIEW A D ANALYSIS RESULTS OF OPERATIONS 300 20 Earnings and Dividends Declared (cents) 82 83 84 85 86 Earnings Dividends EARNINGS Earnings per share of common stock increased to $2.91 in 1986 from $2.76 in 1985 and

$2.63 in 1984. The 1986 increase was principally attributable to higher electric sales, increased investment income and lower financing costs partially offset by rate decreases and higher other operation and maintenance expenses. The 1985 increase of 13<!: per share compared to 1984 resulted from higher electric sales, additional amortization of the credit arising from the sale of contracts (Summit), and increased investment income partially offset by higher other operation and maintenance expenses.

DIVIDE OS In December 1986, the Board of Directors increased the quarterly dividend 5% to 53<;: per share, the tenth consecutive annual increase. The current indicated annual dividend rate has increased to $2.12 per share from $2.02 per share. This increase reflects a dividend policy which is to gradually increase dividends on an annual basis and thus provide stockholders with a fair and competitive return on their investment. Although earnings may decline in 1987 due to lower returns authorized by regulatory commissions, the company's favorable cash position should allow for continued increases.

ELECTRIC REVENUES AND SALES Electric revenues, net of fuel, decreased $9.8 million or 2.33 in 1986. The 1986 decrease was primarily due to a $28.1 million Delaware Summit credit payment and a $13.5 million decrease from lower rates offset by a $31.5 million sales increase. (See Note 10 on page 40 for a discussion of rate matters.) The sales increase resulted from a continued strong economy in the service territory, colder winter weather, and new residential construction. A new system peak of 1,840 megawatts was reached in July 1986, a 2.5% increase over the previous peak in August 1985. The $28.1 million Delaware Summit credit payment consisted of the unamortized Summit credit and related tax benefits. The settlement payment did not reduce earnings since there was a corresponding credit to operating expenses.

1985 net electric revenues increased $12.3 million or 3%. The increase was mainly attributable to higher sales resulting from an expansion of the banking and financial services sector in Delaware and growth in the residential market.

GAS REVENUES AND SALES 1986 gas revenues, net of fuel costs, increased $2.7 million or 9.4% in 1986. The net revenue increase reflects a full year of revenues at higher rates, effective March 5, 1985, compared to 1985 which includes only ten months at the higher rates. Also contributing to the increase were higher residential space heating sales which were due to colder winter weather and residential and commercial customer growth. Offsetting these increases was a decrease in industrial sales, largely attributable to lower oil prices, which caused some customers to switch from gas.

Delmarva Power &._ Li9ht Company FINANCIAL REVIEW AND ANALYSIS 100 80 60 40 20 0

Generation Fuel Mix (percent)

I -

~

83 84 85 86 87 Oil Nuclear Coal 1985 net gas revenues increased 2.63 due to increased rates partially offset by a 8.93 decrease in sales principally attributable to fuel switching, decreased industrial production levels and mild weather in the first quarter of 1985.

GAS SUPPLY The company minimized the impact of competition from oil through the purchase of significantly lower priced gas, when available, earmarked specifically for alternate fuel customers. The company has taken two additional actions to secure low priced natural gas for its customers. First, regulations issued in 1985 by the Federal Energy Regulatory Commission have enabled the company to make spot purchases. The company makes spot purchases when they are advantageous and available. Second, the company will have another primary supplier, Columbia Gas System, Inc., in late 1987 when it is anticipated that construction of a pipeline by Columbia will be completed.

FUEL Mix In 1986, generation from coal, nuclear and oil sources was 613, 173, and 223, respectively.

Nuclear generation increased 233 due to increased production by the Peach Bottom units which experienced extended outages during 1985. Oil generation increased 93 primarily due to a 393 decline in the company's average cost of oil. These factors lowered the effective customer fuel cost, which includes fuel, interchange and purchased power costs, to l.84ct/ kwh in 1986 from 1.94ct/ kwh in 1985 and 1.9M/ kwh in 1984.

OPERATING EXPENSES Operating expenses, net of fuel costs, decreased 2.23 in 1986 due to $13.5 million accelerated amortization of the Summit credit in the Delaware jurisdiction and the $14.3 million tax effect of the Delaware Summit credit payment. Excluding the impact of the Delaware Summit credit payment, operating expenses, net of fuel costs, increased 5.93. This increase was due to higher payroll, increased insurance costs and higher annual overhaul expenses for the company's generating units.

1985 operating expenses, net of fuel costs, increased 4.93 principally due to higher payroll and associated benefits, the higher cost of jointly-owned nuclear facilities, costs related to Hurricane Gloria, and increased steam service expenses, which are billed and reflected in steam revenues.

21

Delmarva Power &. Li9ht Company FINANCIAL REVIEW AND ANALYSIS IMPACT OF INFLATION 22 1986 TAX REFORM ACT The Tax Reform Act of 1986 (Tax Act) is the most significant and comprehensive tax legislation passed since 1954. The changes provided by the Tax Act having a significant impact on the company include lower corporate tax rates, less favorable depreciation rules and elimination of the investment tax credit (ITC). The lower corporate tax rate will reduce tax expense and the company expects a corresponding reduction in revenues due to lower customer rates. The company's tax payments are expected to increase due to elimination ofITC and less favorable depreciation rules. This may require the company to rely more heavily on external capital markets for new financing in future years. Additionally, the alternative minimum tax, which is significantly more stringent under the Tax Act, may affect future years.

OTHER INCOME Other income, excluding allowance for other funds used during construction, increased $6.9 million in 1986 and $3.l million in 1985. The increases in both years reflect increased leveraged leasing income and higher interest and dividend income. Interest and dividend income in 1986 benefited from increased investment funds available, although lower prevailing rates slowed the growth of income. Interest income also increased in 1986 due to interest received on income tax refunds. The 1985 increase consisted principally of leveraged leasing income, as this was the first year the company invested in leveraged leases.

FINA CING COSTS Interest on long-term debt increased $7.2 million in 1986 primarily due to a December 1985 refinancing of $41.9 million of preferred stock with long-term debt. An increase in loans used to finance leveraged lease investments also contributed to the interest expense increase. During 1986, $87.l million of bonds and preferred stock were refinanced with lower cost securities. The 1985 and 1986 refinancings resulted in a net of tax savings of $2.3 million in 1986, which reflects a $5.2 million decrease in preferred dividends. In 1985, interest on long-term debt increased $1.4 million mainly due to borrowings related to leveraged leases.

In recent years the impact of inflation on the company has decreased due to declining inflation rates. However, the cost of replacing utility plant would be significantly higher than the historical cost reflected in the financial statements. Based on past practices of regulatory commissions, the company anticipates it will recover the increased cost of facilities when replacement actually occurs.

Delmarva Power &.. Li9ht Company FINANCIAL REVIEW AND A ALYSIS LIQUIDITY AND CAPITAL RESOURCES 4.0 3.0 2.0 1.0 0

Ratio of Earnings to Fixed Interest Charges (SEC method) 82 83 84 85 86 LIQUIDITY The company's liquidity is affected principally by its construction program and, to a lesser degree, by other capital requirements such as maturing debt and sinking fund requirements.

The company's cash flow was decreased by 1986 rate reductions and will decrease to a greater degree in 1987, when the rate reductions will be in effect for a full year. The Tax Reform Act of 1986 will also reduce the company's internal generation of cash due to loss of the investment tax credit and less favorable depreciation rules.

The company has the ability to issue commercial paper supported by adequate lines of credit to meet fluctuations in working capital requirements as well as the interim financing necessary for construction projects. The company has lines of credit with banks in the amount of

$44.5 million. These lines are available for bank loans and to secure commercial paper borrowings as the need arises. At December 31, 1986, the company had no commercial paper outstanding.

During 1986, the company continued to lower its cost of capital through refinancings. In June 1986, the company issued $66 million of 9.25% first mortgage bonds pursuant to a $102 million shelf registration statement filed with the Securities and Exchange Commission.

The proceeds were primarily used to redeem $30 million and $29.1 million of first mortgage bonds, bearing interest rates of 11.75% and 11%, respectively. In June 1986, the company also issued $28 million of adjustable rate preferred stock to refund $15 million and $13 million of preferred stock, bearing dividend rates of 8% and 8.96%, respectively. The dividend rate on the adjustable rate preferred stock averaged 5.58% in 1986. In another 1986 financing,

$18 million of bank loans were secured to finance investments in leveraged leases.

The company's ratio of earnings to fixed charges of 3.67, as of December 31, 1986, decreased

&om 1985 primarily due to increased interest on long-term debt and a lower effective income tax rate. This ratio may decrease in future years due to the effects of the Tax Reform Act of 1986 and lower returns authorized by regulatory commissions. The company's preferred stock and first mortgage bonds maintained a AA quality credit rating in 1986.

23

Delmana Pou er &. Li9ht Company FINA CIAL REVIEW AND ANALYSIS 150 120 90 60 30 0

24 Construction Expenditures and Internally Generated Funds (millions of dollars) 85 86 87 88 89 Internally Generated Funds Construction Expenditures (excluding AFU DC)

CAPITAL AND CONSTRUCTION REQUIREMENTS For the period 1984-1986, the company had total capital requirements of $424 million, including $277 million for construction (excluding AFUDC). During the same period, $407 million was generated internally (cash from operations less common and preferred dividend requirements) which represents 963 of the capital requirements and 1473 of the construction requirements. Capital requirements for the period 1987-1989 are estimated to be $478 million, including $396 million for construction (excluding AFUDC). The company presently anticipates that, for the period 1987-1989, internally generated funds will be $311 million which equals 653 of the total capital requirements and 793 of its construction requirements.

Actual construction expenditures may vary from the above estimates due to, among other factors, the rate of inflation, regulation and legislation, rates of load growth, licensing and construction delays, results of rate proceedings, and the cost and availability of capital.

The company estimates that its annual energy and peak load growth for the next 10 years will be at a rate of 2.13 and 1.33, respectively. The company's present generating capacity of 2,277 megawatts provides a reserve of 243 against its company peak of 1,840 megawatts experienced in the summer of 1986. In 1985, the company peak was 1,795 megawatts.

The company developed a plan to delay the in-service date of its next generation unit until the late 1990's because of the high cost of adding new capacity and possible future technological developments. In order to respond to the unexpectedly high peak growth experienced over the past two years by the company, the development of the plan's supply side and demand side options has been intensified. The company's strategy is to match capacity expansion and load growth as closely as possible. This strategy will enable the company to maintain its relatively low pricing within the Northeast and meet developing competition in the utility industry.

Delmarva Power &. Light Company REPORT OF MANAGEMENT REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 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 cunently 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 examine the financial statements and express their opinion thereon. Their examination was conducted in accordance with generally accepted auditing standards which include a review of internal controls.

The audit committee of the Board of Directors, composed of outside Directors only, meets with management, internal auditors and the 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 shareholder approval.

Chairman, President and Chief Executive Officer

~fl~

Roger D. Campbell Senior Vice President and Chief Financial Officer To THE BOARD OF DIRECTORS AND STOCKHOLDERS DELMARVA POWER & LIGHT COMPANY WILMINGTON, DELAWARE We have examined the consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company as of December 31, 1986 and 1985, and the related consolidated statements of income, changes in common stockholders' equity and changes in financial position for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the consolidated financial position of Delmarva Power & Light Company at December 31, 1986 and 1985 and the consolidated results of its operations and changes in financial position for each of the three years in the period ended December 31, 1986 in conformity with generally accepted accounting principles applied on a consistent basis.

~~

Philadelphia, Pennsylvania February 6, 1987 25

Delmarva Power &._Light Company CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)

For the Years Ended December 31 1986 1985 1984 OPERATING REVENUES Electric

$ 602,240

$ 605,581

$ 584,163 Gas 91,802 95,256 101,578 Steam 20,821 21,997 16,852 714,863 722,834 702,593 OPERATING EXPENSES Operation:

Fuel for electric generation 207,862 240,901 278,474 Net interchange and purchased power (28,098)

(63,962)

(108,011)

Purchased gas 57,012 69,847 74,082 Deferred energy costs 7,767 (2,549)

(2,345)

Other operation 128,116 121, 105 108,001 Maintenance 62,621 59,406 56,752 Depreciation 64,657 61,183 58,464 Amortization of Summit credit (15,707)

(7,202)

(4,762)

Taxes on income 65,208 77,836 77,577 Taxes other than income 30,687 30,754 31,152 580,125 587,319 569,384 OPERATING INCOME 134,738 135,515 133,209 OTHER INCOME Allowance for other funds used during construction 2,750 2,428 2,780 Other, net 13,267 6,382 3,243 16,017 8,810 6,023 INCOME BEFORE INTEREST CHARGES 150,755 144,325 139,232 INTEREST CHARGES Long-term debt 54,478 47,236 45,815 Short-term debt and other 922 1,059 2,090 Allowance for borrowed funds used during construction (768)

(608)

(783) 54,632 47,687 47,122 EARNINGS Net Income 96,123 96,638 92, 110 Dividends on preferred stock 7,405 12,599 12,662 Earnings applicable to common stock

$ 88,718

$ 84,039

$ 79,448 COMMON STOCK Average shares outstanding (thousands) 30,482 30,482 30,248 Earnings per average share 2.91 2.76 2.63 Dividends declared Eer share 2.045 1.945 1.83 See accompanying Notes to Consolidated Financial Statements.

26

Delman-a Power &._Light Company CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Dollars in Thousands)

For the Years Ended December 31 1986 1985 1984 CASH FROM OPERATIONS Net Income

$ 96,123

$ 96,638

$ 92,110 Items not requiring (providing) cash:

Depreciation 64,657 61, 183 58,464 Amortization of Summit credit (15,707)

(7,202)

(4,762)

Amortization of nuclear fuel 5,405 6,594 2,071 Allowance for funds used during construction (3,518)

(3,036)

(3,563)

Investment tax credit adjustments, net (956) 21,878 2,253 Deferred income taxes, net 54,535 47,462 31,935 Dther (1,569)

(2,307)

Refundable taxes and interest 31,111 (2,981)

(2,188)

Net change in receivables, inventory & payables 17,228 20,915 (24,029)

Changes in other current assets

& liabilities':'

(21,154)

(19,140) 15,003 Net cash flow from operating activities 226,155 220,004 167,294 INVESTING AcnvITIES Construction expenditures (excluding AFUDC)

(102,597)

(94,923)

(79,488)

Investment in leveraged leases (28,682)

(45,006)

Investment in marketable securities (51,249)

(32,308)

(19,754)

Construction funds held by trustee 9,186 6,392 (4,933)

Other non-current changes, net (6,911)

(8,313)

( 4, 722)

Net cash used by investing activities (180,253)

(174,158)

(108,897)

FINANCING ACTIVITIES Dividends: Common (61,574)

(58,525)

(54, 139)

Preferred (7,405)

(12,599)

(12,662)

Redemptions: Term loan (33,000)

(5,500)

Long-term debt (114,250)

(10, 100)

(10, 100)

Preferred stock (31,635)

(41,573)

(1,418)

Premium on redemption of securities (6,218)

(2,814)

Issuances: First mortgage bonds 126,000 Variable rate demand series bonds 33,500 15,500 Other long-term debt 18,000 80,000 Preferred stock 28,000 Common stock 11,921 Net cash used by financing activities (49,082)

(45,111)

(56,398)

Net increase ~decrease) in cash (3,180) 735 1,999

• 'Other than long-term debt due and preferred stock redeemable within one year and current deferred income taxes.

See accompanying Notes to Consolidated Financial Statements.

27

Delmarva Power &__Light Company CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

ASSETS As of December 3 I 1986 1985 UTILI1Y PLANT-Electric

$1,685,954

$1,624,881 AT ORIGINAL COST Gas 96,782 90,956 Steam 24,746 24,389 Common 85,261 80,541 1,892,743 1,820,767 Less: Accumulated depreciation 587,075 535,873 Net utility plant in service 1,305,668 1,284,894 Plant held for future use 6,830 15,297 Construction work in progress 45,467 33,184 Nuclear fuel, at amortized cost 19,461 19,796 1,377,426 1,353,171 0rHER INVESTMENTS Investment in leveraged leases 60,716 30,465 Construction funds held by trustee 9,186 Other 11,178 4,340 71,894 43,991 CURRENT ASSETS Cash 14,228 17,408 Marketable securities, at cost 111,205 59,956 Accounts receivable:

Customers 46,844 49,037 Other 19,433 24,337 Inventories, at average cost:

Fuel (coal, oil and gas) 43,745 55,694 Materials and supplies 21,284 20,648 Prepayments 4,999 4,236 Deferred income taxes, net 1,326 (755)

Refundable taxes and interest 31,111 263,064 261,672 DEFERRED CHARGES AND Unamortized debt expense 6,233 5,368 0rHER ASSETS Deferred recoverable plant costs 8,145 Other 15,790 8,325 30,168 13,693 Total

$1,742,552

$1,672,527 See accompanying Notes to Consolidated Financial Statements.

28

Delmarva Power &_Light Company CONSOLIDATED BAIANCE SHEETS (Dollars in Thousands)

CAPITALIZATION As of December 31 1986 1985 AND LIABILITIES CAPITALIZATION Common stock

$ 102,876

$ 102,876 (see Statements Additional paid-in capital 235,187 235,798 of Capitalization)

Retained earnings 249,386 223,137 Total common stockholders' equity 587,449 561,811 Preferred stock:

Without mandatory redemption 103,306 105,000 With mandatory redemption 3,277 5,192 Long-term debt 666,829 637,940 1,360,861 1,309,943 CURRENT LIABILITIES Long-term debt due and preferred stock redeemable within one year 950 950 Accounts payable 31,947 33,129 Taxes accrued 1,961 16, 181 Interest accrued 10,937 22,729 Dividends declared 16,155 15,393 Deferred energy costs, net 6,229 (1,488)

Other 8,344 10,440 76,523 97,334 DEFERRED CREDITS AND Credit arising from sale of contracts 1,261 16,057 OTHER LIABILITIES Deferred income taxes, net 231,360 174,746 Deferred investment tax credits 69,460 70,416 Other 3,087 4,031 305,168 265,250 OTHER Commitments and Contingencies (Notes 6 and 11)

Total

$1,742,552

$1,672,527 See accompanying Notes to Consolidated Financial Statements.

29

Dclmal1'a Power &_Light Company CONSOLIDATED STATEMENTS OF CAPITALIZATION COMMON STOCKHOLDERS' EQUITY CUMULATIVE PREFERRED STOCK LONG-TERM DEBT 30 (Dollars in Thousands)

As of December 31 Common stock, par value $3.375 per share authorized 35,000,000 shares, outstanding 30,481,925 shares Additional paid-in capital Retained earnings Total Common Stockholders' Equity 1986

$ 102,876 235,187 249,386 587,449 433 Par value $25 per share, 3,000,000 shares authorized, none outstanding Par value $100 per share, 1,800,000 shares authorized Without Mandatory Redemption:

Series Shares Issued (1986 and 1985) 3.70%-4.56%

240,000 and 240,000 5.00%-7.84%

330,000 and 330,000 7.88%-8.96%

200,000 and 480,000 Adjustable-5.58%Pl 280,000 and 0

Less: Reacquired preferred shares held in treasury (at cost)

Preferred Stock without Mandatory Redemption With Mandatory Redemption:

9.00% Series!2l 40,766 and 59,916 shares Less: Amount to be redeemed within one year Preferred Stock with Mandatory Redemption First Mortgage and Collateral Trust Bonds:

Maturity Interest Rates Jun. 1, 1988 3Ys%

1994-1997 4%%-6%%

1998-2002 7%-11-M%

2003-2005 6.6%-10\\4%

2008-2016 9\\4%-12%

Pollution Control Notes:

Series, 1973 5.7% effective rate, due 1987-1998 Series, 1976 7.3% effective rate, due 1992-2006 Variable Rate Demand Series, due 2014-2015-4.51%! 1)

Other Long-Term Debt-7.76%(1 1 Unamortized premium and discount, net Long-term debt due within one year Total Long-Term Debt Total Capitalization illAverage rate during 1986.

!21Redemption price at December 31, 1986 is$ 107.

See accompanying Notes to Consolidated Financial Statements.

24,000 33,000 20,000 28,000 105,000 1,694 103,306 83 4,077 03 800 3,277 25,000 50,000 158,100 92,150 207,900 533,150 7,550 34,500 42,050 49,000 43,000 (221) 666,979 493 (150) 666,829

$1,360,861 1003 1985

$ 102,876 235,798 223,137 561,811 43%

24,000 33,000 48,000 105,000 105,000 8%

5,992 0%

800 5,192 25,000 50,000 158,100 121,250 111,900 466,250 7,700 34,500 42,200 49,000 80,000 640 638,090

( 150) 637,940 49%

$1,309,943 100%

DelmatYO Power ~Light Company CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Dollars in Thousands)

Additional For the Three Years Ended Common Par Paid-in Retained December 31, 1986 Shares Value Capital Earnings Total BALANCE AS OF 29,841,182

$100,714

$225,585

$177,214

$503,513 jANUARY 1, 1984 Net income 92,110 92, 110 Cash dividends declared:

Common stock ($1.83)

(55,361)

(55,361)

Preferred stock (12,662)

( 12,662)

Issuance of common stock:

Dividend Reinvestment and Common Share Purchase Plan 640,743 2,162 9,888 12,050 Gain on retirement of preferred stock 125 125 Common stock expense

( 125)

(125)

BALANCE AS OF DECEMBER 31, 1984 30,481,925 102,876 235,473 201,301 539,650 Net income 96,638 96,638 Cash dividends declared:

Common stock ($1.945)

( 59,287)

(59,287)

Pref erred stock (12,599)

(12,599)

Net loss on retirement of preferred stock 325 (2,916)

(2,591)

BALANCE AS OF DECEMBER 31, 1985 30,481,925 102,876 235,798 223,137 561,811 Net income 96, 123 96, 123 Cash dividends declared:

Common stock ($2.045)

( 62,336)

(62,336)

Preferred stock (7,405)

(7,405)

Issuance of preferred stock (650)

(650)

Redemption of preferred stock 39 (133)

(94)

BALANCE AS OF DECEMBER 31, 1986 30,481,925

$102,876

$235,187

$249,386

$587,449 See accompanying Notes to Consolidated Financial Statements.

31

Delmarva Power &_ Li9ht Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT ACCOUNTING POLICIES 32 FINANCIAL STATEMENTS The consolidated financial statements include the accounts of the company and its totally-held subsidialies, Delmarva Energy Company, Delmarva Industries Inc., Delmarva Services Company, and Delmarva Capital Investments, Inc. and its subsidialies. In conformity with generally accepted accounting plinciples, the accounting policies reflect the financial effects of rate decisions issued by regulatory commissions having juiisdiction over the company.

Certain reclassifications, not affecting income, have been made to amounts reported in plior years to confo1m to the presentations used in 1986.

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 ( electlic and gas) are deferred and charged to operations on the basis of fuel costs included in customer billings under the company's taliffs, which are subject to peiiodic regulatory review and approval.

DEPRECIATION AND MAINTENANCE The annual provision for depreciation is computed on the straight-line basis using composite rates by classes of depreciable property. Provision for the costs of decommissioning of nuclear plant is made to the extent of the net cost of removal allowed for rate purposes (approximately 203 of 01iginal plant cost). The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.53 for 1986, 3.63 for 1985 and 3.43 for 1984.

The cost of maintenance and repairs, including renewals of minor items of property, is charged to operating expenses. A replacement of a unit of property is accounted for as an addition to and a retirement from utility plant. The original cost of the property retired is charged to accu-mulated depreciation together with the net cost of removal. For income tax purposes, the cost of removing retired property is deducted as an expense.

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 authoiized by the regulatory commissions in each juiisdiction and is paying such amounts quarterly to the Department of Energy.

Delmarva Power &.. Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LEVERAGED LEASES The company's net investment in leveraged leases includes the aggregate of rentals receivable (net of principal and interest on nonrecourse indebtedness) and estimated residual values of the leased equipment less unearned and deferred income (including investment tax credits).

Unearned and deferred income is recognized at a level rate of return during the periods in which the net investment is positive.

INCOME TAXES Deferred income taxes result from timing differences in the recognition of certain income and expenses for tax and financial accounting purposes. The principal items accounting for deferred income taxes are: (1) use of the Accelerated Cost Recovery System and other accelerated depreciation methods for income tax purposes, (2) deferred fuel and gas production costs deducted currently for income tax purposes, and (3) other timing differences involving the capitalization of certain taxes and overhead costs. The company expects that accumulated deferred taxes resulting from accelerated depreciation will be amortized ratably over the remaining regulatory lives of the assets in accordance with the average rate assumption method prescribed by the Tax Reform Act of 1986. 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 non-regulated operations (excluding leveraged leases) are accounted for by the flow-through method.

Additional tax credits in 1984, 1985 and 1986 related to an Employee Stock Ownership Plan do not affect net income and are recorded as liabilities until the contribution is made to the Plan.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Allowance for funds used during construction (AFUDC) is a non-cash item and is defined in the regulatory system of accounts as the "net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds so used." AFUDC is segregated into two components: (1) the interest on debt component ("allowance for borrowed funds used during construction"), which is net of taxes and classified as a credit to interest charges, and (2) the common stock equity and preferred dividend component

("allowance for other funds used during construction"), which is classified as an item of other income. AFUDC is considered a cost of utility plant with a concurrent credit to income. It is excluded from taxable income for tax purposes. The rates used in determining AFUDC, which includes semi-annual compounding, were 9.2% in 1986 and 1985 and 9.0% in 1984.

33

Delmarva Power &.. Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. INCOME TAXES 34 (Dollars in Thousands) 1986 Operations:

Federal: Current

$29,278 Deferred 26,779 State: Current 5,051 Deferred 4,596 Investment tax credit adjustments, net (496)

Other income: Current (27,223)

Deferred 23,160 Investment tax credit adjustments, net (1,720)

Total

$59,425 1985

$32,557 28,638 6,320 4,978 5,343 (29,788) 13,846 12,608

$74,502 1984

$36,131 27,380 6,560 4,555 2,951 1,528

$79,105 Investment tax credits utilized to reduce federal income taxes payable amounted to $5,450,000 in 1986, $24,992,000 in 1985 and $6,890,000 in 1984. The amounts for 1986, 1985 and 1984 include Employee Stock Ownership Plan credits of $464,000, $535,000 and $707,000, respectively.

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 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 Amortization of credit arising from sale of contracts Other, net Income tax expense 1986 1985 1984 Amount Rate Amount Rate Amount Rate

$71,553 46% $78,725 46% $78,758 46%

(1,619)

(1) 2,852 2

(7,667)

(5) 5,333 3

(7,225)

(5)

(3,802)

(2)

(1,397)

(1) 2,196 1

(7,144)

(4) 6,160 4

(3,313)

(2)

(725)

(1,639)

(1) 1, 163 1

(4,018)

(2) 6,067 3

(2,190)

(1) 964

$59,425 38% $74,502 44% $79,105 46%

The components of deferred income taxes relate to the following tax effects of timing differences between book and tax income:

(Dollars in Thousands)

Depreciation Deferred energy costs Capitalized overhead costs Deferred recoverable plant costs Pollution control amortization ADR repair allowance Other, net Total 1986

$43,443 (2,082) 1,143 3,488 3,076 2,337 3,130

$54,535 1985

$33,394 1, 163 1,432 3,629 4,295 3,549

$47,462 1984

$18,887 954 1,508 3,687 4,863 2,036

$31,935

Delmarva Power 8(_ Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

2. INCOME TAXES (continued)

3. TAXES OTHER THAN INCOME

4. PENSION PLAN AND POST-RETIREMENT BENEFITS The company has not provided deferred income taxes of approximately $83 million, based on anticipated future income tax rates, related to cumulative timing differences of $208 million arising before the adoption of full 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.

During 1986, the company received the refund of approximately $11.5 million of net federal and state taxes and interest related to taxation of the proceeds from the sale of contracts for a nuclear steam supply system (Summit). (See Note 7.) Accordingly, all tax years through 1981 were closed as of December 31, 1986.

(Dollars in Thousands) 1986 1985 1984 Delaware utility

$11,869

$12,168

$13,732 Property 6,787 6,784 6,652 Other gross receipts 5,881 5,799 4,995 Payroll, franchise and other 6,150 6,003 5,773 Total

$30,687

$30,754

$31,152 The company has a trusteed noncontributory pension plan covering all regular employees.

There were no pension contributions in 1986. Pension contributions for 1985 and 1984 were $3,284,000 and $2,354,000, respectively. The contributions provide for normal cost and amortization of prior service costs over periods of five to twenty-five years.

The actuarial present value of accumulated plan benefits, determined as of January 1, 1986, was

$102,756,000 for vested benefits and $15,936,000 for accrued nonvested benefits. The market value of net assets, at that date, available for plan benefits was $253,468,000. The actuarial present value of accumulated plan benefits, determined as of January 1, 1985 was $94,410,000 for vested benefits and $15,638,000 for accrued nonvested benefits. The market value of net assets, at that date, available for plan benefits was $201,398,000. The assumed rate of return used in determining the actuarial present value of accumulated plan benefits was 8% for 1986 and 1985.

In 1987, the company will adopt Statement of Financial Accounting' Standards No. 87, "Employers' Accounting for Pensions." Implementation of this accounting standard will not have a material ~ffect on the company's financial position or results of operations.

The company provides certain 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 those benefits by expensing the insurance claims as they are paid. These costs totalled $2,009,000, $2,094,000 and $1,640,000 for 1986, 1985 and 1984, respectively.

35

Delmarva Power &._Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. CAPITALIZATION 36 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, which available amount at December 31, 1986 was approximately $170,059,000.

PREFERRED STOCK The annual preferred dividend requirements on all outstanding preferred stock at December 31, 1986 are $6,656,000. 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 $103 to $106 at December 31, 1986).

1) On June 4, 1986, the company issued 280,000 shares of $100 par value Adjustable Rate Preferred Stock, Series A. The dividend is cumulative and adjusted quarterly based on U. S. Treasury securities rates, but in no event will be less than 5.5% or greater than 10%.

As of December 31, 1986, the dividend rate was 5.5%. The proceeds were used to redeem 280,000 shares of $100 par value preferred stock (8% Series-150,000 shares and 8.96%

Series-130,000 shares) called on June 30, 1986. The call premium plus related unamortized premium and expenses totaling $1.3 million have been deferred in anticipation of recovery in rates. Recovery in the Maryland jurisdiction has been approved.

2) On July 2, 1986, the company paid $1.7 million to purchase 17,200 shares of its 7.88%

preferred stock. As of December 31, 1986, these shares were held in treasury.

WITH MANDATORY REDEMPTION The company redeemed 16,000 shares of the 9% series in December 1986 at $100 per share.

Eight thousand of the 16,000 shares were required to be redeemed by the sinking fund and the remaining 8,000 shares were redeemed under an option of the sinking fund. Through a 1985 tender offer for the 9% series the company purchased at $103 per share 3,150 shares in January 1986. Under certain conditions the 9% series may also be redeemed at the option of the company. Mandatory sinking fund redemptions are $800,000 per year during the next five years.

Delman'a Power &._Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. CAPITALIZATION (continued)

LONG-TERM DEBT

1) Sinking fund requirements for the First Mortgage and Collateral Trust Bonds may be reduced by an amount not exceeding sixty percent ( 603) of the bondable value of property additions. For the years 1984-1986, property additions satisfied the sinking fund requirements.

2) Substantially all utility plant of the company now or hereafter owned is subject to the lien of the related Mortgage and Deed of Trust.

3) Pursuant to a bank loan agreement, the company has a $33,000,000 revolving credit commitment through November 1, 1989, convertible into a term loan due November 1, 1992. The loan agreement requires a commitment fee of 1/53 on any unused portion of the revolving credit commitment. Loans under the agreement may be prepaid at any time without penalty and would bear interest at 1003 of the prime rate.

4) As of December 31, 1986, $49,000,000 of Variable Rate Demand Bonds were outstanding which have put options for the bondholders whereby the bonds can be presented for payment at specified times. The bonds can be sold by the remarketing agent. The company has sufficient long-term financing agreements available to redeem any bonds not remarketed.

In recognition of the long-term financing capability, these bonds have been classified as long-term debt.

5) On January 15, 1986, the company issued $60 million of the 10Ys3 Series First Mortgage and Collateral Trust Bonds, due January 1, 2016. The proceeds from the bond issuance were used to repay a $55 million bank loan with the balance being applied to general corporate cash requirements.

6) On June 4, 1986, the company issued $66 million of 9~3 Series First Mortgage and Collateral Trust Bonds, due June 1, 2015. The proceeds were primarily used to redeem

$59.1 million of First Mortgage Bonds (11.753 Series, due July 1, 2010-$30 million and 113 Series, due July 1, 2005-$29.l million) called on July 1, 1986. The call premium plus related unamortized discount and expenses totaling $5.5 million have been deferred in anticipation of recovery in rates. Recovery in the Maryland jurisdiction has been approved.

7) During 1986, a subsidiary extended its borrowings under an existing loan agreement from

$25 million to $43 million. $3 million was borrowed at a rate of 8.733, maturing on February 19, 1989. $15 million was borrowed at a rate which is adjusted periodically based on prevailing rates. The $15 million loan matures on February 19, 1989 and may be prepaid at anytime, in some instances subject to a penalty.

8) Maturities of long-term debt during the next five years are 1987-$150,000; 1988-

$25,150,000; 1989-$43,150,000; 1990-$150,000; 1991-$15Q,OOO.

9) The annual interest requirements on all borrowings classified as long-term debt at December 31, 1986 are $54,315,000.

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

37

Delmarva Power &_Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

6. COMMITMENTS 38 The company estimates that approximately $137,779,000 excluding AFUDC, will be expended for construction purposes in 1987. The company also has commitments under long-term fuel supply contracts.

Under SFAS No. 71, regulated industries were required to adopt the lease accounting requirements of SFAS No. 13 for all capital leases commencing on or after January 1, 1983.

The company's capital leases commencing after January 1, 1983, were not material and therefore, were not recorded. All capital leases, including leases commencing prior to January 1983, were treated as operating leases. However, if capital leases had been recorded on the balance sheet, related assets and liabilities would have increased by $6,504,000 and

$8,609,000 at December 31, 1986 and 1985, respectively. The company will record its capital le~ses in 1987, as required by SFAS No. 71.

Minimum commitments as of December 31, 1986 under all non-cancellable lease agreements are as follows:

1987 1988 1989 1990 1991 Remainder Total

$ 3,059,000 2,310,000 2,080,000 537,000 260,000 3,857,000

$12,103,000 The total minimum rental commitments are applicable to the following types of property:

railroad coal cars, $1,110,000; distribution facilities, $5,157,000; transportation vehicles, $5,152,000; computer equipment, $684,000. Rentals charged to operating expenses aggregated $7,439,000 in 1986, $6,634,000 in 1985 and $6,213,000 in 1984.

Nuclear fuel requirements for Peach Bottom Generating Station are being provided by the operating company through a fuel purchase contract. The company is responsible for payment of its share of fuel consumed and interest expense. Nuclear fuel expense for Peach Bottom totalled $8,372,000 in 1986, $4,520,000 in 1985 and $6,072,000 in 1984.

The company has an agreement providing for the availability of fuel storage and pipeline facilities through 1999. Under the agreement, the company must make specified minimum payments monthly, which totalled $2,766,000 in 1986, $1,682,000 in 1985 and

$1,912,000 in 1984. The amount of required payments is $2,151,000 in 1987, $1,484,000 in 1988, $1,299,000 in 1989, $999,000 in 1990, $1,672,000 in 1991 and $12,398,000 between 1992 and 1999.

Delmarva PolVer &_Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

7. SALE OF CONTRACTS FOR NUCLEAR PLANT

8. SHORT-TERM DEBT AND LINES OF CREDIT

9. JOINTLY-OWNED PLANT The proceeds received by the company for the sale in 1975 of the contracts for a nuclear steam supply system (Summit) and related fuel, net of related plant expenditures, are classified as a deferred credit in the balance sheet. The credit has been reduced by applicable income taxes and related interest. The company has amortized the credit since 1982 in the retail jurisdictions. Amounts amortized in 1986, 1985 and 1984 were $15,707,000, $7,202,000, and $4,762,000, respectively. Amortization in 1986 included $13,455,000 of accelerated amortization due to the Delaware Summit credit payment as discussed in Note 10. Amortization in 1985 included $2,500,000 for the resale jmisdiction. As of December 31, 1986, the Summit credit was fully amortized in the Maryland and resale jurisdiction. The December 31, 1986 balance of $1,261,000 includes $674,000 for Delaware and $587,000 for Virginia.

As of December 31, 1986, the company had unused bank lines of credit of $44,500,000 and 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.

Information with respect to the company's share of jointly-owned plant, including nuclear fuel for the Salem plant, as of December 31, 1986 is as follows:

(Dollars in Thousands)

Construction Ownership Plant in Accumulated Work in Share Service Depreciation Progress

• Nuclear:

Peach Bottom 7.51%

$ 91,307

$ 29,818

$ 3,602 Salem 7.41%

198,839 63,716 9,074 Coal-Fired:

Keystone 3.70%

11,880 4,491 299 Conemaugh 3.72%

11,692 4,982 758 Men-ill Creek Reservoir 11.91%

10,534 Transmission Facilities Various 4,462 1,252 Total

$318,180

$104,259

$24,267 The company provides its own financing for its share of improvements to jointly-owned plant. In addition, the company is a joint guarantor of loans ($662,000 proportionate share) advanced for operation of the coal mines that supply the Keystone plant. 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.

39

Delmarva Power &. Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. RATE MATTERS

11. CONTINGENCIES 40 The company is subject to regulation with respect to its retail sales of electricity by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission, 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.

1) DELAWARE ELECTRIC RETAIL Effective August 20, 1986, the Delaware Public Service Commission (DPSC) issued an interim rate order decreasing electric rates by $22.8 million annually. The interim rate reduction was based on a 133 return on equity, which was previously 15.13. In December 1986, the company made a $28.1 million payment to electric retail customers, as ordered by the DPSC. The payment consisted of the December 15, 1986 Delaware Summit credit balance and related tax benefits. Rate hearings are currently in progress to determine permanent rate levels, which will become effective in early 1987.

In September 1986, the DPSC issued an order regarding the settlement of various fuel-related issues through December 31, 1985. The settlement requires a $3 million reduction in fuel clause collections during 1987. There is no effect on the company's financial position or results of operations due to a prior accrual.

2) MARYLAND RETAIL The Maryland Public Service Commission approved a settlement agreement between the company, the Commission Staff and People's Counsel, under which the company's rates were reduced by $5.55 million, effective October 1, 1986. The rate decrease was based on an overall rate of return of 10.083. Maryland retail rates were reduced an additional $3.3 million due to the Tax Reform Act of 1986, effective January 1, 1987.

3) RESALE In December 1986, the Federal Energy Regulatory Commission approved a settlement agreement which provided for a $1.4 million refund for the period July 1, 1985 through June 30, 1986 and an annual rate reduction of $1 million effective July 1, 1986 with an additional $3 million reduction effective August 20, 1986. The settlement agreement also provides for an additional rate reduction in early 1987, primarily to reflect the effects of the Tax Reform Act of 1986, based on the final outcome of the current Delaware retail electric rate proceedings.

1) PLANT HELD FOR FUTURE USE In 1982, the company delayed the construction schedule for the coal-fired Nanticoke #1 generating unit. The plant is now scheduled to begin commercial operation in the late 1990's, based on the company's current load forecast. During 1986, $8.1 million of preliminary engineering and design costs were reclassified from plant held for future use to deferred charges as a result of downsizing the planned unit and the advent of new technologies after development of the preliminary conceptual* design. The remaining $6.2 million classified as plant held for future use and the $8.1 million deferred charge are both anticipated to be recoverable through the ratemaking process.

Delmarva Power &_ Li9ht Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

11. CONTINGENCIES (continued)

2) NUCLEAR INSURANCE The company's insurance coverages applicable to its nuclear power units are as follows:

(Millions of Dollars)

Type and Source of Coverage Maximum Coverage Maximum Retrospective Assessment for a Single Incident Public Liability:Pl Private Price Anderson Assessment(2l Property Damage:(5l Peach Bottom(6l Salem(7l All units(Bl Replacement Power:

Nuclear Electric Insurance Limited (NEIL)l9'

$160 535

$695(4)

$585

$585

$575

$3.0-$3.3 None

$1.5(3)

$3.0

$1.6

$1.6 (llThe Price-Anderson Act is scheduled to expire in August 1987 and Congress is currently considering several proposals. The company is unable to predict Congress' ultimate action and what effect such action may have on the company's liability.

(ZlRetrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954 as amended. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in the United States.

(llMaximum assessment would be $3,000,000 in the event of more than one incident in any year.

(4lLimit of liability under the Price-Anderson Act for each nuclear incident.

(SlThe company is a self insurer, to the extent of its ownership interest, for any property loss in excess of the stated amounts.

(6lfor property damage to the Peach Bottom nuclear plant facilities, the company and its co-owners have private insurance up to $5 85 million.

(7lNuclear Mutual Limited, a utility-owned mutual insurance company with which the company and the Salem nuclear facility co-owners are members. Maximum retrospective assessment is ten times annual premium with respect to loss at any nuclear generating station insured by the mutual insurance company.

(BlAll 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.

(9lUtility owned mutual insurance company provides coverage against extra expense incurred in obtaining replacement power during prolonged accidental outages of nuclear power units. Maximum weekly indemnity for 52 weeks which commences after the first 26 weeks of an outage. Also provides for an additional 52 weeks indemnity at one-half maximum level. Maximum retrospective assessment is five times 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 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.

41

Delmarva Power &_Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

12. SEGMENT INFORMATION 42 Segment information with respect to electric, gas and steam operations was as follows:

(Dollars in Thousands) 1986 1985 1984 Operating Revenues:

Electric

$ 602,240

$ 605,581

$ 584,163 Gas 91,802 95,256 101,578 Steam 20,821 21,997 16,852 Total

$ 714,863

$ 722,834

$ 702,593 Operating Income:

Electric

$ 126,007

$ 127,148

$ 125,200 Gas 6,985 6,604 6,616 Steam 1,746 1,763 1,393 Total

$ 134,738

$ 135,515

$ 133,209 Net Utility Plant:l'l12l Electric

$1,306,215

$1,284,062

$1,257,728 Gas 67,267 64,967 59,097 Steam 3,944 4,142 4,349 1,377,426 1,353,171 1,321,174 Other Identifiable Assets:

Electric 112,423 144,544 157,437 Gas 17,722 32,890 42,685 Steam 409 418 440 130,554 177,852 200,562 Assets Not Allocated 234,572 141,504 69,894 Total Assets

$1,742,552

$1,672,527

$1,591,630 Depreciation Expense:

Electric 59,725 56,577 54,255 Gas 4,016 3,699 3,310 Steam 916 907 899 Total 64,657 61,183 58,464 Construction Expenditures:l3l Electric 94,337 86,073 69,233 Gas 7,751

'8,382 10,109 Steam 509 468 146 Total

$ 102,597 94,923 79,488 ll l!ncludes plant held for future use, construction work in progress and allocation of common utility property.

12lStated net of the respective accumulated provisions for depreciation.

13>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 proportionate share of taxes on income and general corporate expenses.

Delmarva Power &. Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

13. 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 seasonably 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 Applicable Average per Quarter Operating Operating Net to Common Shares Average Ended Revenue Income Income Stock Outstanding Share (Dollars in Thousands)

(In Thousands) 1986 March 31

$208,703 $ 38,235

$27,345

$25,405 30,482

$0.83 June 30 171,341 29,966 19, 183 17,125 30,482 0.57 September 30 201,082 45,766 35,212 33,505 30,482 1.09 December 31 133,737 20,771 14,383 12,683 30,482 0.42

$714,863 $134,738

$96,123

$88,718 30,482

$2.91 1985 March 31

$198,788 $ 36,946

$27,114

$23,964 30,482

$0.79 June 30 161,093 29,416 20,582 17,433 30,482 0.57 September 30 196,352 43,496 34,235 31,085 30,482 1.02 December 31 166,601 25,657 14,707 11,557 30,482 0.38

$722,834 $135,515

$96,638

$84,039 30,482

$2.76 In the second quarter of 1985, adjustments were recorded for the additional Delaware electric retail revenue refund for 1984 and additional amortization of the credit arising from the sale of contracts, which resulted from an out-of-court tax settlement. The effect of these adjustments reduced second quarter net income by approximately $1,100,000 (4¢ per share).

In the fourth quarter of 1985, the company wrote-off its share of advances under uranium supply contracts that were terminated and also accrued for a resale revenue refund. The effect of these adjustments reduced fourth quarter net income by approximately $2,063,000 (7<r-per share).

Rate decreases in the company's jurisdictions decreased net income during 1986 as follows:

first quarter-$528,000 (1.7<r-per share); second quarter-$468,000 (1.5<r-per share); third quarter-$1,578,000 (5.2<r-per share); fourth quarter-$4,179,000 (13.7<r-per share).

In the fourth quarter of 1986, the company recorded the Delaware Summit credit payment, interest on tax refunds, tax accrual adjustments, and the impact of the Tax Refmm Act of 1986 on its leveraged lease investments. The effect of these adjustments increased net income $1,119,000 (3.7<r-per share).

43

Delmarva Po1Ver &._Light Campany CONSOLIDATED STATISTICS 10 Years of Review 1986 1985 1984 1983 ELECTRIC REVENUES (thousands):

Residential

$ 217,393

$ 212,254

$ 205,910

$ 193,021 Commercial 169,157 168,957 156,507 140,809 Industrial 127,900 135,141 128,833 126,703 Other utilities, etc.

80,291 79,399 79,235 68,991 Miscellaneous revenues 7,499 9,830 13,678 12,728 Total electric revenues

$ 602,240

$ 605,581

$ 584,163

$ 542,252 ELECTRIC SALES

( 1,000 kilowatt-hours):

Residential 2,496,099 2,256,922 2,249,270 2,136,265 Commercial 2,370,775 2,165,685 2,073,457 1,844,324 Industrial 2,753,902 2,606,466 2,569,572 2,600,492 Other utilities, etc.

1,585,019 1,501,447 1,415,934 1,297,395 Total electric sales 9,205,795 8,530,520 8,308,233 7,878,476 ELECTRIC CUSTOMERS (end of period):

Residential 293,452 283,911 275,175 267,357 Commercial 35,089 33,189 31,548 30,525 Industrial 853 893 929 949 Other utilities, etc.

517 492 502 434 Total electric customers 329,911 318,485 308,154 299,265 GAS REVENUES (thousands):

Residential 43,145 39,224 40,933 36,694 Commercial 18,523 17,901 18,663 16,527 Industrial 16,995 19,762 22,940 23,232 Interruptible 11,464 17,419 18,098 17,026 Other utilities, etc.

142 130 160 115 Miscellaneous revenues 1,533 820 784 764 Total gas revenues 91,802 95,256

$ 101,578 94,358 GAS SALES (million cubic feet):

Residential 6,201 5,622 6,213 5,640 Commercial 2,906 2,742 2,971 2,677 Industrial 3,338 3,579 4,245 4,378 Interruptible 3,471 3,734 3,769 3,723 Other utilities, etc.

36 31 41 31 Total gas sales 15,952 15,708 17,239 16,449 GAS CUSTOMERS (end of period):

Residential 72,685 70,804 70,183 69,608 Commercial 4,693 4,417 4,233 4,075 Industrial 158 160 165 160 Interruptible 14 15 19 19 Other utilities, etc.

1 1

1 Total gas customers 77,551 75,397 74,601 73,863 STEAM SERVICE Electricity delivered 370,802 335,308 298,203 309,043

( 1,000 kilowatt-hours)

Steam delivered 6,627,130 6,794,105 6,922,416 6,965,904

( 1,000 pounds) 44

Average Annual Compound%

1982 1981 1980 1979 1978 1977 1976 Rate of Growth

$183,258

$164,919

$144,637

$115,381

$105,237

$ 97,691

$ 80,416 10.46 137,434 123,099 112,166 91,798 82,196 74,641 60, 111 10.90 127,441 129,601 116,401 98,023 83,972 76,801 64,458 7.09 73,469 73,602 63,698 53,782 40,840 38,974 34,896 8.69 13,168 12,898 7,025 4,682 5,261 3,461 2,398 12.08

$534,770

$504,119

$443,927

$363,666

$318,106

$291,568

$242,279 9.53 2,026,398 1,996,647 2,046,546 1,968,452 1,979,624 1,924,723 1,787,663 3.39 1,729,863' 1,660,147

. 1,648,776 1,598,299 1,568,600 1,495,796 1,412,259 5.32 2,255,673 2,454,685 2,429,842 2,624,438 2,418,527 2,277,630 2,260,661 1.99 1,237,508 1,283,845 1,335,216 1,300,611 1,281,498 1,207,941 1,199,155 2.83 7,249,442 7,395,324 7,460,380 7,491,800 7,248,249 6,906,090 6,659,738 3.29 260,371 255,646 246,887 242,745 237,925 233,106 230,579 2.44 29,966 29,450 28,162 27,998 28,421 29,648 28,345 2.16 741 788 821 874 858 921 1,002

( 1.60) 434 434 440 478 480 561 550 (0.62) 291,512 286,318 276,310 272,095 267,684 264,236 260,476 2.39

$ 36,505

$ 34,123

$ 26,525

$ 25,719

$ 28,370

$ 21,829

$ 18,826 8.65 15,792 14,344 10,342 8,954 10, 154 7,133 6,062 11.82 20, 112 22,259 12,404 9,884 10,191 6,950 5,984 11.00 11,733 11,711 9,293 4,440 716 169 1,301 24.31 53 61 46 55 93 49 44 12.43 552 572 430 270 116 103 31 47.71

$ 84,747

$ 83,070

$ 59,040

$ 49,322

$ 49,640

$ 36,233

$ 32,248 11.03 6,062 6,193 6,321 6,423 6,941 6,751 6,956 (1.14) 2,768 2,704 2,683 2,415 2,593 2,439 2,586 1.17 4,108 4,809 3,937 3,388 3,290 2,811 3,264 0.22 2,656 2,802 2,738 1,720 319 81 953 13.80 10 12 14 16 29 17 20 5.76 15,604 16,520 15,693 13,962 13,172 12,099 13,779 1.48 69,092 68,608 67,784 66,631 66,364 66,231 67,754 0.71 4,057 3,967 3,846 3,712 3,773 3,738 4,154 1.23 166 167 155 131 163 163 198 (2.23) 18 16 16 16 21 21 21 (3.97) 1 1

1 1

1 1

1 73,334 72,759 71,802 70,491 70,322 70,154 72,128 0.73 322,804 343,063 328,420 262,159 270,006 289,049 318,389 1.54 7,778,929 7,673,420 7,570,944 6,378,705 6,016,095 4,888,366 5,301,421 2.26 45

Delmarva Power &._Light Company STOCKHOLDER INFORMATION 46 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.

STOCK SYMBOL Common Stock, DEW - listed on the New York and Philadelphia Stock Exchanges.

ANNUAL MEETING The Annual Meeting will be held on April 28 at 11:00 a.m., in the Clayton Hall, University of Delaware, Newark, Delaware.

ADDITIONAL REPORTS To supplement information in this Annual Report, a Financial and Statistical Review (1975-1985) 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.

TRUSTEES First Mortgage and Collateral Trust Bonds - Chemical Bank, New York, New York Pollution Control Revenue Bonds -

Mellon Bank (DE) N.A.

Wilmington, Delaware Bank of Delaware, Wilmington, Delaware Wilmington Trust Company, Wilmington, Delaware Irving Trust Company New York, New York.

TRANSFER AGENTS AND REGISTRARS 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.

Manufacturers Hanover Trust Company Stock Transfer Department P.O. Box 24935 Church Street Station New York, New York 10249.

REGULATORY COMMISSIONS Federal Energy Regulatory Commission, 825 North Capitol Street, N.E.,

Washington, D.C. 20426.

Delaware Public Service Commission, 1560 S. du Pont Highway, Dover, Delaware 19901.

Maryland Public Service Commission, American Building, 231 East Baltimore Street, Baltimore, Maryland 21202.

Virginia State Corporate Commission, P.O. Box 1197, Richmond, Virginia 23209.

Delmarva Power &._Light Company STOCKHOLDER INFORMATION QUARTERLY COMMON STOCK DIVIDENDS AND PRICE RANGES COMMON STOCK The company's common stock is listed in the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges.

The company had 53,446 holders of common stock as of December 31, 1986.

1986 1985 Dividend Price Dividend Price Declared High Low Declared High Low First Quarter

$.505 30%

25%

$.48 23Ys 21 Second Quarter

.505 34%

291/4

.48 26llz 22Ys Third Quarter

.505 381/s 30%

.48 26%

22}4 Fourth Quarter

.53 341/2 30%

.505 28!4 22%

(

47

Delman-a Po1Ver &._Light Compan,v OFFICERS AND DIRECTORS OFFICERS DIRECTORS 48 NEVIUS M. CURTIS Chairman of the Board, President and Chief Executive Officer HOWARD E. COSGROVE Executive Vice President ROGER D. CAMPBELL Senior Vice President and Chief Financial Officer H. RAY LANDON Senior Vice President HARLAND M. WAKEFIELD, jR.

Senior Vice President WAYNE A. LYONS Vice President DONALD E. CAIN Division Vice President, Northern Division DONALD P. CONNELLY Secretary CHARLOTTE LEE CANNON Director of H. P. Cannon & Son, Inc.

(warehousing) Bridgeville, Delaware OSCAR L. CAREY President and Director of Larmar Corporation (general real estate and home builders) Salisbury, Maryland 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 HOWARD E. COSGROVE Executive Vice President of the Company NEVIUS M. CURTIS Chairman of the Board, President and Chief Executive Officer of the Company 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 DONALD W. MABE President and Vice Chairman of Perdue Farms Incorporated (integrated poultry company)

Salisbury, Maryland jAMES 0. PIPPIN, jR.

Director, President and Chief Executive Officer of the Centreville National Bank of Maryland, Centreville, Maryland RICHARD H. EVANS Vice President, Corporate Communications PAUL S. GERRITSEN Vice President, Regulatory Practices BARBARA S. GRAHAM Treasurer KENNETH K. JONES Vice President, Planning CHARLES MARCHYSHYN Comptroller FRANK j. PERRY, JR.

Vice President, Gas Division THOMAS s. SHAW, JR.

Vice President, Production DUANE C. TAYLOR Vice President, Information Systems D. WAYNE YERKES Division Vice President, Southern Division WILLIAM G. SIMERAL Director, Executive Vice President and member of the Executive Committee of E. I.

du Pont de Nemours & Company (a diversified chemical, energy and specialty products company)

Wilmington, Delaware DAVID D. WAKEFIELD Senior Vice President of Morgan Guaranty Trust Company of New York, New York, New York; Director of Continental American Life Insurance Company, Wilmington, Delaware HARLAND M. WAKEFIELD, jR.

Senior Vice President of the Company EXECUTIVE COMMITTEE Nevius M. Curtis, Chairperson; Oscar L. Carey; William G. Simeral; David D.

Wakefield; Harland M. Wakefield, Jr.

AUDIT COMMITTEE Oscar L. Carey, Chairperson; John R.

Cooper; James 0. Pippin, Jr.

NOMINATING COMMITTEE Sally V. Hawkins, Chairperson; Nevius M. Curtis; James 0. Pippin, Jr.

COMPENSATION COMMITTEE William G. Simeral, Chairperson; Oscar L. Carey; Nevius M. Curtis; David D. Wakefield INVESTMENT COMMITTEE David D. Wakefield, Chairperson; Nevius M. Curtis; James 0. Pippin, Jr.