ML20155C933

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Delmarva Power Annual Rept 1985
ML20155C933
Person / Time
Site: Salem, 05000000
Issue date: 12/31/1985
From: Curtis N
DELMARVA POWER & LIGHT CO.
To:
Shared Package
ML18092B116 List:
References
NUDOCS 8604170175
Download: ML20155C933 (48)
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Text

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3 To Oca StocKiiotDrns I Our report this year is designed to reRect q y = anomer year's good work and con 4dence gamed through sustainedperformance. I 6 i i TnE SloCKilOLDERs' PtnsercTivt Delmarva ikweris a Cnancially healthy climpany with wellrunning facilities and a balanced fuel mix. 1 , m: \\ j r. * @ 7-l

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i Tiit CesTositas' PrasercTivt Competivve atut flexible pricing is me ~ ) 1 cornerstone of Delmarva ikwer2 plan to l n j y? r" Ineet u.;twettain future. 10 Tur EstetoYtts' Prasercnvt i ) To seek innovadon, the company has developed a metod forinvoMng more employees irt i w decisions attecting meirjobs. I 12 Tiit CONiNiUNiTY's PERSrLCTivE Energy and employees work togemer to help im-i prove me quality of ble on me Delmarva Etnittsula 14 Tun Fultan Farnings grown will require continued sales 5 improvement costcontrolproductivitygains, l 4 and supplemental outside investments. 4 -e,r-.- e .nw---m~ ~~-,,ne.e-,nn-,__,,,--w .a._n..,--,-_-_-_,,,.-

Itrcent increase FINANCIAL Hiciiucius 1985 1984 (tkcrease) RtvtNets 722.8 million S 702.6 million 2.9 NET INCO\\tE 96.6 million 5 92.1 million 4.9 EARNINGS PLR $llARE 2.76 2.63 4.9 DmntNos Dtct2Rtn 1.945 1.83 6.3 COmtON $TOcK OursTANDING AvtRAGE bilARLs 30,481,925 30,248,482 0.8 COmf0N $TOCK BOOK VALUE 18.43 17.70 4.1 CONSTRUCTION ExetNoireRLs 94.9 million 79.5 million 19.4 INTERNALLY GtNERAri n FuNos 151.3 million 110.5 million 36.9 bi!' on kwh 2.6 El LCTRIC $Aus 8.53 billion kwh 8.31 g EttcTRic CusTO\\lER (average) 314,013 303.965 33 AvtRAGE RosIDENTIAL USAGE 8,059 kwh 8,283 kwh (2.7) gas $Atts 15.71 million mcf 17.24 million mcf (8 9) gas CUsTO\\ttRs (average) 75,103 74,319 1.1 AvtRAGE RESIDENTIAL USAGE 79.7 mcf 88.8 mcf (10.2) 2

To Oun STocxitotorns \\ + i l 1 ~ Tile RECORD SilOWS TilAT 1985 was ANontliR GOOD, SOllD, BUILDING BEOCK YEAR. HOWEvER, uPON REFEEcTiON,1985 was NIORE TilAN TilAT. IT WAS A YEAR WilERE SUSTAINED PERFORNIANCE GENERATED INCREASED CONFIDENCE ANIONG ENIPlOYLIX i Hiciiucius Aar:

  • Earnings increased for the fifth consecutive year.

There were no electric rate increases in the service territory. Customer approval ratings increased for the third consecutive year.

  • Delmarva Power generating plants performed above national averages.
  • Employee safety r

records showed continued significant improvements. Employee paiticipation programs continued to mature and yield innovative ideas.

  • New outside investments increased earnings.

Our report this year is designed to reflect another yeari good work and confidence gained through sustained performance. This performance and confidence is important to you now as a shareholder or customer because in 1986, we will begin to make some decisions concerning energy supply for the mid 1990s.These decisions will be complex because of changing forces in the economy. Employees will be able to look ahead and focus on these challenges with the confidence that they can perform their current jobs well. 3

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  • However, management is concerned about com-has established one of the lowest average electric Y

byn each day with f 7ailgate'sessas mitting to a new power plant now for several prices in the region through reducing dependence &stgnedtotramote safety ctroency and reasons.

  • The construction costs will be large.

on oil from 53% in 1979 to 20% in 1985, reducing E partcpata Around the country,large buildmg programs have wot kforce, consolidating facilities, and developing E become financial and emononal albatrosses for a participative workstyle which encourages inno- [ utilities. A new plant in 1996 is projected to cost vauve ideas to contain costs without reducing $3,800 per kilowatt which is more than six times quality. Technology review

  • We willinvest $50

[ the cost of the Indian River Unit 4 completed in million over the next ten years, to keep old plants F 1980. Total costs are estimated to be three quar-runnmg longer than planned rather than replace 7 F ters of a billion dollars.

  • Also, for several years them with more costly new units. Investment ex-h in this letter, concerns have been expressed about pansion
  • Earnings not now needed to finance n

[ the lessons learned in the railroad industry. Large construction are being used to upgrade facilities Our report ttus yearis designed to reflect I-S capital investments can be devalued quickly by in advance of any major building program and C anomer year's Gmd work and confidence [ technology breakthroughs and structural changes to invest in related projects outside the utility L=- gained trough sustained performance. iiii within an industry.

  • Finally, utility barometers business which can achieve returns greater than E-r

[ are sending contradictory signals. Forces such as the principal business

  • The next few years will E-

{ increasing summer peaks indicate building while be challenging and excning We must plan care-k-- other forces such as wheeling and cogeneration fully for the long-run needs of our customers. At 5-g indicate delay. the same time, we must find ways to maintam I

  • So, in 1986, we will be asking ourselves, do earnings growth in face of modest projected growth Ly we need another plant in 1996 or can it be post-in assets and no increase in authori:cd returns.

bg poned through a combination of various energy The 1985 performance shows that employees management techniques? What are the benefits if have the know-how and confidence to perform [ our assumptions turn out to be correct? What are their current jobs well and take on these chal-k the consequences if they turn out to be wrong? lenges. I appreciate their efforts and h,ok forward L {

  • While future capacity planning will be empha-to working with them as Delmarva Power con-i.[

si:cd this year, the company has been prepanng tinues to prepare for the next decade. [- for the 1990s in other ways including: Price con-sincerely, v I trol

  • Competitive pricing is crucial for staying i

[ r ahead of emerging competition. Delmarva Power N v ct:ar n ti bru.iry ti i+6 L = E' 5 E E

i Tm S iocKnoi ni as' Pi asi>i c iivi i l k. N i.5 [' ,,/ l\\ IMi. I \\ K \\! \\(.s IN-E\\RNI%s l\\ll'Rt W I e. a T 4 ' '.. 7 < Kl ist IT 4d !st Y 2 ~O Qi \\R il Kli lil\\fl5l \\lis $.. g 5 1,,.., yg-s n. l\\( Kl \\si li I A 52 li' 5 h _ ( l\\lN IsIk \\\\ l\\lli

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'l! . llit l5 (CJI '2i' i i$t s i t u!1pu!ct tcnict,' 'npalf pi tyk'rt \\. L i me wew! rec ws weit runmag facilmes ano a balanrec tuet ma lyMy')l:: 'M7/(?!% m ']',1 : [c ); {l,ints } '. ,unctlk l Ic ! ],lt i.i ( h i l s t [,l t;,j l \\ )Ju,t: [ ht-t 'I : ! j i t.l ft: t ct;tt i.l tl ' n 'd t 1 t 'ntTiefgY, ?f 1 :en T U lU/PV@) l/ W' }' ( i +u t ! 3 7 i. i ; ' N nt: ! ! 131 ' ; i t-s nt l; i s u ;!f] a; e < ! j s,i' t tj c s1,j r;;i j];,il t it]t [ ii ;;}\\ c s[ !!> f xv.',f yr ibA >x Stawr Sac Wmm 3p3bh o _i,,u;,_ a ir n, nu.e nt nrs , t he !.s halt a i nc ( +, aa : ti rncantha: s s c" 1 t at en in; ni > d 4?),Mf ? 4 [' V, ( ' ' ] ] t ' l [s ( : s s(l;Tj'f f t's,l [ (' 7 [ { :'i j ) A T s'[], { f](- t 1 ,1 -] ij j ], i,j\\ f' 1\\ g' {g i g { c [ ' 1,] f ' ; j '1 ( sc( k( t t, DimiMnv '!3!P;p f. t nVy'. T lp f f 1p : ic!s j'!! rt r ;,t ;: u i ! c,it !a r t ,jt: bi,; ;, mp ts s pt t t ,, s, rMif u.6 L n. A L '>d.\\dGdO/k l_)l.S @6 f kg. ,1+1sC t)I I fit.' l',l { T I( !Il( [ t',) 5c ! [ I,iI.I { T I't 1( t 's s \\j(llll R \\ ll k iRt In lll f \\r} t ] l lI !t x *Ij ' 1 J ('s ( M-a' c u _' n e> w'n. h t p m, < :nt ,2 7.. ~. d.; k Lp,.,. N I!I' a t ( s* f * ' I I t' t t i t s i Ilc 't c II c. t> t d-A 2 .e t 'e* s3 [c s b 7 gi., tj J.w a b1 j( ,s ,s er r r v. i ucathi .lFti .txt t h !:: '['t ' ' t inci1 r s RiiiN m iu.s k t mrii ii n

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Tile CUSTOhiERs' PERSPECTIVE COsircr:Tivt PRictS

  • DLLitARVA POWIR lst-PLOYLIS tlAVI DLNIONSTRATI D lilAT IlllY CAN l.

Special ettorts were mae tnis year toprow& businesses, as those tn kwntown Wilmingtort with usefulenergymtormalat 1101.D 'llit iINE ON PRICIS. I

  • In 1985, there were no rate increases through-sidered the improvements excellent or good.

out the service territory, and none are expected Cesiosit n Oeisios Istenovis

  • Customer follow-in 1986.
  • Delmarva Power's average prices for up surveys completed in 1985 show that while energy rank low in the region. In cents /kWh:

there is always room for improvement, customer New York,13.03; Newark, NJ,9.21; Boston,8.79; service workers at Delmarva Power generally do Philadelphia,8.79; Delmarva Peninsula,6.99; and their job well and find ways to do better. In the l Competitive and flexible pricmg is ttte l Baltimore, 6.57. Rankings of natural gas prices gas business for example,97% of the customers Thedserse cornerstone at Delmarva hwr.r's plan to blendatcustomers on } (in cents /ccf) are New York,79.95: Philadelphia, surveyed rated the overall performance of the ser-tre ccimana emnsula l meet an uncertain tuture. Is a strength. The varied i 67.81; Newark, NJ,67.33; Boston 60.81; and Wil-vicemen who visited their home as excellent or energy rree; ottarms. i cmes. tones. and i mington, 60.16.

  • These achievements are im-good. Customers in the Wilmington area were resorts prow & balance

} to tu sntm aM portant to face developing competition such as more likely to reach a representative the first time less mMeraanitykung i extretitelhCluat01s in I l wheeling, co-generation, and imported power. they telephoned (90%)than in 1984(75%)

  • As the nationalermrry Thts Customer $ tarmis l

Bitt Fonsi Rtvisto

  • In 1985, the company com-a result of these and other efforts in price and s centraloelaware.

pleted a key project designed to improve customer customer service. 71 percent of customers gave understandingofits product and cost The format Delmarva Power a tavorable rating in the 1985 of the monthly electric and gas bills was revised customer survey compared to 66 percent in 1984 to include new information and highlight other and 59 percent in 1983. information that would be of most use to the cus-tomer Customers participated in the development of the new bill format and contributed several major suggestions which were used. In the 1985 customer survey,81 percent of those polled con-8

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E p 4 5 M ~ h E' w; g. m E h 4'. E The company's 2.570 employees work to provide energy at the ~ '%u h lowest reasonablepuce ~ Donaktu ers r b contmues to aperate out a lost-time accident-a ic,nificant achievement training and had undertaken more than 2,100 hiscraneattheDelaware t Oty h& Plant M in this work environment.

  • This is an example innovative projects with the techniques they had

^ October 1985. Texaco I andtheconpany agreed of the excellent 1985 safety record. Recordable learned

  • The long-term goal of this program is to a fivejear exten-E sm ot iesacos annon injuries decreased 12% to 50, lost-time injuries to encourage the ideas of the individual and to

^ toMrchasetheDelaware E oty generanno stata decreased 64% to 5; and lost workdays decreased recognize the benefits of teamwork. = The 94-megawatt plant provdes steam and 83% to 71.

  • In 1982, the company's safety pro-llenaicasr Gronia Risrossr
  • Employees deserve r

electicty to Texaco's To seek innovadon. the company has developed g neareyretmery and gram was strengthened in an effort to reduce acci-special commendation for their efforts to restore electroty to other a method for involving more employees in ,R Delmatva mer dents and to spare employees and their famihes power and serve customers after Hurricane Gloria customers-decisions affecting theirjobs. L-the accompanying pain and anxiety. Then, the delivered a glancing but powerful punch to the company ranked near the bottom in safety per-Delmarva Peninsula. The last of 50,000 customers E formance among companies in the Southeastern without electricity were restored within 51 hours (( Electric Exchange. In 1985, Delmarva Power after the storm. Customer letters complimented ranked first in its group in the safety performance Delmarva Power employees on their high level of r and fleet safety contests. preparation for this storm Customer letters from e { Pauriciratios, Isvoivrsirst, Coscras

  • In an I.ong Island, where Delmarva Power employees N

effort to seek innovative ideas and solutions in a also worked, were especially appreciatice of the w 7 changing business, the company. during the last time Delmarva Power workers sacrificed from three years. has developed and refined a method their families to help them. for involving more employees in the decisions Pinsossii

  • Senior Vice President and Director g

affecting theirjobs

  • While progress can still be Frank A. Cook retired after 14 years of distin-E made in this area, by the end of 1981 1,045 guished service with the company. Ihs technical m

i employees had received at least the first level of expertise and friendly support will be missed. 11 w

Tile CONthlUNITY's PEnsPEcrivE ENVIRON M ENTAL PROTICTION

  • ON Juty 16, help people in trouble through the Radio Watch program.
  • While Delmarva Power employees 1985, ED LARMORI:, Vll NNA POWI.R PLANT I QUIP-have always used their equipment to summon aid for people, in 1983 the company sought to The canpany MI NI OPE RATOR, REI.EASID Tile IIRST OF 26,000 increase awareness of this service by developing helps promore area economic &veicoment a logo and advertising it. In 1985, the company cy participarm witn state atxtlocalQokern-sl RIPI D BASS l'INGl RllNGS IN TO Till. NAN ucOKl:

began informing children about Radio Watch ments ttrovahovr the pensasula wI ther through a campaign in the schools. Dispatchers Avelopment e/fars andadxcatmlawrate river NEAR VilNNA, MARYLAND. also broadcast descriptions supplied by police of simctures wfuch help businesses maintain missing children.

  • People in the community a competitme cdge Energy and employees work together to help im-The commercialsector
  • He participated in the first hanest from a fish use this service about twice a day to call for help is arowmas symoolized prove the quality of hfe on the Delmarva Peninsula.

by the new builds of brooding pond buih by the company and main-in situations ranging from a flat tire to serious cnase vanhattan sank tUSA)NA whchis rained by employees on their own time. It was accidents

  • In other activities, the Good Neigh-nsina cy wilmstors innity EpiscopalCruch one of many efforts where Delmarva Power em-bor Energy Fund, raised more than $144.000 in ployees went beyond their jobs to help improve customer and stockholder contnbutions to help the quality of life on the Delmarva Peninsula.

people having trouble paying their energy bilk

  • In keeping with its commitment to provide
  • Employees again exceeded their goal in contri-energy with as little intrusion into the environ-butions to the United Way and volunteered count-ment as possible, the company maintained its less hours to community activities schedule well ahead of the 1988 federal deadline I

to remove capacitors containing PCBs from dis-s D tribution lines. So far, 98% of them have been removed. i Couucstry Acuvmis

  • In April,1985.Delmarva Powei employees who dispatch work and who The Honorable George Romney and Presakwt Bonald Reagan present Marty Dutty manarp consumer attaws with a medal drive company vehicles were hon..ed at a honorg oelm aa ttwer employees tor nacio watch luncheon in the East Room of the White House by President Ronald Reagan for their efforts to 12

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18 Fixasciai Rtvitw Aso As.uvsis 22 Rtroni 01-NIANAci:sii s i-l 23 Quanti:ni.y CONistoN stock DIVini Nos ann Paici: RAscis 23 Ri ront or Isni.ri sni s t AccoesTAsis 24 CossounAri n FisAsciAt Sirti sii: sis 30 Nori:s to Cossounxti n FisasciAt Suri sii sis 42 Cossoiinrii n S r.uistics 44 Oiiic i us, I)ini(: ions sNo Siianiiloi ni a Isioasiaiios

Deinurva i\\wver 6r Light Comluny Stucno FINANCIAt. DArA (Ibilars in Thousands) li>r the Years Ended neember 31 1985 1984 1983 1982 1981 OMRAUNc Operating Revenues S 722,834 5 702,593 S 649,799 5 636,666 5 608,5M OperanngIncome 135,515 133,209 129,138 116,573 107,325 Net income %,638 92,110 85,003 73,571 58,711 EARNiNcs ANo DivinENos Eamings Per Share 7 76 2 63 2.45 2.I 3 1.78 Dwidends Declared on Common Stock 1.945 1 83 1.68 1.595 1.535 Average Shares Outstanding (000) 30,482 30,248 29,541 28.489 25,747 Total Assets 1,674,770 1.591 630 1,533.263 1,509,771 1,460,529 Construction Expenditurc9 " 94,923 79,488 76,056 110 646 84.206 Intemal Generation of Funds 151,349 110,485 117,582 77 061 72,346 CarnAuzAnoN long Tenn Debe 2' 638,090 567,761 567,935 542.615 596,219 Preferred Stock without mandatory redemption 105,000 105W0 105,000 -101000 105,000 Preferred Stock with mandatory redemption

  • 5,992 47,836 49,383 50.000 50.000 Common Equity 561,811 539.650 503,513 468.073 437,080 Total

$1,310,893 51,260 247 $1,221831 S1,21 1688 S1,188.294 CAri rAUZATION llUiOS [Dng Term Debt 49% 45% 46% 49% 50 % i Preferred Stock without nundatory redemption 8% 8% 9% 9% 9% Preferred Stuk with mandatory redemption 0% 4% 4% 4% 4% Common Eqmty 43% 43% 41% 38 % 37% Total 100 % 100% 100 % 100% 100% Er rcmc/ GAS SAns Ekctric Sales (1<wh 000) 8,530,520 8.308.233 7.878.476 7,249,442 7,391324 Gas Sales (Mcf 000) 15,708 17,239 16.449 15604 16,520 o 1 xliales Alkm ance for i unds l % d Dunng Gingnatain. I o Inthales king tenn debe due wuhin one year

  • rindudes nundatory n dempain due wnhin one year 17

twarva Iw & tyht canpany FINANCIAL Rnvn:w Asn ANALYSIS REstus or On RArioNs Eausisc.s 3 Delmatra Power & Licht Company's financial performance and strength continued to im-prove in 1981 Eamings per share of common stock were $2 76 for 10M an increase of 13e or 4.9% from 1984. Conmbuting to the higher 1985 camings level were higher electne sales, addinonal amortcation of the credit arising from the sa!c of contraus (Summitt and increased investment income. The 1984 increase of 18e m caming per share to $2M was pnmanly attnbutable to increased sales which resuhed from a stro,g economy in the semcc temtory and cold-winter weather condaions. Divmts.os in December 1985. the floard of Dircuors incremed the quarterly dividend 5 2% to 50 5e per share, the ninth conwcutive annual increase. The current mdicated annual dividend rate has increased to $2 02 per share from $192 per share. This merease reflect., a dividend pohcy which is to gradually increase dividends on an anntul basis. caming permimng and thus pmvide stockholders wuh a fair and competinte return on their inve.stment. 4 Etra RC Rt vi sats wn S u i s Earnings and Dnidends Declared <ama Electnc revenues, net of fuel. mueased $12.3 milhon or 3 0% in 1985 and 5144 milhon er 5 4.9% in 1984 The increases in both years are net of refunds to Delaware retail elettnc customers. Refunds of $14.7 milhon in 1983 and S5 8 milhon in 1984 were designed to bnng 250 % f camed rates of retum in hne wah authorted rates of retum. as sales of cleaneny were greater than projected in both years. 4g The increase m 1985 and 1084 net revenues was achieved pnmanly through increased sales. EA N Li with the company reachingan all-nme peak kud of 1.705 mcpwans in Aucst 1085 The increase in 1985 volume was primanly attnbutable to higher sales in clie commercul and kf{o ' resale classes. A 4.4% increase in commercul sales was partully due to an expansion of the 4 bankmg and financul sernes scoor in Delaware. Some addinonal commeraal customers [ k were also guned through the npple etico assocuted with increased residenna! construction in "I the beach areas T he resale cLtss expenenced a 7 W sales grow th pnnopally because of a iso l I growing residential market that is dommated by clearical he.u in the municipahnes served by the company The increase in 1084 volume-reLued electric revenues w as largely due to higher sales in the E E res'dential and commeraal classes. which incremed mainly as a result of the improved 1084 cconomy and colder winter weather wndaions m the first quarter of 1u84 50 llll 0 81 82 81 84 85 E Eammg3 5 Dw&rkh 18

OchTtifVJ f0% CT N bejit Colly \\lr!V FINANGAL Rixnw ann ANatssis C \\s R1 \\ l N1 'i s A ND $31 f ~ 1985 gis revenues. net of fuel costs. increased 2.0% due to increased rates u hich were pamally oIIset by an 8 9% decrease in sales. Industnal sales dedmed 8 0% due to swathing to ahemate fuck and decreased producnon levek Residential space-heatmg sales decreased 9.3%, pnndpa!!y due to mt! der than nonnal winter weather wndinons in the first quarter of 1085 1084 net gis revenues increased 7 8% hit fly due to higher sales Residential space-heatmg sales increased 113% in 1084. refletting an increase in customers and the cold weather in early 1984 Commercial sales increased 110% reflectmgan improved economy Ran Ruaunos. 1 he company is subject to regulanon with respect to its retail sa!cs of electncity by the Delaware and Maryland Pubhc Scruce Commis3 tons and the Virpnu State Corporano. Commission, whkh have broad pow ers over rate matters. accounnng and ternw J service. The Federal Energy Regulatory Commission i FERO exercises junsdicoon with respect to the company's accountmg systems and pohcies and the transmtssion and sale at wholesale (resale) of electnc energy in interstate commerce Generation Fuel Mix On Januatr 29.1985 the company announted a plan to voluntanly refund a mimmum of 4 ~ "" $7 5 milhon of 1984 revenues to Delaw are electric retail customers After renew ing the hnal 1984 results. the Deiaware Pubhc % rvice Comnussion (DPSC) ruicd that an addaional 57 2 mdhon should iv refunded Also. the company recommended and the Commission agreed 100 that Delaware c!cctne retad rates should he reduced approxunately 1% or 53 6 nu! hon an-h, j,j, 3 h i ntullv, etIcctive a.s of June 28.1083 a lj d o n e a !1 lj i M M W q. Hp Rate increase < were h!cd in the tompany's other retad jun*httions m 1084 and were gg ML!j H E strthtured to recover increases m operanng udts and to improve the return on unhty p n mvestment Dunng the founh quarter of 19H4. rate mcreases were granted in Virgmia for 5449 000 or 2 7% and in Marylind for $4 8 milhon or 3 9% On Marth i 1085. the DPSC granted a 5 3 i mdhon or 3 7% rate increa>e m gts revenues 60 In December 1081 the company reached a tentanvc settlement w ith all resale tustomers to refund $ 3 5 mdhon The tentanve agreement uould have provided lor a redutnon in resale rates for the penod covenng July 1085 through December 1086 On I ebrtury 6 1986. the company was inlonned by some of the resale customers that the tentante settlement was not g aucptah!c. I he wmpany is wrrently aw.utmg funher attion on the part 01 the resaic customers Fi o M n, 20 in 1083 generation from wal. nudear and od sources was 63% 15% and 20% respecovely. Nudear generanon me reased 29% due to higher avadabihty of nudcar units I he ellet tive cllstomer lucI cost. w h!di likludes luCl Interd1.inRe Jnd part hased pow er costs. rem.uned low at 1.0 le kWh m 1085 and was 106e kWh m 1984.ind 1083 0 82 83 84 H5 86 Q O'l E N A rr o cua }9

Detmindiwer & ughtcompany , FINANCIAL REVIEW AND AN'ALYSis t OnRAnNa ExetNsts - Other operation and maintenance expenses lure increased since 1983 primanly as a result of higher payroll and associated benefits. the higher cost ofjointly-owned nuclear generanng units, and increased steam senice expenses, which are billed and reflected in steam revenues. The 1985 increases were partially oliset by an additional $2.5 milhon amortization of the (- credit arising from the sale of contracts (Summit) which resuhed from an out-of-coun tax settlement During 1984, both Salem Units #1 and #2 were removed from senice due to ele (tnc genera-tor failures. Salem Unit #1 was returned to senice in October 1984 and Unit #2 was retumed L to service in April 1985. There was an extended outage at Peach Ikittom #2 from Apnl 1984 to July 1985 due to piping repbccment Peach Bottom *3 was removed from senice inJuly 1985 for refuchng and a pipmg inspectior and is anticipated to begin operating apin by the end of the first quarter of1986. lurAcT or INT LMIoN Supplementary unaudited financial infonnation sl ving the estimated cliccts of intlation on the company's operations is shown in Note 12 of the Fmancial Statements. This data should be viewed as estinutes of the approximate effects ofinflation, rather than as precise measures. LiquiDirY AND CAPITAL flNANONG AND CM MAUZAnON Rtsouncts The company is committed to maintaining its financial strength and Ilexibihty and beheves that it is imponant to have a strong capital structure. The company's financial strength is evidenced by its continuing high ratio of camings to fixed charges w hith was 4 3 in 1985 The fog'. ,"re company's financial tiexibihty was demonstrated through the refinancing of $419 milhon of Charges Preferred stock with hing-term debt This refinancing will reduce the company's cost of capital and will enhance the company's abihty to issue additional preferred stock in subwquent years, ac=60 g if necessary. t +0 In December 1985 the company temporanly borrowed $55 nullion to redeem kWo of the

g I

company's 12.56% preferred stock senes and appmximately 68% of its 9% preferred stock i series; the rema'nmg funds were used to retire $10 million of T% Series First Mortpge and o Collateral Trust Bonds. In January 1086 the company issued $60 million of 10Mo Senes First s Mortpge and Collateral Trust Bonds. w hith nuture in January 2016. T he pnweeds from the 3.0 I l l bond issuance were used to repay the $55 milhon bank hun with the balance bemg apphed s to general corporate cash requirements. i i l n i ~ Due to continued improvements in ca3h flow. and to control the increasmg equity position. 2.0 the company further mahlied its Dividend Reinve.stment and Common Share Purchase Plan i (DRIPA Ellective January 1085. all reinvested dividends are bemg used to purchaw shares on I j the open market. 1 i 1.0 Dunng 1985 5tandard & Poor's increawd the company's pretenrd stak credit ranng from A + l,l h to AA-Cndit rating on the company s first mortpge bond 3 renuined at a high level in l 1985. due to the company's continued strong financial perfonnance l he company's bond 1 l rating is the equivalent of a strong AA in the language of the diilerent raters l O 81 82 83 84 85 20

[Mmarva 1%rr 65 Light Compurj FINANCIAL Rtvitw AND ANALYs!5 FINANCING AND CAW!r.MUADON (c.ONnNcMN in September 1981 the company issued. thmugh the Delaware Economic Development Authenty. 533.5 milhon of Variable Rate Demand Exempt Fachties Revenue Bonds-Series 1985. The proceeds were primanly used to refinance $33 milhon of tax-exempt revenue notes, classified as a temt hun agreement as of December 31,1984. During 1985. Delmarva Caretal Investments. Inc., a subsidiary, borrowed $25 milhon and invested the proceeds in satclhte and aircraft leveraged leases. See the related discussion under " Liquidity? Cam.u ANo CoNst secuoN Rt et na w No For the penod 1983-1985, the company had total capital requirements of $493 mdlion, includmg $250 million for construction (excludmg AfCDC) Dunng the same penod. $ 379 milhon was generated mtemally which represents 77% of the capital requirements and 151% of the constmenon requirements Capital requirements for the period 198o-1988 are estimated Construction to be $474 mdhon including $404 mdlion for construction (excludmg AFUDO 1he com-Expenditures pany presently anticipates that. for the penod 1986-1988, internally generated funds wdl be and Internally $396 mdhon which equals 84% of the total capital requirements and 98% ofits construction Generated Funds requirements. The higher level of esumated construction expenditures dunng 1986-1988 in <mummure nson to 1983-1985 results from the company's plans to budd a computer center, mcreased investment in environmental protection facihties and upgradmg of vanous fatihties. Actual construction expenditurt3 nuy vary from the above esumates due to. among other "O [ factors. the rate of inflation. regulanon and legislition, rates of load growth. licensing and [ con 3truction delays. results of rate proceeding. and the cost and avadabihty of capital e h S -- g The company estmutes that its annu.d energy and peak load growth for the next 10 years R will be at a rate of I 84% and 0 6% respecurely. The company's present generanng capacity of no Mk 2.277 mepwatts provides a recen e of 27% apinst its company peak of 1.795 mcpwatts k, E fl expenenced in the summer of 1985. In 1984 the company peak was l A24 mepwatts-g[ L Although the company continues to plan for new generation it is actively considenng attematives to a central power stanon due to the high cost of buildmg a new power plant 1 he 90 i N company has a put to develor a plan to delay, by at Icast five years the in-service date of its D 6 4 next generation unit u hich is currently sc heduled for the mid 1990's The company connnues H to be committed to maintaining a high degree ol flexibihty as long as possible in its planning to i meet future capacity sequirements. 60 L-1 f The company has the abihty to issue commercul paper supported by adequate hnes of credit jp to meet If uctuanons in workmg capital reqmrements as well as the mtenm financing necessary d for construenon projects The company has hnes of crrJit with banks in the amount of 544.5 [f [ mdlion These knes are avadable for bank loans and to secure commercial paper borrowing as M r the need anses At December 31.1985. the company had no tommercul paper outstandmg g b I3 p 3 0 84 85 86 87 88 5 Interna'ly Generami Fu n B Cowructxe f xtenifitures teud:simg AFUDO 21

Delmarva Ibwer & Light Company Rtroar or h1ANAGENtENT ON Tile FtNAsaAL. STATEhtENTS - lacaony The company's liquidity is afIccred principally by the const mction program and, to a lesser degree, by other capital requirements such as nuturing deb: and sinking fund requirements. As a n sult oflower construction expenditures and improved financial condition, fmancial investments increased from $27.6 milhon in 1984 to $72 million in 1985 with no short tenn debt outstanding at the end of either year. In order to unh:e cash generated from ongping operations beyond construction requirements, the company has invested in both energy related and financial opponunities. During 1985, the company invested $32.1 million of equity capital in a wholly-owned subsidiary, Delmarva Capital Investments, Inc., which has arranged bonuwing; and generated cash intemally to provide an investment ponfolio of $716 million. On December 31,1985, these investments included $34.6 milhon in marketable secunties, $9.8 million m a Boeing 747 aircraft lease and $27.2 million in satelhte leases with GTE Corporation and RCA Corporation, both of which are currently in operation. These investments are designed to provide yields higher dun those camed on the company's unhty busmess. REronT or h1ANAGENtENT The consolidated financial statements of Delmarva Power & Ught Company have been prepared by company ocrsonnel in confonnity with generally accepted accounting princi-ples, based upon currently available facts and circumstances and management's best estinutes and judgements of the expected cifects of events and transactions It is the n'sponsibihty of management to assure the integnty and objectisity of such financial statements and to assure that these statements fairly report the financial position of the company and the resuhs of its operations. Deinurva Power & Ught Company maintains a system ofintemal controls designed to provide reasonable, but not absolute, assurance of the rehabihty of the financial records and the protection of assets. The intemal control system is supponed by wntren administrative policies, a program of intenul audits, and promiures to assure the selection and training of quahfied personnel. These financial statements have been examined by Coopers & Lybrand, independent centfied pubhc accountants. Their examir:ation was conducted in accordance with generally accepted auditing standards which indude a review of intemal accounting controls to determine the nature, t ming and extent of auditing procedures, as well as such other procedures they deem necessary to produce reasonable as3urance as to the faimess of the company's financial state-ments and to enable them to expres3 an opinion thereon. The audit committee of the Lkurd of Directors. composed of outside Directors only, meets with management, intemal auditors ar.d the independent accountants to review accounting, auditing and financial repomng mattendhe independent accountants are appointed by the Board on recommendation of the audit committee, subject to shareholder approval. 8v W f Nesius M. Cunis Roger D. Campbell Chairman of the ikurd and Vice President Treasurer and Chief Execunve Officer Chiel 1:inancial Officer 22

odmarva rower sr ught compny - QUARTERLY CONINtoN COMMON STocx StoCx DivintNos AND [. PRICE RANGES The company's common stock is listed on the New York and Philadelphia Stock Exchanges l and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges. The company had 58.824 holders of common stock as of December 31,1985. The company's Cemficate of Incorporation and the Mortpge and Deed of Tmst securing the company's outstanding bonds contain restrictions on the payment of dividends on common stock which would become apphcable if its capital and retained caming bli below certain specified !cvels or if prefern'd stock dividends become in arrears. The retained earnings available for dividends on common stock as of December 31,1985 were approximately $143.810,000 under the most resmetive of these provisions. 1985 1984 Dividend Price Dividend Pnce Declared liigh low Declared tiidi Low First Quarter $.48 23 % 21 5.45 19 % 17 % Second Quarter .48 26 % 22 % .45 18 % 17 % Third Quarter .48 26 % 22 % .45 20 % 17 % Fourth Quarter .505 28 % 22 % .48 22 % 20 % ~ RnroRr or: INotensotNT To int BOARn Or Dini-c. TORS AND SMUHOIDtR> CERTit sto Punuc Du MARvA POWI R N laGH T COMPANY ACCOUNTANTS Wii MiNGTON. Dr LAWA Rt We have examined the consohdated balance sheets and statements of capitalcation of Delmarva Power & Light Company as of December 31,1985 and 1984, and the related con-solidated statements of income, changes in common stockholders ~ equity and sources of funds for constmetion exrvnditures for each of the three years in the period ended December 31,1985. Our examinations were made in accordance with generally accepted auditing standards and, accordmdy, induded such tests of the accounting records and such other auditing pro-cedures as we considered necessary in the circumstances. In our opinion. the financial statements referred to above present fairly the consolidated financial position of Dehnarva Power & Light Company at December 31,1985 and 1984 and the consolidated results of their operations and sources of funds for construction expenditures for each of the three years in the penod ended December 31.1985 in confonnity with generally accepted accountmg pnnciples applied on a consistent basis + 1900 Three Mellon Bank Center Philadelphia. Pennsylvania February 7,1986 23

< Deinurva Ibwer 6r Ught Company ' CONsouoAreo Staruimrs or INCouti (Dolln in Thuunda l'or the Years En&d Decemhcr 31 1985 1984 1483 OPERATING RtvtNets Electric $ 605.581 $ 584,163 $ 542.252 Gas 95,256 101.578 44.358 Steam 21,997 16,852 13,184 722.834 702,593 644.709 Ortnarisc EXrLNsEs Operation: i Fuel for clectric generation 240,901 278.474 275,117 i Net interchange and purch.tsed power ( 63,962) (108 011) (108,654) j Purchased ps 69,847 74 082 72.475 Deferred energy costs ( 2,549) ( 2.345) ( 24.507) I Other operation 121,105 108 001 107.490 Maintenance 59,406 56,752 53.781 Depreciation 53,981 51702 49,596 Taxes on income 77,836 77.577 67.584 Taxes other than income 30,754 31,152 27.773 587,319 569,384 520.661 Ortn.uiNc INCONtl 135,515 l33.209 I29.138 O rni n INcoNtti Allowance for other funds used dunngconstruction 2,428 2.780 2.447 Other, net 6.382 3.243 2.440 8,810 6 023 4.887 ~ INCONil I3tl ORii INII REST Cuom s 144.325 130.232 134.025 INTFRI;$f CllARGLs long-tenu debt 47,236 45.815 45607 Short-term debt and other 1,059 2.000 3.900 Allowance for boriuwed funds used dunng construction ( 608) ( 783) ( 7341 47,687 47,122 48.002 EARNiNos Net lacome 96.638 92,110 85ANil Dividends on preferred stixk 12,599 12.662 12.818 Eaming applicabic to common stix k $ 84,039 $ 79.4 68 5 72.245 CO\\f NtON S tock Average shares outstanding t thousands) 30,482 30 248 29.541 Eaming per average share 2.76 5 263 $ 2.45 Dividends decLtred per share 1.945 $ 183 $ 1 68 4 4 m 24

IXlmarva I%er 6r Lydit Gmptny CONsounalto STATDtLNrs or Souncts oi-Fesos t on CONST RUCiloN Exi Esnarcats (IMars tn lhousando Ibr the Years Dided Iktember 31 1985 1984 1983 Souncts or Fusos Provided from operations-Net income $ 96.638 $ 92,110 $ 85.063 less-Prefe:Ted dindends declared 12,599 12.602 12.818 -Common dividends declared 59,287 55.361 49.668 Eammp reinvested dunng the year 24,752 24.087 22.577 Items not requiring (providing)lunds: . Depreciation 61,183 58,464 56.599 Amom:ation of credit ansing from sale of contracts (7,202) ( 4,762) ( 7003) Amorticauon of nuclear fuel 6,594 2.071 2,394 Allowance for funds uwd dur ng constmction (3.036) ( 3363) ( 3,181) - Invesanent tax credit adjustments, net 21.878 2.253 3,495 Deferred mcome taxes. net 47,462 31,935 42.701 income from leveragxileases (2,307) less on uramum mine advances 2.025 Funds provided from operations 151,349 110.485 117.582 Extemal financing: Long-term debt: Vanable ra:e dem.md senes 33,500 15.500 Tenn kaan (33000) ( 5300) 15.500 Other long-tenn debt 80,000 Common stock 11.921 12.861 Redempnon of long-tenn debt (10,100) (10.100) (40.100) Redemption of preferred stock (44,387) ( I,418) ( 617) Extemally financed funds 26.013 10.401 (l2.354) Other sources (uses): Decrease uncrease) in workmg capital * (65,809) (29.557) (l7,709) Construction funds held by trustee 6,392 ( 4 033) ( l.N1 ) Investment in leveraged leases (36,959) Refundable taxes and interest 32,322 ( 2,188) ( 2.603) Credit ansing from sale of contracts ( 4,690) ( 926) 850 Other. net (13695) ( 3.796) ( 8.669) Other sources tuses) (82,439) (41,400) (29.172) Cossiut cTios (exdudmg allowance h r funds used Exci Not t t wi s dunng construction) $ 94,923 $ 79.488 $ 76036 Di. cat:Asi (iNcatasi,) Marketable setunties $( 32,308) $ (19.754) S( 4.314) IN wonk:Nu carit At.* Acwunts receivable 33 ( 3.0 50) ( 7.586) Deferred fuelcosts net ( 2,537) ( l.8 31) (23,120) inventones 13,997 (l5.114) 5.428 Refundable taxes and interest (35.303) Accounts payable 6,885 t 5.865) 7.993 Taxes accrued ( 4,455) 6 842 ( 4.488) Interest accrued 2.532 908 ( l016) Other, net (14,653) 8 307 9.400 Total $ (65.809) $(29357) 5(17.709)

  • t_hhcr dun h>ng renn dda due and prefencd rotk redanut lc w nlun me scar irut tuncni defcncd nome tascs see enrunung Noics to Gnulared I nunt ul statemi nis 25

'f Delm.uva Ibwer 65 Ught Company I ". ComounAno Batact Suters tIV. irs in T hous.nis) AssErs A,ot December 31 1985 1984 UnUTY PtaNT-Electric $1,624,881 $ 1,555,174 At onictNAL COST Gas 90,956 83.104 Steam 24,389 24.143 Common 80,541 71,391 1,820,767 1,733,812 1.ess: Accumulated depreciation 535,873 488.987 Net utility plant in service 1,284.894 1.244.825 Plant held for future uw 15,297 15.022 Construction work in pny,ress 33.184 36,372 Nuc! car fuel, at amortized cost 19,7 % 24.955 1.353,171 1.321.174 NoNunuTY PRON RIY AND Net nonutility property. at cost 34.805 5,383 OnitR INVESWENis Construction runds held by trustee 9,186 15.578 43,991 20.963 CtJRRENT Asstis Cash 17,408 16.673 Marketable secunties, at cost 59,956 27,648 Accounts rewivable: Cu3tomers 49.037 48.8 N Other 24,337 24,568 inventories. at average udt: Fuel (coal, oil and ps) 55.694 68,164 Materuis and supphes 20.648 21,975 Prepayments 4,236 3,776 Deferred fuel adts. net 1,488 (1949) Refundable taxes and interest 35.303 268,107 210.794 DtrtRRro CliARcts ANo Refundable uses and interest 32.322 OmtR Assus Unamortized debt expense 5,368 4.827 Other 4,133 1.550 9,501 38 690 Toral $ 1,674,770 51.591.630 ve.uompinying Niwcs hi Con +1dued hnm ul suicnuus. 26 =

.Delrma Powir & b$t Company CONSOUDATED BALANCE Suters t Dolbrs in 1htwnsh1 CAPITAUZATION As of Decemhr 31 1985 1984 Asn LIAarurits CANTAUZADON Common stock $ 102,876 5 102,876 (sce statements Additional paid-in capital 235,798 235,473 IC dt" "I P Retained earning 223,137 201.301 Total common stockholders' equity 561,811 539.650 Preferred stixk: Without nundatory redemption 101000 101000 With mandatory redemption 5,192 47,036 tong-tenn debt 637,940 557.661 1,309,943 1,249,347 CunnexT 1iArtturies Long-tenti debt due and preferred sttxk redeemable wnhin one year 950 10A)0 Accounts payable 33,12.9 26,244 Taxes accrued 16,181 20.636 Interest accrued 22,729 20,197 Dividends declared 15,393 14.631 Nudcar fuel disposal costs 10.888 Deferred income taxes. net 755 ( l.661_) Other 10,440 11026 99,577 116.861 Dettunro Catoits AND Credit ari3:ng from sale of contracts 16,057 27 449 O riita I iasiurits Defenrd income taxes. net 174,746 128.444 Deferred investment tax credits 70,416 61380 Other 4.031 3643 261250 225,422 Orinta Coiiimitments and Contingencies (Notes 6 and 10) Total $ 1,674,770 $ 1,541,6 30 w.u_t empimiry N wo to Gin < JabrcJ l inuns i.il 9.ircments l 27 i

I. '- sI Deinurva ihrr 4r bght Comptny . CONSOUDATED STATBHSGS OF CAPITA 1RAllON (IMbrun 1hiu,.nis) Asof Decemfvr il 1985 1984 Costs ON SrOcxiiOi otns' - Common stock, par ndue $3.375 per share l EQUUY authon:cd 35.000.000 shares. outstanding 30,481,925 shares 5 102.876 5 102.876 Additional paid-in capital 235,798 235,473 Retained camings 223.137 201.301 l Total Common Stockholders' Equity 561.811 43% 539.650 43% Ctatuurivt Pari tant n Par value $25 per share. 3.000.000 shares authonced, none outstanding SrOcw Par value $100 per shair.1.800.000 shares authonced Without Niandatory Redemption: Series Shares Issued ) 370%-456% 2401100 241MO 241VO 5110 % 7 84 % 330.000 331100 33100 788%-846% 4801YO 48.000 481V0 Pnierred Stock without Nfandatory Redemption 1051100 8% 101000 8% With Niandatory Redemption: 91V% Series

  • 30.416 and 192.000 shares 5,492 19.200 12.56% Series 0 and 300AM0 shares 30AM0 5,992 49.200 Irss: Reacquired prefened shares held in treasury (at coso 1364 5.992 0%

47.836 4% i ess: Amount to be redeemed withm one year 800 800 Prefennl Stock with N1andatory Redemption 5.192 47.036 LONc-Ttasi DriiT First Ntortpge and Collateral Trust Ibnds. Ntatunty Interest Rates Dec. I 1985 3%% 10100 jun 1.1088 3% 25100 251Y0 1994-1497 4%%6W% 501100 50AY0 1998-2002 7%i1 % 158.100 158,100 2003-2007 66411% 121.250 121.250 2008-2011 9%%-12% 111,900 1 I l.400 466.250 476 250 Pollution Control Notes: Senes.197317% cticctive rate. due 1986-1908 7,700 7 800 Series. 1976 7.3% ellective rart, due 1942-2006 34,500 34 500 42,200 41KU Vanahic Rate Demand kries. duc 2014-2015 441100 11500 Other long-Tenn Debt 801100 Term loan 33000 Unamortred premium and discount, net 640 711 6381140 49'o 567.761 4 %, long :emi debt due within one year ( l50) (10.l00) Total Inng-Tenn Debt 637,940 U7 66I Total Capitaication $ 1,304.443 100% SI.240347 100% satempun par e twemtvr n 1+wio7 ve.mmpmpng Nur, t., und.Lunmn..no.breena ns 28

Deinurva Power & Ly,ht Com;uny Cossouaano SrArtsiexr> or CHANGE 5 IN COstMoN Siocxiiotot Rs' EQUIIY &lbrs m Ilwusanda Additional hv the Three Years Ended Cominon Par thid-in Retained December 31.1985 Shares value Capital Eirning. Total BAiascE As Or JANUARY 1,1983 29.048.445 5 98.039 $215.397 $154.637 5468.073 Net income 85,063 85.063 Cish dividends declared Common stock ($168) (49.668) (49.668) l' referred stock (12.818) (12.818) Issuance of common stock. Dividend Reinvestment and Common Share Ibrchase Plan 742.737 2.675 10.526 13.201 Common stotk expense ( 338) ( 338) BAIANCE AS Of Dt:CEst Br-R 31,1983 20.841.182 100.714 225.585 177.214 503.513 Net income 42.110 02.110 Cash dividends dedared Common stock (5183) (55,361) (55 361) Preferred stock (12.662) (12.662) !*uance of common stock. Dividend Reinvestment and Common Share Ibrchase Itin 640.743 2.16) 9.888 12.050 Gain on retirement of preferred stock 125 125 Common stock expense ( 125) ( 125) BALANCI: AS Of DtctsinrR 31,1984 30.481.925 102.876 235.473 201.301 iN 650 Net ino>me 96 638 96.638 Cash dividends dedared Common stock ($1945) (54.287) (59.287) Preferred stock (12.599) (12.549) Net loss on reurement of preferred stock 325 t 2.nin) ( 2.591) OAIANCE A5 Of-Di cr sintR 31,1985 30.481.925 $10187o $ 235.798 $22 3.137 $561811 sv.mm;unymg Nae., to cons unca i uuntui steancots 20

Ddmarva Power 6r 12ght Company

' Nons to CossounAiro FINANCIAL STAmn:NTS

1. SIGNn:lCAN T FINANClu SI AH NH W AccouN nNG Poucn:s The consolidated financui statements indude the accounts of the company and its totally-held subsiduries. Delmarva Energy Company. Delmana industries Inc. and Delman a Capital Investments. Inc. and its subsidunes in conformity wah generally accepted accounting pnnciples the accounting pohcies reflect the economic efIccts of rate decisions issued by regulatory commissions h.ningjurisdiction over the company.

Certain reclassifications. not allecting income. luve been made to amounts reported in pnor years to conform to the presentations used in 1985. Rivtxt n Revenues are recorded at the time bilhngs are rendered to customers on a me.nhly cycle basis and include rate increases penmtred to be billed subject to refund pendmg final approvat At the end of each month, there is an amount of unbilled electne and pts service which has Iren rendered from the last meter reading to the month-end Et t t Cosis Fuel costs (electnc and gts) are deferred and charged to operations on the basis of fuel costs included in customer bilhngs under the company's tarills whkh are subject to periodic regulatory revi(w and approval Dr im unos aso Mmu s av i The annual prousion for depreciation is computed on the straight hne basis using wmpmte rates by cla3ses of deprecuble 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 (appnmmately 20% of plant cost). The relanonship of the annual provision for depreciation for hnancul accounung purposes to average deprecuble property was 3 0% for 1983 and 3 4% for 1984 and 1983 1he cost of maintenance and repairs induding renewals of minor items of property, is charged j to operanng expenws. A replacement of a unit of propeny 8 accounted for as an addinon to and a renrement from unlity plant 1he ongnal cost of the property renred is charged to accu-mutued deprecution together w nh the nei cost of removal For income tax purposes. the cost of removmg reared property is dedutred as an expense NtcliAl4It11 'T he company's share of nta. lear fuel costs relinng to iomtly-owned nudcar generanng stanons inharged to fuel expense on a unit ol production basis. u hk h indodes a factor for spent nudcar luci disposal costs purstunt to the Nudcar hre Pokcy Att of 1981 I he wmpany is collettmg future storage and dr-posal costs for spent fuel as authon:cd by the regulatory wmmissions m cath unsdicoon and is paying sut h amounts qturterly to the Department J of Energy. 30

Y~ y,w Qg Notes to CONsoticarto FINANCIAL.STATENUNTS s M. -Ixcom Taxr.s Deferred income taxes result from timing ditTerences in the iecognition of certain income and expenses for tax and financial accounting pbrposes. The principal items accounting for de-fenul income taxes an>: (1) tue of the Actcierated Cost Recovery System and other accelerated. depreciatio'n metheds for income tax purposes. (2) deferred fuel and gts production costs : . deducted currently for income utx purposes, and (3) other uming dif ferences invohing the capitalization of certain taxes and overhead co3ts. Investment tax credits utilized to reduce federal income taxes are defenni and generally amor-tired over the useful lives of the related utility plant. Additional tax credits in 1983,1984 and 1985 related to an Employee Stock Ownership lbn do not afTect net income and are recorded as liabilities until the contnbution is made to the Man. AuowANcr ton Fusir Usw Duiusa Coxsnt cuoN Allowance for funds used during construction (AFUIXl is a non-cash item and is defined in. the regulatory system of accounts as the " net cost for the period of constmction 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 unlity plant with a concurrent credit to income. It is excluded from taxable income for tax purposes. The rates used in detennining AFUDC, which includes semi-annual compoundmg, wen 9.2% in 1985,9.0% in 1984 and 7.8% in 1983.

2. TAXES ON INCOME Income tax expense for 1985,1984 and 1983 is as follows:

(tullars in husmia 1985 1984 1983 Operations: Federal: Current $32,557 $36,131 $16,557 Deferred 28,638 27,380 36.654 State: Current 6,320 6,560 4,345 Deferred 4,978 4,555 6,047 Investment tax credit adjustments, net 5,343 2,951 3,981 Other income: Current (29,788) 1,528 816 Deferred 13,846 Investment tax credit adjustments, net 12,608 Total $74.502 $79,105 $68,400 investment tax credits unh:cd to reduce federal income taxes payable amounted to $24,992.000 in 1985. $6.890 000 in 1984 and $7,654.000 in 1981 The amounts for 1985. 1984 and 1983 mclude Employee Snx k Ownership lian credits of $535 000. $707AVO and $360,000, respectively. 31

Ikinurva ibwer6r 1.iglu Gupiny Not ts 10 Cossounano Fisasci At STAmn;xis
2. TAXES ON INCOME The followingis a reconciliation of the difference between income tax expense and the (ayntinuaD amount computed by multiplyingincome before tax by the federal statutory rate:

(ters m Thiusn!s) 1985 1984 1983 Amount Rate Amount Rate Amount Rate Statutory income tax expense $78,725 46 % $78,758 46% $70,594 46 % Increase (Decrease)in taxes n sulting from: Exclusion of AIUDC for income tax purposes (1,397) (1) (1.639) (1) (1,463) (1) Depreciation not nonnalced 5,026 3 2.490 1 ( 171) - ITC amortized to income (7,041) (4) (3039) (2) (3.673) (2) State income taxes. net of federal tax benefit 6.0 31 4 6.067 3 5.682 4 Amom:ation of credit arising from sale of contracts (3.313) (2) (2,100) (1) (3.221) (2) Other, net (3,529) (2) ( 442) - (62 Income tax expense $74,502 44% $79.105 46% 68,400 45% The components of deferred income taxes relate to the following tax cliccts of nmmg diilerences between book and tax.ncome: tI 4 rsin 1 h us n hi 1985 1984 1983 Deprecianon $33,394 $ 18.887 519.251 Deferred energy costs 1,163 9 54 12.480 Capitah:cd overhead costs 1.4 32 1,508 1.648 Nuclear fuel disposal costs 5 675 Pollution control amortcation 3.629 3.687 3,548 ADR repair allowance 4.295 4.803 Other. net 3,549 2.0 36 99 Total $47,462 531.935 542.701 1he company has not prouded deferred income taxes of approximardy 5123 nulhon on etunulative ummg dif ferences arising before the adopoon of full tax nonnahanon for ratemaking purposes by the regulatory authorities. T he company is currently collecung the unnormalced taxes in its Delaware and resale elcune rate junsdictions, and m the gts jurischct on on a levelced basis. over the ble of the related plant fauhties For the o.her iunsdiuions, it is anucipated that the amounts will be recoscred for rate purposes u hen paid 1he company's federal income tax retums have been examined for the years 1975 through 1981 During 1985 the company reached a snpulated Tax Court sett!cment wah the govemment regtrding the taxation of the proceeds from the sale of contracts for a nudcar steam supply system (Summitt Pursuant to the decision. the net pmceeds are taxable at a rate that approximates a capital guns tax rate, w hich resulted m a federal and state tax habihty and interest of approumately $351 milhon. pnntipally paid in prior years. As of December 31. 1981 approximately 515.4 milhon of net federal and state taxes and interest.uc sefundable to the company resulting from the reversal of the preuous tax treatment apphed to :he sale of the contracts As more fully discuwd in Note 7. the net proceeds u hith were dassified as a deferred credit on the balance sheet, are bemgamonced 1 he Tax Court dea 3 ion and resulong adjustment to the deferred credit did not have a matenal ef feu on the company's knanaal posinon or results of operations 32

Delnurva fher & Udit Com;uny ' Notts To CONsounArto FINANCIAL STAI LMLNTS (Dolbrs in Thouunds)

3. Tms Oriita TilAN 1985 1984 1983 INCOME Debware utihty

$12,168 513,732 512,341 Propeny 6,784 6.652 6,483 Other gross receipts 5,799 4,995 4,149 Payroll, franchise and other 6,003 5.773 4,8tY Total $30.754 531,152 527,773

4. PENSloN PLAN AND The company has a trusteed noncontributog pension pbn covenng all regubr employees.

Post-RLTIREMLNT Pension contnbutions for 1985,1984 and 1983 were $3.284,000, 52,354.000 and 54,400.00, BLNu iTs respectively. The conmbutions provide for nomul cost and amorti:ation of prior scivice costs over periods of five to twenty-five years. The xtuanal present value of accumulated pbn benefits, detennined as ofJanuary 1,1985, was 594,410,000 for vested benefits and 515.638.000 for accrued nonvested benefits. The market value of net assets, at that date, availabic for plan benefits were 5201,398.000. The actuanal present value of accumulated pbn benefits, detenumed as ofJanuary 1,1984 was 580.31L000 for vested benefits and 513.816.000 for accmed nonvested benefits. The market value of net assets, at that date, avatbble for pbn benefits were 5191.062.000. The assumed rate of return used in determining the actuanal pn sent value of actumubted pbn benefits was 80% for 1985 and 1984. The company provides certain health care and hfe insurance benefits for retired empk>yees. Substantially all of the company's employees may become chgible for these benefits if they reach normal retirement age while still working for the company. The company recognees the cost of providmg those benefits by expensing the insurance cbims as they are paid Thew costs totalled 52.094.000,51.640.000 and $2,075NO for 1985,1984 and 1983, respectively.

5. CAPITALIZATION Rt taiNi n EARNINGS The curn nt first mcrtpge bond indenture restrict 3 the amount of consolidated tvtained caming available for cash dividend payrnents on common stixk to 535.000.000 plus accumubtions afterJune 30,1978, which avatbble amount at December 31,1985 was approximately 5143,810,000.

Pat ti uni n Sun The annual preferred dividend requirements on all outstanding preferred stock at December 31.1985 are 57,7611W If preferred dividends are in arrears the company may not declare common stock dividends or acquire its common sto& Wnnous MANnATORY Ri onwnos These series may be redeemed at the option of the company at any time,in w hole or in part, at the various redemption prices fixed for each series (ranging from 5103 to $106 at December 31,1985). 33 J

y ' Delmaru lher & bght Guruny Notts To Cossounaito FmANGAL. STATtNH.NT S Wu n hhsuuon Rm smoos (1) The company redeemed 15F00 shares of the 9% senes m December 1985 at $100 per share. Eight thousand of the 15,900 sharts were trquired to ir redeemed by the sinking fund and the remaining 7900 shares were irdeemed under an option of the sinking fund. Through a tender otter for the 4% senes the company purchased. at 5103 per share,99.834 stures m December 1985 and 3.150 shares in January 1986 (2) The 200.000 shares of the 12.56% series were calkd and purchased by the com;uny at $108 38 in December 19810) Undenenain condaions the 9% senes nuy al3o be redeemed at the option of the company. (4) htandatory sinking fund redemptions are $800 000 per year dunng the next five years As of Detrmber 31.1985, all shares previously held in the Treasury were retired LowTt ni Dt a r (1) Sinking ftmd pnwisions wnh respect to substantully all issues of the First Mortpge and j Collateral Tmst Ikinds require that there be deposaed anntully with the Tmstee cash eqtul to one percent (1%) of the greatest aggregue pnncipal amount at any one time outstandmg There slull be credaed aptinst such cash requirements (a) an amount not exceedmg sixty percent (60%) of the bondable value of propeny addnions which the company then cleos to nuke the basis of thm cred t, and (b) the aggregue principal amount of bonds which might then be made the basis of the authentication and dehvery of bonds and whwh the company then ek cts to make the basis of this creda. For the years 1983-1985, the company deacd to cemfy propeny addnions to sardfy its sinking fund requirements equal to 1% of each series as penmtred by the indenture. (2) Subsuntially all utihty plant of the company now or hereafter owned is subject to the lien of the related hiongage and Deed of Tnot (3) Purstunt to a lunk kun agreement the company has a $33 000.000 revolvmg credit commitment through November 1.1989, convemble mto a tenn loan due November 1.1992. The hun agreement requires a commitment fee of S% on any unused ponion of the revohang cretht commitment and tenn kuns may be prepaid at any time without penalty and would bear interest at 100% of the prime rate. (4) on September 26.1985, the company issued. through the Delaware Economic Development Authonty. $33.500f00 of Vanable Rate Denund Exempt Fauhties Revenue Ibnds-Senes 1985 (Vanable R.uc Demand Senes 1985); due September 1. 2015 The proceeds wen prinurily ttet to refinance $33000000 of tax-exempt revenue notes. This senes was collaterahred wnh $37000.000 Fm.t Mortpge Bonds due September I 2015, w hich secure repayment of principal and accrued interest T he mterest rates on the Variable Rate Demand Senes 1985, by election of the company, are subject to change dady weekly, or under speufied conditions anntully. on the htm of prevading rates The Vanab!c R ne Dimand Senes 1985 and the $15,500.000 Vanable Rate Demand Gas Facihties Revenue Ikinds-Senes 1984 luve put options for the bondholders whereby the bonds can be presented kir payment at speafied nmes The bonds can be sold by the remarkenng agent The com;uny has sutlicient long-tenn financmg arrangements avai!abic to redeem any bonds not renurketed. In recognition of the king-tenn financing capabihty, both the 1985 and 198heries of these lunds have been classified as long-term debt (5) Dunng 1981 a subsidary of Dehnarva Capaal Investments. Inc. entered into a hun agreement to bonuw up to 525 000 000 at a r;.te of 10k T he loan matures on February 19.1989 and may be prepaid at anyume. in some instantes subject to a penalty. At December 31.1985. $25000000 was outsundmg under this agreement (61 Dunng December 1985 the company temporanly borrowed $55 000W0 from a bank in order to redeem 544.711000 of preferred stot k (indudmg acquisition costs) and retire 510 mdhon of 3%% Senes First Monpge and Collateral Tmst ik,nds. OnJantury 111986 34 =

Delmarva ther 61 Ught Cannmy NoTts To CONsounAno FWANCIA1.STAnstLNrs Losc.-Ti nst De n t (cos uset o) the company issued $60,000,000 of 10%% Series First Monpge and Collateral Tmst Ik>nds, f ducJanuzay 1,2016. The proceeds fmm the bond isstance were used to repay the $5HW000 bank kun in January 1986, with the balance being applied to general corporate cash requirements. As of December 31,1985, the lxmk loan was classified as long-term debt in recognition of refinancing the kun tim > ugh issuance of the bond 3 (7) Marurities oflong-term debt during the next five yean are 1986-5150,000; 1987-5150,000,1988-525350,000; 1989-525,150,000; 1990-5150,000. (8) The annual interest requirements on all twrowing classified as long-term debt at December 31,1985 are 555355,000. UsAstonrizon Dr nr DscouNT, Pmntsi Aso Exn w These amounts are amoni:cd on a straight-line basis over the hves of the long-tenn debt issues to which they penain.

6. Cosist:Tsiixrs The company estimates that approximately $125,689.000, excluding AIUDC, will be expended for consnuttion purge in 1986. The company also has commitments under longnenn fuelsupply contracts Under SFAS No. 71, regulated industries were required to adopt the Icase accounting requirements of SFAS No.13 for all capital leases commencing on or afterJanuary 1,1983.

The company's capital leases commencing afterjanuary 1,1983, were not material and, therefore, were not recorded. All capital leases, includingleases 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 58,609.000 and $13,324.000 at December 31,1985 and 1984, respectively. Minimum commitments as of December 31,1985 under all non-cancellable base agreements are as follows: 1986 $ 4,202.000 1987 3,203.000 1988 2,503.000 1989 1.003.000 1990 507.000 Remainder 3.642,000 Total 515.060,000 The total minimum rental commitments are apphcable to the following types of property: railroad coal cars, $1,387,000; distnbution facihties, $4,792.000; other, principally transportation and computer equipment, $8,881.000. Rentals charged to operating expenses aggregated 56.634,000 in 1985, $6.213.000 in 1984 and $6.677,000 in 1983. Nuclear fuel requirements for Peach Bottom GeneratingStation 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 totalled $4,520,000 in 1985,56,072,000 in 1984 and 54.283.000 in 1983. 35

Ddnurva 1%er @ISt Comruny Norns To CossounArto FWANCIAt STATchnNTs

6. CONthnIhltN t s The company has an agreement providing for the availabihty of fuel storage and pipehne konnntas facihties through 1999. Under the agreement, the company mttst make specified minimum payments momhly, which totahl 51.682,000 in 1985, $1,9121V0 in 1984 and

$2.101,000 in 1983. The amount of required payments is 52.060.000 in 1986, $1.749,000 in 1987,51.206AY0 in 1988 $1.0561100 in 1989, $812.000 in 1990 and $11.435.000 trtween 1991 and 1999.

7. SAui or CONTRACTS The proceeds received by the company for the sale in 1975 of the contracts for a nuc! car IoR Necitan PLANT steam supply system (Summid and related fuel, net of related plant expenditures w hich are considered of no future value to the company, are classified as a deferred credit in the balance sheet The credit has been reduced by applicable income taxes and related interest (See Note 21 The company has obtained regulatory approval for thu accounting treatment As a result of ratemaking orders commencing in 1982, the compmy is amoni:ing the net credit in all retail jurisdictions over approximately five years and is recording the credit for linancial reponing purposes as a reduction in depreciation expense. Amounts amoni:cd in 1985,1984 and 1983 were $7.2021100, $4,7621100 and $7.003.000. respectively, which includes, in 1985 and 1983 amonization of $2,5001100 and $ 3.818.000 for the resalejumdiction.
8. Suont-TERM Dtist ann As of December 31,1985, the mmpany had unused bank lines of credit of 544,5001100 and is Lists or Cui nir generally required to pay commitment fees for these hnes such hnes of credit are periodically reviewed by the company, at which nme they may be renewed or cancelled.

9.Joisa tv-OwNtn PrasT Information with respect to the company's share of jointly-owned plant. including nuclear fuel l for the Salem plant, as of December 31,1985 is as follows: anars in Thusado Constmction Ownership Plant in Accumulated Workin Share service Depreciation Progress Nuclear: Peach Ik>ttom 7.5t% $ 90,530 $26,384 $ 2,156 Salem 7.41 % 190.486 52.820 11.381 Coal-Fined: Keystone 3 70 % 10.701 4,158 1,199 Conemaugh 3.72% 13.699 5.430 165 Total $305,416 $88.792 514.901 The company provides its own financing for its share o mprovements to joindy-owned plant n in addition, the company is a joint guarantor of bans (5760.000 prop >nionate sharehuivanced for operation of the coal mines that supply the Keystone plant. The company's share of operating and maintenance expenses of the jointly-owned plint is included in the correspond-ing expenses in the statements of income. , 36 f m

Delmarva ioner(t3 la@t Comptny Non.s to CON 50UDAn:D FisAxc At.SrAsimitNis

10. CONUNGtWCIEs a) FERC Rui Casc In December 1985, the company reached a tentative settlement with all resale customers to refund $3.5 mdhon, which would luve reduced resale rates for the peritxl covenngJuly 1985 through December 1986. Accordingly, a revenue rescive of 51.2 million was estahltshed as of December 31,1985. On February 6.1986, the company was informed by some of the resale customers that the tentative settlement was not acceptable. ~1 he company is awaiting fenher action by the resale customers. In the opinion of managment, the ulanute disposition of this matter wdl not luve a nuterial clicct on the company's financial position or results of operations.

b) Ptert t h w s on Furt:kt' Usr In 1982,the company delayed the constmction schedule for the coal-fired Nanticoke #1 (formerly Vienna =0) generating unit. The plant is now scheduled to begin commercial operation in the mid 1990's. The decision is based on the company's current kud forecist, which indicates a lower rate of growth in the coming decade tlun lud prenously been projected The net investment of $14.424.000 is classified as plant held for future use and is anticipated to be recoverable through the normal raremaking pnxess. c) Nt cu AR INsURANc! The company's insurance coverages apphcable to its nuclear power units are as folknvs: (Mdhons of(Mlars) Ataximum h!aximum Retmspective Type and Source of Coverage Coverage Assessment for a Sinde Incident Public laability: Pnvate S160 None Price Anderson Assessmentm 480 $1.5m $640m Property Damage:"" Peach Bottomm $585 Salem * $585 52.8 All unitst7' $525 $1.3 Replacement Power Nuclear Electric Insurance Limited (NEIL)* $3 0 52 2 WRetros[ntwe ptrirnum pn yram o-der the Pnce-Arxicrson lubday pnmssons of dw Atomic Ence At of 19M as amended Subpt to retrospetuve assessment wuh trspett to loss from an madem at any twensed nuticar reAtor m the Unned Sures. U himum aesment wotdd he 5 kW OtU m the esent of more dun one uudent m any year. 4 i Lama of lubdity under the ih:c-Arxicrson Act for cath nta kur inadent * "T he company is a vil msurer, to the extent of its owncrship interest}r any pniperty loss in en ess of dic sured amounts Pfbr pnp rty durug to the Peath 110ttom nudcar plant faabnes. the company and as co4muers hwe pnv.ue manance up to $ 5m mdhon

  • Ntalear Muttul Lamnett a utday-owned munul insurarne compmy wuh w hah the compuw and the %lem nudcar faahry cow ncrs are memben Ntnimum retrospetuve amnent is ten nmes anntul premium umh rc<pect to loss at any nuclear gneranng stanon insured by the mutual insurance compmy. 47 'All umts are insurrd by Nudcar I kitne insurante Lanured (NEII.In for losses in excess of 5 W mdlion Maximum retnwpemvc aussment is wven and a half nmes the annual premiuna ~ Unhty imned munul msuranic owpeny wuh w hkh the mmpany is a member wha h pnwafes onerag agung extra expense mcuned m olwaunmg repLwrment pmtr dunng prolongd acadenul out4s of nudear pm er un ts Maximum werkly mdemnay kir 52 wreks whuh unnmences after the first 26 w ceks of an ouug Also prta kles $1.W OtV weckly for an addinonal het ks htmmum retrospettive a,sessment is hve nmes anntui premiums d) O1nta The company is involved in certain other legal and administrative pmceedings before various courts and governmental agncies conceming rates, erwironmental issues. fuel contracts and other matters. In the opinion of nunagement. the ultimate disposition of these proceedings will l

not have a matenal ciTect on the company's financial position or results of operations. 37

g-Delmarva Power 65 t@i Company Nort.s To Cossounarm FINANCIAL STARMENTS - 11, Src.urs r INr onvai nos segment information with respect to electne, gts and steam operations was as follows: gulars m Eusands) 1985 1984 1983 Operating Revenues: Electnc $ 605,581 $ 584.163 $ 542.252 Gas 95,256 101,578 94,358 Steam 21,997 10.852 13.189 Total 5 722,834 5 702.593 $ 649.799 Operatmgincome: Electric $ 127,148 $ 125.200 $ 122.993 Gas 6,604 6.616 4.928 Steain 1,763 1.393 1.217 Total 5 135,515 $ 133.209 $ 129.138 Utility Plant:0*D Electnc $1,284 062 $1.257,728 $ 1,242,145 Gas 64,967 59.097 51.033 Steam 4,142 4,349 4,924 1.353.171 1.321.174 1,298.102 Otheridentifiable Assets: Electric 90,348 157.437 100.347 Gas 29,985 42.685 12.301 Steam 413 440 471 129,746 200.562 119.179 Assets Not Alknited 191,853 09.894 115.982 Total Assets $1,674,770 $ 1,591.630 $1.533.203 Depreciation Expense:'" Electric $ 56,577 5 54.255 5 52.530 Gas 3,699 3.310 3,173 Steam 907 800 846 Total $ 61,183 58.464 56.599 Construction Expenditures:< " Electric $ 86.073 $ 69.233 70.927 Gas 8,382 10.100 5,070 $ team 468 146 59 Total $ 94,923 $ 79.488 76.050 01ndudes plant heki for ftaure use. awrutnon werk m pnpess and allotanon of common cohty peopcmt d Stated net of the rtspante.kmmulated pnnwous for depreanion ' Utnludes amoncanm of crnht ansing from wie of mntraos " Exdudes ailowance for funds uel donng wnstnanon. - Operatingincome by segments is reported in accordance with generally accepted accounting and raremaking principles within the unlity indusuy and, accordingly. mcludes each segment's proportionate share of taxes on mcome and p neral corporate expenses. 38 E

Deinurva Power 65 usht comruny ' No1Es To CONSOUDATED FINANCIAL STATEhtLNTS 12, SUPPLE % TEN TARY The following supplementary financialInfom1ation, as prescnbed by the Financial Accounting INI onstATION To Standan]s Board in statement No. 33, as amended, is supplied for the purpose of providing Disci osE TlIE ErrEc1s information about the etTects of changing prices on the company's operations The infonna-or CHANGING tion should be viewed as an estimate of the approximate efTect ofinflation rather than as a PaicEs (UNAUDITED) precise measure. Current cost amounts reflect the change in specific prices of plant from the dare the plant was acquired to the present The current cost of utihty plant represents the estimated cost of replxing existing plant assets and was determined by indexing existing plant by the llandy-Whitman Index of Public Utility Construction Costs. Constant dollar amounts n present histoncal costs stated in tenns of dollars of equal purchasmg power, as measured by the l Consumer Pnce Index for All Urban Consumers, and difTer from current cost amounts to die extent that prices in general have increased more or less rapidly than specific prices. Supplementary Financial Data Adjusted for the EiTects of Changing Pnces. (Dollars in Ihmsmds) For the Year ended Decemirr 31. llistoncal Cost Current Cost (Average 1085 Dollars) Operating Revenues $722,834 $722,834 Operating Expenses: Operation and Maintenance 424,748 424,748 Depreciation 61,183 116,142 Amortization-Summit (7,202) (7.202) Taxes 108,590 108,590 Other income-Net (8,810) (8,810) Interest Charges 47.687 47,687 Net inccme(D $ 9ti638 5 41,679 Eaming per common share (after preferred dividend requirementsF' 2.76 5 0.95 increase in cunent cost of utility plant held during the yearo) $ 26,308 Adjustment to net recoverable cost 61,394 ElTect of increase in general price level (79,549) Excess ofincrease in current costs after adjustment to net recoverable cost over increase in general price level 8.153 Purchasing pu,ver pin on net amounts owed 21,441 Net 5 29,594 o induang the adjustment to nt1 recoverable cin. the income on a current as basis for 1985 would lure been 5101073 'l bdudng adjustment to net remverable uN.

  • At December 31.19H 5. the current cts of net unbry plant was 52.265170 w hile he,toncal cts was $1351171 39

Deinurva l\\mcr & UghtComtuny Norns To Cossounann FmANciAt.Sramitwrs 12.Surru:MExrARY Supplementary Five-Year Comparison of Selected Financial Data INFORMATION Adjusted for the ElTects of Gunging Prices (cononued) On 1housands Dof Aseray 19t6 Dollars) for the Years ended December 31 1985 1984 1983 1982 1981 Operating revenues Ihstoncalcet dollars $722,834 $702,593 $649,799 $636,666 So08,504 Cons: ant dollars 722,834 727,428 701,626 709,560 719.750 Net income Current costs 41,679 49,331 34,128 25.065 17,774 Eamings per common share Curn nt costs .95 1.20 .72 .41 .12 Net assets at year endm Ilistoncal cost dolbrs 666,811 644,650 608.513 573 073 542,080 Current costs 655,619 656.467 646.006 631,478 620,455 Excess ofincrease in current costs over increase in general pricelevelm 8,153 (10,515) 5.848 4,033 (71,210) Purchasing power giin on net amounts owed 21,441 25,914 24,489 25,276 59.185 Cash dividends decbred per common share llistorical cost do:brs $ 1.945 1.83 $ 1 68 5 1.595 $ 1.535 Constant dollars 1.945 1 80 1.81 1 78 1.82 Market price per common share at year-end llistorical cest dollar s 27.88 22 00 19.25 16.38 12.63 Constant dollars 27.41 22.40 20.44 18 05 14.46 Average Consumer Price Index (1967 = 100) 322.2 311.2 298.4 289.I 272.4

  • Except per slwr amounts
  • At net rectwerable cost t After ad;ustment to net reunerable awt.

As required by Statement No. 33, the current prtwisions for depreciation on the current cost amounts of unhty plant were determined by applying the company's deprecution rates to the indexed plant amounts, even though depreciation is hmited to recovery of histoncal costs as further discuswd below. Other operating expenses were either not required to be adjusted or were not adjusted due to rate-making considerations The company, by holding monetary assets such as cash and receivables, kwes purchasing power during periods of inflation because these items can purchase less at a future date. Conversely, by holding monetary habihties, primanly long-term debt, payments in the fu-ture will be made with dollars havmgless purchasing power. For die years 1981-1985, the company's monetary habihties exceeded monetary assets which re3ulted in a purchasing power gpin on net amounts owed during the year. The rate regulatory process limits the company to the recovery of the historical cost of pbnt. Therefore, the excess of the cost of plant stated in terms of current cost over the historical cost of plant is not presently recoverable in rates as depreciation and is reflected as a reduction to net recmcrable cost. Rtwd on past practices, however, the company beheves it will be allowed to cam on the increased wst of its facihties when repbccment acttully occurs. 40

. Urinurva1%rr6rt$tCompmy

Norns To CossounATrn FWANCML STAIENIENTS IE Sumanwraay.

Since the pin from the dechne in purchasing power is attnbutable to long-tenn debt which ' INroRNtATION has been used to finance utility plant, the reduction of utility plant to net recoverable amount Xomanueu) - is netted apinst the purchasing power pin on net amounts owed dunng the year. 13 QUARTERLY FINANCIAt. The quar edy data presented below reflect all adjustments necesary in the opinion of the INI ORNIATION company for a faur presentation of the interim results. Quartedy lata normally vary seasonably "(UNAUDn to) with temperature variations, differences between summe, 4.d a,nter rates. the timing of rate orders and the scheduled downtime and maintenance of electric generating units. Eaming; Eamings Apphcable Average .per Quarter Operating Operating Net to Common Shares Average Ended Revenue income lacome Stock Outstandmg Slure ubibrs in lhtuundd tin 11munda 1985 March 31 $198,788 5 36,946 $27,114 523,964 30,482 $0.79 June 30 161,093 29,416 20,582 17,433 30,482 0.57 - September 30 1%,352 43,4 % 34,235 31,085 30,482 1.02 December 31 166,601 25.657 14,707 11,557 30,482 0.38 5722,834 $135,515 $96,638 584,039 30,482 $2.76 ~ 1984 Matth 31 S190,185 5 36,823 $25.996 522.809 30.003 $0.76 Junc 30 164,181 29.957 19,130 15.954 30,172-0.53 September 30 188 901 42,862 33 092 29,937 30,337 - 0 99 December 31 159.326 23,567 13.892 '10.748 30,482 0.35-j $702,593 5133,200 592,110 $79,448 30,248 $2.63 in the fourth quarter of 1984, adjustments for a voluntary Delaware revenue refund and other . regulatory items were recorded. The etTect of these adjustments reduced founh quaner net income by approximately 54.200.000 (14e per share). In the second quarter of 1985, adju3tments were recorded for the additional Delaware electne - retail revenue refund for 1984 and additional amortization of the credit arising from the sale of. contracts, which resuhed from m out-of-court tax settlement. The effect of these adjustments - reduced second quarter ner in we by approximately 51.100.000 (4e per share). l In the fourth quarter of 1985, the company wrote-of f its share of advances under urari nn supply contracts that were terminated and also accrued for a resale revenue refund. L clicct i-of these adjustments reduced fourth quarter net income by approximately $2 063,000 (7e per share). t l i 41 ~

e-l IMm.uva timer & tWu company f Cossounann SrArisTics 19 yean d acww 1985 1984 1083 1982 Eu cTurc Revisets Residential $ 212,254 5205,910 $193.021 $183.258 agat Commercial 168.957 156.507 140.800 137.434 Industrial 135,141 128.833 126,703 127.441 Other utilities. ctc. 79,399 79.235 68,991 73,469 htiscellaneous revenues 9,830 13.678 12,728 13,168 Total electric revenues $ 605,581 5584.163 $542,252 5534,770 Euicinic SAu:s Residential 2,256,922 2.249,270 2.136.265 2.026.398 (11W kikwatt hours): Commercial 2,165,685 2.073.457 1,844,324 1,729.863 Industrial 2,606,466 2.569,572 2.600,492 2,255.673 Other utilities, etc. 1,501,447 1,415,434 1.297.395 1.237,508 Total electric sales 8,530.520 8,308.233 7.878,476 7.249.442 Eu:cTaic CusTOMt.RS Residential 283,911 275,175 267,357 260.371 (eg gggy Commercial 33.189 31/i48 30,525 29.966 Industrial 893 929 949 741 Other utilities, etc. 492 502 434 434 Total electric customers 318,485 308,154 299,265 291.512 gas Rtvtsets Residential 5 39,224 5 40,933 $ 36.694 5 36.505 ehww.,): Commercial 17,901 18.663 16.527 15,792 Industnal 19,762 22,940 23.232 20,112 Interrupable 17,419 18.008 17.026 11,733 Other utihties, etc. 130 160 115 53 Nliscellaneous revenues 820 784 764 552 Total pts revenues $ 95,256 $101,578 $ H.358 $ 84,747 gas SAuiS Residential 5,622 6.213 5.640 6,062 (nulhon mNc kro: Commercial 2,742 2,971 2c77 2.768 Industrial 3,579 4.245 4.378 4,108 Intenuptible 3,734 3.769 3.723 2b56 Other utihties, etc. 31 41 31 10 Total ps sales 15,708 17.239 16.444 15bM Gas CusTourns Residential 70,804 70.183 69 608 69.002 (end d p nodt Commercial 4,417 4.233 4,075 4.057 Industrial 160 165 160 166 Interruptible 15 19 19 18 Other unlities. etc. I 1 1 1 Total pts customers 75.397 74b01 73.803 73.334 Ru lNERY $tRVICE Electricity delivered 335.260 298.203 3091M3 322AM ( HW kikwatt-hours) Steam delivered 6,238,829 6.683.335 6.965.904 7,778.929 t 11W pounda 42

~ l Ascrag Annual Compund % 1981 1980 1979 1978 1977 1976 1975 KucolGnuth $164,919 $144.637 $115.381 $105,237 5 97.691 $ 80,416 $ 77,069 10.66 123,099 112,166 91,798 82,796 74,641 60,111 58,169 11.25 129,601 116,401 98.023 83,972 76,801 64,458 64,141 7.74 73,602 63.698 53.782 40,840 38,974 34.896 35.606 8.35 12,898 7,025 4.682 5.261 3,461 2,398 4.370 8.44 $504,119 $443,927 $363.666 $318.106 $291,568 $242,279 $239.355 9.73 1,996,647 2.046,546 1,968,452 1,979.624 1,924.723 1,787,663 1.672,180 3M 1,660,147 1,648,776 1,598,299 1,568,600 1,495.796 1.412,259 1,359.673 4.77 2,454.685 2,429,842 2,624,438 2,418.527 2.277.630 2.260 661 2.142,151 1.98 1,283,845 1,335,216 1.300.611 1,281,498 1.207.941 1,194,155 1.218,785 2.11 7.395,324 7,460,380 7,491,800 7,248.249 6.906.090 6.659,738 6.392.789 2.93 255,646 246,887 242.745 237,925 233,106 230,579 221,780 2.50 29,450 28,162 27,998 28,421 29,648 28.345 27,345 1.96 788 821 874 858 921 1,002 923 (.33) 434 440 478 480 561 550 545 (1.02) 286,318 276,310 272 095 267.684 264.236 260,476 250,593 2.43 $ 34.123 $ 26,525 5 25.719 $ 28,370 $ 21.829 $ 18.826 $ 15.365 983 14,344 10.342 8,954 10,I54 7,133 6.062 4,670 14.37 22,259 12,4 M 9,884 10,191 6,950 5,984 4,343 16.36 11,711 9,293 4,440 716 169 1,301 1,211 30.55 61 46 55 93 49 44 33 14.70 572 430 270 116 103 31 45 33 68 5 83,070 $ 59,043 $ 49.322 $ 49,640 $ 36.233 $ 32.248 $ 25,673 14 01 6,193 6,321 6,423 6,941 6.751 6,956 6.540 (1.50) 2,7M 2,683 2,415 2.593 2,439 2,586 2,429 1.22 4,809 3,937 3.388 3,290 2.811 3.264 2.849 2.31 2.802 2,738 1,720 319 81 953 1.073 13 28 12 14 16 24 17 20 18 5.59 16,520 15,693 13,962 13.172 12 099 13,779 12 900 1.98 68,608 67,784 66,631 66,364 66,231 67,754 68,160 0 38 3 967 3,846 3,712 3.773 3.738 4,154 4,180 0.53 167 155 131 163 163 198 198 (2.11 ) 16 16 16 21 21 21 21 (3.31) 1 1 1 1 1 1 1 72.759-71,802 70,491 70,322 70,154 72,128 72.569 0.38 343.063 328,420 262,159 270.006 289.049 318.389 207.282 1.21 7,673.420 7,570,944 6,378,705 6.016.095 4.888,366 5,301.421 5.517,000 1.24

' Delnvva Ibwer & L@t Company Ot riCi ns, Diat cTOns ANo SurutnOmtn INrORMAUON NLVit % M. Cl 'R I ts iiIARt.oI t L 111 L ANNON 1 RUs(( t s Chauman of the lloard Din'tfor of 11 P Cannon & 9 n.Inc Iirsi Mortgage and Couateral Trust and Chief becunve Olhccr (warehousmg) Bndgrulle. Delaware Bonds-thenucal Bank. Ilow ARD 1. ( ( %Ros L OSCAR L CARI Y Exetutive Vhe President he,: dent and Dirtuor of Pollunen Control Revenue Ibnds-- Lirmar Corporanon igeneral Mdlon Bank (DF) N A r nANs A. ( oog ' cal est.ne and home builders) Wdmmgron. Ddaware Seniot Yke President n hshury MarAmd a Bank of DdawJrc, it. RAY LANDON ' RANK ^- ( WK Wdmmgton, Delaw are senior Vue hendent Semor Yne Prcydcnt of Wdmmgton Trust Company. Hasi AND u. wAkt i n t D. lR-the Company """A'""' UCId" #' C Semor Vk e Presdent I rank A Cook has rctued as semor s he RoGt R D. CAMPitt 1.L president and a dnet for of the company. Irving Trust Company Vice h cudi nt 1 rea surer Mr. Cook joined the company it,197 2 as New York. New York and Chief I nunual Oth<cr manager of deura pastudion and hdd 8 RANM I H ^'l NI5 ^ND Rf Gh1 RAks meral management ;wnions dunng "' } #d""I 'C'"'c He w as deued to I%dNO wAYNi A. noNs Vhe Prcudent the hoard of dire tors m 1982 % dmmgton T rust Company. financt.d 5crYhes Divbion DONALD fu CAlN Rodney Squarc North Dn Non Yke President l ""'"""'C "'M ^ U " Wdmmeton Ddaware 19890 Northern Div mon and Occupanonal Ileakh. Cenunon Motk-DONAl D T. ( ONNI t LY Petnsliemicah Departmrnt of Sa rctary i 1 du Pont de Nemours & Wdnungton Trust Company. I uundM scruces DiuNon Lompany U diversihed thenuta] RKilARD H IAANs energy and Wahy produus Rdng Num Nonh Yke Presidenr. Corporate company Mdmington Delmare %,dmmgton. Delaware 198ud. Commumcanons nufauuren Hanover I st Company M8Ii E DTw hiNs pal'L s. ct RRt t u N Dircuor. President and Chid beamvc Srotk Trans!cr Department Vice Presidert. Regulatory EO I50X24935 ner of DeLiwm Broadcasting Prat t kes Churs h Street s tanon CompJny Jnd PrcNdent and Gcnt raj New York New York 1(1249 ( HARlis M AR( IDMlVN ManJK of Nianon way g4 Cninptmuer broalast mp Wilnungton. Dd, siOC K s) Mik)l. I RANK j. PLRRY,jk. I \\ML s O. PIPPIN. jR. Common Stot k. Dl.W-lbled on Vhe firsidct11 GJs Dn bion President and Dire (tor of the Ccntresille the New York and pinladdph a mouAs s. sH Aw, jR. Nanonal Bank of Mary Lmd. Centreville. Stot k f uhanges Vhe President. Pnslutnon Maryland Rt Lt.taloR) touusssioNs D, w As Ni u usi s wIlitut 0 sius RAl' I cdcral Energy Regulatory Commission' Dnision Vke Preudem Dirator.mJ becutne \\.ac hesrdent g3 gg c, 3g S anhern Da bion and a mcmivr of the becuin e wg gg (ommmee of L 1 du Pont de Nemours Ext ( t:rn l-couui r H L & ( ompany L. diversihed s henucal Ddaw are Pubhc Scrut e Comnusson. Neuus M C urns Ch urm m, 7 cncrgy and speualty produus I %0 S du Pont ll ghw ay. Owar L Carcy. W dham G nd Wdnungton. Ddaware Dos er. Ddaware 19901 Nmeral. Dr E Arthur Irabant; liarland M Wakchdd Jr. DR.1. ARilit 'k i RAllANI M tr)Lind Publh Serthe Commb40n. President of the t:nn ersity of Ddawarc. Amerian Budd ng At DH ( OMus t u i g.A Dda m 2 31 f#r BMnmordrcet. Osoir L Carey, Chairma't-Ba!nmore Mar > land 21202. John R Cooper; James O hppm.Jr DA\\ ID D. W^kt iIl L D Direuor and Prcudent of Morgan Bank Vngmu $ tare Corporate Comnuwien. NoulNAIING couvi e it i WhMWhneDdaa PO Bm IIW Dr L Arthur Trabant. Chairman. Citunnan of Morg.m Chr:stiana Rahmond. Vugmu D209 Neuus M Curtis. 5 ally V Haw kms (.orpu anon. %.dnungron. Ddaware. ' "" 3"^ " ^ DDR ' " Court Ns4 hon Couvir ti i Dircuor of Cononcnul Amerhan Ud *"" J I"" Cf Wdham G Simeral Ch.urman. Life Insurantc Cumpany. Oscar L Carcy; Neuus M Curtis. Wdmmgron. Deliw nc ' HN Mnetrcct. PO Dm DI. Davkl D. Wakeheld W'Immgton. Ddaw are 198W ltARI AND M. % Ak! 1 ll l D, lR-Idephone < M2)-+29-WI I INM SIMINI COMMIT II F %emor Vice hesident of Daud D Wakchdd. ( hannun. the Company James O Pippm. Jr ; Neuus M Corns 44

ANNUAL hltETING The Annual hieeting will be held on April 29 at 11:00 a.m.,in the Clayton Hall, University of Delaware Newark, Delaware. ADDITIoNAt. RtronTs 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 Stockholder Relations, Delmarva Power,800 King Street, P.O. Box 231, Wilmington, Delaware 19899. t 1 Aar Dinecix)= se Dew,N TtarsA Zsuutau4N. Pmmx,marHv:Jcm CAtitR III,(OVER ILLL$f t4Tk1N-Pruu4 P4:an Hn.aw

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Financial. Highlights Contents f PSE&G Profile frhousands of Dollars where applicable) 1985 1984 ( Ns) 2 Message to Shareholders Electric Sales - Megawatthours 32,320,508 31,597,401 2 7 A Company in Transition Gas Sales - Kilotherms 2,125,674 2,147,315 (1) 8 The Financial Picture Total Operating Revenues $ 4,409,054 $ 4,196,124 5 ff Review of Operations Total Operating Expenses $ 3,781,268 5 3,597,986 5 26 Financial Statement Responsibility Earnings Available for Common Stock $ 484,550 $ - 429,808 13 27 Fmancial Statements Shares of Common Stock (Thousands) Average 122,344 108,913 12 3f Independent Accountants' Year-end 131,699 112,563 17 Opinion 34 Summary of Significant Earnings per Average Share of Common Stock $3.96 $3.95 Accounting Policies Dividends Paid per Share of Common Stock $2.81 $2.70 4 35 Notes to Financial Statements Common Stockholders - Year-end 231,732 234,156 (1) 43 Management's Discussion Coverage Ratios and Analysis of Fixed Charges 3.76 3.61 Fixed Charges and Preferred Dividends 2.91 2.76 esuI f r s Return on Average Common Equity 14.03 % 14.43 % 48 OperatingStatistics Book Val. $28.04 $27.17 3 48 Financial Statistics Year <nd Market Price ~ 31 % 26% 18 sf Directors Cross Additions to Utility Plant $ 1,220,089 $ 967,365 26 52 Officers Total Utility Plant at Original Cost $10,977,321 $ 9,870,429 11 53 Corporate Information About the Cover: Public Service Electric and Gas Company joins in celebrating the Centennial of the Statue of Liberty in 1986. The Company is proud to provide the electricity to light the torch that has been a beacon of hope and a sign of welcome for millions of Americans. And it is proud to have produced a 27-minute film honoring the many immigrants who passed through Ellis Island. Harold W. Sonn, PSEAC's chairman of the board, serves as chairman of the New Jersey State Campaign for the laberty Centennial, to raise funds for the restoration of the Sta:ue of Liberty and Ellis Island.

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(, c To Our Shareholders t In 1985, Public Service Electric and Gas Company stepped boldly toward the threshold of the 21st century. During no other year in its rich history has the Company expressed such excitement for the future and, more important, such con-fidence in its strength to meet the chal-lenges and opportunities that the years ahead will bring. The 130ard of Directors, in July, author-ized the fonnation of a holding company, subject to the approval of the New Jersey i lloard of Public Utilities and, of course, PSE&G's stockholders. The action, which was strongly supported by management, charted the course PSE&G would travel in order to retain its finn financial footing in a changing utility environment. The essence of our strategy is, in a word, diversification. A newly fonned hold-ing company would diversify, to a limited extent,into non-utility businesses with the potential for enhancing financial strength. At the same time, electric and gas service by PSE&G as a regulated subsidiary of the holding company would continue as the principal business of the system. In short, PSE&G would be the backbone of the holding company. The holding company, which would bear the name Public Service Enterprise Group Incorporated, would provide an appro-priate structure for diversification and for maintaining the Company's strength in the volatile and competitive utility environment. In the 1960s, the utility industry was generally stable with manageable capital and energy costs needed to meet customers' demands for electricity and gas. In the 1970s, the industry was faced with energy shortages, a depressed economy, greater regulatory and tax pressures and uncertainty about the future. ~ 2 i w_ t

=..__ _ _ 7 / The i#g,come " Today, the financial community tends to perceive the utility business as an in-

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/ creasingly uncertain investment. However, where H ~'f 7 conditions of the rest of the 1980s and, for that matter, of the 1990s and beyond must not be viewed with trepidation-if a h eM company is active, fk xible and adaptive. / During the 1980s, PSE&G has con-j centrated on completing the Hope Creek E Generating Station, its last major con- [',*le'"ues 5 65 ' / 3' ' struction project in this century. We will go,enues us$ / - continue focusing on Hope Creek until it is ru ds n placed in service, which is expected to be gT,79 cEns,0, / W / later this year. WA g48 Once this maior milestone is reached, PSE&G will be ready for the future, and the ,,n t gfj holding company will fit this need. Where p / Our service area is relatively mature, 1 A' 'g 4 ['# with only modest growth projected. PSE&G, like the utility industry, is confronted with ,/ .oe ,,,si i E formidable, unregulated competition. For f; ,g# ' say"y*,s example, changes in federal regulation en- / os able natural gas consumers, especially large D' .09 users, to buy the fuel privately and make ["u'Inased od*"d' their own arrangements for pipeline de- [os,*s' s 39 ' uateoa's .io n'c,, livery.The business of a gas distribution .ir X a se y utility, such as PSE&G, is changing. '3 2-Diversification would provide the 8*[u's*'nes,.i r Company with the opportunity for growth { in earnings without increased rates for electric and gas customers. We feel that the holding company structure offers the best y way for diversification and provides a basis [ for insulating customers from results of a unregulated businesses. It allows also for greater freedom for innovation and initiative. Common stockholders would par-E ticipate in the benefits and the risks of the Company's investment in non-regulated r businesses.The fom1ation of the holding g o.nds company is described in much greater depth ,,,nin9s a ,y in the Company's proxy statement, and you ec[ are encouraged to read it carefully. P 3

.A r: ( L m as Ne* JerseV w g state to theI" paisin9 its IU ~~ reach Statue go8I for Ih Elli* 0d ty 8 of n islapd: $5 roigpo - t i r Q. u p [klU llc \\1 l \\ CJfs AsJICsil![ \\s t sfl(ill!tI istIllttichs % {li > h i ti k t t! dit itlijsi t ! 1 t. t is ht able t< > Int et iiur t < inst rtitt li jn (_< nt s h 1t h t r.l\\ clct! t < > tit let;b it t ric ut i!!t !< s t<t I: ;p tullds faisa!!IlfC f11.l i [ \\ ! lll s h l } } t a!' sit t i k 1 C ill it sit 'It scii it s it I k i t. 11 i s' is -E )I U.i fillllC s {t ' !I \\t -! f '. II.i s ht !,tt . l],t il d t 0 !!it plUsstllt i 1[] t IlC f lt it 1 t s t u } ll t' (. t( 't!! { l lilI dt 's O lll l )s

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to perceive the utility business as an in-TM Fror" creasingly uncertain investment. However, were H ~ s*3#f conditions of the rest of the 1980s and, for that raatter, of the 1990s and beyond ~h 4 must not be viewed with trepidation-if a company is active, flexible and adaptive. e > N' m During the 1980s, PSE&G has con-centrated on completing the Hope Creek Generating Station, its last major con-f,$es 5* struction project in this century. We will

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continue focusing on Hope Creek until it is ,oriundsS$ / u g$g*"c'oas""'" " // A placed in service, which is expected to be W WA later this year. p43 Once this major milestone is reached, 8gj D PSE&G will be ready for the future, and the ,,nt / holding company will fit this need. W p f Our service area is relatively mature, / with only modest growth projected. PSE&G, / ,g ((' like the utility industry, is confronted with j 96 ,,,si formidable, unregulated competition. For 3, example, changes in federal regulation en- / sagy *,,, os able natural gas consumers, especially large P' ~09 users, to buy the fuel privately and make [dnased D*d*"d' their own arrangements for pipeline de- [ g,*s' 5 39 ' uatena'S .io serec,, X s livery.The business of a gas distribution .ie - y utility, such as PSE&G, is changing. Diversification would provide the 8Tu's'sted 12 ness Company with the opportunity for growth in earnings without increased rates for electric and gas customers. We feel that the holding company structure offers the best way for diversification and provides a basis for insulating customers from results of unregulated businesses. It allows also for greater freedom for innovation and initiative. Common stockholders would par-ticipate in the benefits and the risks of the Company's investment in non-regulated businesses.The formation of the holding an j aends company is described in much greater depth g,,nin9s W c' in the Company's proxy statement, and you are encouraged to read it carefully. M 3

Assuming we garner all the necessary mercial operation sometime in the second approvals, including the endorsement of half of the year. our holders of Common Stock and $1.40 Hope Creek's cost has been increasing, Dividend Preference Common Stock when partly because of scheduling adjustments we meet in April, the Company would and partly because of higher labor and other undergo restructuring in May. construction charges. We are concentrating While 1985 was a year in which we on placing the plant in service as quickly as sharpened our focus on the future, it was possible, without sacrificing quality, for the also a year in which we paid careful atten-benefit of our customers and stockholders. tion to the present. The cost of the plant is now expected to be Eamings per share of Common Stock between S4.15 and S4.3 billion, which is were $3.96, compared with S3.95 in 1984 about S400 million in excess of the cost cap when there were 13.4 million fewer shares. contained in the 1982 cost containment In May, we raised the quarterly divi-agreement for the plant. The final figure dend by three cents to 71 cents a share. will not be known until Hope Creek begins It marked the tenth consecutive year we operation, because of numerous clean-up increased the dividend in line with our items and testing which must be completed. policy to raise it on a regular basis. The in-Based on our present estimate, the cost dicated annual rate is now $2.84 per share. overruns will result in a reduction in earn-New Jersey continued to hold wodd-ings per share of between 5 cents and wide appeal as a place to do business. Many 8 cents in 1987 under the carnings penalty foreign firms have found the state to be in the cost containment agreement. The an ideal home, and they now account for a reduction would be less in subsequent years. sizable portion of its workforce. Developers In December, we petitioned the New have excitedly pursued plans along the Jersey Board of Public Utilities (BPU) for Hudson River waterfront-New Jersey's a $633.6 million, or 14.2%, increase in Gold Coast-and in other key regions from annual revenues. Nearly 90% of the total is the Meadowlands to Burlington County. in electric revenues, mostly attributable to Milestones marked the year at both the completion of Hope Creek. our Salem and Hope Creek Generating The rate increase request also reflects Stations. In December, Salem I broke the anticipated savings in the cost of fuel, national record for annual electric genera-stemming from Hope Creek's operation. By tion by any type of unit-nuclear, coal, oil the time we receive a ruling on our appli-or gas. Its 277 consecutive days of service cation, our existing base rates will have was a Company record. Salem 2 returned been in effect for over two-and-a-half years. to operation in May after a long outage We believe, therefore, that the amount of because of a problem with its generator, and increase in our petition is reasonable. We it performed well for the balance of 1985. anticipate a decision in September when By the end of the year, Hope Creek's we expect Hope Creek in service. construction was virtually completed. The With the completion of Hope Creek, plant began undergoing a series of tests the Company will end a period of heavy in anticipation of fuel loading in 1986. construction expenditures. We do not plan Plans call for the unit to be placed in com-any new large generating units for at least 4

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A Company In Transition i I In 1985, PSE&G took several steps to meet the subsidiary. The corporation will serve as a vehicle l challenges anticipated in the near future.The action for investing available funds so that they earn a 3 reflected the Company's concern for its financial reasonable retum that will enhance the everall strength and its high-quality service to customers. financial strength of the Company. ""E

  • Holding company proposed ities, invested in a communications satellite i

On July 16, the Company's Board of Directors I unc h N fmn the space dunk Atlanus i authorized the formation of a holding company on November 27. PSRC invested $12.9 million for j which would own all voting stock of PSE&G, subject NS

  • I" * ' '#

#"U " * '"' to the approval of the New Jersey Board of Public p yments and tax benefits. Utilities (BPU) and the Company's stockholders. Under the proposal, which was endorsed by the Atanagement assessments launched BPU in early 1986, a company, to be named Public During the year, there were activities on several Service Enterprise Group Incorporated, would be fronts that will figure in any restructuring the established. The present company, PSE&G, would Company may undergo. become a subsidiary of the new holding company A strategic management group was formed to and would continue as a regulated electric and gas develop a process which will pmvide senior manage-4 l utility under the laws of the state.Two present ment with early identification and effective analysis subsidiaries of PSE&G--Community Energy Alter-of strategic options available to the Company.The natives Incorporated, and Public Service Resources strategic process will enable PSE&G to seize those i Corporation-also would become subsidiaries of the opportunities which will improve its core business l holding company. and define its role as a highly visible participant in 1 Details about the restructuring appear in the directing the future management and use of energy Company's proxy statement. All stockholders are in New Jersey. encouraged to read the statement. Holders of Com-A separate program was launched to create a mon Stock and $1.40 Dividend Preference Common leaner, more efficient organization by reducing levels Stock will be asked to vote on the proposal at the of management and broadening the span of control. Annual Meeting on April 15,1986. Nearly 200 management positions will be eliminated ~"b * "'"'"W"" Cogsneration subsidiary begins activities on, a managemen audi of all Com-1 a l Community Energy Alternatives Incorporated (CEA), p ny operat ns was con acted hnde gar h formed as a subsidiary of the Company in 1984, Temple, Barker & Sloane, Inc., one of the country's began formal operations in 1985. It will participate '"E"'"##*'" "'" " N ""' } in the development of cogeneration and small power done in line with a 1982 law which requires the BPU production projects on an unregulated basis. 4 E" ' CEA's headquarters is in Ridgewood, in Bergen and gas utihties m the state. County, and Arthur S. Nislick took office as its first president and chief executive officer on October 1. i Arthur 8 g,iick s i Since its formation, CEA has been explanng g of opportunities to participate in ecoaomically sound, g technically efficient preiects designed to help supply ,ne first P' the energy needs of industries, commercial establish-com* hich

  1. ,,n ti" #

ments and large residential complexes. CEA intends s ,perstlo"* in to consider proimsals to join with developers and fi-be98 'L ' 9985 as,,ubsid3 I nancial institutions in launching quahfying proiccts. o' '"* comp ** Investment subsidiary formed In 1985, the Company formed Public Service Resources Corporation (pSRC) as an investment i 1 4 4 7 l

The Financial Picture Despite adverse pressures from various fronts For the 1985-87 period, electric sales were . during the year, the financial results in 1985 placed forecast to increase,on an average basis,1.5%, while the Company on firm ground. Throughout the ' year, the Company sought to provide a solid capital _ gas sales were anticipat ed to grow, on average,2.1% Thereafter, through the first decade of the 21st structure and strong credit rating. century, growth is expected to remain modest-g generally in the 1%to-2% range-for both electric . Eamings available for Common Stock rose to $484.6 '" E'S 8# million in 1985, up from 5429.8 million in 1984. As a result of the higher revenues m. 1985, ~ Eamings per share of Common Stock were $3.96 in New Jersey gross receipts and franchise taxes rose to .1985, compared with $3.95 in 1984, when there were $557 million from $530 million, an increase of 5.2% - 13.4 milliori fewer average shares outstanding. Dividemtincreased The increase of 0.3% in earnings per share, or The ik>ard of Directors in May increased the quar. 12.7% in overall camings, was attributable to the terly dividend on Common Stock to 71 cents per base rate increase, effective March 23,1984, higher share, up from 68 cents. It marked the 10th consec-electric sales, and greate'r Allowance for Funds Used utive year the dividend has been raised.The annual During Construction (AFDC). Operating expenses rate is now $2.84 per share, up from $2.72. rose at about the same rate as the previous year, The increase in the dividend, effective with to $3.8 billion from $3.6 billion, or 5.1% payments in June,1985, was in line with the Com-Reported camings for the year were reduced by pany's policy of raising dividends on a regular basis a write-off, after taxes, equal to 10 cents a share, of a and paying a dividend that is sustainable. portion of replacement energy costs which stemmed from outages at the Peach Ikittom and Salem gen-erating stations and for which recovery was disal-Construction expenditures, including AFDC, pay-lowed by the New Jersey Ik>ard of public Utilities ments for nuclear fuel and advances to subsidiaries - increased to $1.22 billion in 1985 from S964 million (BpU). The results also include a write-off, equal to in 1984 about 3 cents a share, from losses associated with the abandonment of three uranium supply agree-Expenditures in 1986 are expected to drop to ments, which were no longer economical. $739 million, as the Company bnngs to an end a period of heavy construction spending. Total revenues mcreased 5.1%, to $4.4 bilh.on from $4.2 billion. Electric revenues accounted for in the five years through 1990, total construc- ._68% of the total, rising to $3.0 billion from $2.8 tion costs are estimated at $3.0 billion, including billion, or 6.5% Gas revenues made up the other approximately $240 million of AFDC. Much of the 32% of the total, rising to $1.41 billion from $1.38 amount will be used to upgrade existing facilities. billion, or 2.1% Hope Creek has had a targeted cost of $3.795

  • "'"*""'*I"*'"*I"""'

The higher revenues were buoyed in large

measure by an upswing in electric sales to the ex-tive agreement approved in 1983 by the llpU. The panding commercial sector and to service-oriented agreement had been reached in 1982 with the New

- and high-technology facilities. Overall electric sales Jersey Departments of Energy and the Public Ad-rose 2.3% m 1985 over sales recorded a year earlier. vocate and also designated December,1986 as the Total gas sales, however, dechned 1%, an outcome target date for Hope Creek's operation. of the switching from gas to oil by some customers There will be an camings penalty if Hope L'

with dual-fuel capability and a slowdown in manu' Creek is completed in excess of the cost cap. Under p

facturing activities. the agreement, the Company's revenue requirement According to the Company,s latest financial fore-ed to rate base, as determined by the npU, would be based on the exclusion from rate base of p. cast, electric and gas sales will show modest gains through 1987.The brightest spot will remain the 20% of costs incurred in excess of the cost cap. lf the t commercial sector, as development unfolds in cer-overrun exceeds 10% of the cost cap, the approved tain regions of the state, such as the Hudson River rate base would be based on the exclusion of 30% of those expenditures in excess of the 10% overrun. . waterfront and the Route I corridor _m princeton. L 8

The agreement also provides for the exclusion of market and cancelled a total of more than S70 costs relating to certain extraordinary costs from million of high coupon debt to help reduce interest the gnalty provision. costs. Additional retirements of high cost debt and The Company's current estimate of the cost of preferred stock are anticipated in 1986 through the plant is between S4.15 and $43 billion. Based on open-market purchases and early redemptions. that estimate, the cost in excess of the cap could During the year, pSE&G ventured for the firs, . result in a reduction of eamings in 1987 of between time into the European debt market to take advan-5 cents and 8 cents per share of Common Stock tage of lower interest rates. On December 10, the under a formula in the agreement.The reduction Company negotiated the sale of $75 million of 9%%, would decline in subsequent years over the depreci-10 year First and Refunding Mortgage Ikmds, which able life of the plant. were sold in Europe. Entry into the Eurobond market It is difficult to predict the final cost of the will save the Company an estimated $1.5 million project as it nears completion because of numerous in interest costs over the life of the bonds, when pre-operational items and imprecision in the timing compared with the domestic market. of tests and power ascension programs which must In July, the Company issued $125 million be adjusted to meet problems as they arise. principal amount of 30-year First and Refunding Costs at the completion of the project, after Mortgage Bonds. Interest will be 9%% in each of the fuel is loaded, will include the accrua! of AFDC at first three years,and then the rate will be reset or about S18 million per month and direct costs of the bonds will be redeemed at par. about 55 million per month, until the plant is de-The Company raised dl77.8 million through clared in commercial operation. the public offering of 7 million shares of Common The Company's first priority is to get the plant Stock in January. During the year, it raised S1653 completed and operating as quickly as possible million from the sale of 5.9 million shares of Com-without sacrificing quality. Delays would further mon Stock through its Dividend Reinvestment and increase costs. Stock purchase plan and employee benefits plans. A goal of the Company has been to raise in-The Company also generated $159.9 million ternally at least half of its total capital requirements. by selling 6.2 million shares of Common Stock in a That aim has been met generally in the 1980s. rights offering. More than 88% of the shares were Now that Hope Creek will be coming on line purchased through subscription. Holders of Com-and construction costs will drop significantly for mon Stock were issued rights to subscribe to one new the remainder of the decade, the Company's goal is share for every 20 shares they owned as of October to generate all funds intemally. This will reduce

16. The subscription price was $25.75, and the offer pressure on the ratio of earnings to fixed charges ended on November 6.

associated with debt and preferred stock financings, proceeds from the sale of the stock and bonds and will limit the need to issue additional shares of were used principally to pay short-term debt incurred Common Stock. as a result of the Company's construction program. Capitalstructure shows balance Changes affect reinvested dividends The principal financial objective of the Company Major modifications of the Dividend Reinvestment continues to be a conservative capital structure that and Stock purchase plan became effective with the reflects the increased risk in the utility business. start of 1986. About 92,000 or one-third of the Com-Wintaining this posture will enable the Company pany's stockholders participated in the plan in 1985. to protect its high credit rating and take advantage First, taxes on dividends reinvested in qualified of financial flexibility. utility reinvestment plans can no longer be deferred. The Company hopes to achieve interest cov-Congress did not extend the deferment granted erages, before taxes, of at least 4 times. Another through 1985 by the Economic Recovery Tax Act. - objective is to continue reducing its long-term debt The change should be considered in tax planning for ratio, which dropped from 45.8% at the end of the year.The Company urges each participant to 1984 to 42.4% in 1985. consult the Intemal Revenue Service or a private in 1985, the Company purchased on the open advisor to determine individual tax consequences. 9

Second, the Company has eliminated the 5% The reduction is based on estimated decreases discount on shares purchased with reinvested divi-in the projected cost of gas,increa ed purchases of dends. The change, made only after considerable lower-priced gas on the spot market, anticipated deliberation because of the discount's popularity,is refunds from pipeline suppliers, and general changes in line with steps taken by other utilities. Since the in a business that is becoming increasingly daegu-Company's construction program is winding down, lated.These conditions have meant good news for I the need for new equity capital has diminished. customers, especially homeowners, whose bills are The Company is continuing the plan, however, now about 4% less than they were in late 1982. so that stockholders can conveniently purchase Electric customers' bills rose $137.4 million on shares without paying brokerage commissions. The an annual basis, commencing in July, under a Company is also now accepting Common Stock revision of the levelized energy adjustment clause E certificates, held by stockholders, for deposit and appioved by the BPU. It was the first in:rease in safekeeping in their reinvestment accounts; future more than three years. As of the end of 1985, the dividends on those shares will be reinvested under underrecovered electnc energy costs under the the plan. clause were 5283 million. EE "E' " ' Rate increase is requested energy adjustment clause, the BPU deferred-until The Company filed a petition in December with the i Board of Public Utilities (BPU) for an increase of the Companys next application for a revision-cons er ti n of $70 million of replacement energy 5633.6 million, or 14.2%, in annual revenues. The ~ request includes an increase of 5569.2 million, or c sts associated with certain outages at the Salem = 18.8%, in electric rates, and $64.4 million, or 4.5%, Generating Station. The outages mvolve failures of the electric generators at Salem I and 2. One of tne 5 in gas rates. k The filing is sizable because it asks that 100% utages is n w the basis of pending lawsuits against of allowable costs assxiated with the construction esunghouse Electnc Corporation, the supplier of the stations turbine-generators. I of the Hope Creek Generating Station be included In addition, the BPU disallowed S19.6 million in the rate base. The Company believes that the amount of the in replacement costs related to certain outages at Peach Bottom and S2.9 million at Salem.These dis-( filing attributable to Hope Creek v.ill not be un-reasonably burdensome on customers because im- "'I"'""'I*"* Y mediate benefits are derived from the savings in the million; the subsequent effect on camings of the h cost of fuel once the unit begins operation. Nuclear wntemff was 10 cents per share of Common Stock. E-fuel is less expensive than,ossil fuels, such as oil, g and the petition reflects those savings. The filing was timed so that a decision by the BPU would coincide with the start of Hope Creek's f commercial operation. Generally, the BPU takes about nine months to <lecide a rate case. About $81 million of the requested amount would be used to pay additional New Jersey gross E receipts and franchise taxes. c-Adjustment clauses are revised i Gas customers' bills were reduced, starting in = October, after the BPU approved a S35 million [. decrease under the raw materials adjustment clause. The Company had originally sought a $16 million reduction, but entered ii.to an agreement with the BPU staff and the New Jersey Public Advocate for a larger decrease as the cost of natural gas continued r to decline. s 10

Review of Operations afectric operations During 1985,2.3 million tons of coal, and 3.4 million barrels of oil were purchased and 394 million A 2% increase in electric output was recordea in therms of naturai xas were usea for pStaG s New 1985, largely as the result of a growing demand Jersey electric production facilities The natural gas in the commercial sector. Total megawatthours pro-displaced the equivalent of 6.5 million barrels of oil, duced, purchased and interchanged amounted to representing a $19.9 million savings. Additional 34.9 million, up from 34.2 milhon a year earlier. savings of about S3.4 million were realized through spot market purchases of coal and oil. cecords are set Steamy weather in mid August resulted in shattered The.aerage delivered cost of coal purchased peak load records. An all-time, one-hour peak of in 1985 to generate electricity was 553.05 per ton, 7,721 megawatts occurred on August 15. Only the 4% lower than in 1984, due to more favorable day before, August 14, the peak load had reached a market conditions and lower contract prices. The new high of 7,549 megawatts, breaking the previous average cost of low-sulphur heavy oil to produce mark of 7,422 megawatts on June 11,1984. Also electricity was S28.50 per barrel,8% lower than in on August 15, the maximum day's output reached 1984, because of soft market conditions which 149,457 megawatthours, up more than 4% from the resulted in lower contract and spot prices. previous record of 143,558 megawatthours on June The diversity of the Company's energy output by fuel sources in 1985 is illustrated as follows: 11,1984. When the new peak load record was estab. nuclear-24%, coal-32%, natural gas-9%, oil-5%, lished, the Company had an installed generating and purchased and interchanged-30% capacity of 8,999 megawatts, providing a reserve uranium supplies are adequate margin of '5.6%. The Company has sufficient uranium supplies The table below shows the Company's forecast under contract with producers in the United States for generating capacity, in megawatts, over the next and Canada to meet the fuel needs of both the Salem decade, based, in part, on normal weather conditions. and Hope Creek Generating Stations through 2000. The installed capacity, in megawatts, reflects the During 1985, uranium prices stabilized at Hope Creek Generating Station starting in 1987. around $16 a pound, after declining from a high of S24 a pound in mid-1983. Uranium production in v a the U.S. dropped off as the availability of lower-cost, higher-grade Canadian supplies increased. 7 -- In September, the Company terminated a con-tract with Sequoyah Fuels Corporation, a subsidiary h of Kerr-McGee Corporation.The project had been in a standby status since 1980 because open marktt

7; m

~ pnces of uranium had been substantially lower than 21 the coraract price. Sequoyah was to have delivered 2]t four million pounds of uranium. T In December, the Company terminated its in-I terest in two other uranium ventures, one of which was a proicct of philadelphia Electric Company for N Ec::nomical fuelmix is sought the peach Bottom units. The Company continued to reduce its dependence As a re< ult of these three abandonments and on high-cost oil to produce electricity, reaching in prior to regulatory approval, the Company's aggre-1985 the lowest amount used since 1948. It relied gate net losses of $21.7 million after related tax instead on more economical fucis-nuclear, coal and savings were deferred and are being amortized over natural gas. a seven-year period commencing in 1985.This - Comparative fuel costs in 1985 per million Brit. amortization reduced net income by approximately ish thennal units were: nuclear-50.82, coal-St.99, S3.1 million in 1985. The reduction in earnings natural gas-54.05, and oil-54.73. per share of Common Stock for 1985 amounted to 1I

--x N'N N s ~ E 1 . O ~, ~~ .n. y =

\\

i ; .z E at ms Rigorous progra ar Training Nucle the vided nter pro ing. Ce edge in prepar the s to help employee m! ake Sale r in ade m ation's le n the neratoo n electrsc ge 1985 durong '~ t k 12

c 3 cents after taxes. The Company is seeking regula-sesem f highlightsnucleargeneration tory approval to recover these losses in its current With Salem Generating Station's Unit I leading the ' base rate case. nation in electric generation, the Company's nuclear Future regulatory action may require a change performance showed significant improvement in in the level of annual amortization or could require 1985. The results mamiested the Company's basic the immediate write-off of any remaining unamor-goals of maintaining safety, demonstrating reliability .tized balance existing at that time. Any amount not and upgrading the economic competitiveness of recovered, in the opinion of management, would not nuclear energy. - have a material effect on the Company's position or Nuclear generation came from four operating results 'of operations. units, the ownership of which the Company shares. At year's end, there were reports that the Two units are at the Salem station, wl-ich the United States may consider imposing import quotas Company operates, and two are at the Peach Bottom

on uranium, which could lead to higher prices in station in Pennsylvania, which Philadelphia Electric

~ the future. Company operates. PSE&G has a 42.59% interest in The Company continued, however, to focus on Salem, and a 42.49% interest in Peach Bottom. Its cost-saving measures. An incentive price provision share of total output was 8,352,592 megawatthours. in a new uranium enrichment service contract will - If oil had been used to generate this electricity, there

lower enrichment costs by an estimated S50 million would have been an additional cost to customers of through 1990. The amount is on top of an estimated about S360 million.

S65 million savings stemming from consolidation of During one period of the year, Salem I was on La number of previous agreements under the contract, line for 277 consecutive days, breaking its previously which the Company signed last year with the U.S. longest run of 88 days and establishing a new mark Department of Energy. In September, a federal judge for all PSE&G generating units, regardless of fuel.

in a case to which the Company was not a party On December 16, Salem I became the record ruled that these new contract forms of DOE for the holder for a year's gmss electric power produced in enrichment of uranium are null and void.The par-the United States when it reached 8,969,747 mega-tics involved in those proceedings have appealed, watthours. The 1079-megawatt unit won the distinc-and the Company has joined a group of other utili-tion by surpassing a record held by a 1300-megawatt, ties in seeking to have the decision overtumed.

coal-fired plant, Mountaineer Unit I in West By the end of 1985, the Company had paid the Virginia. By year's end, Salem I had produced f= Federal government 579.7 million in fees to fund the 9,379,960 megawatthours. . eventual transportation and permanent disposal of The new record for power produced by any type c spent nuclear fuel.The fees were paid in accordance of generating station-nuclear, coal, oil or natural with the Nuclear Waste Policy Act of 1982, which gas-came three days after Salem I had established requires utilities to fund the program at a rate of a new record for generation by a nuclear unit. In one mill per kilowatthour of nuclear energy pro-reaching 8,892,300 megawatthours,it bested a record duced.The cost to the Company is for its share of set by Peach Bottom 2 in 1979. energy produced by the Salem and Peach Bottom Salem 2 was returned to service in April after generating stations. its failed generator was replaced with one that had been purchased for Hope Creek Generating Station's purchesedpowe. yields savings mt 2, de constmcen 6M M ken can-During 1985,30% of the Company's energy output celled in 1981. .- came from the purchase of relatively low-cost power reach Bottom 2 was retumed to service in July from n'eighboring electric utilities, mostly through

  1. ' ' ' ' # "E "

"" E "*"' "E the Pennsylvania-New Jersey-Maryland (PJM) Inter-len s. a B ttmn 3, tk oder unn r de stanon,

connection and the Allegheny Power System. The operated well before it was removed from service in
purchased energy was generated primarily by coal July for refueling and piping work. It was scheduled and thus replaced more costly oil-and gas-fueled to return in the first que.tv of 1986.

generation. 13

i .c , 1. .s 3 i gore 9'*" Theodore Barry & Associates. Both auditors are and st, tion 5 nationally recognized engineering and consulting sing meet frms. SE& 11 h5'p P gg gg g g g gg may be helpful in the Company's efforts to obtain n*8 an operatmg license for Hope Creek. h the In the Sargent & Lundy audit, Hope Creek's de 8 c design was considered techmcally adequate and in line with licensing requirements and standards. In the Barry report, the project was described as well-managed, comparing very favorably with other projects in the nuclear industry. Nuclear operations are improved Hope Creek approaches completion During the year, the Company's Nuclear Depart-By year's end, construction work on the Hope ment, which oversees the Salem and Hope Creek Creek Generating Station was essentially completed, Generating Stations, instituted a series of measures while startup, testing and turnover of the plant to improve controls and reduce costs. systems were about 93% completed. The loading The steps included a realignment of the organ-of fuel was planned for the first quaner of 1986 ization for increased accountability, a reduction in and the commercial operation scheduled for the budgets and projected staffing levels, a decrease in second half of the year. the use of outside services, and the implementation The present schedule for commercial operation of a fixed-bid approach to betterment projects to in the second half of 1986 should precede the tar-diminish cost increases associated with plant mod-geted operation date of December,1986 which was ification activities. established in the cost containment agreement. The Department also initiated measures to Achievement of the current schedule will enhance long-term planning. The measures are aimed require a continuing dedication to quality and cost at improving performance of the Company's nuclear control, as well as aggressive licensing, construction units through the reduced length of outages and and testing schedules. The Company recognizes that the elimination of delays in the return to service. there are uncertainties, such as completion costs, y,,,,,r,,,,,,,g, c,,,,,,,, with any large construction project, particularly in Major training programs for the Salem G,enerating the nuclear field. The license for a nuclear plant is Station received accreditation from the Institute of solely within the discretion of the Nuclear Reg-Nuclear Power Operations in 1985. 9.lem is only ulatory Commission (NRC), and hinges on satisfying the second nuclear station in the nation to win full NRC requirements. accreditatmn in February 1985, the Company reached accord INPO's accreditation is based on rigomus with the New Jersey Public Advocate to withdraw scrutmy of a nuclear plant's training program. All 55 intervention in proceedings before the NRC,s nuclear utilities in the nation are committed to gain-Atomic Safety Licensing Board for the issuance of ing full accreditation for training operations, which an operating license for Hope Creek. is in line with INPO's mandate to develop and mon-In 1985, the first group of Hope Creek's nuclear itor high level standards to make sure the industry operators underwent training and received operator operates its plants safely. licenses from the NRC. A total of 14 reactor operator The Company's training of nuclear personnel and 21 senior reactor operator licenses was issued. s based at the Nuclear Training Center in the The Company agreed to two maior indepen-city of Salem, about eight miles from the salem and dent audits of the Hope Creek project. One was an Hope Creek stations. Operators are trained on full-independent design verification program conducted scope simulators that duplicate the control rooms at by Sargent & Lundy, and the other covered gen-Salem and Hope Creek. eral management practices and was performed by 14

Distribution systems are improved I he daik capatits m thenns was da uled as Durmg 19% the Compant installed 21 new 131)00 rollow s pipchne natural gas I ; x46 (H K) hquctied volt powcr hncs. 26.000-volt services to three new or pet role um I '94 (H)U oil gas x 2; 0i X ) ss n expandmg customers and a high-voltage substation thetic naturai gas I12;1xx) and retiners gas In addition. the Compans mstalled nearh 40]HK) 4001 x x). new electnc meters, the most m a scar smcc 1966 supplies are stable T he construction or a 41mde ;UOmu solt I he uinym aintmucd to lim adepte mpphes transmission hne onginating at the Hiipe Creek in a M k o> m unM lig n rm (eenCrating 5tation w h t11mpleted lii March l he ,,, g,,. g, ,gy,gs,,g new hne strengthens power dntnhutmn rehabihts m Mb h io m G> potion llX a wh hoth the Compansi ustem and the Pennsvlvarna udim m PMM, W tbmd &n tenn arrang New lcrsev-Marsland plM Interto inccti..n eihrpumw e m#iemd prI nd tit e rs pgaj_ps- - - - Ilicsc supplies were suppleriiciited bs R.h purthawd Inim t he [.Will Bas was and Aincrada he Ciimpany s gas sendiitit iii 198,- w as lu llion e hernw i hlme of I 3%. triim the 19Ml oldrk " "'" K "J d " < "" "L' '""1 of 2.li hih, ion thenns ( eneralh warmer w cpher tri>ni the t ilinpans s i>w ri priiduttna tatilitics 011 competitlolt and lack or growth m the manutat Natural g.h purchawd ti,r distrib ituiti ti) clistinIncts w as 21)h hillnlil t hcMib ti tulpJred w it h tunng sector u ntnhuted to the detrea,c I he sendout of IT994,000 therms on lanuars 21.198,- 21; bilhon thcrms in 19x4 I he au race (ost was set a 24 hour record and the sendout of h21(x)o00 53 62 per milhon Brithh thermal una Btu s thenns in lanuars estahhshed a monthh mark compared wIth 53.69 Rctiners gas purchast i totaled 1443 unihon therms. t ompared w ith x' O iniJion Daily capacity increases therms Its prite ascraged 53 49 per milhon Bt t, s Ihe dalh capacits was up hs 134]XX) thenns. t' ag.nnst the 190 as cragt ut 54 0; I he produtt mt ut 19,990,0(M) thernls.n or l)cccmher 3l. An additional manuf actured gas Teathtd iI ? milhim thenns 21;JM)0 therms or pipchne gas 322 000 thenas of tompared with x ; nullion therno firm storage sers ite. alld 14;(M X) thernb (>f retlners I he adequate stippk aint the stahic prite re gas more thaii iittset a reductii>n iit ;48 (XX) therms ticct the natiiinwide surplin < >I cn aiiJ the gniw inc [ ill' manutJttured gas resultlllg inim the retircinent ti,mpetitum iii the gas indtntrs I:i ( )t ti >ber t iit or the West lnd has Ilant. I he plant was closed as f ederal E ncro Regulators Dimnusso,n issued new part id an i)ngibillg pri) gram (t) ihethe miist regtilatic an design J t< > priis ide greater at tt w ti, ccimilmical Mitirces i)t R.h .. ~. ~um ,vn, nm -~ ies ~ NaW'8' 9,s f adlit nstal M r } ' are bei"9 for porth ge 98" r + Wr dew l Ro' Harb j ] opr"*"t e*' urin 9 4. f V nd i a 128gagn W,,s

M ^

n o S-W' $51 C*ndorni"jur l

~ y. l3 L / interstate pipeline transportaton. As a result, there sewer construction project in Camden.The Company L may eventually be substantial changes in the negotiated an agreement with the Camden County J way natural gas is marketed, which would lead to Municipal Utilities Authority to be reimbursed a increased competition. : total of $1.12 million, essentially the overall cost of The Company introduced, in August, a new the Company's work. rate that it will charge for the transportation of gas g,,, which large volume customers purchase directly from third parties. A number of customers have The Company announced that all employees in-made such purchases, arranged for interstate pipe-volved in gas appliance service will undergo specially lines to transport the gas to PSE&G, and used the developed, hands-on training to prepare them for ' Company s transportation service to deliver the gas work on advanced gas-fired equipment that is now to their facilities.These direct purchases may result on the market.The program was launched after a - m substantial savings to the customers, largely pilot study completed in May showed a considerable through the partial avoidance of gross receipts and mprovement in service capability among employees. franchise taxes which represent nearly 14% of the cost of regulargas service. CDC's levels remain high n 1985, the Company demonstrated repeatedly its Energy Development Corporation (EDC), the deep concern for the New Jerseyans it serves, as . Company's exploration and production subsidiary, the number of customers reached 2 million for the s' upplied 8% of the total gas purchased by the first time. l Company in 1985. During the previous year, EDC Employees meet the test accounted for 6% of the Company's supplies. Electric service to more than 239,000 PSE&G cus- - Revenues from the sale of natural gas and oil tomers was interrupted by Hurricane Gloria during were 594.3 million, up 19.6% from the 1984 figure. its rampage through the state on September 27. Net income fell 8.1% to 59.5 million, due to in-Crews worked around the clock and restored all creased amortization charges. power within 48 hours. In 1985, EDC drilled 45 wells,13% less than The Company then responded to appeals for L last year. Twenty <ight were onshore and 17 were assistance by dispatching 68 crews to areas of long

offshore. At year's end,13 were still being drilled.

Island, Connecticut and Massachusetts to help Onshore operations took place in the Gulf utilities there restore service to their customers.

Coast regions of Texas, louisiana, Mississippi, On Labor Day, electric and gas crews cooperat-

' Alabama and Florida. Fourteen wells were success-ed with firefighters battling a blaze that destroyed ful, and 14 were abandoned. Offshore activities in-40 acres in the heart of passaic's industrial section. cluded exploratory drilling on 14 lease blocks and One volunteer, William Koenemund, who worked in ' ' development drilling to delineate prior discoveries-the Company's electric transmission and distnbu-Six wells were successful, and 11 were not. tion headquarters in Secaucus, died of a heart attack About 48% of EDC's 1985 gas sales was deliv-while fighting the fire as a member of the Secaucus cred through Casdel Pipeline System Incorporated, Fire Department. Later, the Company offered bill-an EDC subsidiary. t paying assistance to customers who were left home-Tl:tribution expemis less and iobless by the blaze.

The Company continued in 1985 to install new gas in mid-October, eight gas distribution crews mains and services at record levels. Nearly 300 miles and 20 service personnel answered an appeal from of mains and nearly 275 miles of services were the llrooklyn Union Gas Company. Water from a placed throughout the Company's service territory.

broken main had entered the gas distnbution system, ' In addition, some 30,000 new gas meters were in. causing widespread outages over a 100-bhick area stalled, the most since the 1950s. and forcing 11rooklyn Union to seek restoration A maior project involved the relocation of assistance from other utilities. 18,000 feet of mains and 500 services as part of a ouelity emietticiency emphasised The Company maintained its aggressive approach 16

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in instituting programs and projects to improve the ation for its oil-to-gas conversion campaign.The quality and efficiency of service to all customers. Company was honored for its direct selling, adver. The hallmark of the effort remained its " Challenge of tising, and personnel training activities and for its Caring" program that was begun in 1983 to emphasize cooperation with plumbing and heating contractors. to employees the importance of good customer re-Electric heating was promoted,in large measure, lations. And PSE&G continued to stay tuned to the for new construction. Heat pumps were installed thoughts and ideas of customers by supporting, for a in 2,884 new dwellings. Electric heating installed in third year, three consumer advisory panels, industrial and commercial buildings resulted in in 1985, the Company started sending bills in additional loads of 70,236 kilowatts, compared with Braille to blind customers. It made arrangements 52,427 kilowatts in 1984. with a number of additional financial institutions to Sales of efficient high-pressure sodium and other vapor lights set a new all-time record, as a accept bill payments from customers. And it ex- ~ result of the Company's dusk-to-dawn lighting pro-pedited receipt of payments through the mail by adding bar-coding to reply envelopes. motional activities.There were 10,937 units reported ' The Company's ongoing effort to assist low-sold, compared with 7,373 in 1984. income customers took a creative turn when the conservation remains strong Company purchased discounted natural gas from New Jersey's residents continued to exhibit their Citizcas Energy Corporation (CEC), a Boston-based enthusiasm for conservation as a means of saving energy cooperative headed by Joseph P. Kennedy II. energy and money. CEC's profits were then donated to the Salvation . Scal-Up and Save" served again as the central Army, which administers Project Volunteer For theme as the Company carried its message to cus-Energy, the Company's matching fund program t tomers in a variety of ways. For example, some 10,000 hcip qualified needy families pay their utility bills. Iow-income electric and gas customers attended Intense collection activities during the year special workshops at 80 locations. The workshops resulted in a sharp reduction in late and unpai'. were held in cooperation with local community bills.The net write-off of uncollectible accounts in action agencies to outline the benefits of conserva-1985 was $27.6 million, down 31% from the 1984 tion and demonstrate energy-saving measures such amount of $40.2 million. as home weatherization. The Company expanded its efforts to prevent Under the low-income program,9,500 weather-energy theft by mcreasmg its mvestigative staff ization kits were distributed, while the homes of - throughout its service territory. In 1985,4,204 cases 17,000 customers were weatherized free. In addition, were completed, producing billings of $2.1 million, $250,000 was given-for the third consecutive year-compared with 3,793 cases completed in 1984, to community action agencies for low-income con-yielding billings of $1.5 million. servation efforts. During 1985, marketing activities concentrated Home energy audits increased to 39,850 in 1985 on sales mvolving minimal capital investment by from 27,250 in 1984, while commercial energy audits the Company and emphasized the benefits of electric totaled 1,300, compared with 100 a year earlier. and gas to meet energy needs. Overall, the efforts The Company's energy conservation center in will mean $42 million in additional revenues annu-Newark handled more than 180,000 telephone ally for the Company. inquiries and 380,000 letters as interest in the sub-An aggressive advertising campaign encouraged ject boomed. During a stretch in August, the center homcowners to switch from oil to natural gas for received about 1,100 customer calls daily concerning heating purposes.There were 12,306 residential the Company's offer of free home energy surveys. conversions reported during the year, compared with . Conservation on Wheels," the Company's 11,160 in 1984. Residential gas heating installations mobile energy van, visited various h> cations during in new homes totaled 17,238, compared with 12,190 the year, ranging from shopping centers to large in the previous year. In addition,2,154 industrial and companies that gave their employees the time to commercial customers changed to gas. tour the vehicle. The van attracted 62,000 visitors In April, the Company received a marketing in 19R5, traveling some 6,000 miles. achievement award from the American Cas Associ- ) 1 J 19 b

nV g3pa nds sa W'thou nuallY s3 rs' ot dotta its by C n:M o*" g g eblCI"*' i n sP"' ' \\ ..,4 f. '.\\ s i iw 3 i t >r Vehrcle inst rec. t rar, shr'ts<p. ors Mobile da ta terminants to a ai q<> s ser v ic e-1 <b,-. a,- .t'.4.-

New activities in 1985 enabled customers The Great Falls hydroelectric project, on the. 1 having difficulty paying their bills and customers Passaic River in paterson. It will produce 1I megawatts eligible for lifeline credits to take advantage of con-and has a startup schedule planned for late 1986. servation installations, valued at up to $200, in their . A turbo-expander power generating system, homes. About 4,500 have participated. located at a gas metering and regulating station in The Company also offered for the first time, in - Hamilton Township. The installation, set for op- -- '1985, S15 discounts on clock-thermostats, and, by eration in 1986, will produce 2.9 megawatts by har-year's' end,78,000 customers had requested coupons. nessing the energy that results from a process to The discount program complemented the Company's reduce the pressure of pipeline natural gas to the ~ continuing offer of rebates on the purchase of high desired pressure of the gas for utility distribution. efficiency heat pumps and air conditioners. More On June 18, the Company began receiving than 26,000 rebates totaling $2.9 million were made power generated by a 2.6-megawatt methane gas to customers in 1985. recovery project at Kinsley's Landfill in Deptford. In addition to its own conservation programs, The landfill gas, composed primarily of methane and the Company budgeted S140,000 to help underwrite carbon dioxide,is produced by the decomposition of a state-sponsored, cost benefit study of conservation solid waste. The recovered gas fuels four diesel efforts, and supported, through a S360,000 grant, engines from which the electricity is obtained. the newly established New Jersey Energy Conserva-By the year 2000, the Company anticipates that tion Laboratory at Princeton University. about 500 megawatts of non-utility generation will The quality of the Company's conservation be installed throughout its service territory. This activities and efforts was widely recognized in 1985. will help offset the need to build a new generating Both the United States and New Jersey Departments unit by then. of Energy honored PSE&G with awards for energy comihd pratie is aW conservation innovation. On the local level, the The Company continued its investigation of new and Union County Urban League cited the Company for dMoNoh@ah WolmiMm its low-income conservation programs. possible use in its electric power system beyond the year 2000. Studies indicate that coal gasification and on the comnesdee fluidi cd-bed combustion technologies, currently In 1985, PSE&G engaged in a number of activities being developed for large-scale electric power produc-to keep pace with rapidly developing and chang-ti n, can offer PSE&G future energy alternatives. ing technologies that will very likely figure in the Fossis units to be upgraded Company's future responsibilities as one of the Extending the life of fossil-fired generating units is nation's largest electric and gas utilities. the subject of an ongoing study that was given in-Non-utisity genereflon prenned creased attention by the Company in 1985. plans are ( During the year, the Company signed four agree. in the making to maintain the reliability of the fossil ments to purchase eleuricity from non-utility steam umts m the Company's system and to extend generation developers. The contracts will bring to their operating life. '109.6 megawatts the Company's total supply of non-The life extension program is essential since utility generation.The new projects are: m new generatmg capacity is planned for the The Essex County resource recovery facility, balance of the century.The program will involve the located adjacent to the Essex Cenerating Station in development of turbine / generator ultrasonic inspec-Newark. It will have a maximum production capacity tion and analysis techniques to help determine of 79 megawatts and be fueled by municipal solid the remaining operating life expectations of costly waste. The Company expects to begin receiving wmponents m a generatmg umt. electricity in 1988. work begins st averriis creek The Dundee Dam hydroelectric project, on the Construction of the Merrill Creek Reservoir was Passaic River in Clifton. It will produce 2.1 mega-started in September after the acymsition of a watts, with the first delivery of energy to the Com-number of permits. When completed, the reservoir pany set for 1986. 20

I i reliable communications service between the furnace until needed during the day by the home-Company's headquarters in Newark and the Salem owner. Widespread use of the process could help and Hope Creek Generating Stations. It is also plan-utilities reduce the need for daytime generating ning to integrate communications systems into a capacity.Two PSE&G employees volunteered their l single digital network incorporating voice, data, homes for the test, which covers the 1985-86 image, text, and graphic services. The eventual use heating season. of private facilities will enable the Company to In response to several transformer failures in reduce overall communications costs. the industry, a two-year research effort was initiated 1 at Rensselaer Polytechnic Institute to study the Research: Robots to fuel cells dielectric behavior of circulating transformer oil. Through its subsidiary, the PSE&G Research Cor-The research is being underwritten by PSE&G and poration, the Company examined the prospects of a g g gg g variety of technologies that may help enhance its electric charge potential in insulating material in operations in years to come. Total research and development costs for 1985 The Company began testing two 40-kilowatt were S18.9 million, which were partially offset by fuel cell power plants in 1985. One um.t was m-S18 mib...on m sales and reimbursements. Of the stalled at Alcan Building Products in Woodbridge balance,53.2 mihton were spent for mtunal studies nd began operating in January. Preliminary results and $12.9 million for research by u ility-sponsored showed that it has operated well, with 75% avail-organizations. c ability and a combm.ed thermal and electncal Commercially available robou. devices were efficiency of 76%, about twice the rate of the best tested at the Salem and Hope Creek L,enerating fossd. fueled generating station. It produced an Stations to gauge their usefulness ia carrying out average electrical output of 37 kilowatts. reutine inspection, surveillance and maintenance The other unit was installed at Princeton tasks. The nim or the research is to have robots da work in controlled radiation areas of the nuclear University and placed in service in October. Both will be tested for 8,000 operating hours. The fuel plants to minimize personnel radiatmn exposure. cells use natural gas as a fuel and, through an elec-To expand its knowledge, the Company has s..omed trochemical process, produce electricity and thennal with other organizations to fann a national utility energy in the form of hot water. The study is part robotics users group that will investigate more of a nationwide program sponsored by the Gas Re-extensively the apphcations of the devices. scarch Institute and the U.S. Department of Energy. The Company also j..omed other utilities and the Electric Power Research Institate (EPRI) to study in the Public Eye the benefits of heatmg homes by using thermal storage equipment. Under the program, less costly New iersey remainea a simng economic magnet off-peak electricity is used to produce heat at night-for business in 1985, and PSE&G continued to The heat is then stored in a specially designed play a key role in attracting new companies to the i state and encouraging existing ones to expand. ,m. Development is widespread The Company worked closely with a number of agencies on all levels of govemment, particularly the New Jersey Department of Commerce and Economic Development, and the results were again outstanding. d ftobot*,, teste Numerous foreign businesses established op-l - in 1985 f*' P ib

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F corporate or administrative office expansions in in the educational arena, about 140,000 teach-excess of 100,000 square feet. During the year, the ers and students attended workshops and pmgrams state experienced an overall job gain of 4%, placing and received various energy reference materials. it above the national average. Various Company programs, including those The development boom continued in certain conducted by Community Affairs and Speakers' highly attractive areas, such as the Hudson River Bureau representatives, reached nearly 322,000 per-waterfront, the Meadowlands, the Princeton-Route 1 sons.The Second Sun, the energy infonnation center corridor and the Burlington County region. at the Salem and Hope Creek Generating Stations, A clear illustration of the intense development underwent renovation and attracted 18,400 visitors. under way in the state is in builder projections for About 2,300 persons toured the Company's other an 18-mile stretch along the Hudson: 24 million generating stations. square feet of office space,28,000 residential units' Employee orientation improved 1.5 million square feet of retail space,2,500 hotel More than 13,000 persons worked for the Company rooms and 10 marinas-all resulting in as many as in 1985, and their dedication remained the backb(me 80,000 new jobs. of dependable and reliable service to customers. The trend to rejuvenate the state,s mner cities In 1985, a two-day orientation program for new was unabated in 1985 as a number of companies employees was mtroduced to help set a positive, took advantage of PSE&C's innovative area devel-motivating tone as they begin their careers. The opment electric rate. Companies which move program focused on performance expectations, job into or expand in 10 communities are eligible for a standards, safety considerations, and relationships discounted rate.The communities are: Newark', with supervisors and colleagues. Jersey City, Paterson, Elizabeth, Camden, Trenton East Orange, Hoboken, Union City, and Plainfield. Changes in organization The area development rate augments t he Frank P. Libri::i retired as Vice President-state's enterprise :one program, which permits Production on March 2,1985 after more than 38 municipalities to offer tax incentives, grants and years of service. low income business loans to retain or attract com-The Board of Directors elected Corbin A. panies. In 1985, the program's first full year, five McNeill, Jr. as Vice President-Nuclear and redesig-zones-Newark, Camden, Trenton, Plainfield and nated Richard A. Uderitz, formerly Vice President-Bridgeton-attracted $125 million in private invest-Nuclear, as Vice-President-Production, both ments and the creation of 8,300 permanent jobs. By effective March 18,1985. year's end, five more had been designated: Jersey William E. Scott, Senior Executive Vice Presi-City, Kearny, Elizabeth, Orange and a joint zone of dent, retired on May 1,1985, after 13 years of service. Vineland and Millville. Upon the retirement of Robert J. Selbach as To assist developers in finding business Vice President-Transmission and Distribution, locations, the Company and the state produced a after more than 38 years of service, the Board of "New Jersey Map.* The map delineates economic Directors redesignated Rudolph D. Stys as Vice development factors such as maior railway lines, President-Transmission and Distribution, effec-highways and exchanges, and other important site tive June 1,1985. location features. On June 29,1985, Robert M. Crockett retired as Vice President-Fuel Supply after more than Community service continues 37 years of service.The Board of Directors elected A proud tradition of community involvement by Robert F. Steinke, Vice President-Fuel Supply, the Company and its employees was continued in effective June 29,1985. 1985. Representatives or the Company participated James IL Randel, Jr., a Senior Vice President of in a wide range of civic and cultural activities' the Company since July 1,1974 died suddenly on Through an internal program, all employees wer June 15,1985. The Board of Directors and the encouraged to serve as volunteers in organizations management of the Company deeply regret the loss m their home communities and m the municipah-of this distinguished and able executive officer. ties in which they work. 25

Financial Statement Responsibility The management of Public Service Electnc and Gas Company is employees. In addition, management has communicated to all responsible for the preparation, integnty and objectivity of the employees its Policies on 13usiness Conduct, Company Assets and financial statements of the Company.The financial statements Internal Control. are prepared in accordance with generally accepted accounting The Intemal Auditing Department of the Company conducts principles applied on a consistent basis and reflect estimates audits and appraisals of accounting and other operations and based upon the judgement of management where appropnate. evaluates the effectiveness of cost aad other controls. Management believes that the financial statements present fairly The finn of Deloitte Haskins & Sells, independent cert fied and consistently the Company's financial position and results pubhc accountants,is engaged to examine the Company's finan-of operations. Information in other parts of this Annual Report is cial statements and issue an opinion thereon.Their examination consistent with these financial statements. is conducted in accordance with generally accepted auditing The Company maintains a system of internal accounting con-standards and includes a review of internal accounting controls trols to provide reasonable assurance that assets are safeguarded and tests of transactions. and that transactions are executed in accordance with man. The Board of Directors carnes out its responsibility of finan-agement's authorization and recorded preperly. The system is cial overview through the Audit Committee, currently consisting designed to permit preparation of financial statements in accord-of six directors w ho are not employees of the Company. The ance with generally accepted accounting principles. The concept Audit Committee meets periodically with management as well as of reasonable assurance recognizes that the costs of a system with representatives of the internal auditors and the independent of internal controls should not exceed the related benefits. certified public accountants. The Committee reviews the work Management believes the effectiveness of this system is of each to ensure that their respective responsibilities are being e,hanced by a program of continonus and se':ct:ve training of camed out, and dreusses related nutters. Ibth audit groups have full and free access to the Audit Committee. 26

Statements of Income (Thousands of Dollan) For the Years Ended December 31, 1985 1984 1983 Operating Revenues Electric $3,000,564 $2,816,241 $2,570,457 Cas 1,408,490 1,379,883 1,392,475 Total Operating Revenues 4,409,054 4,196,124 3,962,932 l Operating Expenses Operation Fuel for Electric Generation and Interchanged Power-net 965,966 872,805 868,977 Gas Purchased and Materials for Gas Produced 824,648 822,583 858,018 Other 546,267 527,371 503,568 Maintenance 291,437 269,974 238,766 Depreciation and Amortization of Utility Plant 222,963 211,188 201,787 Amortization of Property Iosses (note 4) 55,263 58,975 49,(M() Taxes Federal Income Taxes (note 1) 266,379 255,3(M 191,033 New Jersey Cross Receipts Taxes 557,270 529,654 513,760 Other 51,075 50,132 44,033 Total Operating Expenses 3,781,268 3,597,986 3,468.982 Operating income l 617,786 598,138 493,950 Other Income Allowance for Funds Used During Construction-Equity 127,397 1(M,803 85,591 Equity in Earnings of Subsidiaries (note 2) 9,627 9,098 7,061 Miscellaneous-net 587 3,768 5,544 Total Other Income 137,611 117,(369 98,196 income Before Interest Charges 765,397 l 715,807 592.146 Intsrest Charges \\ note 81 Long-Term Debt 176,227 256,689 228,189 l Short-Term Debt 5,788 5,428 3,480 Other 7,278 17,650 13,699 Total Interest Charges 289,293 279,7(i7 245,368 l Allowance for Funds Used During Construction-Debt (68,448) (53,989) (43,001) Net Interest Charges 220,845 225,778 202,367 l N2f income 544,552 490,029 389,779 Davidends on Cumulative Preferred Stock and 6(t221 58,214 $1.40 Dnidend Preference Common Stock 60,002 Ecrnings Available for Common Stock $ 484,550 $ 429.808 $ 331,545 i Shares of Common Stock Outstanding End of Year 131,698,517 112,563,068 102,857,989 Average for Year 122,344,270 108,913,276 97,467,431 E enings per Average Share of Common Stock l $ 3.96 $ 3.95 l $ 3.40 Cividends Paid per Share of Common Stos k l $2.81 $2.70 l $ 1.62 Scc Summary of 5gndnant Aununtmg Poliaes and Note, to Fm maal statement. 27

l Balance Sheets R l 1 Aseets (Thousands of Ibilars) December 31, 1985 1984 Utility Plant - Original cost Electric Plant $ 5,268,113 54,994,717 Gas Plant 1,290,330 1,222,468 Common Plant 264,106 250,372 Nuclear Fuel 120,888 105,140 Utility Plant in Service 6,943,437 6,572,697 Less Accumulatcd Depreciation and Amortization 2,502,594 2,320,140 Net Utility Plant in Service 4,440,843 4,252,557 Construction Work in Progress 3,997,772 3,255,914 Plant Held for Future Use 36,112 41,818 Nct Utility Plant 8,474,727 7,550,289 Other Property and Investments Nonutihty Property, net of accumulated depreciation - 1985,5670;1984,5831 13,672 12,889 investments in and Advances to Subsidiaries (note 2) 250,598 234,799 Total Other Property and Investments 264,270 247,688 Current Assets Cash (note 3) 13,667 4,702 Working Funds 24,716 27,481 Pollution Control Escrow Funds 30,466 127,103 Accounts Receivable, net of allowance for doubtful accounts - 1985, 520,733, 1984,516,470 386,518 364,850 Unbilled Revenues 210,416 165,529 Fuel, at average cost 224,069 276,206 Materials and Supplies, at average cost 75,551 57,611 Prepayments 21,572 11,445 Total Current Assets 986,975 1,034,927 j Deferred Debits (note 4) Ttoperty Losses (note 7) Atlantic Project 215,232 230,292 Hope Creek Unit 2 174,076 197,206 LNG Project 48,823 59,400 Uramum Proiects 31,623 Other 3,862 5,605 Underrecovered Electric Energy and Gas Fuel Costs -- net 264,039 307,461 Unrecovered Nuclear fuel Dnposal Costs 3,656 Unamortized Debt Expense 23,426 24,120 Total Deferred Debits 761,081 827,740 Total $10,487,053 $9,660.644 %c %mmary of Signdnant Aununtmg I'ohuo.md Notn h hnanual Statements. 28

Capitellaation and Liabilities (Thousands of Ibliarsi December 31, 1985 1984 Capitalization (sce statements, pages 3133) Common Equity Common Stock $ 2,508,945 $2,005,923 Premium on Capital Stock 557 557 Paid-In Capital 26,185 26,185 Retained Earnings 1,232,849 1,098,219 t Total Common Equity 3,768,536 3,130,884 Preferred Stock Without Mandatory Redemption 554,994 554,994 Preferred Stock With Mandatory Redemption 65,000 137,750 Long-Term Debt 3,16'.41 3,103,343 Other Long-Term Obligaticas (note 81 58,337 122,947 Total Capitalization 7,611,508 7,(M9,918 Current Liabilities Preferred Stock to be redeemed within one year 72,750 1,750 Long-Term Debt and Other Obhga' ions due within one year 57,895 3,084 Commcrcial Paper (note 51 107,000 1xinno Accounts Payable 287,290 233,829 New Jersey Gross Receipts Taxes Accrued 545,802 547,341 Deferred income Taxes on Unbilled Revenues (note 1) 96,791 76,143 OtherTaxes Accrued 25,139 16,303 Interest Accrued 84,065 h6,M87 Cas Purchases Accrued 87,669 108,237 Other 70,662 65fx)7 Total Current Liabilities 1,435,063 1,323,581 D5ferred Credits Accumulated Deferred Income Taxes l note 1) Depreciation and Amortization 579,541 507/05 Property Losses Atlantic Project 90,485 96,821 Hope Creek Unit 2 69,105 81,487 LNG Project 18,725 23,885 Uranium Projects 13,106 Deferred Electric Energy and Gas Fuel Costs - net 121,458 141,178 Unamortized Debt Expense 7,791 8,203 Other (27,110) (22,978) Accumulated Deferred Investment Tax Credits (note 1) 547,169 417,978 i Other 20,212 32,966 Total Deferred Credits 1,440,482 1,287,145 Commitments and Contingent Liabilities (note 71 Total $10,487,053 l $9 660,644 l i l l l l 29

Statements of Changes in Financial Position i fihousands of Dollars) For the Years Ended Decemlier 31, 1985 1984 1983 Funds Provided Net income $ 544,552 5 490,029 5 389,779 Add (Deduct) Items not affecting Working Capital Depreciation and Amortization 329,938 299,865 294,628 Recovery (Deferrall of Electric Energy and Gas Fuel Costs-net 43,422 (21I,336) (162,7971 Provision for Deferred Income Taxes-net (note 1) Depreciation and Amortization 71,936 69,125 79,935 Property lesses (10,772) 4,392 (19,915) Deferred Electric Energy and Gas Fuel Costs (19,720) 96,931 76,842 Other (4,544) (14,031) 6,107 Investment Tax Credits-net 131,358 94,457 33,718 Allowance for Funds Used During Construction (AF DC) (195,845) (158,792) (128,592l Equity in Earnings of Subsidiaries (9,627) (9,098l (7,061) Other (9,042) 5,724 3,583 Total Funds from Operations 871,656 667,266 566,227 Net Funds from Financings long-Term Debt 199,118 421.610 161,081 Preferred Stock 29,739 Corimon Stock 499,905 213,492 181,276 In,rease in Obligations Under Capital Leases 548 5,910 2,924 T,tal Funds from Financings 699,571 641,012 375,(120 m- - I IotalIunds Provided $1,571,227 $1,308,278 $ 941,247 Funds Applied Additions to Utility Plant, excluding AFDC $1,024,244 $ 808,573 $ 765,217 Cash Dividends 406,805 355,276 313,989 Investments in and Advsocca to Subsidianes-net 6,172 (9,061) 9,080 Reductions of long Term Debt and Other Obligations 202,855 7,054 58,002 Reductions of Preferred Stock 72,750 LNG Project Abandonment (note 4) Reduction in Investments and Advances (69,313) Dcferral of Loss 69,313 Uranium Prorects Abandonments { note 4) Reduction in Utility Plant (37,108) Deferral of insses 37,108 Miscellancous 17,835 33,025 10,278 Total Funds Applied 1,730,661 1,194,867 1,156,566 Changes in Working Capital-Increase (Decreasel Short Term Debt (47,811) 18,H85 l157,999) Cash and Equivalents (90,437) I 16,7(>7 145,778) Accounts Receivable and Unbdled Revenues 66,555 08,252) 9,755 Fuel (52,137) 54,444 (40,155) Other Current Assets 28,067 4,214 1I,440 Accounts Payable and Other Accrued liabdities (35,726) (26,910) 12,298 Accrued Taxes (27,945) (15,737) 14,880) Net increase (Decrease) in Workmx Capital (159,434) I13.411 1215,319) l Total funds Applied and Changes in Working Capital l $1,571,227 $ 1,308,278 $ 941,247 See Summary of Ngnifwant Aca.untmg l'olson and Nota to Instarn tal Stat (nit-tits.

Statements of Retained Earnings (Thousands of Dollars) For the Years Ended IAcember 31, 1985 1984 1983 Sal;nce January 1 $1,098,219 5 963,617 $ 888,262 Add Net income 544,552 490,029 389,779 Total 1,642,771 1,453,646 1,278 m l Deduct Cash Dividends Preferred Stock, at required rates 58,121 58,317 56,353 $1.40 Dividend Preference Common Stock 1,881 1,881 1,881 Common Stock (A) 346,803 295,078 255,755 Total Cash Dividends 406,805 355,276 313,989 Capital Stock Expenses 3,117 151 435 Total Deductions 409,922 355.427 314.424 Baf nce December 3f $1,232,849 51,098,219 l $ 963.617 A.Restnttions on the pasment of dmdends are wntamed m the Charter. certam of the mdentures surplemental to the Companyi Wrtgage and certam Jebenturc h,nd indenturcs However, none of thesc re,tncnons presenth hmns the pasment of dmdends out of current cammgs.1hc amount of ritamed carmngs tree of these restnttions at uccember.li, ivai was 5il22.aefan See Summary of Sigmficant Accountmg Pohacs and Notes to hnanual statementt Independent Accountants' Opinion Deloitte Haskins-Sells Certified Public Accountants Gateway One Newark, New Jersey 07102 To the Stockholders and Hoard of Directors of Public Service Electric and Gas Company: We have examined the balance sheets and statements of capital in our opinion, such financial statements present fairly the stock and long-term debt of Public Service Electric and Gas fmancial position of Pubhc Scrme Electnc and Gas Company Company as of December 31,1985 and 1984 and the related at December 31,1985 and 1984 and the results of its operanons statements of income, retamed earmngs, and changes in fmancial and the changes in its fmar aal position for each of the three position for each of the three years in the period ended December years in the penmi ended December 31,1985,in confonmt> with 31,1985. Our examinations were made in accord.mce with generally accepted accountmx principles apphed on a consistent generally accepted auditing standards and, acwrdingly, includcJ basis. such tests of the accountmg records and such other auditmg procedures as we considered ne;essary in the circumstances. [- - - - February 10,19K6 31

Statements of Capital Stock Current Certam Outstanding Redemption Refur dings Shares Prae Restrated Dec.ernher 31, (note Al Per share Prior to 1985 1984

[ Thousands iThousands of (bilars) of Dollars) Nonparticipating Cumulative Preferred Stock (note IM With Mandatory Redemption $100 par value - Series 12.25 % 227,5(X) $106.(X) $ 22,750 $ 24,5(X) 13.44'b 500,000 113.44 4/1/86 50,000 50,000 12.80 % 350,000 112.80 10/1/87 35,000 35,(XX) II.62% (300,000 shares issued in 1983) 300,(XX) 111.62 9/1/88 30,000 30,(XX) Less amount to be redeemed within one year 72,750 1,750 Preferred Stock with Mandatory Redemption $ 65,000 $ 137,750 Without Mandatory Redemption $25 par value - Series 9.75 % 1,600,(XX) $ 15.75 $ 40,000 $ 40,[XX) 8.70 % 2,000,(XX) 26.50 50,000 50,000 $100 par value - Series 4 08% 250,lXX) lul.lXJ 25,000 25,000 4.18% 249,942 103(X) 24,994 24,994 4.30% 250,(XX) 102.75 25,000 25,[X10 5.05% 250,000 103 (X) 25,000 25,(XX) 5.28 % 250,000 103(X) 25,000 25,000 6 80% 250,(XX) 102.00 25,000 25,(X10 9.62% 350,000 1(M.50 35,000 35,(X X) 7.40% 500.(XX) 101.00 50,000 50,0fX) 7.52% 5(X),(XX) 101.00 50,000 50,(XX) 8.08% 150,000 101IX) 15,000 15,0(X) 7.80% 750,(XX) 1011)0 75,000 75,(XX) 7.70% 600,(XX) 104.64 60,000 60,[XX) 8.16% 300fXX) 106.86 30,000 30.(XX) Preferred Stock without Mandatory Redemption ino changes in 1984 and 19831 $ 554,994 5 554,994 Dividend Preference Common Stock and Common Stock 51.40 Dividend Preference Common Stock (no par)- 1,343,999 shares authori:cd, issued and outstandmg; current redemption price $35fX) per share (note C) Common Stock (no par) - authorized 150,(XX),[XX) shares (note D); issued and outstandmg at $2,508,945 52,(X)5,923 December 31,1985,131,698,517 shares and at December 31,1984,112,563,068 shares (19,135,449 shares issued for $503,022,(XX)in 1985,9,075,079 shares issued for $213,583,(XX) In 1984; and 8.013.393 shares issued for $181.461.(XX) m 1983) Noteet A.In addition.thcre are 1.471.5;M sharn of $1m par ufue and 6,4mJm sharn of Aryregate Number i4 $15 par value Cumulative Orcierred $took whnh are authon:cd and unmuol, and "C ','] sharn run hased and c crne Dunng the Years whn h upm maante nuy or may not Fronde int mandatory unkmg fund Roletmabk Mmdatory redempt u m. senes Annually Rca mpion 1985 19k4 IVMI O11 dmden h upm ans shares of Prcierred stock are m arrean m an amount equal 12 2Vs1 17.sm 2/1, ha 17,500 179 N) 1h06 to the annual dmdend theroin, votmg nghts for the chuon.4 a maionsv i4 the 114n 2sJm Ul/M7 Sunt of thrnton become opcratne and contmue unt'l all anumulated and unp ud 12mt i 7,sm vdWM dmdtnds thereon have been paid. whercupe 4!I such votma nxhtucaw. sub,cu in Il61t l IUNU Mp9 hemit agam rontJ from ume toimit. Ihe Company n reqmrnl to purthaw or ratccm a spcohed nummum number Prctcrred stock w nhout mandatorv rca mpion n sub, cot to redemption solcly at of sharn of Cumulatne Prtfened stock with mandatory rulempton annually the optmn of the Comp.my upon pa> ment d the apphoble edempoon pnce plus commenung on the etictuve dates shown below %nh re&mpons are cumulaust auumulated and unraid dm&nds to the date hint for redemption 1hc Cornpany may annuallv refctm, at its opnon. an wrrutc of up to awne the ibc *tattment rtikcts the planned redemptmn m IW6 of all shares of the numhcr of shares shown for cath unh wnn All wh rcJouptions are at a rea mg Preferred stoi k of the U 2% seno and the 13 4 rt k nn As a result the annual tion pnce of $1m per sharc A rtJcmpnon of sharn of any wnn aho requirn Jmand rc<purem(nt and the cmbnidcd dmdend onts =dl dmp to 57.966fn) and payment d all accumulatel and unpaid dma nds to the date hwd for rolcmpoon 12 37% respettntiv, for PnterrcJ sem k with mandatorv rufemption 'lf,c annual dmdend regmrcment and emhcdad dmand ont for Pn krred st<nk without mandatory rcJimpoon wt rc $40629JW and 7#t, ropuivciv C.1.nh share s4 $l 40 Dmdend Prcarente Comnuen % b n t nt tkd to t umulative dmdends to two votn. and, on b.pdanon or dmolunon, to twac as minh aux h shart of Common % k 1huc wert no thanen m outsimdmg sharn m 19% IW4. or 19M3 D. hnlu& s % 229.62M sharn of Common h k rewrv allos pmible muanu. und r the Company % Dmdend Reinvnenu;nt and % k Puri ha e Plan tas Hoba tion Au f mplovce W b Ownstwhip Plan I mplovtc % k Punbaw Plan. Ihnft and ~Ias Deicncd sauno Plan and Pnroll f(awd Implouc % k Owncnhip rian 32 sce sur unars of 9gman ant Aunur.rmg Polton and Noto to Imanal stattmtnre

Statements of Long-Term Debt (Thousands of Dollarsi (Thousands of Dollars 1 December 31, 1985 1984 1985 1984 First and Refunding Debenture Bonds unsecured Afortgage Bonds (note Al Series Matunty [hte 5%% June 1,1991 $ 35,787 5 36,778 4%% November 1,1986 $ 50,000 S 50,0(X) 7%% December 1,1993 25,380 26,449 4'4% September 1,1987 60,000 60/XX) 9% November 1,1995 49,345 51,075 4b% August 1,1988 60,000 60fXX) 7% Augun 15, 52,152 M8 5%% lune 1,1989 50,000 50,000 8h% November 1,1996 38,198 39,724 4%% September 1,1990 50,000 50,000 6% July 1,1998 18,195 18,195 4%% August 1,1992 40,000 40/XX) tal enture n 219,057 226,279 4%% lune 1,1993 40,000 40fXX) 4%% September I,1994 60,000 60,000 TotalLong Term Debt 4%% September 1,1995 60,000 60fXX) Principal amount outstanding 6%% lune 1,1997 75,000 75,000 (notes C and D) 3,237,448 3,121,620 7% June 1,1998 75,000 75,000 Less amount due within one year 7%% Apnl 1,1999 75,000 75JXX) (n te El 55,250 306 9%% March I,2(XX) 98,000 W,tXx) long Term Dehl escluding 8h% A May 15,2001 69,300 69,300 amount due within one year 3,182,198 3,121,314 7%% 11 November 15, 2001 80,000 80,000 Net Unamorti:ed Discount (17,557) I17,9711 7h% C April 1,2002 125,000 125,000 Long-Term Debt less 8h% D March 1,2(XM 90,000 90,000 Net Unamortised Discount $3,164,641 53,103.343 12 % E October 1,2(XM 9,730 10,730 a%% F April 1,2006 60,000 60,000 8.45% G September 1,2006 60,000 60fXX) Nhc Compann Monpge, munng the hrst and Refundmg Mortuge Nnds, '""'"'"'" ' d'" h "'""pu hen on suhtannauy au n'reny and hanchnet r 8%% H June 1,2007 125,000 125,000 s.1hn senes was mued January 14.19% and the procccds were u,cd to rtfmance 8%% 1 September I,2007 59,900 59,900 Commeraal raper mhnh was outstandmg at ikccmber 31,19e and redamtied to 9h% ! November 1,2008 100,000 100,(XX) tong-icrm ikbt to rtnett the muance ut ihtse bondt 9%% K July I,2009 100,000 100fXX)

c. At ()cccmber 31,19e the annaal interest reymrement on Long Tcrm ikbt
  • 's s2a.Wipo of whah $27t AMJ)tN)was the requirement for hnt and Refund 12 % L November 1* 2009 119s750 125 000 mg Mongage Nnds. T he embedded mtcrnt cost on t ong Icrm f)cht wa 917%

i 12%% M June 1,2010 87,500 100jXX) D. At I)cccmher 31,196.the Company had unexcrused tomnutments under a 15%% N August I,1991 100,000 100JXX) Credit Agreement wah 12 domesoc hanks for muance of revolvmg kuns up to an 14h% O September 1,2012 43,300 100/X)0 aurcote amount of 52mtman at any ume in May i. ivw 1he company may termmate the commitments m whole or m part, w thout penalty or premium. 12%% P December 1,2012 98,500 1(X),000 Unar the agreement, any Imrrowmg* outstandmg at Mn I.19% are u nvert ble, 'h* C"mrann ortmn mto three year term 1oans 1he company n rcquirca to 12%% Q August 1,1993 100,000 1(X),0fX) pay a commi ment fee on anY unused portion Ihe Company h.n the nght, wnh the 9h% R July 1,2015 125,900 consent of the banks,io extend the agreement on a scar in war bam 9%% S lanuary 14,1996 (note 11) 75,000

n. Itc aurevic pnnorahmount of rc9unemenidor smkmx funds and matun-8% June 1,2037 7,463 7,463 iics for cat h of the hve wars followmg t)cccmbcr 31. Ivo are as follows 5% June 1,2037 7,538 7,538 Year

\\ ink mic Funds Mat unon Total Pollution Control Series ]h'y"p 6.30% A October 1,2006 14,300 14,300 im 5 52m swfm 5 %2m u n 2 6MYL 11 September 1, 2009 42,620 42,620 [ $2, 6.9(Y% C September 1,2009 2,990 2,9'X) i9x9 iuw wtm 6um 12h% D April 1,2012 23,500 23,500 im H+0 5"" 6MW 9h% E June 1,2013 64,000 64JXX) sn912 $27tu m uiv,912 10h% F July 1,2014 150,000 150,000 n,, smkmg fund purr"snaenam hnt and kaundmg Monnec h"nd t son 10h% G September 1,2014 150,000 150,f XX) requne annuauv the rcorunent of $2 Mm40 rnnoral amount 4 burmr iht ""I"'""" """"d'N' P'"P'" Y '# h"""' ""' '"* I h* 8*'""" *

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10h% H November 1,2014 130,400 130,400 met by property additions has been cxduded in>m the table aim Also, che 10%% 1 November 1,2012 4,600 4#X) Company mn. at n oroonactne adanonal amounts ur to $6 2mim a muaur through smkmg fumtu4 artam Abenture fonds the clunon of any su h opoon T.otal First and 1(efundmg n inauaca in iong tenn aat aue wahm one ga, Mortgage lionds $ 3,018,191 52,89;.341 %cc Aummary of Ngmin.mt Anowong rohon and Notts to hr anual sr.nontnts 33

c Summary.of Significant Accounting Policies-Accounting Principles Revenues and FuelCosts Fmancial statcments are presented in accordance with generally Revenues are recorded based ou services renJad to customers accepted accounting principles (GAAP). As a result of accounting during each accounting perimL The Company records unbilled requirements imposed under rate-making decisions by the Board revenues representing the amount customers will be billed for of public Utilitics of the. tate of New Jersey (BPU) and the Federal. services rendered from the time meters were last read to the end t Energy Regulatory Commission (FERClithe apphcations of CAAP of the respective accounting period. by the Company differ ir. certain respects from applications by The Company projects the costs of fuel for electric generation, non-regulated businesses.The Company is under jurisdiction of purchased and interchanged power, gas purchased and matenals the FERC and the BPU and maintains its accounts in accordance for gas pnxluced for twelve-month periods. with their prescnbed Unifonn Systems of Accounts, which are Adjustment clauses in the Company's rate structure allow the same-the recovery of fuel costs over those included in the Company's

    • '^"Y ""

Utilit-Diant and Related Depreciation and Amortisation ' "k** Additions to utihty plant and replacen ents of units of property deferred and meluded in operations in the penal in which th'ey are capitalized at cost.The cost of maintenance, repairs and re-are rcilected in rates. placements of minor items of property is charged to appropriate . expense accounts. At the time units of depreciable properties are income Taxes retired or otherwise disposed of, the original cost less net salvage The Company and its subsidiaries fde a consolidated Federal value is charged to accumulated depreciation. income tax return and income taxes are allocated, for reporting For financial reporting purposes, depreciation is computed purposes, to the Company and its subsidiaries based on taxabic under the straight-line method. Depreciation is based on esti-income or loss of each lexcept for the effects of the LNG aban-mated average remaining lives of the several classes of depreciable donment discussed in note 4). - pmperty. Depreciation applicable to nuclear plant includes esti-Deferred income taxes are pmvided for differences between [ mated costs of decommissioning. Amortization of leaschold book and taxable income to the extent permitted for rate-making j_ . improvements and capital lease assets is based on the term of the purposes. l-lease. These estimates are reviewed on a regular basis and neces-Investment tax credits are deferred and amortized over the sary adiustments are made as approved by the BPU. Depreciation useful lives of the related pmperty includmg nuclear fuel provisions stated in percentages of original cost of depreciable i-Allowance for Funds Used During Construction property are 3.52% m 1983, and 3.53% in 1984 and 1983. Allowance for funds used during construction IAFDC) is a cost . Amortisation of Nuclear Fuel accounting procedure whereby the cost of finarciq construction ' Nuclear energy burnup costs are charged to fuel expense on the (mterest and equity costs) is transferred from the income state-basis of the number of units of thermal energy pnxluced as they ment to construction work in progress (CWip; in the balance relate to total thermal units expected to be pnx!uced over the life sheet.The rate of 8M% used for calculating AFDC was withm the of the fuel The rate calculated for fuel used at 411 of the Com-limits set by FERC, pany's nuclear units includes a provision of one mill per kilowatt-As a result of BPU rate orders, the Company is alloveed to hour of nuclear generation for spent fuel disposal costs. include a portion of CWip in rate base on which a current return is permitted to be recovered through operating revenues. The investments in Subsidiaries amounts of CWip included in rate base were $375 million at the .The Companys mvestments in its subsidiaries (all wholly-owned), end of 1983 and $550 million at the end of 1984 and 1985. No which in the aggregate are not sigmhcant as defmed by the se-AFDC is accrued on the amounts of CWIP which are included in cunties and Exchange Commission, are reported in the accom-rate base. panying fmancial statements on the equity methat of accounu.ng. The carrying value of investments in subsididaries is reported Pension Plan under Other property and investments in the llalance Sheets, and The Company has a non<ontnbutory trusteed pension plan under the equity methat of accounting is adiusted for earnings or covering substantially all employees completing one year of ser- ~ losses of such subsidianes as reported under Other income in the vice. The Company's policy is to fund pension costs accrued. Statements of income. The Company believes that its financial Company contributions include current service costs and amounts E posnion and results of operations are best reflected without required to fund prior service _ats over a 35-year penal begin. consolidation of these subsidiaries. oing January 1,1967 34

l Notes to Financial Statements

f. Federelinconee Temos As a result of Internal Revenue Scruce (IRSI audits for tat able > ears 1976 through 1980, the IRS has proposed an merease in A reconcihation of reported Net Income with pre-tax income and taxable income w hich would increase the current tax habihty by of Federalincome tax expense with the amount computed by 5'2 milhon T hh proposed habihty is pnmanly the result of in-multiplying pre-tax income by the statutory Federal income tax ciudmg unbdled revenues as taxable inecme m the scar estimated rate of 46% is as follows; scrvices wcre prouded. The taxabihty of unbdled resenues a an industry issue. T he Company has appealed the tax assenments (Thouunds of tbilare 1985 IN 19 0 related to unhdled revenues, and the IRS has suspended any Net inmme

$544,553 SWJn29 Os9 7'9 action on the appeal pendmg the outcome of vanous court cases f[,l,*Q' "I"d'd

  • msalung other utihties. Deferred taxes have been proudcJ for current provmon 75,214 lxAt 6.01s such unbdled revenues and, if the Company is unsuccessful m its Prosman for acierred mom
  • appeal, there would be httle effect on earningt taes-nct lAl 57,549 140.3 %

1;l ul Imestment tn eredits--net 133,616 96542 M714 Total included m operarmg maanc 264,379 2%.M* 19Inu q bccllaneous other mcome-net 4,118 1246 4 Als

4. Invesingente in and Advances to 34dpoidderles Total Federal irnome tn Provmon 270,497 2M%n N; M8 Subtotal 815,050 74s579 Snw Insestments in and advances to subwhanes are summarized as Equity m earnmes of sukiaanes (9,627) L 9WC 7&O followy pre.ta mcome

$a05,423 l 5M9 4m l is% s'6 ))

  • f N

Ta expeme at the sututorv rate l $370,495 l S M )161 [ $26614; Adiustments to prean mmme, computed at the statutory rate, tor whuh & terred W Deulopment Geperata,n taes are not providcJ under curicnt rate makmg pn! rues invcument S 64,114 5%W 5 46.h Adunto 167,344 iMNM N7P 231,4a2 WW WW dc t n S 33,077 5 29.122 5 27Mw Anowance for funds used Junng { no !,116 4M W2 comtnation (90,089) ,71(44' 59 t s2 I ine d I $250,598 SM4 799 Stun % Overhead casts captah:ed (18,081)

l WS 13 %!O

Other 9,927 U 74 1A1 Energy lbelopment L,orporation 4 DCl b engaged in ex-pluratmn actinties to obtam supphes of natural gas. The maionty nw n tmn of dekrred tu nems I of the Company's gas punhases from EDC are below IERC pub-smul (99,99s) wi 6: n yo2g Tici Federal mcome in t rou-5270.497 i 52w sso $ivs a Inhed ceihng pnces. Dunng 19C 1984 and 1983, EDC prouded approximatelv n. 6% and 3% revectacly, of the total gas re-A.The provmon for deterred mace tats represents the en criettu4 the tobwmx ceived by the companv. EDG revenues from sales of gas to the Company amounted to 574.7 mdhon, $67 6 milhon and 515 0 Current taabutu mdhon, respectisely, for those years UnM cd resenues $ 20,644 516nw 5 < ul Currently, Other subsidianes consists pnncipally of pubhc Ph (10,772) 4E2 Ll9 915: Additmnal tu depreaarmn and Corporation. On December it 1984, the Company announced the anm m ut.m 72,10s 6uxo w no abandonment of the unused hqucfied natural gas tenninal m a NacIcItInSt N R""ulle, Staten Island. New York, ow ned by its w hollmwned (19J2o) wtv u Nuclear Plant Decanmmmnmg subsidiary, Energy Termmal Scruces Corporation. See Note 4-- cars (5J65) Av .sso" Abandonment of LNG proint.The maront> of the LNG property Nuclear Fuel Dnposal Cmti 2,891 ' 241 2n 4M was sold in 19h Lmum reacqmred debt (412) 14 1 ; .417 Other (1,429) 2 s;9 I.s w biwal 36,901 l'6 417 142 W g Tmal 5 57,549 ! 5:40. m int m O. Co#npensefing Selences Deferred income taxes are provided for differences between Cash consnts pnmanly of compensatmg balances under mformal book and taxable income to the extent permitted for rate-makmg arrangements w uh sarious banks to compensate them for scruces purposes. At December 31,1985 the cumulative net amount of and to support hnes of credit of $202 nnihon at December 31, income tax timing differences for which deferred mcome taxes 196 and Daember 31,1984 There are no legal restrictions have not been provided was approximately $1.3 bdhon. T he re-placed on the withdrawal or other use of these bank balances in lated deferred income taxes, at the current statutory rate of 46%, additmn, at Ducmber 31,19% and Decernher 31,1984, the Com-would be approximately $600 mdhon. The Company expects to pany had knes of credit of SEO mdhon which were compensated l continue to recover through rates the taxes due as such timmg for by fees differences reverse. 35

k geamryear#some Future regulatory action with respect to the abandonments of the LNG and Uranium Projects may require a change in the level l.. Abandonment of Atientic Project of annual amortization, or could require the immediate wnte-off in December 1978, the Company cancelled the Atlantic nuclear of any remaining unamonized balance existing at that time. plant project.The BpU authorized the Company to recover a Any amount not recovered,in the opinion of management, would portion of the costs of the project over a penod of 20 years com-not have a material effect on the financial position or results mencing in April 1980. Such costs are bemg recovered at the rate of operations of the Company.1he recovery of the losses and any of $15.1 million annually,less related taxes of $63 milhon. No return on the unamortized balances will be determined m the retum is being earned on the unrecovered balance. cuncut rate proceedmg. Abandonment of Nope Creek Unit No. 2 Underrecovered Electric Energy and Gee Fuel Coets-net in December 1981, the Company abandoned the construction of Recoscries of electric energy and gas fuel costs are determmed Hope Creek Nuclear Generating Station Unit No. 2. In March by the BPU. At December 31,1985, u.aterrecovenes under the 1982, the BPU authonred the transfer of $112 million of Hope electnc Leveli:cd Energy Adiustment Clause (LEAC) were $2833 Creek 2 costs to Hope Creek I and the recovery of all after-tax million, while overrecoveries under the gas Raw Matenals Ad-abandonment costs for Hope Creek 2 from customers through the justment Clause (RMAC) amounted to $19.2 million. Eamings electric leveli cd energy adiustment clause. The recovery is over are not directly affected by increases or decreases in the costs of 15 years on an accelerated method and commenced in June 1982. fuel or interchanged power, because such cmts are adiosted During 1986, the amount to be recovered is estimated to be monthly to match amounts recovered through revenues. However, ~ $27.9 million, less related taxes of $11.4 million. No retum is the carrymg of underrecovered fuel costs ultimately increaws bemg eamed on the unrecovered balance. Imancmg costs. U"b' Abendonment of LNG Project In December 1984, the Company abandoned its investment in On July iI,1985, the BPU authon:cd an increase in the 11AC of certain facihties for the storage of liquefied natural gas of its $137.4 milli n on an annual basis commencmg July 11,198x wholly, owned subsidianes, Energy Terminal Services Corporation deferred consideration until the next LEAC proceeding of $700 i (ET5C) and Energy Pipehne Corporation (EPC). As a result of this million of replacement energy costs related to the Salem generator abandonment and pitor to regulatory approval, the Company's failures referred to below, and disallowed the recovery of $22.5 investment of approximately $693 million,less tax savings of milli n of replacement energy costs which had been contested m F $27.9 million or the net amount of $41.4 million, was deferred and the most recent proceedmg.This LEAC rate is p;esently scheduled is being amortized over a seven-year penod commencmg in 1984 to be in effect for an 18-month penod. The $22.5 mdhon dis. at a rate which will reduce net income by approximately allowance reduced 1985 net income by $12.2 milhon, net of tax, $6 milhon per year during that renod. "PP"'ximately loc per share of Common Stock. A major reason for the large underrecovenes dunng the pre-Abandonments of Urendum Profects cedmg LEAC penal was extended outages at the Salem Generat-In September 1985, the Company terminated a 1976 uramum ing station, Units I and 2 and Peach Ik>ttom Generating Station, supply agreement with Sequoyah Fuels Corporation (Sequoyahl, Umts 2 and 3 in which the Company shares ownership. These a subsidury of Kerr-McGee Corporation. Under the agreement, outages include an outage resulting from reactor inp breaker as amended, Sequoyah was to have provided up to 4.2 million fadures and failure of the electnc generators at Salem, and outages potmds of uranium and the Company had advanced $27.4 million as a result of meergranular stress corrosion pipe crackmg ta gen-as of September 30,1985 to fmance the related mining facihties enc problem with boihng water reactor 4 at Peach Bottom. which had not been recosered through the purchase of uramum. (;as The project had been in a stand-by status since 1980 because of On September 26,1985, the BPU approved a Stipulation that had the availability of uranium on the open market at pnces which been entered into by the Company, BPU Staff, and Pubhc Advo-were substantially less than those applicable under the contract. cate of New Jersey which wdl reduce revenues under the RMAC This pnce dispanty is expected to contmue for the foreseeable by $35 mdlion for the penod October 1985 through September future. 1986, includmg a one-time credit to customers' bdis reflecting an in December 1985, Philadelphia Electric Company terminated $113 million reduction in gas costs which was implemented m its lee Mine uranium supply project,in which the Company had October 1985. The reduction is beed on estimated decrenes m participated as a coewner of Peach Bottom Generatmg Station. the pnnected cmt of gas, increawd purchases of lower cost gas on in addition, the Company terminated the Homestake Mming the spot market, the retum of an overrecovery and aw>ciated Company contract, dated February 25,1976, for the exploration interest related to the RMAC penod that ended September 30, and development of uranium. The total loss of these proiccts w hen 1984, and anticipated refunds from pipchne suppliers, combined with the Sequoyah loss amounts to $37.1 mdhon. As a result of the abandonments and pnor to regulatory ap. Unemortired Debt Espense proval, the Company's net unrecovered advances of $21.7 milhon, These wsts, aw>ciated with the iuuance or reacqumtion of after related tax savings, were deferred and are being amorti:cd debt, are deferred and amorti:cd over the hves of the related over a seven year penod commencing in 1985. This amortization issue. Amounts shown in the balance shccts wnsnt principally will result in a charge against net income of approximately $3.1 "I'"$ '""'i'ted with the Loinpan6 ten &r o&r for in m, million per year.The reduction in camings per share for the year Senes E Mongage Bonds winch mature in Nober 2n he 1985 is 3c. C<nnpany expeca to amonne $U nuWon of these cosa in N 36

D 5. u -co-Z c -,, _,. ,c.,,,, -,u.w,,,m Bank loans represent the Company's unsecured promissory notes construe,,on and rue, supp,,es issued under credit arrangements with vanous banks and have a ne Company has substantial commitments as part of its con-term of eleven months or less. struction program. Construction expenditures of $10 bilhon, in-Commercial paper represents the Company's unsecured ciudmg about $240 millon of AFDC, are expected to be incurred bearer promissory notes sold to dealers at a discount with a term dunng the years 1986 through 1990 In addition, the Company of nine months or less. Certain information regardmg short term has commitments to obtain sufhaent sources of fuel for electnc debt follows: generation and adequate gas supphes. The pnncipal pnnect m the Company's current construction a nnuunds d txture 1,ss ivw4 i v" program is the Hope Creek Generatmg stauon (Hope Creckl, Balance at end d year s:07,000 susno sisMun

  • hich consists of a 1,067 megawatt nuclear umt owned 95% by Wminum anmunt outstanding at any nmnth end sis 7,500 51859 0 s t 6l vit) the Company and scheduled for operation in 19M6. As of Decem-twerage amtv counang s n,4eo s suon s vnu ber 31,1985, physical construction was essentully complete. The we red aveme annual mt-c

overall start-up, testing and tumover of plant systems was about 7, m a Weighted average mierest rate for 93% complete at that date. As of December 31,1985,ihe Com-ciumcrual parcr outstarans pany had exgnJcd approximately $17 bdhon includmg $726 at vear<nd s.0,s n 26% 9 an d d ME d mm m m h d % hk On November 25,1985, the Company announced that fuel 6*#*a*3*aP88a loadmg at Hope Creek had been delayed until some time in the hnt quarter of 1986. Farber estimates had called for fuel to be Information on accumulated plan benefits and net assets of the loaded around the begmmng of 1986. Commercial operation is still Company's pension plan are as follows: scheduled for the second half of 1986. As a result of the revised schedule the estimated overall cost for Hope Creek is presently rrimusana, a twnare necember ai. 1,ss ivn4 expected to be hetween 5415 bilhon and $4 3 bdhon.Thn exceeds Actuarul present value d auumubted the cost cap refened to below. The actual cost will depend, m F 'j'" large part, on the date of commercul operation, which is diffnuit I g,,, ggg to predict as the proicct nears completion because of numerous Nonvested 7s,H2 M M2 sus 3, y, preoperstmnal items and imprecnion as to the timmg of the test. ing and power ascenuun programs wluch must be adiusted to Awumed rate d return s.s% v5% Wrtet value d Plan Net Awets $447,0s7 silmo meet problems as they may anse. Costs at the end of the proicct, once fuel is huded and construoion n complete, wdl mvolte the Pension costs for the past three years were charged as follows: accrual of AFDC of approximately $18 milhon per month, plus &m um d apum4 E nWon m ene, M & m ,muunas a tullare 19ss ivs4 ivu is placed in commercial operanon. Proicct delns wdl only serve o eraung r.ipene ss2,iss ssuv4 ssaxo r unhty nant sayan ta m inov to further mcrease costt Therefore, the Company's hr t pnonty is Toolren m n owes $44A,s su w) su 469 to get the plant completed and operatmg as quickly as posuble without sacnhemg quahty. Fuel hudmg and operation require a In December 1985 the Fmancial Accountmg Standards Ikurd license from the Nuclear Regulatory Commnuon (NRCi which i, sued Statement No. 87-Employers' Accounting for pensions has been apphed for. Iwuance of a hcense is withm the sole which requires future changes for the accounting and reportmg of dncretion of the NRC. pension costs. The Statement reqmres a standardued method for Hope Creek wnstructmn cmts are subica to a Cmt Con-measunng pension cost, expanded disclosure of the components tamment Incentne Agreement approved by the HPU m luly 1983 of pension plans in the Notes to Fmancial Statements, and re. The Agreement, which the Company entered mto m 1982 with cordmg of a habihty on the balance sheet when the accumulated the New Jersey Department of Energy and the New Jeney De-pension benefit obligation exceeds the fair market value of the partment of pubhc Advocate,estabhshed a target cost of approv pension plan assets.The provisiorn of Statement No. 87 are effec-imately $3 8 bdhon and a target in-semcc date of December 1986 tive for calendar year 1987 fmancial statements, except that the There is an earmnxs penalty if Hope Creek n completed in excess liabihty recogmtion provisions, if any, are not effective untd 1989. of the cmt cap Under the agreement, the Company's revenue As shown above, the fair market value of the plan assets ex-requirement related to rate base would be based on the excluuon cceded the accumulated pensmn benchts awf December 31,1985 of 2Pt of msts mcurred m excess of $18 bdhon. If the overrun l excuds 10% of the cmt cap, the approved revenue rcquirement related to rare base would be based on the exclusion of 30% of expenditures in eness of the 10% overrun. The currcnt estimate could result in a reduct:on of carnmgs m 1997 of between approx. imately Sc and Me per share of Common Stock under the fonnula provided m the Cmt Contamment Agreement. The reduaion would dechne m subsequent yean over the depreaable hie of the plant. On December 111985, the Cornpany petitioned the BPU for s 37 L

= ~~. . =. - ~ ~ = - ~ ~ -. - an increase in its rates. The rate proceeding will examine the lhe Atonuc Energy Ao pnmse m Nues (Al X and ;CWe empie un Aagust Commmum? untended by Congnm in Dmmber 194 the Nu&u Recdangy L '9" unle prudence and cost of Hope Creek and whether a phase-in of rates 6NRC) nubnutted a returt to Lonves, with re pect to the contmuanim should be required so as to spread any authorized increase over a d the pnce Anderum provnums whsh rectanmends that the 56Sn rmlhtm hmit on numbcr of years.The Company cannot predict the outcome. hahhiv be ehmmated and that the rresent Imuis on retimp the m s menn agamst omnen d nuclear umts be replaced by an annual hmst of no umwe than Slo gegerreefifonte nullum per year he exh hocmed nuclear reator Other pneals would retam a haut on lubihty, but mereaw such hnut sutwtantu!!y 1he Company cannot predict As shown.m the Balance Sh'eets, the maior components of Deferred - whether the lwce-Andcrum provnne wdt be estended or what provan*n wdl be items are property Losses associated with plant abandonments. enxted if it is extended ta svu, m uase to whuh the company wn sua a pany, The accounting standards relating specifically to regulated the Umted States supreme Court held that the Atomic Enero Au.the prxe. Anderson hnutatum d habihty pnwisams thereunder and the extensaw regtdation enterprises are promulgated by Financial Accounting Standards d nucicar safety by the NRC do smt preempt c.laims under state bw he perxmal. Board (FASB) Statement No. 71 (SFAS 71).The FASB has issued an rmivarar rumun damnes related ta ratutum hmeds exposure draft which would amend SFAS 71 for three types of ,,,,,,,,,,,,,g,,,,,,, events that occur in the electric utihty industry; phase-in plans, The Comprehensive Envmmmental Ressmse, Compensation and . abandenments, and disallowances of costs of newly completed Liabil ty Act of 1980 and certam simdar State statutes authorire plants.The amendments, if adopted, would become effective for vanous governmental authonties to wk court orders compel-the Company's 1987 calendar year with retroactive application for Img ressmsible parties to take clean-up action at disposal sites pnor transactions. determined to present an immment and substantial danger to the The proposed amendments if adopted in their present fonn public and to the envmmment because of an actual or threatened could require the Company to: release of hazardous substances. Because of the nature of the e reduce the carrying amount of abandonment losses to the Company's business various by.pnnfucts and substances are pro-present value of probable future revenues associated with duced or handled which are classified as hazardous under these each protect, and laws. The Company generally provides for the dnposal of such . reduce the carrying amount of Hope Creek by the present substances through hcensed individual contractors but these value of the future eamings penalty related to the Cost statutory provnions generally impose p stential lomt and several Containment Agreement with the BrU. responsibihty on the generators of the wastes for clean-up costs. Any reduction in carrying amounts of these assets could re-The Company has been notified with respect to a number of such sult in a correspondmg decrease in retained camings. Subsequent sites, and the clearsup of ha ardous wastes n receiving increas-years' results of operation could increase as the discounted ing attentmn from the govemmental agencies mvolved. This amounts are returned to net income. trend is expected to continue.The Company cannot estimate the. See Note 4 for additional information on the plant abandon' costs which may result from these matten, but such costs could ments and other items. be substantial NucleerInesorence Coverages The Company's msurance coverages for its nuclear operations are

g. h ienpJen m W ens as follows:
Mahons of ontlars!

Mammum The amount of other long term obhgations consnts of the Retrmputive following: Maumum Auenment kw Type and sourte d Coverage Coverace a smule mtalene 6Thousan.h a !buar( IM5 i994 Pubhc baNhty Nut! car ful thspital Cmt luNh y 5 61M4 Amerwan Nuclear insurers 5 16o $None Ngate under Captal L. cees 54,357 M,ml Federal Govemment IAI 49n a %R.: ruA Ssa. lit su w $ 6MC) $ 6 Property Damaste Nuclear Mutual bnuted a s sm S 1s 9 Nuclear Fuel Dieposal Coat Liabillty Nalear Electnc losurme bauted ;17 525 HJ In conformitv with the Nuclear Waste pohcy Act of 1982 (the ' Amencan Nuclear insuren 6 None Act), the Company entered into contracts with the Department 5* of Energy (DOE) on June 13,1983 for the disposal of 3 pent nudear NaIe"'r* 1eIc tuel from the salem and Hope Creek nuclear generatmg stations. c lnsurac bmacJ n 1 ME $IU Simdarly, phdadelphia Electric Company contracted with the A.Retnnpecuve prennum prtwram under the Pnce Anderwn haNhty prome d DOF in umDon with the peach Bottom nuclear Eencratmg the Atomic Energy Act of 19% as amended Subect to retruapective aucument l with supett to irms from an mcident at any hcenwd nuclear rextra m the Umted station. Under these contracts, DOE wdl take title to ebe spent state

  • fuel at the site, then provide for its transport and permanent OMaumum aucument would be 51To millum m the event d truwe than one dnposal. Of the three options permitted by the Act, the Company selected the option of a June 1985 lump-sum payment to DOE in l

GUmtd bihty under the Atormc Energy Act r419% as anrrkled, he exh O Mutual irnurance compames e4 wiuch the Cornpany n a member subrett to charges retrospecove aucument mth respcci to km at any nuclear gencratmg statum for 19MS and pnor penodt Jggregatmg $114 million, were re-covered by such msurne. Versed in conformity with the payment.

5. Mammum weekly mdemruiv for $1 weeks which cenmerxes aster the hrst 24 weeks of an outage Alm provides $15 mahon weekly he an addirmnal s2 wecks 33

Lease Committnents . 3 '=tery inhavnsation Concerning Effective December 1984, the Company changed its method of the streets et changing Je sces funeudited) r accounting for leases that meet the critena for capitalization in accordance with Statement of Financial Accounting Standards The Company's fmancial statements are prepared m accordance No. 71,* Accounting for the Effects of Certain Types of Regulation", with generally accepted accountmg principles and are stated on and FERC accounting reqmrements. The Balance Sheets and the basis of historical costs. namely, the pnces that were m effect Statements of Changes in Financial Position for penods prior to when the underlymg transactions occurred. The following sup-December 1984 have been restated to redect the retroactive plementary financial informatmn. prepared in acccrlance with capitalization of leases. Accordmgly, the Balance Sheets include Financial Accountmg Standards Ikurd Statement Null (SFAS 31, assets and related obligations applicable to capital leases. Smce as amended by SFAS G is an estimate of the effects on the Com. the total amortization of the leased assets and interest on the pany of changes in specific prices (Current Costi and General lease obligations equals the net mimmum lease payments in. InHation. cluded in rent expense for capital leases, retroactive adoption had The Company advises readers of the imprecne nature of this no effect on prior years' Statements of Income or Statements of data and of the suhicctwe rudgments reymred m the restatement Retained Eammgs. of selected hutoncalcosts to amounts adrusted for Current Cost Capital leases relate pnmanly to the Company's corporate and GenerallnflanonMus data should not be used to make headquarters and computer equipment. Cenam of the leases con-d'hustments to the comruny's pnmany hnancul statements and tam renewal and purchase options and also contain escalation the rclated carmngs per average slure of Common Stock other clauses. than those ashastments shown m the iollowmg supplementary Utihty plant includes the following amounts for captal (mancial data leases at December 31: Current Cost data purports to show the estimated cost of currently replacing existmg Utihty Plant and was generally mea-imuuna, d ibuary 1,ss i9x4 sured by applymg the Handy Whitman Index of Pubhc Unhty common riant $45,an svi w Construcnon Costs to the histoncal costs of Unhty Plant. ten A umulated Amortanon 4,890 W Cencral InHJtion Jmounts Were determined hy Jdjusung Net Auen under Capit.d traes $60.942 sM ul hatorical cosa of certam items mto dollars of the ume gru ral purchasmg power by usmg the Consumer Pnce Index for All Future minimum lease payments for noncancelabic captal Urhan Consumers ; cpl UL and operating leases at December 31,1985 are: Depreciation and Amorti: anon expense, Amorti ation of Nuclear Fuel (mcluded m Electnc Fuel, Interchanged Power and capn.a

Onrann,
Thouunds d Ibtlari Lea es t e ne, Cas!, and Amortt:ation of Capital Leases (mcluded in rental 1936 s 16o4' s2w expense in Other Operanon and Mamtenancel were adiusted for 19 "

I49" 1.926 Current Cost using the rates and methnis for compuung book N $4 depreciation and amorti: anon apphed to the :ppropnate inHation ad usted Utihty Plant balances. In accordance with SFAS A1, two uim t,69i i Later Years 116 744 3 441 mcome tax expense was not adjusted Mmimum icee pnments WF6 il U27 SFAS Al requires the disclosure of the ad;astment needed to Lew Amount represenoa,;esumated cuecunen reflect Net Unhty Plant at its Nct Recoverable Cmt if that cost IIN r'nIu'r"[ea"e nts ' tvn 2a diffen from the inHanon a4usted amounti Also required under Current Cost is the disclosure of the mcrease m Current Cost of Net mmimum ime payments 197,611 ten Arnnunt terrescnnns mterest im, Net Unhty Nant held dunng the year and the related effect of prnent va!ue a nei mmimum icu on mem, w s e2 general mHation. The amounts shown m the follow mg table d-lustrate that dunng 19M the mcrease in general inflation w as len A. Realected m the balance sheet m other Long Term Obhpoonu4 5%WII" and m Long Term Ikbt and Orher Obhutum due wnhm one year of 5164wn. than the mcrease m the Current Cmt of Net Unhty Plant after ropecnvely. adiustment to Net Recoverable Cost.The A&ustment of Net "' Y "'"' '""#' Recoverable Cost is an adjustment of Utihty The following schedule shows the compminon of rent ex-pense included in Operating Expenser Plant to Hatoncal L,mt m average 196 dollars. Ihstorical Cost n the amount penmtted to be reunered under the rate regulatory (Thouundud Ibilaro procen for utlhties in New Jersey. For the Years Ended Dec 3L 1945 IW4 i94 Dunng inHationJry periods, holdcrs of monetary aucts, such interest on Obhganans unacr as cash and receivables, suffer losses of general purchasing power ' 44 5 5 atImYlunhry riant while issuen of monetary habihties expenence gamt in IVM the A under carnaurecs 5,444 2.942 2m6 Companyi monetarv hahihties. primanly long term debt, ext ceded Net mmimum lene paymcnn its monetary awets resultirig in a gam. Since this gam is primarily relaung to carnal Lea.es io,7,2 lors 9im attnbutable to long term debt which has been used to fmance Other Lene payments 15,549 165:4 19 M g g,g g g ggg Taal Rent E mrense 124.141 126 W lla 4 F .g g gg g ,g g g Net Utihty Nant after adiustment to Net Recoverable Cost in the followmg table. 39

l l \\ l Supplementary Financial Data Adjusted for the Effacts of Changing Prices j - for the Year Ended December 31,1985 (Unaudited) Historical Cost Current Cost (Condensed from the (Average (Milhons of Dollars! fmancial Statements) 19M5 Dollars) Operating Mevenues $4,409 $1,409 Operating Espenses Electric Fuel, Interchanged Power and Gas 1,790 1,785 Other Operation and Maintenance h93 894 Depreciation and Amortization of Utility Plant 223 563 Taxes H75 875 Total Operating Expenses 3.781 4,117 Operating income 628 292 Other (mcluding Interest Expenses) (83) (R3) Income from Continuing Operations (excludmg Ad1ustment of Net Utility Plant to Net Recoverable Cost) $ 54% $g increase in Current Cost of Net Utihty Plant held dunng the year (A) $ 299 Adiustment of Net Utility Plant to Net Recoverable Cost 191 Effect of the increase in General Inflation 1457] Amount by which increase m general inflation was lower than mcrease in Current Cost of Net Utility Plant after adiustment to Net Recoverable Cost 33 Gain from decline in purchasing power of Net Monetary Liabihties 152 Net $ IMS A. At December 31,19% the Current Cmt of Net Urditv Plani was $12 s25 N: lam. whdc hatonal ;mt rewwrabici ont was $4 4% NIlmn. Supplementary Five Year Comparison of Selected Financini Data Adjusted for Elfects of Changing Prices (Unaudited) (Milhons of Dollars where appbcable. All adjusted figures in nerage l94 dollars 1 For the Years Ended December 31, 1985 1984 1983 1982 19kl_ Operating Revenues Historical $4,409 $4,196 $si,963 $3,874 $3,472 Adiusted for Generallnflation $4,409 $4.34h $4219 $4,31H $4,106 Income (Loss) from Contmumg Operations (excludmg Adiastment of Net Utility Plant to Net Recoverable Cost) Historical $ 545 $ 490 $ 390 $ 343 $ 264 Adiusted for Current Cost $ 209 $ 150 $ 72 $ 33 $ (16) Income (Inssi from Continumg Operations per Average Common share (excluding Adiustment of Net Utility I'lant to Net Recoverahie Cost)( A) Histoncal $ 3.96 $ 395 $ A40 $ 3 24 $2M Adiusted for Current Cost $ 1.22 5 89 $ 09 $ I3th $ ( 94) Amount by which mcrease m generalmflatwn was thigher; lower than mcrease m Current Cost of Net Uruhty I'lant after adiustment to Net Recoverable Cost $ 33 $ 63 $ 90 $ 107 $ (219) Gam from dechne m pur hasmg power of Net Monetary babihties $ 152 $ I16 $ 130 $ 119 $ 26M Net Assets at Year end (R) Historical $J,324 $1686 $3,Alh $l081 $1.811 Adiusted for Current Cost $4,2$1 $3. 7(>4 $ 3.543 $3.395 $3.241 Cash Dividends Dcciared per Common Share Historical $ 2.81 $ 230 $ 2.62 $ 2;3 $ 2.44 Adiusted for GeneralInflation $ 2.81 $ 280 $ 2 M3 $ 2 M2 $ 289 Market Pnce per Common Share at Year end Histoncal $11.61 526.75 $22.75 $13 25 $1N 00 Adiusted for Generallnflation tC) $31.63 $27]M $2456 $26 06 $20 95 Consumer Pnce Index {l967 = 100) 122.2 ix 311.1 298 4 2H9.1 272.4 Average Year <nd 327.7,0: 315 i 3m 5 292 4 281 5 A. Aircr deducemst Cumulatne Prriened W k and $140 Ibuknd rn terense Cornnon % b dmands on a hnronal bam m ive amt m Anoxc 19e th41an for prme vtan 0 kgual Common fquity and Prderred srmk withour mandatory redcmpton C. Yur c ruf Ive lhalan o. f ir muted 40 L

prices have been increasmg over the last five years. The average Cpl-U increased from 272.4 in 1981 to 3212 in 1985, an average annual increase of 4.3% The increase from 1983 to 1984 was 4.3% and from 1984 to 1985 was 36%, an indication that the rate of inflation is continuing at a slower pace. Revenues for the five-year period increased from $3.472 bil-tion in 1981 to $4.409 billion in 1985, an average annual increa< of 6.2% Restated in average 1985 dollars, revenues for the same period would have increased from $4.106 billion to 54.409 billion, an average annualincrease of only 18% Cash dividends declared per common share increased from $2.44 in 1981 to $181 m 1985 or an average annual increase of 3.6% However, such dividends would have decreased at an aver-age annual rate of 0.7% or from $2.89 m 1981 to $2 81 m 1985 when restated in average 1985 dollars. Market pnce per common share at year <nd from 1981 to 1985 had an average annual mcrease of 15.1% or from S18 00 to $31.63. Restated in year cad 1985 dollars the 1981 market price would have been $20.95, resulting m an average annual increase of 10.8% from 1981 to 1985. Lack of adequate recognition of inflation in rate-making m addition to delayed rate rehef accelerates attntion, thereby con-tnbuting to poorer cash flow.

10..,.,,,,,ro.,,u mm,,..

The Company has an ownership interest and is responsible for of each iointl> owned protect and the corresimodmx direct et providmg its share of the necessary financmg for the followmg penses are induded m the statements of Inwme as an operating jointlyowned facihtiss. All amounts reflect the Compann share ex pense. [ Thousands of IL!!ars; Amount of Utihtv Atcumulated trouunn Amount ot liant Plant Ow nt rship Interest 11 ant in % rme for Ik rte. anon (!nder Construttmn P Coal Generating Conemaugh 22.;f t h $ 72,297 5 21,231 Keystone 21x4% 67,127 20r121 Nuclear Generating peach Ilottom 42.49% l 510,1M 1;;,780 Salem 42.;9% 779,678 178,8x9 Hope Creek 95Offt $3,7tH416 Nuclear Support Facihties Vanous 59,94; 3,927 pumped Storage Generating Yards Creek

00f rb Im676 4,70x Transmission Facilities Vanous 127,678 14,971 Mernll Creek Reservoir 16.19%

7,321 Linden Sy nthetic f Natural Gas 90(Wy b 66 ;i s [ 48,320 41

11.,,,

,.,,,,w, Electnc Cas Total (Thousands of Dollars) Fur the Years Ended December 31, 1985 1944 19M3 1945 1984 1983 1985 1984 1983 Operating Revenues $3,000,564 $1810,241 52.570.457 $1,408,490 51,479)M3 $ 1,392,4" $ 4,409,054 54, t 96,124 $3.962.932 Depreciation and Amortization 167,959 159,338 152.874 55,004 si,M10 48.913 222,963 211,188 201,787 Operstmg Income Before income Taxes 778,957 753.225 5s4.504 117,220 101.275 101,0;2 896,177 854.su) 685,560 Gross Additions to Utility Plant 1,116,040 879,4 ss 81;.9 tv 104,o49 87.907 77,x90 1,220,0a9 967,36s 893 N9 December 31, Net Utihty Plant $7,671,465 56,797,4)9 56 089.82s s 803,262 5 752,4M) 5 713.991 '$ 8,474,727 57.%0289 56,N11816 Cas Exploration Subsidiary and LNG Protect (See Note 4) 233,482 234/01 vn.osi 231,4s2 231601 3(4,052 Other Corporate Assets 1,307,784 1.410- '. 1.122.418 471,o60 46s.u u 396JW) 1,778,844 I 875.754 1.518.478 -a Total Assets $8,979,249 5-8.20x.560 57.212.243 $1,507,A04 51.4 s2 0x4 Silistal $10,447,051 19 6toA44 5 (626.436 ,.et.d Qu.rt.rly D.t. (Unaudliedj The information show n below in the opimon of th< Company Due to the seasonal nature of the business, quanctly amounts includes all adiustments, consistmg only of normal returnng vary sigmficantly dunng the sear. accruals, necessary to a fair presentation of such amounts. Calendar Quarter Ended March 31, lune M screember 30, thember 31, (Thousands wherc arphcabic) 1985 1944 1985 IVA4 1985 IVMS 19N5 19M4 Operatmg Revenues $1,280,849 11.198,I s t $939,204 5969.474 $1,057,757 SI.0119,W9 $1,131,204 51. Dix.str> Operating !ncome 178,894 142.*78 116,692 146,717 170,130 l x t,979 141,s70 126,5M Net Income 151,517 119,923 127,011 121.443 145,61s 151,s76 120,406 97tH6 Earmngs Available for Common stock $ 136,503 5 10n72 $112,015 5106.412 $ 130,621 5 136.527 $ 105,411 5 81.995 Eamings per share of Common stock $1.16 5w $.93 5 98 $1.07 si 24 $.no 5 74 Average Shares of Common Stock Outstandmg _ l 117,8a9 10;6;2 121,034 104.491 122,329 110 051 12n,oto 111.419 ) 42 j

Management's Discussion and Analysis of Financial Condition and Results of Operations The Company's financial condition and results of operations are May I,1986, the Company wdl become the subsiduty of a hold, affected by numerous facton, includmg the timmg and amount of ing company named pubhc Service Enterpnse Group Incorporated rate relief, weather, the cxtent of sales gmwth, the levels of oper. The purpose of the restructunng is to create a turiwrate structure ating costs and carrying costs of both utibty plant construction for dacrufication into non-utihty businesses. and to enhance the and underrecovered electric energy costs. cortwration's overall fmancial strengtit He electnc and gas On December 13,1985, the Company 61ed a petition with busmen will contmue as the pnncipal business of the new the Board of Public Utihties of the State of New Jersey (BpU) for corporate structure. l higher rates which are designed to mcrease resenues by $6316

      1. "#"8* ""# ##*"#*

million on an annual basis. The request is compnsed of $569.2 Earmngs per share of Lommon %ck were $196 ror 198s an mdhon for electnc service and $64.4 milhon for gas service for an '""# "I I * "' overall rate increase of 14.2% The requested increne m clatnc T he shght gam was pnmarily attributabic to the $286.4 rates is designed to reflect the full cost of Hope Creek in rates at nulhon annual ha e rate mcrease which went into effect on the time the unit is placed into commercial operation, vanous March 23.1984, hyher total kilowatthour sales explained below, general increases in other electnc costs and an anticipa'ed $277 and greater AllX' due to the contmumg construction of Ilope million decrease in the electnc Levch:ed Energy Adiustment Cr ek. The mcrease was tempered by the effect of a greater Clause (LEAC) pnncipally as a result of Hope Creek generata.n numba oMares outstandmg, greata operating upenses lcxclud The ptition for an increase in rates is pnmanly attnbutabb o the induel cost 4 pnncipally higher maintenance, labor costs, taxes full inclusion in rate base of the Company's share of Hope Crnk. and depreaation. Earnmgs were also reduced appruximately 7c The Company's financial conditmn reflects the near com. N

  1. b*
  2. " " # M " " #" N "

l pletion of Hope Creek, a 1,067 megawatt nuclear umt owned 95% haHowed by the llpU m 1985 over 1984 and approximately 3c by the Company. As of December 31,1985, physical construction was essentially complete. The overall start-up, testmg and tum-per share due to the abandonment > of urann3m pnnats (See Enap Costs ow and Note 4 of Notes to Imanual statements) over of plant systems was about 93% complete. At that date, the Lamings per share were 53 9; for 1984, an macase of Sic or Company's share of expenditures was $170 bdhon-includmg '^ f"'"' '" * *d ##' #""" """"E ' h# M'h $726 milhon of allowance for funds used dunng construction macase and gmta salca explained Ww, outpxed the nse in 1 (AFDC). Construction is proceedmg on a schedule which would opaionnostt Ianungs wae aNutduced due to the the wnte of f - prmit nuclear fuel to be loaded in the first quarter of 1986. f uel of replacement energy cosa dnallowed by the IWU and the aban-load requires a hcense from the Nuclear Regulatory Commission donment of a hquefied natural gn pnyut (See E nergy Costs (NRC) which is solely withm the control of the NRC. "te 4 W otes to hnandal MatemenN The costs of construction of Hope Creek are subiect to a L,ommon m en s e incn for the lat three cost containment agreement approved by the ItpU in July 198A yean nsmg to $2.H1 m 19M5 from $170 m 198 4 and 52 62 m 1981 This agreement provides for an carnings penalty for the c,ompany if its share of constructmn costs exceeds 53,8 bdhon. The fmal such amounts resulted m payout ratms of 71% 6n and 77%. respettively. Total L,ommon 5.totk dmdend payments m 1983 protect cost wd! exceed the cmt cap figure, and the C,ompany's in and.Wh over 1984 and 1983, respectacly, due to current estimate of the cost of the plant n between $4.15 bdhon the greata number of shares outstanihng a well a the higher and $43 billion. The current esumate could result in a reduction dm&nd exe. of carnings in 1987 and future years of between approumately Sc and Mc per share of Common Stock under the fonnula provided m Revenues end sales i the Cost Contsmment Agreement. It n difficult to predict the Hn tra final cost of the proicct as it nears completion because of numer-Revenues increned 6 5% m 196 pnmanly due to the impu t of ous pre-operational items and imprecmon n to the timmg of the the March 1984 rate macaw and greata sala in 198 t. elettnc testing and power ascemion programs which must be adiusted to resenues intrened 9 6% due to highcr rates and improved sales meet problems as they may anse. (see Note 7 of Notes to f mancial flecinc energy ants follow amounts rumered through resenues, Statementsj as pcnmited by rate orden, and thertfore have no dfect on Certain problems expenenced by other unhoes which are earmngs constructmg nuclear generatmg units could have an indirect the vimponents of the almve changes are highhghted m the effect on the Company's operations and financial condiuon, be-table below-cause of common regulatory requirements, such a those of the NRC, and because industry events m some caes may affect the '[y' ]"g pnce of the Company s secunties m the capital markets, where the Company must compete for investon' funds. O'l,CIf,5,'['_n

  • [

In July 1985, the Company's ibard of threctors approved bl~ohme sein 't ed I a draft plan and agreement of merger to provide for a corporate "' h" "P '

  • 8 '""*"

[ restructuring of the Company's operations and authon:cd the of-I I hcers to take the steps necessary to cffatuate the plan. Ihe nuev I9" ""'t kilowanhounalcunauwd 2h Residential sary regulatory approval we obtamed from the IWU m January salo woe relauvdv Hat, unprowng shde uva hm year Nth 1986. If suxkho!Jen approve the proposed restructurmg, dfative the Residennal and Commtttial saleuatgones reilut the impxt p of the userall umla,lew hunnd sununer weatha expentmed l 43

this year compared to 1984. Temperature humid:ty mdex hours A record total of 34.869 mdhon megawatthoun was gen-dropped 5.7% from last year. Sales lost in the Commercial category erated, purchased and mterchanged. a 2% increase over 1984, due to the cooler weather conditions were more than offset by the pnncipally due to the growth of high technology and service ongoing growth in this service onented category. The lackluster onented facdities in our senice area. Higher generahon. mamly performance of New Jersey's manufactunng sector throughout. due to the perfonnance of Salem station, which achiesed a Umted 1985 depressed sales in the Industnal category. On August 15, States record for power pnxluced by any t>pe of generahon-1985 records were set for a 60' minute net peak load of 7,721 mega-nuclear, coal, od or gas-accounted for most of the increase, watts and the maximum day's output of 149,457 megawatthours. On July 11,1985, the IWU detenmned that arproximately 1984 - Electric kilowatthour sales increased 2.7% Residential $22.5 mdlion of replacement energy costs should not be recovered sales declined slightly, pnmardy the result of the cooler weather from customerCIhe $22.5 mdhon is composed or $19 6 mdlion experienced during the summer of 1984 compared to 1983, w hde associated with the Peach Itottom 2 pre rcplacement outage and the impmved economy dunng 1984 helped to increase sales m $2.9 mdhon assocuted wnh the Salem 2 water hammer outage. both the Commercial and Industnal categones. Although the isee table below and Note 4 of Notes to Fmaneral statements!. overall summer weather was cooler when compared to 1983, As a member of the penns>lvama New Jersey-Maryland onJune 11,1984 records were set for a 60 mmute net peak load ' interconnectmn and as a party to several agrecments which pn> of 7,422 megawatts and the maximum day's output of 143,558 vide for the purchase of avadable power fmm neighbonng utihties, megawatthours. A monthly record output of 3.452 mdhon the Company is able to optmure as mix of ntemal and estanal megawatthours was attained in August. suurecs usmg the lowest cost energy avadable at any given ume. Gas Total electnc energy cost mcrea ed 1Ph m 196 after an Revenues improved 2.1% in 1985 pnnapally due to the impact of increase of less than 1% m 1984, as de3cnhed below; the March 1984 rate increase. This mcrease was negat vely im-pacted by the one-time refund to customers of $13 2 milhon and a ,Q'g"' *,";'g reduction in the raw matenals adjustment charge, both ordered hv Gana m rmo raul tor tuci.urpha the BPU dunng the latter part et 196 The shght decime in 1984 ya po,c, purtha,c, 5 ist, sis gas revenues was mamly attnhutab!c to the one-time refund to Ado-ethat ouiru 21 n customers of $42.9 mdhon ordered by the BPU dunng the last ^d;"*',"'$^'"',' "['g,"yh m u. quarter of 1984, which was partially offset by higher salet The acetuc na nt incray a mt. to,.h. h refunds mentioned abose resulted mamly from an overrecm cry n c""" *" d~H"" d bv e lu o n a of gas costs dunnx the pnor levelized penod that was attnbutable 1 54 5

  • pnmarily to lower than anticipated pnces for prehne gas and

, g,g,,y,,,aw r-a -m r.2,th m ite wo ivo ins mi substantial purchases at lower prices on the spot market. Gas fuel int arnoumea to Sn mahon 5.N< md:wou 5 in matmn rontonh a costs follow amounts recusered through revenues, as pumated "r" """""'2d"* a cru swa4 anm ound wu"ol nunion m No and S H mdhou m Nsi by rate orders, and therefore have no effect on armngs. The components of the above changes are highinghted m the Gas costs mcreased lew than 1% m 196 and were 4% lowcr table below: m 1984. Contnbutmg fxtors are shown bclow r--- Im rtec or Dev reaw: Int rm.e or t h roe

Mdhons of Ibibn 196 u 190 to t o 19e

.Milla m d t bibh' be n t%s IW4 u Nml Changes m bec recs l'n 5 26 (hang m pntes pad for ni surpho 5, i: 5.49 Remvenes ut gas costs iAl 10 M sun harge relad to n"n prulut non Therm sa:cs 1 21 gauuu. 9 Orher onut me rewoun I j l koutah in.m pinime surrh<n . t u' 12 Thrm wrakt '1T 40 g l g,y Adrustms nt of atual unn m mm h A frnhales the afat of $131 rmHum refund to mtomen m ie5 and is2 y mdhon I^ m Nu i 1 1 gm 1985-Overall gas heatmg sales remamed relati, ely flat A Rentwur unJct. runwnJ ouou, whnh m th mn Nn tea ud IN when comIared to 1984. Heatmg degree days rose only.4% ova '"""*d '" 5 " """"" 5# "" ""'" '"d 5 ' ^ """'""'n'"th n es hw l o nt '"""""*""d" rtuntry of 54 mdimn in IM and $24 tmila.n m l A4 last year.Since early 1985, swnchmg of catam dual fuct Commer-to uo.t.,nwn or s u mahon and s u mdhon. ronutwb cial and Industrial customers from gas to lower pnced oil has Liquidity and CapitalResources depressed sales in these categones. Industnal sales have also been . #."* F"" N" I" "" I' affected by the cngomg slowdown m New Jersey's manutxturing non pnenn, hnanung com awoaat wah undemcomed

activity, 1984-Cas therm salts mercased hv 4% Therm sales elcanc cnagy cosa an to a leuer degree, by other uptal re I

improved over last year m all maior customer categonecibe mmemenn sua as matunng debt, reacquanmn of wcunnen and general improvement in the ect aomy dunng the var and the unking fund requndnenn. Ha capaal wsourus audMe m colder weather cady in 1984 favorably impacted all accgones.

  • "' ' h ' " 4 " """' "" ' " I ""d ' f " "" I "' ""'I """'""" '"

external fmanung intenully renuated funds depend upon cur Cnergy costa nomic vindit ons and the adequacy of nmely rate rehtf, as to Electric energy costs and gas fuel costs are adiusted +o match whah no awuran(c can he gnen. Accco to the long term and amounts recovered through revenues and have no eticct on cam-short term antal and acd t matlicts n neuwary for obtaming ings. However, the carrying of undarecovered enagv unts ulu-mately increases fmancmg costs 44

funds extemally.The Company expects to generate app oximately Short Term Financing two-thirds of its capital requirements for 1966 from operations. For mtenm hnancmg, the Company is authonxd by the 11pU to have up to a total of $300 mdtmn at short tenn obbgations out-Gonstruction Program standmg at any given time. Ihn avadabihty of short term imanc- .The Company maintams a continuous construaion program, ing proudes the Company dexiNhty in the hsuance of long term which mcludes payments for nuclear fuel. Thn program is penad^ secunties The Company's average dadv short-tenn debt donng ically revised as a result of changes in economic conditions, and 1985 e $U dime $17 MW hr bt mn mm depends on the ability of the Company to faunce construction At scar end the Company had $107 mdhon of short term debt costs and to obtam umely rate relief. Changes in the Companys outstandmg, excludmg $73 mdhon, which was reclawined as plans and forecasts, price changes, cost escalanon under construe-gg,gg tmn contracts, and reqmrements of regulatory authonne3 may As mennoned ah>ve. the Company has a Credit Agreement also result in revisions of the construction program. 6a unf domesne lunks for the issuance of revohmg Construction expendnures of $1.2 bdhon in 1983 and $9M loans..I he L,ompany aho has a $7, mdhon revolvmg credit agree-mdlion in 1984 include AFDC of $196 mdhon and $159 nulhon, ment with a group of foreign b.mks, under which the Itinks have respectively.Construcuon expenditures are estimated at S 30 bd. agreed to make resoh mg loans for one month, three months or q hon for the hve years endmg in 1990 and mclude AFDC ot ah>ut us months at a ute based upon the Inndon Interbank Ottered $240 mdhon. Rate for depouts m Umred States Dollars these agreements These esumates are based on certam expected compleuon provide the Company wtth an mtennedute term sourte of fundt dates and mclede anuupated escalation due to mtlatmn of atw proximately 6% T herefore, construcuon delays or inordmate Cash PosJtion inflation lesels could cause sigmficant increases in these amounts. The Company's cash pmtion decreased $87.4 milhon unce if Hopt Creek begms commercial operation dunng the second year <nd 19n4. Ihe compments of the deucase are: half of 1986, the Company expects that, with adequate rate rehef. as to which no assurance can be gncn, it wdl be able to gencrate [ '"""*' *"5 ( internally almost all of us construction expendnure requirements for the next five years. n,n.,mnn,m,. u y nmnwemt rce ao Long.Terrn financing a mma mlrgr.rn w.uoswtne urmt w nr The Company raised more than $7a3 milhon through sales m na seo 1985 of $125 milhon of First and Refundmg Mortgage IWnds and $5G3 milhon of Common Stock, and, on lanuary 14,19 % $75 Customer Accounts Receivable milhon of First and Refundmg Mortgage lwnds on the European At Daemlwr 31,196 customer anounts retenable approw market. As a result, the Company's mterest and dmdend re-mated $354 mdhon (excluJmg unbdled revenues of $210 rmlhon( quirements have continued to mcrease. as the Company a conunumg to tmance large retuvables f rom At December 31,1985 look value per share amounted to as cuuomcrs Net wnte off of untollutible aununts m 196 was $2a fu compared to $27.17 at Daember 31,1984 t he market down 31% to appmxunately $28 rmthon, a durcase of $13 mdhon value of common shares expressed as a percentage of book value trom last scar Net wnte off per $ltX1of reunucs w.n down 32 was 112.8% and 98h at year-end 1985 and 19% respuuvch cents to 64 centuompared to 19% the rcsult of impmved col-In addition to penmhe smking fund redemptmns and the lectmn procedures and umunued improvement m the nonom> pronned redemption of $69 250 mdhon of preferred stock, hve T he lesel of the Company's ratcs and a HpU requuement pro-mongage innd inues aggregatmg $270 imlhon wdl mature by the hibiting the termmatmn of cletinc and gas semcc danng wmter end of 1990 months to fmanually needy uncomen aho have an unp.ut upon Under the terms of the Company's Mortgage and Reuatcd the level of ruovaHes, unadlauble auoants and no wnte off Cernficate of incorpouuon at December 31,1985 the Company thercof. could mue an additional $2.115 bdhon pnncipal amount of g f MortMge Ikmds at a rate of 10625% or $2.1/J bdhon of prcierred e cunt of indanon on the L.ompany was sevcrc dunng the Suttk at a rate of 9375% present plans for the renumder of 19x6 penal 1979 through 1981 when the Aveuge tonsumcr prue call for the issuance ot debt and eqmty sccunties In February 19% the Company renewed as Crecht Agree-Index ; Cpl U) rdicued mucascs or our ifn smye 19x1, the m ment wnh 12 domesuc banks to May 1,1986 for the nsuance of 1943.1984 and 196 w cre 6 !% 3 2% 4 3% and 3 6%, resivct nely. revolvmg loans up to an aggregate ot $2(X) milhon to be ountand tven though the rate of intiat on h.n dropped below double thgit ing at any time.'T he agreement permin the C,ompany to consert utes, the cou of carnal lus renmnd relanuh ludi dunne a the outstandmg balance at the end of the penal to three$ ear tune when subsonnal.unounn nunt N und m se carnA term hunt Aho, the Company has the nght, wah the vinsent of "*k'"'"I'""""'""'""'""" the banks, to extend the agreement on a scar tuyear baut Ior a non.d intonnanon on die tun n of clunging entes In addamn to the domestic capital markets descnhed above. see Note 9 of Notn to Imanual sutements the Company hsts its Common stock on the Inndon sunk Ex-change,lamdon, England and the $3pxmio first and Refundmg Mortsge Ibnds have been Inted on the Luxembourg stock Exchange. 4%

Operating Statistics % Annual Inc.itke.)- 1945 comrared with iThousands of Dollars where arplicable! 1985 1984 1984 1975 Electric Revenues from Sales of Electricity Residential $ 918,911 5 883,6;2 3 99 HAl Commercial 1,236,027 1,111,175 11.24 11.15 Industnal 774,963 749,725 3.37 8.53 Public Street Lightmg 43,786 42,164 3 85 6.48 Total Revenues from Sales to Customers 2,973,687 2,786,716 6.71 9.43 Interdepartmentai 1,877 1,810 170 1.78 Total Revenues from Sales of Electncity 2,975,544 2,788,526 6 71 9.42 Other Electric Revenues 25,000 27,715 (9 80) 19 09 Total Operating Revenues $ 3,000,564 $ 2.816.241 6.55 9.48 Sales of Electncaty - megawatthours Residential 8,390,654 8,373.471 .21 1.00 Commercial 13,313,639 12.452,020 6.92 4 00 Industnal 10,290,711 10,444,412 (1.47) .14 300,612 301,702 p61 1.59 Pubhc Street Lighting ~ Total Sales to Customerr 32,295,620 31,571,605 2.29 1.8 I Interdepartmental 24,8A8 15,796 {3 52) (4 61) Total Sales of Electncity 32,320,508 31.597.401 1 29 1.80 Megawatthours Produced, Purchased and Interchanged - net 34,869,192 34,178,862 2 02 l.77 Load Factor 51.6 % 52.4% Capacity Factor 31,3 % 326% Heat Rate -I tu of fuel per net kwh generated 10,692 10.616 .72 .10 Net installed Generating Capacity at December 31 - megawatts 9,007 N,999 D9 .28 Net Peak Load - megawatts (60-minute integrated) 7,721 7,422 4in 2.10 Temperature Humidity Index Hours 15,720 16 677 (5741 1.45 Average Annual Use per Residential Customer - kilowatthours 5,494 5,543 ( MM) .27 Meters in Service at Ikeember 31 - Thousands 1,784 1,769 I07 .57 Gas Revenues from Sales of Cas Residential $ 751,319 5 717,2N4 4 75 11.23 Commercial 407,073 393,197 3Al 14 77 Industnal 242,767 2M.080 (7.72) 16.14 372 369 .H I 12.36 Street Lighting Total Revenues from Sales to Customers 1,401,551 1,373,932 2 01 12.91 Interdepartmental 1,321 1,6MI 121.461 7.40 Total Revenues from Sales of Gas 1,402,A72 1,375,614 1.98 12.90 Other Gas Revenues 5,614 4 269 31N) 43 29 Total Orerating Reienues $ 1,408,490 $ f.379.MH I 2 07 1294 SJes oi Gas - kilotherms Reudenttal 1,019,A50 1,019,025 .08 .'d Cor mercia! 634,059 62M,H s; .83 3 54 in atrial 464,4A9 495.719 (5.49) All S.re^t Lighting

736, A19 6.18, Total sales to Customers 2,123,134 2,143.938 197) 1 MM Interdepartmental 2,540 3,377 124 79) (1301 Total Sales of Gas 2,125,674 2.147.315 11 Oli i MM Gas Produced and Purchased - kilotherms 2,218,A18 2,149,.152 11.3 6) 1.9M Effective Daily Capacity at December 31 - kilotherms 19,990 19.H s6

.67 .21 Maximum 24-hour Gas sen fout - kilotherms 17,994 14.927 10.55 4 97 Heating Degree Days 4,764 4,743 .48 .24 [ Average Annual Use per Reudential Customer - therms 851 N63 (1.16) ( 101 l Meters in service at December 31 - T hou santis 1,422 1.4nt i 28 .48 l l I 46

i 1983 1982 1981 1980 1975 $ 829,967 $ 791,279 $ 728.M2 5 684343 $ 413 00; 984,499 981,795 871,377 765,356 429.428 686,8s0 716,662 684,976 598,716 341,749 38.672 37.h09 33.249 32,693 2A375 2,540,018 2.527,545 2,318,244 2.081,108 1,207,5;7 1,863 1,709 1,61'2 1,720 1,573 2,541,8M 1 2,529,254 2,319,8;6 2,082,k 28 1,209,130 28.576 13,937 2,186 1.(172 4Ai8 $ 2,570.4;7 ~ $ 2,543.191 ~$ 2.322,(M2 $ 2.083 9(O $ l.2134xx 8,402,397 7,(A6.;48 7,79;,988 8.129,198 7,598.964 11,753.667 11,1 I J.65; 10.940.(O) 10,726()36 Hy>4.hi; 10,253,784 10,017,613 10.923 (M2 11/189/>*2 10.144.917 302.053 301,603 275.489 26;.126 2;6.7;; p 30,741.901 29,120,419 29,935,128 i 30.I70,0;2 26.99;,191 27.h00 25.I54 2;.;67 27.64

  • I 39,9 III 30.769.701 29.14;,573 29.960 69; 30.197.736 27111;401 33,391.011 31,56A 231 32.2(11.191 3 2,7(11 ;(14 l

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348 1,757 1,746 1,739 1,732 1,6h9 l

$ 746,2f0 $ 716,N)8 $ (61.521 $ iI;.013 $ 2;9,09; l 396, t 59 371,(127 ,V)2,281 228L;77 1 f)2.6;/> j 246,408 241,437 240,711 1(>5 762 54.169 35M 3;0 290 2w2 _116 1,389.125 1,329,122 1,l 47,kul 90M,611 j 416.2 % 1,011 1.068 1J17; 92; i 647 1,390,136 1,AV),190 1,14 8,M 7M 909,;i9 l 416,xM3 2.339 59; 732

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I.; & 7 $ l.392.475 i $ 1330.7x; $ 1 119 610 $ 910 l;4 i $ a l 7n47 995,6H6 994.647 993.;27 1.023 027 968 187 596,k68 581,719

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460,(411 46;,83; 314,l M 447,474 A41.9 s 7 327 331 334 A4; 4nt g 2,053,482 2,(182,5 ; 2 2J)M,8m 1.977,3s6 1,761,478 i 1.857 2.090 2.4 V) i 2.322 A2fli 2.0ii.M9 2.M4 642 2.( A6 255 l 1.979 7()x 1.7/>t 64 2 2,151,417 2,148,x39 2,14;,32; I 2,077hi l l 1,M14191 19,129 19,139 19(110 1 M.419 19,;7; + 19612 16.201 11812 14,144 l1.077 4,677 4,820 5,082 5.1;/i 1,654 M;0 M;3 H;7 87; 862 1392 iAM1 1 378 1.3 7f) I,1 % i l l l 47 ~.

Financial Statistics (Thousands of Dollars where arrlicable) 1985 1984 Condensed Statements ofincome tAl Amount Amount Operating Revenues Electric $ 3,000,564 68 $2,H16.241 67 Cas 1,408,490 32 1,379,M&1 11 Total Oper. sting Revenues 4,409,054 100 4.196.124 ItX) Operatmg Exgnses Operation Fuel for Electric Generation and Interchanged Power-net 965,964 22 872,805 21 Cas Purchased and Materials for Gas Produced 824,648 19 H22,5R1 20 Other 546,267 12 527,171 13 Maintenance 291,437 7 269,974 6 Depreciation and Amortiation of Utihty Plant 222,961 5 211,188 5 Amortintion of Property losses 55,263 1 58,975 I Taxes FederalIncome Taxes 244,379 6 25% Int 6 New Jersey Gross Receipts Taxes 557,270 13 529,654 13 Other 51,875 1 M),132 i Total Operating Exrenses 3,781,268 A6 3.597,946 M6 Operating Income Electnc 547,343 12 527,625 12 Cas 80,443 2 70.513 2 Total Operating income 627,786 14 598.138 14 Allowance for Funds Used Dunng Construction (Debt and Equity) 195,845 4 15H,792 4 Other Income-net 10,214 12,866 Interest Charges (289,293) (6) (279,767) (/>l Income before Extraordmary Irems $44,552 12 490.029 12 Extraordinary items, net of mcome t.ix: Unrecoverable costs of Atlantic Pnnect Gam on sale of Transport of New lersey Net Extraordmary Items Net income 544,552 12 490 029 12 Preferred and Preference Stock Dividends 60,002 1 (d1221 2 Eammes Available for Common 5tock $ 484,550 11 5 429 80M 10 Shares of Common Stock Outstanding (Thousands! End of Year 131,699 112. % 1 Average for Year 122,344 108,913 Earmngs per average share of Common Stock $ 3.96 $ 39; Dmdends Paid per Share $ 2.Al $ 2.70 71 % 68 % Payout Ratio Rate of Return on Average Common Equity (Cl 14.01 % 14.43 % Ratio of Eamings to fixed Charges Before Income Taxes (Di 3.76 3 61 $28.04 $27.17 IWok value per Common Share tE) Utihty Plant (F) $10,977,321 59,M70,429 Accumulated Depreciation and Amortiation (F) $ 2,502,594 l 52.320,140 Total Awets IF) $19,447,051 I 59 6/41/>44 CapiteUsetiort Mortgage Ibnds $ 2,945,721 39 52.M77,518 41 Debenture Ibnds 218,914 3 225,N25 3 Other toneTerm Debt Total Long Term Debt 3,164,641 42 3.1n1341 44 , Other inne-Term Obligations tF) l 58,317 1 121.947 2 Preferrad Stock with Mandatory Redemptmn l 65,000 t l 137.7s0 2 Preterred 5tock without Mandatory 14edemrtion i 554,994 7 l 554 994 M $1.40 Davidend Preference Common Stak and Comme,n Stak 2,50s,945 35 2fX6,923 2M 557 557 Premium on Capital Stak 24,145 26lHi PJid In Capital Retamed Eamings 1,232,A49 16 1,09M.219 16 Tot 21 Common Fouitv 3,762,556 49 3130 NM4 48 I $ 7,411,58A 100 l 57Dl9 9l A HX) Total Caritaltution A ' ice %ummary sa %gmhunt Auountma Niu rn Noen to hnanual',taerments. and M4.uc ment

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Directors J ames R. Cowan, M.D. Prcudent and Chief hetutne Ottwer Umted Hosruah Medical Center, Ncwark, New Jersey. Afcmkr ad Fmance Commuter and Nonnn.:tm;z Conumrtce T.I. Dermot Dunphy Prcudent.Chict betutnc Onker and dirutor. scaled Air CorTeranon,manuf acturu fr itettne p.n kaang pn>Jutts and wstemi, haddle 14 rook. New lcncy Memkr of Nummat <nx Comtmtice and ()ry,ancatwn and Corn;rnutson Comrmure. Robert R. Fe rgwm, J r. Prcudent.Chaf bccutne Otnur and d:rutor, hnt hdthtv Ibncorporatnin and Chairman of the 1%rd and direttor, hrst hdchts llank, Nanonal Amutwn. imth of New uk, New ltrscs Aic.nhet of Fmant e Commarcc and Orgatu:atu,n and Comivnw fon Commatre r Irwin Lerner Prcudent.Chirt becutac Ottiur and dirtttor, H.4munn la khe Inc. manufacturo prestnrtion pharmauutiuk. utamms and ime thcmiuh and proudo diagnostic Pro f.ats and scruc( Nutlo. Ncw Jerses hitmbri tb Aud:t t 'ommah'i k ul uth r U smmJf ts t' und or2am: anon and t 'om;xnstron c< mituna William E. Marfuggi ( hamnan of the IWrd and.brutor. htory Orttui Manutxtunna Compinv manuf acturn ophtha! mt tramo and Chamnan of the luard and diret tor Plaza Aung!ano lot manuf atturo sunglance b th of Newark, New Itrwt MemNr of Auda G,mmetu and law a e t. mmnree Marilyn M. Pf'altz Partncr ut P and F, Annuato pu% tclations and rubhuts 4 grmbts, Summa. N w k rw v. Mem%r u d hu.},t Cr muntn v and ?o r'vaa'mz i'.nmuttcc james C. Pitney Partrcr in the law tam of htno. Hardm, hrp n %:ut h, Nwark and Murratown New kno chairmun # 3 Au la ('i mmrerte aih! rnernNr e!()r anutat ain and Com;4 n wtJon O muurh c Kenneth C. Rogers PrcuJent Arocns losutu c id In hnoloo. Hoh4cn, N w krso r ch.ntman <d t.ununatan t o mmnter and mendwr ot t Ir4JrH:Jf U d ath[('t ifnlN't.Wf Fif] I d inm'r f f r Verdell L Roundtree he Prcudent. National i n yre. UmtcJ Negro Collyc land. Nt w Erk. N w Lik '.1e r&r of A udit ( omnmu, I Wrme rou (i mm tto William IE kott Retircd %mor 1 meturne Vit o l'rcudt nt of the Comr.ans i1.ntinan e A I anan r ( 1.mm:rn e und m: +< r e,1 het ur n e ( < mr.nnt e Robert 1 %mith R(tao' thairm m of th( 1%r.1 of the Compun Mcrr%1 of F ner t.tn e ( < nannter an II m m. e ( n, rant n liarold W.semn Chunnan of the lund. Prcudent and t.hnt I ut otat t ) tut cr of the Compans t h.ntinan eJ l xr. urn e ( om:nnra an.l nu mkr of hnans e ( omnutrt c Itobert V. Van louan ( hairm.m of the IWar1( ha f l u t atne t )ttu i r an i dautor i ht Mutual P+nt he I dc bnorant c ( ompn r New uk. N w b rw. I hwrman or i nana:nn an.!( omp+ o wnon t innvaru ani merb r ud I w utn e c onstwr, e,m I f unau e u~. m rons < losh %. Weston Prcudent ( ha t t u t un.c (Ithu r an.f.bn (tor. Automa a 1 bta l'rne i umg, int, N m land N w b ru s r Meinber a Au la Lomnotn e anuliIrzara:.aren and L.,mpen s,,1v n t.ornunnre 61 w

jf l "a Officers f( l I L Harold W. Sonn Chairman of the ikurd. Prc.sident and Chicf Executive Officer Everett L. Morris Executive Vice President -~ Fmance Frederick W. Schneider Executive Vice Preudent - Operations Fredrick R. DeSanti Senior Vice Prcudent - Customer Operations Richard M. Eckert Senior Vice Preudent - Nuclear and Engmeenng Robert W. Lockwood Semor Vice Preudent - Admmntration j Stephen A. Mallard Semor Vice President - Plannmg and Research Donald A. Anderson Vice Preudent - Information Systems Lawrence R. Codey Vice Preudent and Corporate Rate Counwl Robert H. Franklin Vice President - PuNic Relations Charles E. Maginn, Jr. Vue Preudent - Human Resources i . Wallace A. Maginn Vice President and Treasurer Winthrop E. Manse,lr. Vice Preudent - Corporate $crvxes Thomas I. Martin Vice Preudent - Engmeer.ng and Construction Corbin A. McNeill, Jr. Vice iteudent - Nutlear Parker C. Peterman Vac Preudent and Comptroller Emuis L Rizzi Vae Preudent - Customer and Marketmg Services William saller Vice Iteudtnt -- Governmental Affairs R. Edwin %elover Vice Prcudent and General Counwl Robert i Smith - VKe President and Secretary Robert F.%teinke : Vnc Prcudent - fuel supply Rudolph D.$tye Vac Prenant - Transmisuon and Dntnbuttori Richard A.U.Jeritz Vice Prtudent - Prmfuctum l. } 52 = 4 .-r

Corporate Information Anneneianneting. Sleek Eseinense Lietinge - Please note that the Annual Meeting of Stockholders of g,,,,,,,,,,p,,,,,,,,,, the Company will be held m Newark Symphony Hall,1020 New York Stock Exchange Broad Street, Newark, N.J. Tuesday, April 15,1986 at 2.00 p.m. Phthdelphia Stock Exchange A summary of the meeting will be sent to all stockholders London Stock Exchange (Common only) of record at a later date. Preferrodr AduNtionslinoporto Aeeidatie-Fenn fe.g New York Stock Exchange Stockholders or other interested persons wishing to obtam e copy of the Company's 1985 Annual Report to the Steek Synenest950 Securities and Exchange Commission, filed on Form 10-K, The table below shows the quarterly dividends paid for the may obtain one without charge by writing to the Manager-penods indicated and the high and low Composite pnces of Investor Relations, Public Service Electnc and Gas Company, such stocks. P.O. Box 570, T6B, Newark, N J. 07101. The copy so provided will be without exhibits. Exhibits may be purchased for a conwnen Steek specified fee. 1985 1984 Dividend ygee sygu Financialand Statietteet Revleu, A comprehensive statistical supplement to this report, Price containing financial and operating data for the years hrst Quarter 27%25% 24%.20% 1975-1985 will be available this Spnng. If you wish to Second Quarter 32 % 27 % 23 20h receive a copy, please wnte to the Manager-Investor Third Quarter 32 % 26 % 25 % 21 % Relations, Public Service Electne and Gas Company, Fourth Quarter 33%-24 % 27% 24n P.O. Box 570, T6B, Newark, N.J. 07101. '94 hm Quance ontr s s hm ouann ont, Treno0erAgente $ 1.40 Dividend Preferenee Ceneneen Stock di Stocks, 1985 1984 Morgan Guaranty Trust Company of New York' D vidend 354 35c 30 West Broadway, New York, N.Y.10015 Pnce Stockholder Services, First Quarter 13 -12 12 11% Pubhc Service Electric and Gas Company second Quarter 14 % 12 % 11 % 10 % 80 Park Plaza, P.O. Box 570 Third Quarter 15 13 % 11 %.10 % Newark, N.J. 07101 Fourth Quarter 14 % 13 % 13 4-10 % Regietrors All Stocks, Steekleolder Intermetten - Tell Free First Fidehty Bank, N.A., New Jersey New Jersey residents !Mur 242 0813 765 Broad Street, Newark, N J. 07101 Outside New Jersey (km) 526 80;0 Morgan Guaranty Trust Company of New York, 30 West Broadway, New York, N.Y.10015 Seeurity Aneirets end inetitutioner enveetere Manager-Investor Relations (20ll 410 6%4 PSE&G Territory ium=:m ,,,,.,.aw ym p f i /0/.,_ _ / Rp

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bout the Cover-The cohural gateway to center city along the Schuylkill River factures the F' 1J/ ' A4useumof Art M ]j .a olongnedeihe FormountWooerworkn (center) w% she Company's h - t

t. buikhng in she dneance (righe).~

cp 1 . About the t,_, "' ' ?/.:a Electric Company is on operahng usildy which'provides elecenc, ges and senem senace to the 4 public in soushooseern Pennsylvania and to certen perhons oinortheessern ??_,'n f through o subelsbery. Theestelosse served by the Company and subsidiories covers 2,475 squore miles. Electric serwce is supphed in on ores ol 2,340 square miles wish o. i poguksenof about3,700,000, including 1,700,000insheC#or ' fff i?__ _^J,95percemEtheelecenseeruse j -oreo and 63 percent of recoil kk - :" :-f sales are in the.T'_ f fff: suburbs and in northeastern ??.,'if, and S perceneof j the serwce oreo and 37 percent of such soles are in the Ch of Philadelphia. Natural ges sonnce is supplied in a 1,475 equese mile ores of soushooseern Pennsylvania od aceae to Philodolphio wA o populosion of 1,900,000. 5esem eerwce is supphed in the i y, a or Y s Ceessnes Leserto Shoreholders 2 Repoeto(1985 Operosions $L tt_. _rs Doevesionond Analysis o# Financio Conde.on and Reschs f oowonons 21' ~ Accouncones' Report - .22 Consoladolod Financiolleesen.ords 23 Nosesto Financiolleosomenes 20 - F-.iu o,do,,. w s .0 Shoreholder:.-a.. ':- "44 [ 4 ONicersand Directors 45 1

" ' '; M: Electric Company Annvol Report 1985 Financial Highlights 1985 1984 Change Operating Revenue $3,013,704,000 $2,981,017,000 I t. Operating Expenses $2,598,751,000 $2,526,758,000 3% Taxes Chorged to Operations $443,347,000 $453,612,000 (??.) Operating Income $414,953,000 $454,259,000 (9?.) Earnings Applicable to Common Stod $434,724,000 $409,707.000 6% Earnings per Average Common Shore $2.56 $2.70 (5%) Cash Dividends Poid per Common Share $2.20 $2.20 Average Shores of Common Stod Outstanding 169,784 471 151,803,698 12 % Construction Expenditures $864,703,000 $1,063,630,000 (19*.) Toto' Assets $10,165,314,000 $9,555,729,000 6% !$$ft"E$7fswee I?eTt I0tbtY

m. ix CC,a 2*

x; I} D y 0~ i= g;1!- y : 4 nagm yw r gM '4 h p h L,1.. g.! y l I 1 81 82 O 84 85 81 82 83 84 Si (sternal $rwm (<,n.ngi PF $hnr. m ame Dvusenes men leani $ow m 1 L

ToOurShoreholders woother during the hooting season. Stoom sales I i 1985 was a yearof solid occ._ _ _ -s for the were also down.

Company, o A 28.2% ofectrk role increase roguest, the c UmorickUnitNo.IreceiveditsfvN-powerop.

lorgest in the Company's history, was filed in eroting license on August 8. Abr the unit was _ _ _i to bring Umerick Unit No. I into rato exhoustively tested while, i:", being base. To moderate the impoct of the increase on reised to fvN capacity, it was placed in commer. customers, the Company proposed to phase in ciel operation on Febrvory 1,1986. the increase over a three-year period in three o Umorka Unit No. 2 received Pennsylvania equelstepsof 9.4%each. Public Utility Commission (PUC) permission in a Gas for#Fs were reduced by opproximately December to be completed under a cost contain. $24 minion per year in several reductions that ment and operational incentive progrom whkh took ehct during 1985.These reductions match includes o construction cost cop, operating and comporobie reductions in suppliers' pekes to the meintenance cost controls and performance in. Compony and did not ahet Company earnings. contives and penalt6es. Full construction re.

The Point Pfossent Water Pr@, whkh is de.

sumed in Febroory 1984, with a targeted signed to provide permanent s _, L _.:J [ c 4::,,. date of lose 1990. cooling water for the operation of Limerick, was a fornings per shore were $2.56, o decline of ordered completed by the Court of Common 14 cents from lost year. A PUC disallowance la Pleas of Buck s County in February, whkh was October of opproximately 573 minion of prior oNirmed by the Commonwoolth Court in Octo. years' deferred costs reduced earnings per ber. Buc k s County and IM Neshaminy water me. shore by 20 cents. The Company has appealed sources Authority have petitior,ed the Supreme this disollowance to the Commonwoolth Court Court of Pennsylvania for oilowonce of on of Pennsylvania,

oppeal, u flectrk soles to retail customers remained es.

1986 will be another year of challenges os the sentioily flot compared to lost year as milder Company ottempts to put its investment in Lim. weather offset growth in customers. Gas sold erkk Unit No. I into base rates. Construction ond transported declined slightiy due to warmer work has begun again on Unit No. 2 and will be 7

pursued vigorously during 1986 and until com. The counties that we serve in southeastern pietion. These items comprise our top priorities Pennsylvania and norttwastern Maryland are for 1986. rkh in history, culture, scenk beauty, recrea-The Company's accomplishments in 1983 are tional activities and economk opportunity. We theresuitof thecontinuingeffortof adedkated have attempted to capture some of these ele. 1 and talented group of employees. Their commit. ments in the photogrophy of this year's report. i ment to efficient operation, high-quality cus. As we face the future, we recognize the sup. f I tomer servko and innovative technology serves port of our investors that has made this year's our Company well.They are also actively in-significant ochievements possible. Thank you l volved in our local communities, leading and for your continuing support I participating in a wide variety of octivities that contribute to the quality of life within the Com-James L. Everett j Chairmanof the Board 1 I " **"

  • l pony's servko oreo. Examples of our employees' i

i octivities are highlighted in this report. in _l l 8 John H. Austin, Jr. Prosident and Chief Operating Offker l k. i h J.An 11. Amsin.Jr. Janin I b eren I t i 3

A H I L A D E L P I A C O U N T Y zw- +9 g 9 ~ = -b ~ [w I_ _g,p - -, Hs

r T I he Schuylkill fuve, tri. verses our service terri-tory from above Pottstown along the Chester County and Montgomery County borders and through Philadelphia and provides many recrea-tional activities for area residents. The Temple University varsity crew completes a workout !.c ,j' M' t. <k ... - 1; e 4 4 9 4 m,., s,, 5. '^i 'i + w.t w e Sa r a I s. r w.-,' n _' - +; '. -' +- r,. . ww i' n

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%l 6< $l{ ~ n 94. &&,Tg.f Mygg ;)8 ..,. ; * % ; ~'+ , _ ~,. ua w,,,;;- bp

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fe#> ?, 1 + _h 11r Greenfichl Elonwntan N l...I at rawI arai t :liewnisi ' treri,i-nnav than l'Ebenter its neight..r. IL 4,icil 5 Greenfiehl ur=ler ilw l%Ia.lel.hia N h...I Ih irm ti i bl 5 t - b l*.I 1*nigrain ihn, ugh whn h the Gannun 5.nsiir* hm ibir* an.1 en u.* li Irl. ilm i li...I i The number of e;ectric customers grew 1*. in 1985 1985 Maior F moncings totall;ng nearly 14 milhon at year-end. The number of M'Iho"5 Month of Dollars gas customers also grew, entreas+ng 2*. to 311,700 Apr. Common Sicx k -4.000,000 Add tional informat.on on sales, revenue and cus-shores (,e $15 48 5 6M May Pollut.on Contrd Bonds-10~-' *. tomers con be found on pages 42 and 43 due 2015 2450 Financing Oct Pollution Control Bonds-103*. due 2014 41 0 The Company raised over $10 billion n new cop tal Nov. Mortgage Bonds-dunng 1985 to provide funds for construct,on debt re. 10i'. due 1995 150 0 115.*. due 2014 250 0 funding and other needs. As a resun of lower Werest Jan. Dec Common Stod Purchase Plons ro'es. the Company sold $250 milhon of 1144*. mort D.vidend Re.nvestment. E mployee. PAYSOP-gage bonds due 2014 and $150 milhon of 10 7/8*. 7,990.000 shores Average Pnce of $15 77 126 0 mortgoge boHs due 1995 in November for the pur. Common Stod cont,nvous oHennqs pose of repurchasing through a tender offer, certain of 3.387,100 shores Average Pr<c ci ll 5 65 53 0 the Cornpany's outstanding bonds consisting of the 18-Sub-To ol 5 9269 e 3/4*. Senes due 2009 the 18'. Senes due 2012 and the L.menck Credit Agreement-17 5/8*. Senes due 2011 As a result of the offer, $23 7 Net odd t.onal borro*rng joutstandej 12/31 85- $ 550 mahon of bonds were tende<ed enobhng the Company million) 1500 to reduce its annvol interest payments by opprow motely $7 6 mdf,on per year Funds not needed for the Construct;on E spend,tures tender offer will be used for construction and other Investment in new plant and equ.pment amounted to k Co'Porate purposes i $865 mdhon in 1985 w.th apprommately 70*. spent on tirnergh and relo'ed transmiwon foohties Out!oys for 1986 are espected to amount to oppros.rno'ely$/71 mdhon includ.ng $ 104 m.lhon for timenc k Unit No 2 f. sin-top toen a t.uw* slednuule Ihr d.eui.t..w n ibl til+ lj.hi.i

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I...k..n Ilir $ WlllImlludi twin t.. wor oltn e s usini.lcs jeny* a f sa I...eled.il ll *t.un t \\I.u b ri 't r ert a. 6

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E. Lrtin %ne 4 Area lk sek imwn and Frarwi I y '? Girey i4 tralustrial arul Cinnnerri:d Senice. naler near . ? g ', a nunleli4 One 1.ilerti lixe. whis h i* die firwt pime 4 a 5010 rnilhon Ih.uw &.b= iate dewlqvnent. W 1 4 '.+ ','., [J pn.jci~t will ini lude two #we tower =, c 2.En..m lusurv '. ^ ;., _ ~ S hedulnl to in n,mpletnl in dw fall it l'E, Orw l A-luitel, two lesciut retail *;we arul a puking garage. etty lise w dl riw u b.i..rie, aime gnan=1 lesel, higher than de t..wer ar=1 statue.4 Wilham Ibnn aitCity llall r_ I to st.wicW. Rotes and Regulation recovered ofter the third or final step is effective, but Effective January 25,1985, the PUC od,pted on Order without interest. The PUC suspended the rate mcrease s granting the Cornpany a net ncrease en annual electnc unbl June 27,1986. ond ordered full pubhc hearings. revenues of $49 mell.on, compnsed of a base rate in-In December, the PUC issued on Order in the Umer-I crease of $150 mi! bon, reflecting the inclusion of Solen' ick Un.t No 2 Show Cause proceeding that opproved the S Unit No. 2, less $101 milhon in fuel cost sowngs. The completion of construction of Unit No. 2 provided the m Corrpony ogreed to guarantee that Salem Unit No. 2 Company ogreed to o cost containment and opero-would produce $116 million of fuel savings for the pe-tional incentive program. This program encludes o $3.2 riod from February 1,1985 to March 31,1986. b II.on cop on the total cost of the unit for rote-making in September, the Compory f tied a $671 milhon elec-purposes and two plant performance requiiements with ? fnc rote increase to begin earnmg a cash return on the incentrves and penoides. Aber coreful considerohon, the $3 8 bilhon investment in bmenck Unit No. I and 100'. Company's Board of Directors unon,mously occepted the ,6 of common plant and to recover the cos+s of operating terms of the PUC Order and full constructon resumed on F the un t. The request reflects on est> mated $207 milhon Unit No. 2 in February 1986 Unit No. 2 as needed by die h, in annual fuel cost savings result.ng from the operchon early 1990s to prowde odd <tional copocity for new load of Unit No.1. The Company proposes to phase ;n the growth and to eeplace old oil-fired generation. The 28.2*. increase over three years in three equal steps of Compant osschedu dtheunittobecompletedinlate h 9.4% each and thereby lessen the impact of the in-1990 at a total cost of $3 2 bill.on, includ.ng the $901 { crease on customers. In odd tion, the Company pro-melhon spent through December 1985. The Company f poses that revenues deferred by the phase 4n plan be beleves that it con complete the vn,t on schedule wdh the highest degree of quohty and within the PUC's cost con-k[ In October, the PUC issued on Order denying the ' q n. q. ' . < % t.N~{.; 3. .y... 7 t .sm J - "'.c c. f 'U N %*- , ( Company recovery of opproximately $73 milbon of the ..b,. $101 m.thon of deferred replacement fuel costs associ- _, 3-[ g.c '~ M-ated pomanly with Salem Un t No i outog-s in 1983 and .~ 2 z . J-> ;,. f .f? . c.< h - ?... 7 I j 1984 and costs incurred during operat on of the Com- ,v,; ;. : a ? .,r m.f ' f .{ --y. pony's magnesium oxide (MgO) regeneration equip-4 pg 4, . un y, ) f ment in 1983. (The MgO regenerchon equipment is port d ' NW-of the Company's scrubber system for remowng sulfur E I*ani lluilolph. Jr. 4 t,a O n rati..nu wi. Iw. h.e i anil girl

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1 Iorld famous Longwood Gardens in scenic Chester County consists of 350 acres of outdoor gardens and woodlands, glassed conserva-tories encompassing 20 indoor gardens, and Yr 3. I ,g' illuminated fountains s g s e g yea r.. }t 'qJ's ,('h]+ t k r., ;i <. sti Axp.t - *. N.e,, ss

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in ( he ter i kamis, a mmmimais iJ cia,p eff n irne h..m., n hemg lanh la On.et..lAu, a en.i.,i( l=>ier an.1 Law a-ter (. mis b.nl.l.-r lictr. \\f r %.litur inuid e ~ .h-. u -., la-nr= i ommumts. alled 'u uh. hum m ith lb.l it it ll..nr airlie..t Mc-tren N-om u l Nrm I I. \\l.u klei Jr. e, enir,i..t I!o-me - vn i. c. The timenck Un.; No. I test program went entremely Bucks County pet t oned *e Sup,eme Court of Pennsyl-well and surpassed expectations. The program was von.o for o!!owance of on appeal Work on the proiect completed in January 1986, ono the unit was placed in has been hohed s.nce early 1984 commercial operot on on Febroory 1,1986 Dunng 1995. en order to provide on intenm sepi of f Water Requirement-suppiementof cocheg water necewy for the timrck A cntical corrponent of the permanent supplemental Unit No I test.ng pro.yom, the Company appi ed to the cool.ng water system for Limenck rs the Point Pleasant Delo*are R.ver Bos.n Commiss.on :DRBC) and ob-Water Protect, wh4h was designed to be consnucted and to;ned oppro<ois for the rnod hconon r) ece oons on operated by the Nesham ny Water Resources Author +f the use of the khuyOll Ner and the reallocaMn of (NWRA1, a mun.c. pol author!ty created by Buck s County, cool.ng water to Limenck from two other foss.1 f. red under a contract among NWRA, the Company und Bucks power plants on the SchoyIk di Rwer The Di?BC oppeov-County The Po.nt Pleasant proeect has been the sub ect o!s for the above ment >oned rnod f> cot.ons of re*C i of substantial oppos. tron from vanous groups, includ. hons and reallocottons were e ect.ve the ough December H ing a motonty of the current Comm.ss4oners of Bucks 3L 1985, and the Company brn ago n ided re mts w th County and a maionty of the new members of the board the DRBC for its 1986 supplemeriot wohng weer nmh of NWRA, which has resulted in interruption of con. pend,ng resolut+on of the Po.rt Pleasant protect struction and in Ltigation, in March 1985. oppeals *ere in September, Gover nor Thomas Keon of New Jmey f led by Bucks County and NWRA with the Common-and other d gn'tanes part.c pated in ground breaking wealth Court of Pennsylvonno from the deos.on of the ceremon cs for the Mernli Creek Project This $217 rn !- Court of Common Pleas of Bucks County wh<h found the lion reservoir fac lty, which wiil be owned pnt'y by PE Point Pleasant contract to be vahd and enforceable and and s.n other elettnc ut.! t.es. is sdeduled to be in ser-I j ordered completion of the Proiect in October 1985, the v<e by May 1958 and *dt prov.de water ior power plants s Commonwealth Court afhrmed the decision of the Court along the Delaware R,ver as well os timer.d PE's sh(ne i l i; of Common Pleas of Bucks County, and NWRA and of the proiect cost wdl be $76 mdhon I' iminutrits mu.h ensoni } 6 the ( s.rnp.un.H d it-i empba re-are an mq..riani...,ai d.uto.n i... u - n n r . err.e. lh l e rt %. Ibur..I I.nci p hd.4 m.it n.n.md 2 Ielue. sin en u.lunteer-hn -en n e-in the -to. lent.u.d -r. lf l ..I the (.he arr ( k.in.ts Gal.1 an.1 I..n.* r I i.-s lopn.rni Center..e -. h...l 1..r. lal.hrn = sth Iramag.h.ibihiir-12

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-l I J l l 4 ) located near Phill;psburg. New Jersey, obout 50 miles Marketing f north of Ph.lodelphia, Mernil Creek is a small tributory The Company continued to o90ressively market pro. i of the Delowere River which is being dommed to create groms designed to encouroge the use of h.gh-efficiency l o 15 billion gallon reservoir. Water witi be stored there equipment and oppl.once, and to promote greater oH. f when it is plentiful, then, during times of extreme low flow peak use of our energy serv.ces. i on the Delaware, this stored water will be returned to the Much of our marketing effort is directed to electnc 2 Delowere River to replace the water the project owners space heating. Our terntory expenenced a record level use in operating their power plants. This will ensure thof of commercial construction in 1985--16 mill.on square { the region's electnc generotron needs wdl not be cur. feet of new space underway Over 65* will be heated toiled due to lock of water. Construction of a water stor-electocol!y, wb.le 18*. will be heated by Company gos, oge fochy was ordered by the DRBC in connection with resulting m o total Cornpany pene*otion of 83* m th.s its authonzation to talie water from the Delowore River important market. t for certain generoSng unets,includmg Limenck. The residential market was also unusually oct ve with 12.200 new un.ts connected Electnc space heat ng was mstolled in 65*. of these units Heat pumps, which are octevely promoted by the Company because of their ef. M *4 f aciency and economy, will heot and cool 58*. of these 9 -g new dwelling units Another 23*. will have gas heat, so Ih f that over 88*~ of new homes in the service terr. tory will m ,,N be heated with PE's eff.cient, clean energy products. g Areo Development A y Jd p Southeastern Pennsylvonia is on the move and Philadel-N, ph o Electnc Company cont nues to play a leading role .n promot ng economic developm+,nt in the oreo. Copi. folging on the successful theme,"We Know the Terri-tory", Area Developments rodeo and pont odvertising Curti N lblille. Jr. 4 Ea-irrn Ibi-i..n m. kes an aerial cont,nues to promote the many benefits the Greater in-i

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Philulphia mettopolitan oreo hos to offer Ib k* L.* mis. ile h..ncs an part..f I'E'- Eu ellei= r in l fnero Efficien. 3 iLEEt l'n. gram an.1 mill h.n e 1 cat samy.. 13

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ucks County offers abundant visual wealth and has attracted a community of artists and craft-men. Noted furmture designer George Naka-shima inspects wooden slabs at his studio in .,p. 'a.. ,4 h*' E.},,

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m sixth refueling as well as major pipe replacement. Stoinless steel p; ping connected to the reactor vessel was replaced with on improved alloy pipe to prevent weld cracking. This protect incorporated a modified pipe system design to reduce the number of welds. This re- ~ k i' placement involved the efforts of approximately 650

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}"' pony's system. The total cost of the replacement was $85 ,e 6 r i

i mdhon of which the Company's shore was $36 milhon.

An extensive reston testing program, s;milar to that re-ggi, g, gy;,g g g;4,, ng,,n; quired for o new plant, was corried out to assure that no as finu hrfit the Enterpriw hre Curryany in liatt in>, hauenai s. a sof unteer firefighter f..r 22 years. conditions or system chorocteristics were created dar-l ing the outage which would in any way jeopardee the I safe operotion of the plant. i Lkewise, Peach Bottom Umt No. 3 was shut down for and ope o ed at 76.1*. of fulkopocity for the re no;n-o scheduled refuehng oH p;pe inspection in July 1985. der of she year However, os a result of lower oil pnces, Weld crocks were found in the stoir.less steel piping the onit end not fully ochieve its contemplo'ed fuel sov-L connected to the reactor vessel and were repaired us-ings that the Company ogreed to guorontee, necessitot-ing a weld overlay technique. The un f is expected to be ing on $8 mdhon charge against 1985 pre-ton income. returned to service in February 1986. A pipe replace-The Company owns 42.59*. of the So!em Generat<ng ment progrom semilar to that performed on Unit No 2 is Station wh<h is operated by Pubhc Service Electnc and i being studied for the neut scheduled refuehng oubge in Gas Company. i early 1987. Eddystone Station celebrated i*s 25th anniversary in in 1985, Salem Unit No.1 estobbsbed a new Umted October. When hrst completed en 1960, the two super-States record for electncol production in a calendor yeo-cnticol, high-pressure, cool hred units we e the most ef-by a single unit, operat ng at full capacity 95.3*. of the fecient in the world. The stat.on hos more than doubled time. Solem Unit No. 2 returned to full operof,on in May its generating copoc+y sence the initial operaton of these pioneering base load units with total capacity now equahng 1.5 milhon kilowatts, enough to serve o cdy of l 650,000 people. The station achieved another engi-t I neenng milestone in 1983 by instolhng a portculate and sulfur d>owide remomi system, or scrubbers, which v - o i hie o umque magnesium oxide regeneration system to remove in excess of 90*' of the sulfur d'onide from the flue gas The Company's new nognesium oxide regeneration focihties, located of Albed Chemical Company in Clay. limhhngs maler om, inn tam in this Ithe liell olhre i I n.mpiruy pify the -trimg offii e gnath m die neighi,,,. mont, Delaware, and Essex Chem col Company in Cbf-mynmner*. An ailihtumal its millom wpure feet.4 i n, New ersey, c ntnued to Arn weH dunng N l nifu e,pc e were uruirrw.9 m l'E. surtu ul.uIs m the Chr ter anil \\l.mignmerv C.simts area,i4 Great \\ alles. The regeneration eqapment at these sites separates the IVng of l'rueia. Ithr lirll.11 numth \\fretmg..n I 3 ( Eli.,. Gnne. suflur dioxide frcm the magnesium sulfite by product of I the flue gas scrubbing systems of the Eddystone and l Cromby coal-burning stations and recovers the mag- [ F l l i 18 l l

l I l Od ), ( i 16f ert E. lirwan.f Gawmmgo l' mer Gunpam ea 11

  • ulmi lun ai its with iblph Nilm4 % L Gire anil A--.wiates. Erw. ai dw Fair 11 11 l'lant m \\lan tasmL lle PE cont nued to make optimum use of its transmission company r.unufacturm iratu tnal fibratum an.1 p..lln-ti..n runtn,I pruihn t. in een pluit< in \\ tan Lu.1 armi connections with systems outside lhe Pennsylvon;o-New apprminutch la plant
  • thn nglw.ut the worbL Jersey Maryland Interconnection (PJM), enabbng the Company to buy economkal cool-fired power rather than using its oil-burning units. These arrangements, nesium oxide for reuse in the scrubbers. Dunng 1985, the combined with normal PJM purchases, min. mired the the process reclaimed 18,300 tons of mognesium oxide operation of the higher-pnced, o.l-t red ganerating units for reuse ond supplied 19,600 tons of sulfur dioxide to the on the Company's system. In 1955,10 3 billion kilo-chemical companies for the production of sulfuric acid.

wat' hours of economical power, rep artr sq 34*. of the Regene-ation of the scn,bber by product not only pro. Company's total output, were purchc sed by PE. The re-1 l vides economic recovery of the magnes.um oxide, it also sultant savings of opproximateh $135 m .2n were elimmates the need for ibe disposal of thousands of tons possed on to PS customers. of scrubber waste in landfill sites. The Company's Electric Tronsmission nnd Distnbu-1 The Company owns 21 % of the Keystone and Cone-f.on (T&D) forces had another busy year in 1985. The in-mough mine-mouth, coal-fired stations in western terruption of electric service to about 190.000 customers Pennsylvania which have o combined capacity of 3 4 caused by the high winds of Hurncone Glona made it the milhon Lilowatts. Both stations cont nued to perform well fourth most severe storm in the Company's history. Due during 1985 and PE's shore of their output was 4 4 bil-to the efforts of more than 1,400 employees, sowce was lion kilowatthours. The high level of performnnce of these restored to oil customers in obout two days. At the com. I stat;ons is directly ot'ributoble to capital investments pletion of the work on the Company's system, more than which were made during recent years to increase the ef-200 employees were sent to long Island and New Eng-ficiency and reliabilty of these economic un.ts. Both land to aid in the restoration of serv.ce in those areas Keystone and Conemough receive cool directly from under on industry-wide mutual assistance program. In mines located near plant s tes. oddit on to deol;ng with on extroordincry occurrence like Hurricone Gloria os well os the more typical emer. gency situations, the T&D department emperienced its busiest year since 1979 in construct >r.g facilities to serve new customers The Company hos ocquired two new electronic sys-tems to aid in predicting the sue and seventy of storms such as Glono which upprooch the Company's system. The first, o new color weather rodor, shows levels of 11n.n.nghbml n..rv i4. mg.m.11 nnling aw it.c mas..r

a. nutm..,I 4 in.Ilkbl4 Farm m ( l.e-ageake t in. \\lan-larpl. lla-i u-tonwr of 11 *ulme.han G nom mgo lber G mpim ler.mic the all-une lea.hng I,n riler of takr-w mewr* in ihr l'% an.1 l's A 19

A I e g x 4 ~M W = y M ILa ti..n,e it...a. a< s ion it ai i n <, r a t.m. e. . cntet., in I.m.lm n L prec p ta' on Aroughout +e serva e te" tcry o" J ad p 'y W L tui ad cr* tuo of the sc4' ro'u ol oas mau beycod Ibe seccrd a comp >er: zed Wtn nq de*cc + ou;h n~:m ed ( c-twf f, 'es + um tet o' ' e'" t en system, 'oco'es c'ovd to ground I f M aq s+ kes ett .ur p ers rd t,v pun hos rq 25 : f.% ag e' cre a:ong the east cocet Tr e.c'c e mu* o, f cm >< upst.ts,+ wq se.'or x t oe.s at a v i, r.. n of bc+ svstems 's used by the Comr<:ny to a-' t we >vm $14 9 n.' - 1 ked,x t u s m 't e C. et m,'s :: n r fes n '. act v *, and to te er a4c_a'e r"arpower n o nee M +- M 'g $29 m : n pe veor mod.' " Sec'er'- t.*-' a' d No a doce tre ser v.c e r esty a' cn t -e 'a Com ci"y c es v - tcer pa r ed t'.ese ww - t' N f > Ourtu' 'm 'crrers a"ected by *e s'c< ms H !4f'on " ' + " te y 'r an spo< 'e 4 t' -1 + Cs (je' Ci-oO s 1C I. h ur ( UI% +er' L4 ] h pd ( bQ\\ Pd d PC pIyIQ uso n t... mer.N e PMsav e plac e reptOCerrert cf ca,t,rge rp }s rr 9 os w *E po ys.'L-A '~ 1 t; v 4 e Co n kime-3, b ' e* U S De t - l u r me-t c' E - ;r. s1 F! D e6 / (e : r ene gas p re of +e sarre or aras-r d o u eee-uses..; ; n as ' + - +r' E < l o'.&w s m t t. W. 9 - i<a.e3 ng of spe% to to seven feetre m m-'a -c t ~ * ,a !v. ]',/ f * '. b g a W r( b-[stf5 v' ta f s p" t sf ( / W \\ i P( *

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Philodelphia Electric Company and Subsidiary Componies Managsment's Dinussion And Analysis Of Financial Condition And Results Of Operations Goeral. The revenue growth of recent years hos been occomponied by substantial increases in operating costs and carrying charges on increased investment in plant and equipment. Any future increases in such costs and charges may be expected to odversely offect future net income and earnings per ove..ge common shore unless periodic rote relief is obtained to offset them. The capital carrying charges associated with the construction of Limcrick, which are capitalized by crediting income with on o!!owance for funds used during construction (AFUDC) and recovered through future depreciation, continued to represent o major portion of net income during 1985. These charges will decrease os the commercial operation of Limerick Unit No.1 is reflected in revenue. On September 27,1985, the Company filed with the Pennsylvania Public Utility Commission (PUC) for on additional $671 milhon per year in electric revenue, net of fuel savings, to recover the costs associated with placing Unit No. I and one hundred percent of common plant in rate base. The PUC is expected to issue o final order in late June 1986. The Company hos PUC opproval to utilize on accounting treatment which synchronizes the expense occounting for Limerick Unit No. I with rate recognition of the unit. ( On Jcnuary 25,1985, a $150 million per year base rote increase for electric service was put into effect to recover the costs cssociated with placing Salem Unit No. 2 in rate base. Output from the unit had previously been sold to Jersey Centrol Power & Light Company under o contract which expired on December 31,1984. Despite the increase in electric rotes granted in January E 1985, the return on investment is still below that allowed by the PUC os a fair return in the Company's lost rate order. Electric Operating Revenue. Increased electric revenue in 1985 over 1984 is primarily attributobie to higher base rates. Revenue K ossociated with Solem Unit No. 2 output, formerly sold to Jersey Centrol Power & Light Company, is now reflected in the base rates for retail customers. The increase in 1984 compared with 1983 reflected h;gher base rotes and higher f uel-related revenue. Kilowatthour sales of electricity to retail customers were essentially the some in 1985 and 1984. { Electric Revenue lncrease/(Decrease) Millions of Dollars '85 vsJ84 '84 vs. '83 w Rote Increases $141.4 $140 0 Fuel-Related Revenue (2.8) 104.0 Solem Unit No.2 (67.0) 36.5 3 Other 8.9 47.3 Total $ 80.5 $327.8 Gas Operating Revenue. Decreased gas revenue in 1985 compared with 1984 is attributobte to o decrease in sales and lower fuel-related revenue resulting from reductions in the price of gas purchased from supphers. Gas operating revenue net of fuel costs increased 6.7 percent in 1985 over 1984. Fuel and Energy Interchange Expense. For accounting perroses, fuel on i energy interchange costs are deferred until bille.i os fuel odjustment revenue. In 198'i, gross fuel and energy interchange cos's were $212 million lower than in 1984 due primonly to the excellent nuclear performance of Solem Station. Fuel and energy interchange costs deferred in previous years and charged to E-expense in 1985 omounted to $135 million, resulting in net fuel and energy interchange ex pense remaining essentially the some in T 1985 os in 1984. Included in net fuel and energy interchange expense in 1985 was opproximately $73 milhon of replacement energy costs associated prWorily with Salem Unit No.1 outoges in 1983 ond 1984 and costs incurred during the operation of the Company's flue gas scrubbing systems of coal-burning stations in 1983. Recovery of these costs was disallowed by the PUC in on order which the Company has appealed. Also included was on 58 millior rhorge in recognition that Salem Unit No 2 fuel sovings were not expected to reach the minimum guaranteed to the PUC when the unit was included in the rote bose. The $73 milhon write-off and the $8 million Solem charge reduced 1985 earnings by approximately 23 cents per shore. In 1984, gross fuel and energy interchange costs were essentially the some os in 1983. However, electric fuel costs deferred were =- lower by $104.2 million, resulting in a net increase in fuel and energy interchange expense compored with 1983. Other Operating and Maintenance Expenses. Other operating or d maintenonce expenses have increased in the lost two years due to inflation, growth in utihty plant, and increased costs ossociated with the Company's nuclear generating units and with operating the new flue gas scrubbing systems of the Company's two cool-burning stations. iha Depreciation. Increases in depreciation in the lost two years reflect odditions to plant in service. Income Taxes. Income taxes charged to operations decraased in 1985 compared with 1984 as a result of lower operating income. Income tax credits, net, included in other income, have increased in the last two years os o resuit of the higher allowance for borrowed funds used during construction. [ Other Taxes. Other taxes have increased primarily due to higher capital stock and realty taxes. Allowance for Funds Used During Construction. The increases in AFUDC for the lost two years have resulted primarily from increases in construction work in progress. interest Charges. Interest charges on debt increased in the lost two years due to add.tional debt outstonding. The ratio of earnings to mortgage interest, which is one measure of the Company's abil.ty to issue additional mortgage bonds, was 1.98 times at E December 31,1985. s b 21 s-

Capetal Expendrtures and Changes in Financial Position. The Company is carrying on a construction program which is estimated to require expenditures of $771 million in 1986 and $2.9 billion from 1987 to 1989. A moiority of these expenditures relates to the construction of the Company's second 1055 mW nuclear generating unit at Limerick. Successful completion raf this progrom is i dependent on the Company's ability to obtain external financing, primarily through debt arrangements and sales of equity securities which are subject to market conditions and to meeting certain ecrnings tests. The progrom also is subject to the licensing l requirements of the Nuclear Regulatory Commission, to financing opprovals by the PUC, and to change due to litigation. The j Company connot predict the outcome of such regulatory reviews, but believes the safety requirements have been or will be met, the economic desirability of the program has been demonstrated, and that the progrom will be successfully completed and opproved. Interim financing of the construction progrom is provided by commercial paper borrowings and short-and intermediate-term bank loans, which also are dependent on the Company's financial position. COMMON $T E TY O MOei REST Po,cene 18 TeesCovered 300 15 230 I2 23 T is T iE 3 05 81 82 83 84 85 81 82 83 84 85 Accountants' Report To the Shoreholders and Bwrd of Directors Philadelphia Electric Company We have examined the consolidated bolonce sheets of Philodelphia Electric Company and Subsidiary Componies os of December 31,1985 and 1984, and the related consolidated statements of income, tetoined earnings, changes in common stock, preferred stock, and other poid-in capitol, and changes in financial position for each of the three years in the period ended December 31,1985. Our examinations were made in accordance with generally accepted auditing standards and, occordingly, included such tests of the occounting records and such other auditing procedures os we considered necessory in the circumstances. In our opinion, the financial statements referred to above present fairly the consolidated financial position of Philadelphia Electric Company and Subsidiary Componies os of December 31,1985 and 1984, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31,1985,in conformity with generally accepted accounting principles opplied on a consistent basis. 1900 Three Mellon Bank Center Philadelphia, Pennsylvania February 3,1986 Y i l l 22 i

Philadelphia Electric Company and Subsidiary Componies Consolidated Statenwnts ofincome FortheYear Ended December 31 1985 1984 1983 (Thousands of Dollars) Opemnny Revenues Electric $2,',16,191 $2,435,731 $2,107,897 Gas 428,984 462,966 417,042 Steam 68,529 82,320 71,111 To#alOpwonng Revenues 3,013,704 2.981,017 2,596,050 Operonne Expenses Fueland EnergyInterchange 1,139,553 1,122,177 986,634 Other Operating Expenses 565,713 527,060 449,101 Maintenance 265,173 245,583 222,640 Depreciation 184,%5 178,326 165,327 income Taxes 201,823 246,749 200,026 OtherToxes 241,524 206,863 178,615 TofalOperenng Empenses 2,598,751 2,526,758 2,202,343 Operanng income 414,953 454,259 393,707 Osherincome andDALa Allowance for Other Funds Used During Construction 176,310 134,485 108,126 income Tax Credits, Net 133,415 116,423 87,912 Other, Net (3,464) 239 (3,125) TosalOsherincome andDeduenons 306,261 251,147 192,913 income BeforeInswest Chorges 721,214 705,406 586,620 in# west Chorges Long. Term Debt 435,373 402,475 330,200 Short.Tei m Debt 17,721 30,912 35,199 Allowance tu % rowed Funds Used During Construction (257,181) (220,370) (167,868) NetInswestt vges 195,913 213,017 197,531 Netlacome 525,301 492,389 389,089 Pre (wred5 sock Dmdends 90,577 82.682 67,384 Earnings Applicable so Common Stock $ 434,724 5 409,707 5 321,705 Average Shores o(Common 5#ock Ovessandmg (Thousands) 169,784 151,804 133,852 Earnegs Per Awroge Common Shore (Dollars) $2.56 $2.70 $2.40 Dmdends PerCommon Shore (Dollars) $2.20 $2.20 $2.12 See notes to financio! statemen4. 23

' Philadelphia Electric Company and Subsidiary Componies Consolidated Balance Sheets ASSETS December 31 1985 1984 j (Thousands o' Dollars) . Utili*tNant.otoriginolcost ' Electric $ 4,982,099 $4,806,496 Gas 474,599 443,946 Steam 54,138 53,846 Common,used in oli services 132,323 129,649 5,643,159 5,433,937 Less: Accumulated Depreciation 1,824,420 1,726,321 Net Utility Plantin Servict 3,818,739 3,707,616 ConstructionWorkin Progress 4,929,093 4,400,166 Leoted Property, net 338,141 357,133 Net Utility Mont 9,085,973 8,459,915 investments 87,670 80,871 CurrentAssets Cash and Temporary Cash investments 188,785 30,357 Escrow Deposits 13,301 88,076 Accounts Receivable Customers 348,233 346,018 Other 22,687 38,284 inventories,at overage cost Fossil Fuel 63,594 93,004 Materials and Supplies 60,152 57,532 . Deferred Energy Costs 101,655 229,895 Compensated Absences 46,370 41,478 Other 12,101 7,392 To#alCurrent Assets 856,878 932,036 DeferredDebits 134,793 82,907 Total $10,165,314 $9,555,729 See notes to financial statements. 24

CAPITALIZATION AND LIABILITIES December 31 1985 1984 (Thousands of Dollars) Capitalisation Common Shoreholders' Equity Common Stock $ 2,601,989 $2,360,948 Other Poid-in Capital 7,331 6,727 Retained Earnings 583,728 523,300 3,193,048 2,890,975 Preferred Stock Without Mondatory Redemption 572,472 572,472 With Mondatory Redemption 318,309 326,235 Long-Term Debt 4,309,131 3,777,961 TotalCopetolization 8,392,960 7,567,643 Currentliabilities Short-Term Debt Bar k Loons 1,000 20,000 240,000 Pollution Control Notes Long-Term Debt Due Within One Year 80,800 50,361 Capitol I :ose Obligations Due Within One Year 76,326 68,332 Accounts Poyoble 144,407 156,245 Taxes Accrued $8,509 40,314 Deferred income Taxes-Energy 51,814 117,729 Interest Accrued 93,008 91,110 Dividends Declared 40,698 43,796 Compensated Absences 46,370 41,478 Other 25,583 85,749 TotalCurrentliabilities 618,515 955,114 Deferred Credits and Other liabilities Deferred income Taxes 502,621 373,343 Unamortized Investment Tax Credits 302,409 299,419 Capitol Lease Obligations 261,815 283,802 Other 86,994 76,408 Total Deferred Credits and Other liabilities 1,153,839 1,032,972 Total $10,165,314 $9,555,729 25

Philodelphia Electric Company and Subsidiary Componies Consolidated Statements of Changes in Financial Position For the Year Ended December 31 1985 1984 1983 (Thovsonds of Dollars) Funds From Operations Netincome $ 525,301 $ 492,389 $ 389,089 Principal Non-Cosh Charges (Credits) to income Deprecionon 184,965 178,326 165,327 Nuclear Fuel DisposalCosts 5,601 13,201 12,166 Deferred income Taxes 66,281 76,197 175,307 Investment Tax Credits, Net of Amortization 3,567 49,927 (46,064) Allowance for Other Funds Used During Construction (176,310) (134,485) (108.126) Totalfrom Operations 609,405 675,555 587,699 Funds from Financings Sales of Securities Common Stock 241,041 250,445 284,305 Preferred Stock 100,000 150,000 Long-Term Debt 686,000 258,700 175,000 Short-Term Pollution Control Notes 240,000 Net Borrowings Under Revolving Credit Agreements 150,000 200,000 200,000 Sole of Magnesium Oxide Regeneration Facilities 55,928 37,679 Increase in Capitol Lease Obligations 46,364 12,690 72,514 Increase in Short-Term Debt 202,800 Total from Financings 1,123,405 1,117,763 1,122,298 TopolSources $1,732,810 $1,793,318 $1,709,997 Uses ofFunds Additions to Utility Plant $ 826,609 $1,053,133 $1,030,321 Additions to Leased Assets 46,364 12,690 72,514 Allowance for Other Funds Used During Construction (176,310) (134,485) (108,126) Dividends on Preferred and Common Stock 464,003 418,098 352,553 Retirement of Long-Term Debt 273,394 11,194 41,573 Premium on Retirement of Long-Term Debt 48,589 Redemption of Preferred Stock 7,926 8,628 7,427 Redemption of Short-Term Pollution Control Notes 240,000 Decrease in Short-Term Debt 19,000 247,500 Net Changein Deferred Energy Costs (128,240) 80,649 234,625 Net Change in Nucleor Fuel Escrow Account (51,816) 32,160 7,113 Net Change in Other items of Working Capital 153,528 50,340 71,451 Other, Net 9,763 13,411 546 TofolUses $1,732,810 $1,793,318 $1,709,997 See notes to financiol statements. 26

Philadelphio Electric Company and Subsidiary Componies Consolidated Statements of Retained Earnings Forthe Year Ended December 31 1985 1984 1983 (Thousands of DollorQ solonce, January I $ 523,300 $452,964 $423,596 Netincome 525,301 492,389 389,089 1,048,60) 945,353 812,685 Cosh Dividends Declared Preferred Stock (at specified annual rates) 90,524 83,820 68,970 Common Stock (per shore, $2.20 in 1985 and 1984, $2.12 in 1983) 373,479 334,278 283,583 Expenses of Issuing Preferred and Common Stock 870 3,955 7,168 464,873 422,053 359,721 solence, Decendwr31 $ 583,728 $523,300 $452,964 Consolidated Statements of Changes in Common Stock, Preferred Stock and Other Paid in Capital Common Stock Preferred Stock p gn Shores Amount Shores Amount Cap.tal (All Amounts in Thousands) solonce, January 1,1983 125,767 $1,826,198 6,648 $464,762 $4,641 issuance of Stock 4 Public Sales 11,000 186,055 1,500 150,000 Employee Stock Ownership Plans 1,256 21,054 Dividend Reinvestment and Stock Purchase Plon 4,788 77,196 Redemptions (75) (7,427) 1,215 Bolonce, December 31,1983 142,811 2,110,503 8,073 807,335 5,856 lssuonce of Stock Public Sales 11,613 144,548 1,000 100,000 Employee Stock Ownership Plans 914 10,563 Dividend Reinvestment and Stock Purchase Plan 6,965 95,334 Redemptions (86) (8,628) 871 Bolonce. December 31,1984 162,303 2,360,948 8,987 898,707 6,727 Issuance of Stock Public Soles 7,387 115,008 Employee Stock Ownership Plans 873 15,294 Dividend Reinvestment and Stock Purchase Plan 7,117 110,739 Redemptions (79) (7,926) 604 Bolonce, December 31,1985 177,680 $2,601,989 8,908 $890,781 $7,331 See notes to financiol statements. 27

Philadelphia Electric Company and Subsidiary Componies Notes to Financial Statements 1.SIGNIFICANT ACCOUNTING POLICIES General. All utility subsidiary companies of Philadelphia Electric Company are wholly owned and are included in the consolidated financial statements. Nonutility subsidiories are included in investments and accounted for by the equity method. Accounting policies are in accordonce with those prescribed by the regulotory authorities having jurisdiction, principolly the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC). Revenues. Revenues are re< orded in the occounts upon bil ling to the customer. Rote increases are billed from dotes outhorized or permitted to become effective by the regulatory outhorities. Fuel Enpenses. Fuel expenses, which are recoveroble under energy odiustment clauses, are recognized when the related revenue is billed to customers. Nuclear fuel used in the Peach Bottom and Salem Generating Stations is leased, and the costs of such leased fuel are charged to fuel expense on the unit of production method. Nuclear fuel disposal costs are being charged to fuel expense os the related fuel is burned. Depreciation. For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line method ond, for tax purposes, generally, over shorter lives on accelerated methods. The estimated decommissioning costs of nuclear plants, totaling approximately $181,862,000 of December 31,1985, are being charged to operations as permitte. for rote-making purposes. The amounts charged are deposited in on escrow account and invested for funding of future costs. Tha Company believes that any increase in the estimated costs would be recoverable through odiustments of rates charged to its customers. Annual depreciation provisions, expressed os o percent of overage depreciable utility plant in service, were opproximately 3.35% for 1985,3.29% for 1984 and 3.20% for 1983. Income Taxes. Deferred income taxes are provided for differences between book and taxob!e income to the extent permitted for rote-making purposes. Investment tax credits, other than credits resulting from contribu' ions to employee stock ownership plans, which do not offect income, are deferred and amortized to income over the estimoted useful life of the related utility plant. Allowance for Funds Used During Construction (AFUDC). AFUDC is o non-cosh item which is defined in the uniform systems of occounts os "the net cost for the period of construction of borrowed funds used for constmction purposes and a reasonoble rote on other funds when so used." AFUDC is recorded as a charge to Construction Work in Progress, and the equivalent credin ore to " Interest Charges" for the prefox cost of borrowed funds and to "Other income" for the remainder os the allowance for equity funds. The rote used for capitalizing AFUDC, which overaged 9.5% in 1985,9.4% in 1984, and 9.3% in 1983,is computed under o method prescribed by the regulatory authorities. The rate is o " net offer-tox rote" and the current income tax reductions applicable to the..iterest charges capitalized ore recorded in "Other income." AFUDC is not included in toxoble income and the depreciation of capitalized AFUDC is not tax deductible. Gas Emploration and Development Joint Ventures. The Company has invested in several joint ventures for exploring and dnlling for natural gas. Costs are capitalized under the full cost method and charged to operotions commensurate with production.

2. JOINTLY OWNED ELECTRIC UTILITY PLANT The Company's ownership interests in jointly owned utility plant of December 31,1985, were os follows:

Tronsmission Production Plants Plant Peach Bottom Sofem Keystone Cor emough Mernli Creek Operator Philadelphia Public Service Pennsylvania Pennsylvanio Jersey Centrol Various Electric Electric ond Electric Electric Power & Componies Company Gas Company Company Company Light Company Porticipating Interest 42.49 % 42.59 % 20.99 % 20.72 % 44.24 % 21% to 43% (Thousands of Dollars) Compony's shore of: Utility Plant $510,652 $903,473 $60,683 $62,186 $68,658 Accumulated Depreciation 120,522 145,577 23,464 23,520 13,991 Construction Work in Progress 12,717 19,936 7,791 2,469 $18,458 The Company's por+icipating interests are financed with Company funds and, when placed in service, all operations are occounted for os if such porticipating interests were wholly owned facilities. 28

r

3. COMMON STOCK At December 31,1985 and 1984, Common Stock, without por value, consisted of 240,000,000 shores authorired and 177,619,977 and 162,303,390 shores, respectively, outstanding. At December 31,1985, there were 8,394,449 shores reserved for issuance under stock purchase plans.
4. PREFERRED STOCK At December 31,1985 and 1984, Preferred Stock $100 w, cumulative Shores Amount Current Refunding Outstanding Redemption Restricted Price (a)

Prior to (b) Authori:ed 1985 1984 1985 1984 (Thousands of Dollars) Series (without mandatory redemption) 14.15%(c) $114.15 2-1-90 500,000 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) 113.35 2-1-89 750,000 750,000 750,000 75,000 75,000 12.8*6 (c) 112.80 51-88 750,000 750,000 750,000 75,000 75,000 9.50 % 103.50 750,000 750,000 750,000 75,000 75.000 8.75 % 104.00 650,000 650,000 650,000 65,000 65,000 7.85 % 103.00 500,000 500,000 500,000 50,000 50,000 7.80 % 103.00 750,000 750,000 750,000 75,000 75,000 7.75 % 103.00 200,000 200,000 200,000 20,000 20,000 4.68 % 104.00 150,000 150,000 150,000 15,000 15,000 4.4% 112.50 274,720 274,720 274,720 27,472 27,472 4.3% 102.00 150,000 150,000 150,000 15,000 15,000 3.8% 106.00 300,000 300,000 300,000 30,000 30,000 5,724,720 5,724,720 5,724,720 572,472 572,472,_ Series (with mandatory redemption)(d) 17,125 % $117,13 5187 300,000 300,000 300,000 30,000 30,000 15.25 % 110.00 5-1-90 500,000 500,000 500,000 50,000 50,000 14.625 % 108.70 (e) 5-1-90 500,000 500,000 500,000 50,000 50,000 10 % 104.44 5-1-90 220,000 220,000 220,000 22,000 22,000 9.52 % 106.25 5-1-86 500,000 393,690 401,650 39,369 40,165 8.75*. 105.15 5-1 88 500,000 433,400 466,700 43,340 46,670 7.325 % 103.81 750,000 540,000 570,000 54,000 57,000 7% 101.00 400,000 296,000 304,000 29,600 30,400 3,670,000 3,183,090 3,262,350 318,309 326,235 Unclassified 605,280 TotalPreferred5tock 10,000,000 8,907,810 8,987,070 $890,781 $898.707 (o) Redeemoble, of the opt;on of the Company, of the indicated dollar amounts per shore, plus accrued dividends. (b) Prior to the dote specified, none of the shores of each series indicated may be redeemed through refunding of an interest cost or dividend rote which is less than the dividend rote of such series. (c) Ownership of these series of Preferred Stock is evidenced by Depository Preference Shores, each representing 1/10 of a shore of Preferred Stock. (d) Sinking Fund requirements (por value) in the period 1986 -1990 ore os follows: 1986-$14,599,000,1987-$15,230,000; 1988-517,530,000;1989-517,530,000;1990-527,530,000. (e) Not redeemoble prior to May 1,1990. 29

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements (Continued) 5.LONG TERM DEBT At December 31,1985 and 1984 Series Due 1985 1984 (Thousands of Dollars) First and Refunding Mortgoge Bonds (o) 3-1/8% 1985 $ 50,000 4-3/8% 1986 5 50,000 50,000 4-5/8% 1987 40,000 40,000 3-3/4%-14% 1988 52,500 52,500 5*/.-14% 1989 62,500 62,500 14 % 1990 11,000 11,000 4-1/2%-14% 1991-1995 508,225 359,700 6-1/8%-15-1/4% 1996-2000 608,684 610,817 7-3/8%-12-1/2% 2001 2005 480,000 480,000 6%-18-3/4% 2006-2010 447,369 523,500 10-1/2 % 18 % 2011-2015 745,283 350,000 Total First and Refunding Mortgage Bonds 3,005,561 2,590,017 Notes Payable--Banks (b) 1987-1989 225,000 225,000 Notes Poyoble--Other 17 % 1986 1987 20,000 20,000 Revolving Credit and Term Loon Agreements (c) 1988-1991 550,000 400,000 Pollution Control Notes 5-1/2 13 % 1997-2013 272,685 274,190 Debentures 4.85 % 1986 20,800 21,161 Debentures 14-1/8 % 1990 50,000 50,000 Debentures 14-3/4 % 2005 100,000 100,000 Debentures 14.5*; 2009 150,000 150,000 Sinking Fund Debentures-Philadelphia Electric Power Company,o Subsidiary 41/2% 1995 15,325 16,397 Unamortized Debt Discount and Premium, Net (19,440) (18.443) Total Long-Term Debt 4,389,931 3,828,322 Due Wuthin One Year (d) 80,800 50,361 Long-Term Debt includedin Capevolization(e) $4,309,131 $3.777,961 (a) Utility plant is subiect to the lien of the Company's mortgage. Proceeds from the November,1985 sole of $250,000,000 principal amount of 11 -3/4% Series due 2014 and $150,000,000 principal amount of 10-7/8% Series due 1995 were used in port to repurchase $76,131,000 principo! omoun+ of 18-3/4% Series due 2009, $62,621,000 principal amount of 18% Series due 2012, and $78,096,000 principal omount of 17-5/8% Series due 2011. Premium on the repurchase of $48,588,515 was charged to Deferred Debits. The Company,in its currently pending electric rote case, will request the PUC to allow recovery in rotes of this amount over the weighted overage life of the new debt,opproximately 21 years. Amortization of the premium will be chorged to interest expense over the period of recovery. (b) At interest rates ranging from prime rote to prime rote plus 1/2%. (c) The Company has a $550 million revolving credit and term loon ogreement with a group of banks which provided the financing required to complete Limerick Unit No.1. The revolving credit arrangement converts into o term loon in August 1987. The borrowings are due in eight semi-onnual instol!ments with the first payment due 6 months ofter the conversion into the term loan. Interest on outstanding borrowings is based on specific formulos selected by the Company involving yields on several types of debt instruments. There is on annual commitment fee of 1/2% on the unused omount. At December 31,1985, $550 million was outstanding under this ogreement. The Company also has a $400 million revolving credit and term loon agreement with a group of bonks which expires in 1987, but which may be extended through 1990 upon opproval of the banks. There is on annual commitment fee of 3/8% on the unused omount. There were no borrowings under this ogreement during the year. (d) Long-term debt moturities in the period 1987-1990 ore os follows: 1987-5187,844,000; 1988-$281,775,000; 1989-5241,850,000; 1990-5215,350,000. (e) The onnvolized interest on long-term debt of December 31,1985, was $455.7 million of which $309.3 million was ossociated with mortgage bonds and $146.4 million was associated with other long. term debt. 30

6.5HORT-TERM DE8T 1985 1994 1983 (Thousands of Dollars) Average Short-Term Borrowings $127,392 $166,713 $164,429 Average Interest Rates, Computed on Daily Basis 6.38 % 9.88 % 9.06*4 Maximum Short-Term Borrowings Outstanding $360,000 $302,500 $340,000 Average interest Rates on Short-Term Borrowings of December 31: Bank Loons 9.50 % 9.95 % 10.53*'. Commercial Poper-Tax Exempt 5.61 % CommercioI Poper-Taxable 10.64 % Pollution Control Notes 6.44 % At December 31,1985, the Company had borrowed $1.0 million under formal and informal lines of credit with banks oggregating opproximately $371 million. The Company generolly does not have formal compensating bolonce arrangements with these bonks.

7. RETIREMENT BENEFITS The Company and its subsidiaries have noncontributory trusteed retirement plans opplicable to oil regular employees. Pension costs include normoi cost for the year and amortization of unfunded prior service costs over ten to twenty years. Approximotely 80% of such costs were charged to operating expenses and the remainder, associated with construction labor, to the cost of new utility plant. Retirement plan costs, which are funded as occrued, were $46,700,000, $42,000,000 and $41,000,000 in 1985,1984 and 1983,respectively.

Pension Plan dato os of the dates of the most recer's actuorial voluotions is os follows: January 1 1985 1984 (Thousands of Dollars) Actuariol present value of occumulated plan benefits (7.0% ossumed rate of return) Vested $512,639 $447,994 Nonvested 60,990 54,174 $573,629 $502,168 Net assets available for benefits $645,726 $573,372 Changes in plan provisions, effective January 1,1985, increased the octuarial present value of occumulated plan benefits by opproximately $16.3 million and increased pension expense by approximately $2.8 million. The octuoriol methods and assumptions, os well as the accounting policy, ore the some os those in the prior year. The preceding tobular disclosures are required under opplicable occounting principles. However, the Company is of the opinion that comparing the octuarial present value of occumulated plan benefits with the net assets available for benefits may be misleading. The plan is of a long-term nature and is funded on a basis consistent with this concept. The octuariol value of occumulated plan benefits is, essentially, a hypothetical plan termination calculation which does not toke into account future solories or future service. Net assets, which are measured at fair value of Jonvory 1, are subject to fluctuations in the securities markets and therefore, may not be indicative of the plan's long-term funded status. In December,1985, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 87 (FASB 87), Employer's Accounting for Pensions. FAS8 87 supersedes existing occounting principles for defined benefit pension plans and becomes opplicable to the Company in 1987. The Company hos not fully evoluoted FAS8 87, but it believes it would not have a material negative impact on the financial statements. In addition to providing pension benefits, the Company provides certain health core and Ide insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach retirement oge while still working for the Company. These benefits and similar benefits for active employees are provided by on insuronce company whose premiums are based on the benefits paid during the year. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing benefits for opproximately 2,400 retirees during the years 1983 to 1985 is not separable from the cost of providing benefits for opproximately 10,000 octive employees for the some period. Total premiums amounted to $29.3 million, $26.6 million, and $24.3 million,in 1985,1984 and 1983, respectively. 31

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements (Continued) 8.INCOMETAXE5 1985 1984 1983 (Thousands of Dollars) includedin operateons: Federal Current $106,994 $ 96,915 $ 54,495 Deferred 59,837 49,770 151,259 investment tax credits, net 3,567 49,927 (46,0 0 ) State Current 24,981 23,710 16,288 - Deferred 6,444 26,427 24,048 Included in other income and deductrons (principolly current): Federal (109,580) (93,818) (70,902) State (23,835) (22.605) (17,010) Total 5 68,408 $130,326 $112,114 investment tax credits and income tax credits resulting from contributions to employee stock ownership plans reduced Federal income taxes currently payable by $12 million in 1985 and $58 million in 1984. Approximately $244 million of such odditional tax credits generated from 1982 through 1985 have not been utilized due fo limitations based on taxoble income. These credits moy be used to reduce Federal income taxes in future years and expire of various times from 1997 to 2000. Effective with the PUC's electric rate order doted January 24,1985, the Company begon flowing through the state income tax benefits ossociated with occelerated depreciation attributable to its electric operations. This change reduced operating revenues and operating expenses by opproximately $1.8 million but had no effect on operating income and net income. For o number of years the Company hos used accelerated depreciation for income tax purposes and straight line depreciation for financial reporting purposes. Deferred taxes were recorded only on those timing differences recognized for rote-making. The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately $ 790mdlion at December 31,1985. Since the Company expects to chorge customers for taxes paid when the timing differences reverse, the tax effect of such timing differences is not recorded currently. Provis;ons for deferred income taxes on operating income consist of the tax effects of the following timing differences: 1985 1984 1983 (Thousands of Dollars) Depreciation and omortization 5 34,417 $ 33,965 5 38,792 Nuclear waste disposal costs (5,932) (7,355) 24,281 Deferred energy costs (65,915) 41,212 119,867 Precommercial operation of Limerick Unit No.1 97,867 Premium on retirement of long-term debt 24,731 Other (18,887) 8,375 (7,633) Total $ 66,281 $ 76,197 $1/5,307 The total income tax provisions differ from amounts computed by applying the Federo! statutory tax rate to income and odiusted income before income taxes for the following reasons: Net income $525,301 $492,389 $389,089 Totalincome tax provisions 68,408 130,326 112,114 income beforeincome taxes 593,709 622,715 501,203 Deduct-cIlowance for funds used during construction (nontaxoble) 433,491 354,855 275,994 Adiusted income before income taxes $160,218 $267,860 $225,209 income taxes on obove at Federal statutory rate of 46% 73,700 123,215 103,596 increase (decrease) due to: Depreciotion timing differences not normalized 7,297 7,247 7,941 State income taxes, net of Federalincome tax benefits 4,099 14,867 12,597 Amortization of investment tax credits previously deferred (8,265) (7,752) (6,210) Other, net (8,423) (7,251) (5,810) Totalincome forprovisions 5 68,408 $130,326 $112,114 Provision for income toxes os a percent of: Income before income taxes 11.5 % 20.9 % 22.4 % Adjustedincome before income taxes 42.7 % 48.7 % 49.8 % 32 t

r m )

9. TAXES, OTHER THAN INCOME 1985 1984 1983 E

(Thousands of Dollars) Gross receipts $128,346 $122,881 $108,211 Capital stock 28,246 13,240 19,198 Recify 62,296 48,030 30,975 Other 22,636 22,712 20.231 Total .s $241,524 $206.863 $178,615 i

10. ESCROW DEPOSITS Escrow deposis are stated of cost plus os crued intere>t, which approximates mor ket,and consist of cash equivolent secunties held 7

in trusteed accounts which are restricted us to withdrowol pending the Company's incurring qualified costs. Below is a summary of such escrow deposits at December 31,1985 and 1984. !?85 1984 E (Thovsondsof Dollars) Pollution Control Facilities Under Construction 5 5.415 $31,305 Other Facilities Under Construction 7,886 4,955 Nuclear Fuel Disposol 51,816 Total $13,301 $88,076 r i

11. INVESTMENTS d

At December 31 1985 1984 (Thousands of Dollars) i Gas Exploration and Development joint Ventures $44,743 $46,406 Real Estate Developments and Other Ventures 15,433 12,120 r L Nonutility Property 13,931 13.441 Q Escrow Deposits for Decommissioning Nuclear Plants 12,563 7,792 Other Deposits 1,000 1,112 Total $87,670 $80,871

12. LEASES

{ Leased property included in Utility Pfont at December 31, l985 and 1984: 1985 1984 i (Thousands of Dollars) Nuclear Fuel $445,699 $424,721 5. Electric Plant 48,342 48,342 Common Plant 3,116 3,702 Gross leased Property 497,157 476,765 Accumulated Amortization (159,016) (124,632) [ Net Loosed Property $338,141 $352,133 The nuclear fuel obligation is amortized as the fuel is burned. Amortization of leased property totof ed $60.9 million, $39.1 millior 3 and $28.8 million in 1985,1984 and 1983, respectively. Other operating expenses include interest on capital lease obligations of -. $18.2 million, $22.0 million, and $19.0 million in 1985,1984 and 1983, respectively. Minimum future lease poyments os of E December 31,1985, ore: n_ Year Ending December 31 Capitolleases Operating leases Total (Thousands of Dollars) = 1986 $103,780 $ 30,700 $134,480 1987 89,861 29,502 119,363 1988 91,072 26,917 117,989 1989 56,851 27,327 84,178 = 1990 45 790 26,483 , 72,273 Remaining Years 32,047 108,324 140,371 Total Minimum Future Lease Payments 419,401 $249.253 m a 654 L Imputed Interest (rotes ranging from 6.5% to 17%) (81,260) + g Present Value of Net Minimum Future Lease Payments $338,141 Rento! expense under operating leases totoled $43.9 mi!! ion, $29.2 mi!! ion, and $19.3 mi!!;on,in 1985,1984. snd 1933. E respectively. s

Philodelphio Electric Company and Subsidiary Componies Notes to Financial Statements (Continued) 13.SEGMENTINFORMATION 1985 Electric Gas Steam Total (Thousands of Dollars) Operating revenues $2,516,191 5428,984 $68,529 $ 3,013,7M Operating expenses, excluding depreciation 1,974,222 375,399 64,165 2,413,786 Depreciation 168,208 14,841 1,916 184,%5 Totoloperating expenses 2,142,430 390,240 66,081 2,598,751 Operating income $ 373,761 $ 38,744 $ 2,448 $ 414,953 Utility olont odditions $ 793,195 $ 32,896 5 518 $ 826,609 December 31: Allocableassets Net utility plant (*) 8,675,701 389,396 20,876 9,085,973 Inventories 100,793 22,745 208 123,746 Deferred energy costs 109,244 (4,766) (2,823) 101,655 $8,885,738 $407,375 $18,261 $ 9,311,374 Nonallocoble assets 853,940 Totolassets $10,165,314 1984 Operating revenues $2,435,731 $462,966 $82,320 $ 2,981,017 Operating expenses, excluding depreciation 1,858,505 413,938 75,989 2,348,432 Depreciation 162,959 13,474 1,893 178,326 Total operating expenses 2,021,464 427,412 77,882 2,526,758 Operating income $ 414,267 $ 35,554 5 4,438 $ 454,259 Utility plant additions $1,022,496 5 30,613 $ 135 $ 1.053,244 December 31: Allocoble ossets Net utility plant (*) 8,068,233 369,239 22,443 8,459,915 inventories 116,775 32,572 1,189 150,536 Deferred energy costs 227,524 4,147 (1,776) 229,895 $8,412,532 $405,958 $21,856 $ 8,840,346 Nonallocable ossets 715,383 Totolossets 5 9,555,729 1983 Operating revenues $2,107,897 $417,042 $71,111 $ 2,596,050 Operating expenses, excluding depreciation 1,592,027 377.624 67,365 2,037,016 Depreciation 150,898 12,694 1,735 165,327 Total operating expenses 1,742,925 390,318 69,100 2,202,343 Operating income $ 364,972 $ 26,724 $ 2,011 $ 393.707 Utility plant additions $1,004,219 5 26,020 $ 82 $ 1,030,321 December 31: Allocable ossets Net utility plant (*) 7,257,594 353,979 24,599 7,636,172 inventories 98,391 32,350 343 131,084 Deferred energy costs 116,661 29,359 3,226 149,246 $7,472,646 $415,688 $28,168 $ 7,916,502 Nonallocoble ossets 627,962 Totolossets 5 8,544,464 (*) includae e-% tion work in progress, leased property and allocated common utility property. The Company is considering a proposal for the sole of its steam operation. Ultimate sole of the steam operation is subject to many factors, including occeptance of the proposal by the Company's monogement and Board of D rectors and opproval of the sole by the PUC. The Company estimates that a sole of the steam operation would result in no significant gain or loss. 34

14. LIMERICK GENERATING STATION The Company's Limerick Unit No.1 commenced commercial operation on February 1,1986. Construction of the second of the two nuclear units at Limerick resumed in February 1986, following a suspension of opproximately 2 years. Unit No. 2 is scheduled to be completed in late 1990. As of December 31,1985, the Company had invested opproximately $4.61 billion in the Limerick Generating Station, consisting of $2.48 billion in Unit No.1, $901 million in Unit No. 2 and $1.23 billion in common facihties.

On September 27,1985, the Company filed with the PUC for on electric rote increase designed to yield $671 milhon onnvolly, net of fuel savings. The increase, designed to recover the costs associated with Limerick Unit No.1 and 100 percent of common plant was requested to become effective November 27,1985. On November 1,1985, the PUC issued on order which suspended the effective date of the increase until June 27,1986, pending hearings and investigation into the reasonableness of the requested increase. In order to lessen the impact of the increase on customers, the Company has proposed to phase in the increase in three equoi steps over three years and to collect from customers the amounts unrecovered by the phase-in plan, without interest, offer the lost step is effective. In addition, the Company hos announced that it does not intend to file for onother electric base rate increase prior to September 27,1987, unless,in the Company's judgment, a failure to file such a request would jeopardire its financio! viability. In the post, the PUC's practice has been to include in any rate increase with respect to one unit of a two-unit l generating station only one-half of the costs of the common facihties. On January 21,1986, the PUC entered on order stating I that the prudence of the Company's 1976 and 1978 construction deferrol announcements would not be examined in the rate proceeding, because a finding of imprudence had allegedly been issued in on earlier PUC proceeding. The Company intends to appeal this decision to the Commonwealth Court of Pennsylvania. As a result of these construction deferrol announcements, the PUC staff and the Office of Consumer Adycsccde contend that certoin amounts of construction costs should be emcluded from rote base. The Company mc ntoins, however, that the 1976 ond 1978 construction deferro!s were prudent and that rote base should not be reduced. The unavoilobility of sufficient supplemental coohng water would limit or prohibit operation of Limerick during certoin months of the year. Until the planned supplemental cooling water system is completed and in operation, the Company must obtain interim supplemental cooling water for the operation of Limerick during such months. The Delowore River Bosin Commission (DRBC) opproved, for o portion of 1985, two Company requests for modification of restrictions on the use of the Schuylkill River for Limerick cooling water and for a reallocation of cooling woter to Limerick from two other power plants on the Schuylkill River. The DRBC's approvois were effective through December 31,1985. The Company filed one similor modification request and the some reallocation request with the DRBC for its 1986 supplemental cooling water needs. If only the request for reallocation were granted, supplemental cooling water is expected to be available to permit Unit No. I to operate of opproximately 25 percent of its capacity. Based on historic river conditions, even if both the modification request and the reallocation request were granted, it is unlikely that there would be sufficient water to operate Unit No.1 ot 100 percent capacity throughout the year. Therefore, the Company is investigoting other possible sources of supplemental cooling water ic-r 1986, all of which would require regulatory approval. One component of the supplemental cooling water system for Limerick is the Point Pleasant project to be constructed and operated by Bucks County and by the Neshaminy Water Resources Authority (NWRA), o municipcl authority created by Bucks County, under o contract omong NWRA, the Company and Bucks County. The Point Pleosont project has been the subject of substantial opposition from various groups, including a moiority of the Commissioners of Bucks County and a mojority of the members of the Board of Directors of NWRA. This opposition has resulted in disruption of construction and in htigation. During 1985, the Court of Common Pleos of Bucks County ordered completion of the Point Pleasant project, this decision was offirmed by the Commonwealth Court, nnd NWRA and Bucks County petitioned the Supreme Court of Pennsylvania for on allowance of an oppeal from the decision of the Commonweoith Court. The Supreme Court of Pennsylvania has not yet acted on the petition. 35

l. Philadelphio Electric Company and Subsidiary Companies j Notes to Financial Statements (Continued) Following o lengthy investigotion, on December 5,1985 the PUC determined that the Compo,y could complete construction of Unit No. 2 subject to o cost containment and operational incentive program (" Program"). The Company ogreed to the Program on December 23,1985. Principal elements of the Program ore o construction cost cop of $3.2 billion, which would represent the maximum allowed rate base for Unit No.2 throughout its lifetime; on operating performance incentive / penalty related to the unit's copocity factor; and operating and maintenonce expense standards. The construction cost cop of $3.2 billion includes AFUDC, but does not include any costs related to common plant.The cost cap includes capitol odditions offer commercial operation, net of occumulated depreciation. Any expenditures in excess of $3.2 billion cannot be recovered from ratepayers or included in rote bcse. Adjustment of the cap for inflation, regulatory scope changes, or any other factors is not permitted. The estimo+ed total cos+ of Unit No. 2 does not exceed the cost cop. In 1984 the Commonwealth of Pennsylvanio enacted a low which requires the PUC to compare the octual cost of construction of on electric generating facility with the estimate submitted at the commencement of construction. The low provides that if the octual cost exceeds the estimated cost, the PUC must exclude the excess cost from the utility's rote base unless the utility con show that some or all of the excess cost was necessary and proper. In 1974 the original estimated cost of construction of the Limerick Generating Station was in the range of $1.7 to S2 billion. Estimates at earher stoges were significantly lower but the Company does not believe that such eoriier estimates are opplicable to determine the excess cost opplicable urder the low. On December 19,1985, the Financial Accounting Standards Board issued on exposure droft of a proposed amendment to the accounting principle;cnplicable to rate regulated enterprises, such as the Company. The proposed omendrnent,if adopted in its present form, would Lec >me opplicoble to the Company in 1987 and would offect, principolly, occounting for phase-in plans and disallowances of plant rosts. In general, this amendment would occelerate the timing of recognition of en penses in the Company's financial statements. Under the exposure droft,allowoble costs could be deferred in connection with a phase-in plon only if the regulatory authority agreed to the plan and all amounts deferred were recovered within ten years; otherwise, no deferrols would be ollowed. If the PUC disallowed a portion of Limerick's construction costs through either o reduction in rote base or rote of return, or if the Company estimated that the total construction costs of Unit No. 2 would exceed the cost cop, on immediate write-o'f o; portions of Limerick's construction costs would be required. Such a write-off could be material to results of operations or retained earnings of the Company in the year of write-off and could offect the Company's abihty to pay dividends and to finance its construction program. Under existmg accounting principles,it is unlikely that the aforementioned circumstances would cause the Company to write off immediately any amounts of Limerick's construction costs.

15. COMMITMENTS AND CONTINGENCIES The Company hos incurred substantial commitments in connection with its construction program. Construction expenditures are estimated to be $771 million for 1986 and $2.9 bilhon for 1987 through 1989. These estimates are reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts and other oppropriate factors. Plant facilities under construction, porticularly the Limerick Generating Station, require numerous permits and licenses, which the Company connot be assured will be issued of completion of the facihties.

The Price-Anderson Act places a " Limit of Liability" presently of 5650 mill;0n, for claims that could orise from on incident involving ony licensed nuclear facility in the notion. All nuclear utihties, includ ng the Compor.v have covered this exposure through a combination of privote insurance and mondotory porticipation in a secondary financial protection pool. In the event of such a nuclear mcident of any licensed nuclear facility in the notion, the Company could be ossessed up to $13.5 million per incident, with a maximum omount of $27 million in any one year. 36

The Company maintains property insurance, including radiation contamination coverage, for loss or demoge to its nuclear facilities. Although it is impossible to determine the total amount of the loss that may result from on occurrence of these facilities, the Company maintains the maximum amount of insurance presently ovailoble,51.1 billion for each station. Under the terms of the f various insurance agreements, the Company could be ossessed up to 535 million for losses incurred at any plants insured by the f insurance companies.The Company is o member of on industry mutual insurance company which provides replacement power l cost insurance in the event of a major outage of a nuclear station. The premium for this coverage is subject to on ossessment for odverse loss experience. The Company's maximum shore of any assessment is 513 million. The PUC hos conducted severolinvestigations involving the Company's management of maior plant outages during 1983 ond ) 1984 and the resulting impact on energy costs recoverable from customers under the electric energy cost rate. On October 24, 1985, the PUC issued its final order in on investigation which oddressed the prudency of outages of certain base lood nuclear and cool units during 1983 and 1984. As o result of this order,the Company was denied recovery of opproximately $73 million of energy costs. The disollowed energy costs were charged to expense os of September 30,1985, and reduced operating income and earnings opplicable to common stock by 534.7 million and earnings per overage common shore by opproximately 20c. On November 26,1985 the Company filed a Petition for Review with Commonwealth Court oppealing the PUC order. The PUC is holding hearings in connection with 547 million of replacement energy costs related to other outoges of nuclear units during 1984 and 1985. The Company believes its monogement of those outages was prudent and that it should not be precluded from recovering the replacement energy costs. Ultimate resolution of this matter will not have o material adverse effect on the results of operations or financial position of the Company. A final decision by the PUC is not expected untl mid 1986. On October 9,1985, a low was enacted in Pennsylvanio granting the PUC statutory authority to modify or holt construction of any generating unit if the PUC determines that such construction is not in the public interest. The low provides that a utihty may recover o return of, but not a return on, prudently incurred costs of any partially completed focihty, the concellation of which is found to be in the public interest. The Company is a nominal defendent in a class action and derivative suit ogo;nst certain of its directors and officers, brought by four shareholders own;ng in the oggregate 202 shores of common stock. The suit arises out of the construction of the Limerick Generating Station and seeks to cause Unit No. 2 to be abandoned,its cost to be written off os o loss, dividends on common stock to be terminated until certoin earnings levels have been met, and the shores authorized under the 1983 Amendment to the Articles of incorporotion to be declared involid. Additional domoges also ore sought. While the outcome of htigation connot be predicted with certainty, monogement beheves resolution of the suit will not have o material offect on the Company's financial position. The defendants have filed a motion to dismiss the complaint. 37

Philadelphio Electric Company and Subsidiary Companies Notes to Financial Statements (Continued)

16. QUARTERLY DATA (Unoudited)

The dato shown below include all odiustments which the Company cor.liders necessary for a fair presentation of such amounts. Operating Revenues Operating income Net income Quarter Ended 1985 1984 1963 1984 1985 1984 (Thousands of Dollars) March 31 $852,299 $818,031 $126,892 $128,942 5151,166 $134,838 June 30 683,519 703,219 98,153 100,680 118,859 108,151 September 30 - 750,904 155,619 93,240 121,524 124,163 132,339 December 31 726,982 704,148 %,668 103,113 131,113 117,061 Earnings Applicoble Average Shores Earnings Per to Common Stock Outstonding Average Shore Quarter Ended 1985 1984 1985 1984 1985 1984 (Thousands of Do!!ars) (Thousands) (Dollars) March 31 $128,422 $115,451 162,859 143,044 $.79 $.81 June 30 %,212 87,098 168,723 150,266 .57 .58 September 30 101,569 111,340 171,993 153,519 .59 .73 December 31 108 521 95,818 175,401 160,274 .62 .60 1985 third quarter results include o charge of opproximately $34.7 million (net of related income taxes) resulting from the PUC's denial of recovery of opproximately $73.0 million of energy costs (see Note #15).

17. SUPPLEMENTARY INFORMATION TO DISCLOSE THE ESTIMATED EFFECTS OF INFLATION FOR THE YEAR ENDED DECEM8ER 31,1985(Uncodited)

The following supplementory information is supplied to show the estimated effects of inflation under the " current cost" method The techniques required to develop this information ore opproximate and complex, and may not necessarily reflect the true effects of inflotion on the Company. Under existing regulatcry low, the Company is permitted to recover octual operating and capital costs incurred to serve customers and a reasonoble return on investment, and the Company believes it will be allowed to recover cost increases caused by inflation as such increases are octually incurred. E#ect of fnHotion on Reported income. In odiusting the Consohdoted Statements of Income, os shown below, only depreciation expense was odiusted for the effect of inflation. Depreciation expense was determined by opplying the Company's depreciation rates to restated 1985 overoge depreciable plant in service. Other Operating Expenses were not required to be odiusted. If the Company had to replace its entire utility plant of this time, the costs to do so would greatly exceed the original costs incurred when the facilities were built because of the cumulative effect of inflation. These plant replacement costs, net of occumulated depreciation, are estimated at $14.2 billion. The effect ($496 million) of general inflation in 1985 on net utility plant was greater than the increase ($456 million) in specific prices by $40 million. Consolidated Statements of income Adjusted for Inflation for the Year Ended December 31,1985. As Adjusted As Reported (Average 1985 Dollars) (Thousands of Dollars, except per shcre amounts) Operating Revenues $3,013,704 $3,013,704 Depreciation 184,965 477,987 Other Operating Expenses 2,413,786 2,413,786 Operoting income 414,953 121,931 Other income 306,261 306,261 Income Before Interest Chorges and Preferred Stock Dividends 721,214 428,192 Interest Chorges and Preferred Stock Dividends 286,490 286,490 Earnings Applicable to Common Stock $ 434,724 $ 141,702 Earnings Per Average Shore 2.56 5 0.83 38

^ of Selected Five Year Financial information. In order to reflect the impact of general inflation on selected financialinformation for each of the years 1981 through 1985, the following table shows actual dato compared with dato odiusted to 1985 dollars. Fnre Year Summary of Selected Fmonciallnlonnation and Current Cost Data (T1 ~~

a. og poigo,s, escep, per shore amounts) 1985 1984 1983 1982 1981 C.. '; :'of ^ R ^

t Factors Consumer PriceIndex Average During Year 322.2 311.1 298.4 289.1 272.4 Year End 327.4 315.5 303.5 292.4 281.5 Consumer Priceindex Multiplie A = Average (322.2 + 1ndex) 1.00 1.04 1.08 1.11 1.18 B = Year End (327.4 + Index) 1.00 1.04 1.08 1.12 1.16 Actuel and Adjusted Historical Fmoncial Information Cindends Per Common Shore Actual Poid $2.20 $2.20 $2.12 $2.06 $1.90 Adjusted (Actualx A) $2.20 $2.29 $2.29 $2.29 $2.24 Market Price Per Common Shore ActualYear End $17.38 $14.87 $14.38 $17.00 $13.63 Adjusted (Actualx B) $17.38 $15.46 $15.53 $19.04 $15.81 Operating Revenues Actual $3,013,704 $2,981,017 $2,596,050 $2,644,753 $2,433,425 Adjusted (Actualx A) $3,013,704 $3,100,258 $2,803,734 $2,935,676 $2,871,442 Earnings Applicobfe to Common Stock Actual $434,724 $409,707 $321,705 $278,623 $223,761 Adiusted(Actuol x A) $434,724 $426,095 $347,441 $309,272 $264,038 Earnings per Averoge Common Shore Actual $2.56 $2.70 $2.40 $2.39 $2.25 Adjusted (Actual x A) $2.56 $2.81 $2.59 $2.65 $2.66 Common Shoreholders' Equity ActualYear End $3,193,048 $2,890.975 52,569,323 $2,254,435 $1,963,527 Adiusted (Actualx 8) $3,193,048 $3,006,614 $2,774,869 $2,524,967 $2,277,691 Current Cost Data Excess of increase in General Infiction over increase in Specific Prices on Utility Plant Cost Actual Current Cost $39,973 $296,690 $147,379 $(9,011) $186,585 Adjusted (Actual x A) $39,973 $308,558 $159,169 $(10,002) $220,170 Purchasing Power Goin on Net Amounts Owed ActualCurrent Cost $199,010 $190,521 $165,235 $148,672 $307,972 Adjusted (Actual x A) $199,010 $198,142 5178,454 $165,026 $363,407 Earnings Applicable to Common Stock Actual Current Cost $141,702 $113,662 $51,049 $48,471 $23,044 Adjusted (Actualx A) $141,702 $118,208 $55,133 $53,803 $27,192 Earnings per Average Common Shore Actual Current Cost $0.83 $0.75 $0.38 $0.42 $0.23 Adiusted (Actual x A) $0.83 $0.78 $0.41 $0.47 $0.27 37

Philadelphio Electric Company ond Subsidiary Componi:s FinancialStatistics

SUMMARY

OF EARNINGS (Millions of Dollars) For the Year Ended 1985 1984 1983 1982 1981 1980 1975 Operahng Revenues (fordetails see pages 42and 43) $3,013.7 $2,981.0 $2,596.0 $2,644 8 $2,433.4 $2,123.4 $1,134.8 Opemnng Expenses Fueland Energyinterchange 1,139.6 1,122.2 986.6 1,128.5 1,187.6 1,090.5 457.8 Labor 370.8 345.3 317.2 291.1 256.8 232.1 152.2 l Other Materials, Supplies and Services 460.0 427.3 354.6 320.5 260.9 184.5 72.6 Total Operation and Maintenance 1,970.4 1,894.8 1,658.4 1,740.1 1,705,3 1,507.1 682.6 i Depreciation 185.0 178.3 165.3 143.8 130.3 122.9 91.2 Taxes 443.3 453.6 378.6 372.2 274.8 227.4 163.9 TotalOperating Expenses 2,598.7 2,526.7 2,202.3 2,256.1 2,110.4 1.857.4 937.7 Operahng income 415.0 454.3 393.7 388.7 323.0 266.0 197.1 Otherincome Allowance for Other Funds Used During Construction 176.3 134.5 108.1 65.7 65.0 50.5 23.3 income Tax Credits, Net 133.4 116.4 87.9 75.8 63 2 49.0 22.3 Other, Net (3.5) .2 (3.1) (0.7) 2.5 34 2.0 TotolOther facome 306.2 251.1 192.9 140.8 130.7 102.9 47.6 income 8efore interest Charges 721.2 705.4 586.6 529.5 453.7 368.9 244.7 Interest Chorges Long-Term Debt 435.4 402.5 330.2 308.9 266.7 225.0 136.5 Short. Term Debt 17.7 30.9 35.2 32.0 33.2 13.9 7.9 Allowance for Borrowed Funds Used During Construction (257.2) (220.4) (167.9) (147.6) (123.8) (97.11 (43.6) Netlaterest Charges 195.9 213.0 197.5 193.3 176.1 141.8 100.8 Netincome 525.3 492.4 389.1 336.2 277.6 227.1 143.9 Preferred 5tock Dividends 90.6 82.7 67.4 57.6 53.8 52.2 36.0 Earnings Applicable to Cmnmon Stock 434.7 409.7 321.7 278.6 223.8 174.9 107.9 Dnndends on Common Stock 373.5 334.3 283.6 240.5 189.5 157.4 95.4 [ Earnings Retained $61.2 $75.4 $38.1 $38.1 $34.3 $17.5 $12.5 Earnings Per Average Common Shore (Dollars) $2.56 $2.70 $2.40 $2.39 $2.25 $2.00 $1.86 Dividends per Common Shore (Dollars) $2.20 $2.20 $2.12 $2.06 $1.90 $1.80 $1.64 Common Stock Equity (Per Shore) $17.97 $17.81 $17.99 $17.93 $18.10 $18.72 $19.05 Average Shores of Common Stock Outstanding (Millions) 169.8 151.8 133.9 116.5 99.6 87.3 58.1 Ratings on Philadelphia Electric Company's Securities ) Mortgage Bonds Debentures Preferred Stock Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps,Inc. 9 3/80 10 3/80 11 2/83 Fitch Investors Service BBB 9/82 BBB-9/82 BB+ 9/32 l Moody's investors Service Boo 3 1/83 Bol 1/83 bol 1/83 Stondord & Poor's Corporation BBB - 9/82 BB + 9/82 BB 9/82 7 40

l $UMMARY OF FINANCIAL CONDITION (Millions of Dollars) December 31 1985 1984 1983 1982 1981 1980 1975 j Assets Utility Mont, of ongmolcost $10,572.2 $9,834.1 $8,864.2 ' $7,905.7 $7,044.7 $6,415.7 $4,445.6 . Less: Accumulated Depreciation 1,824.4 1,7263 1,592.0 1,450.1 1,330.6 1,235.7 775.8 Leased Property, net 338.1 352.1 3(4.0 299.1 270.0 1393 91.0 Net Utility Plant 9,085.9 8,459.9 7,636.2 6,754.7 5,984.1 5,3193 3,760.8 investments 87.7 80.9 99.4 91.4 77.8 58.7 123 CurrentAssets Cash ond Temporary Cosh investments 188.8 30.4 57.2 50.0 30.7 6.7 17.4 Escrow Deposits 13.3 88.1 8.0 Accounts Receivable 370.9 384.2 338.6 342.2 342.4 300 3 139.8 inventories 123.7 1503 131.1 143.0 132.2 121.1 88.0 Deferred Energy Costs 101.7 229.9 1493 (85.4) (31 3) 11.0 17.9 Other - 58.5 48.9 44 3 40.2 35.1 31.8 19.2 Deferred Debets 134.8 82.9 80.4 24.9 31.5 18.5 13.8 Total $10,1653 $9,555.7 $8,5443 $7,361.0 $6,602.5 $5,867.4 $4,069.2 Capitalization andliabilities Common Stock $ 2,602.0 $2,361.0 $2,110.5 $1,826.2 $1,572.4 $1,377.4 5 916.6 Other Poid.in Capital 7.3 6.7 5.9 4.6 3.9 2.6 1.5 Retained Earnings 583.7 5233 452.9 423.6 387.2 353.6 304.7 Common Shoreholders' Equity 3,193.0 2,891.0 2,5693 2,254.4 1,963.5 1,733.6 1,222.8 Preferred Stock Without Mondatory Redemption 572.5 572.5 522.5 372.5 3723 372.5 372.5 With Mondatory Redemption 318.3 326.2 284.9 2923 266.9 2743 113.4 Long-Term Debt 4,309.2 3,778.0 3,381.8 3,028.5 2,745.7 2,371.9 1,776.9 Total Capitalization 8,393.0 7,567.7 6,758.5 5,947.7 5,348.6 4,752 3 3,485.6 Currentliabilities Short-Term Debt 1.0 260.0 267.5 64.7 54.2 52.6 108 0 Current Maturities of Long-Term Debt 80.8 50.4 21 3 36.1 130.8 60.9 Capital Lease Obligations due within one year 76.3 683 61 3 32.5 53.9 18.5 12.4 Accounts Poyable and Dividends Declared 185.1 200.1 179.9 188.5 188.9 187.6 80.1 Taxes Accrued and Deferred 1103 158.0 1023 22.6 51.4 77.8 44.2 Interest Accrued 93.0 91.1 91.8 99.8 823 64.9 37.8 Other 72.0 127.2 54.1 24.7 18.1 17.4 20.2 Deferred Credits and Other liabilities CapitalLease Obligations 261.8 283.8 3023 266.6 216.1 120.8 78.6 Other 892.0 749.1 726.4 692.6 552.9 444.7 141.4 Total $10,1653 $9,555.7 $8,544.5 $7,361.0 $6,602.5 $5,867.4 $4,069.2 41

Philadelphia Electric Company and Subsidiary Companies opwa,mg stanstics ELECTRIC OPERATIONS 1985 1984 1983 1982 1981 1980 1975 Output (Millions of Kilowotthours) Steam 9,455 11,085 10,457 8,598 9,931 11,234 12,814 Nuclear 8,359 6,462 5,520 10,743 7,464 7,333 4,387 Hydraulic 1,484 2,085 1,739 1,581 1,397 1,240 2,275 Pumped Storage Output 1,235 1,100 979 1,126 1,101 1,050 1,275 Pumped StorogeInput (1,754) (1,579) (1,427) (1,665) (1,624) (1,526) (1,785) Purchase and Net Interchange 10,252 11,975 12,181 11,120 11,173 9,973 7,363 InternalCombustion 178 425 491 178 283 442 914 Other 1,254 528 TotalElectnc Output 30,463 31,553 29,940 31,681 30,253 29,746 27,243 Sales (Mil' ions of Kilowatthours) Residendol 8,440 8,515 8,467 7,877 8,014 8,341 7,424 SmollCommercialand Industriol 3,731 3,543 3,284 3,142 3,115 3,065 2,624 Large CommercialandIndustrial 14,920 14,881 14,478 14,178 14,916 15,056 14,060 AllOtkr 1,044 1,061 1,003 1,012 1,005 1,159 1,227 ServiceTerritory 28,135 28,000 27,232 26,209 27.050 27,621 25,335 Jersey Centrol Power & Light (Solem #2) 1,395 346 3,352 1,218 TotalElectnc 5 ales 28,135 29,395 27,578 29,561 28,268 27,621 25,335 NumberofCustomers, December 31 Residential 1,245,481 1,230,883 1,217,635 1,206,944 1,200,238 1,190,312 1,120,981 SmallCommercialand Industriol 124,719 121,676 119,292 118,407 117,016 116,808 114,896 Lorge Commerciolandindustrial 4,881 5,100 5,437 5,616 5,790 5,820 5,719 AllOther 773 751 751 762 746 736 2,305 Totof flectric Customers 1,375,854 1,358,410 1,343,115 1,331,729 1,323,790 1,313,676 1,243,901 Operahng Revenues (Millions of Dollars) Residential $923.9 $354.9 $744.0 $694.4 $643.7 $607.8 $364.7 Small CommercialandIndustrial 388.7 360.2 316.6 310.6 285.9 249.8 138.9 Large Commercialend Industrial 1,061.8 1,008.5 877.4 922.3 917.1 813.9 418.3 All Other 141.8 145.1 139.4 118.3 109.5 95.4 56.5 Service Territory 2,516.2 2,368.7 2,077.4 2,045.6 1,956.2 1,766.9 978.4 Jersey CentroI Power & Light (Solem #2) 67.0 30.5 135.4 45.9 TotalElectric Revenues $2,516.2 $2,435.7 $2,107.9 $2,181.0 $2,002.1 $1,766.9 $978.4 Operahng &penses (Millions of Dollars) Operating expenses excluding depreciation $1,974.2 $1,858.5 $1,592.0 $1,688.4 $1,586.5 $1,414.0 $717.6 Depreciation 168.2 163.0 150.9 130.2 117.3 111.1 81.6 TotalOperateg hpenses $2,142.4 $2,021.5 $1,742.9 $1,818.6 $1,703.8 $1,525.1 $799.2 Electnc Operatingincome (Millions of Dollars) $373.8 $414.2 $365.0 $362.4 $298.3 $241.8 $179.2 Average Use per Residential Customer (kilowatthours) Without Electric Heating 6,034 6,160 6,319 5,875 6,022 6,411 6,354 With Electric Heating 15,923 17,293 16,523 16,813 18,054 19,482 18,916 Total 6,820 6,960 6,990 6,544 6,699 7,058 6,645 Electric Peck Load, Demand (thousands of kws) 6,034 5,925 5,879 5,691 5,731 6,095 5,530 Net Electric Generating Copacity-Year End Summer roting (thousands of kws) 7,599 7,765 7,974 8,006 8,006 7,698 7,186 Costof Fuel per Million Btu $1.72 $2.22 $2.25 $1.57 $2.10 $1.90 $1.23 Btu per Net Kilowotthour Generated 10,843 10,920 10,906 10,918 10,930 10,787 10,523 42

GAS OPERATIONS 1985 1984 1983 1982 1981 1980 1975 Sales (Millions of Cubic Feet) Residential 1,810 1,941 2,168 2,442 2,446 2,461 2,334 House Heating 23,227 25,429 22,981 24,237 24,675 23,671 20,817 Commercialand Industriol 36,254 41,145 39,043 41,660 45,670 42,890 30,012 AllOther 1,209 1,282 672 422 127 92 74 TotalGos Sales 62,500 69,797 64,864 68,761 72,918 69,114 53,237 Gas Transported for Customers 10,262 3,794 789 To#alGos Sales & Transported 72,762 73,591 65,653 68,761 72,918 69,114 53,237 Number of Customers, December 3I Residential 69,632 70,794 72,501 76,638 78,426 81,346 90,117 House Heating 217,840 211,984 206,443 198,910 193,038 182,246 162,914 Commercial andindustriol 24,234 23,442 22,810 22,324 21,578 20,197 19,874 TotolGos Customers 311,706 306,220 301,754 297,872 293.042 283,789 272,905 Operotmg Revenues (Millions of Dollars) Residential $18.7 $19.0 $19.1 $18.1 $15.4 $14.0 $8.1 House Heating 185.4 191.7 165.8 147.1 128.5 108.5 54 8 Commercial and industrial 214.1 243.7 227.3 221.1 209.7 166.7 54.5 AllOther 5.2 5.6 3.0 1.8 0.5 0.3 0.1 Subtotal $423.4 5460.0 $415.2 $388.1 $354.1 $289.5 5117.5 Other Revenues (including Transported for Customers) 5.5 3.0 1.8 2.3 2.3 1.2 0.5 TotalGos Revenues $428.9 $463.0 1417.0 $390.4 $356.4 $290.7 $118.0 Operating Expenses (Millions of Dollars) Operating expenses excluding depreciation $375.4 $413.9 $377.6 $354.1 $322.0 $258.0 $93.7 Depreciation 14.8 13.5 12.7 11.9 11.3 10.2 8.3 Totoloperating Expenses $390.2 $427.4 $390.3 $366.0 $333.3 $268.2 5102.0 Gas Operatmg income (Millions of Dollars) $38.7 $35 6 $26.7 $24.4 $23.1 $22.5 $16.0 STEAM OPERATIONS Sales (Millions of Pounds) 4,229 4,735 4,552 5,086 5,484 6,044 7,117 Number o(Customers, December 3I 487 540 545 571 593 618 689 Operateg Revenues (Milliens of Dollars) $68.5 $82.3 $71.1 $73.4 $74.9 $65.8 $38.5 Operating Expenses (Millions of Dollars) Operating expenses exduding depreciation $64.2 $76.0 $67.4 $69.8 $71.6 $62.4 $35.3 Depreciation 1.9 1.9 1.7 1.7 1.7 1.7 1.4 TotalOperating Expenses $66.1 577.9 $69.1 $71.5 $73.3 $64.1 $36.7 Steam Operating income (Millions of Dollars) $2.4 $4.4 $2.0 $1.9 $1.6 $1.7 $1.8 t u,W Na 2) UD g,_, _ _ = y. y j,_._____ E 60 5i di Ii 30~ 'S 1[ 81 82 83 84 85 81 82 81 84 85 me sale,n Urd No 2 Sales 43

f Philadelphia Electric Company and Subsidiary Componk;s ShareholclerInformation Stock Exchange Listings provide information. Please address your comments to Mrs. Most PE securities ore listed on the New York Stock Exchange L S. Binder, Secretory, Philadelphia Electric Company,2301 and the Philadelphia Stock Exchange. Philadelphio Electric Market Street, P.O. Box 8699, Philodelphia, PA 19101. Power Company debentures o<e listed on the Philodelphio Inquiries relating to shareholder accounting records, stock Stock Exchance. transfer and change of address should be directed to Devidends ~ Philadelphia Electric Company, The Company has paid dividends on its common stock 2301 Market Street, P.O. Box 8699, Philadelphio, PA 19101, Attn:St ck Transfer Section,S6-4. continually since 1902. The Board of Directors normally considers common stock dividerds for payment in March, Toll-Free Telephone Line June, September and December. Toll-free telephone lines are available to the Company's The Company estimates that 4% of the $2.20 per share shareholders for inquiries concerning their stock ownership. dividend paid to common shareholders in 1985 represents a When colling from outside Pennsylvanio, dial 1 -800-223-return of capital which is not taxable os dividend income for 7326. From within Pennsylvanio dial 1 -800-242-7326. Local Federal income tax purposes. All dividends on preferred Philodelphic coils should be mode to 841 -5795. stock are taxable. AnnualMeeting Dividend Reinvestment ond 5fock Purchase Plan The Annual Meeting of the Shoreholders of the Company will Shoreholders may use their dividends to purchase additional be held on April 9,1986, at 10:30 A.M. of the Adams Mark shares of common stock through the Company's Dividend Hotel, Monument Road & City Line Avenue, Philadelphia, PA. Reinvestment and Stock Purchase Plon. Philodelphia Electric Common stock shareholders of record of the close of pays all brokerage and service fees. business on February 28,1986, are entitled to vote of this Customers of the Company who are not shareholders may meeting. enroll in the plan by making a one-time purchase of common Notice of the meeting, proxy statement, and proxy will be stock directly from the Company, mailed urJer separate cover. Prompt return of the proxies All shareholders have the opportunity to invest additional will be appreciated. funds in common stock of the Company, whether or not they Form 10-K have their dividends reinvested - otso with all fees borne by Form 10-K, the annual report filed with the Securities and the Company. Exchange Commission, is avoilable, without chorge, to Over 35% of the Company's common shareholders were shareholders upon written request to Philodelphia Electric participants. In 1985, they invested more that $110 million Company,2301 Market Street, P.O. Box 8699, Philadelphia, through the Plon, including cash payments. Informotion PA 19101, concerning this Plan may be obtained from M.W. Rimerman, Attn: Financial Division, S21 1. Treasurer, Philodelphia Electric Company,2301 Market Shoreholders Street, P.O. Box 8699, Philadelphia, PA 19101. The Company has 302,097 shareholders of record of Comments Welcomed common stock, a 13% inctease in 5 years. The Company olways is pleased to answer questions and Transfer Agents and Registrars PHILADELPHIA ELECTRIC COMPANY-PHILADELPHIA ELECTRIC COMPANY-Debentures Preferred and Common Stocks PHILADELPHIA ELECTRIC POWER COMPANY Registrors: Mellon Bank (East) NA, Four Mellon (A Subsidiary)-Debentures Bank Center, Philodelphia, PA 19102 Trustee: The Philadelphia National Bank, Morgan Guaronty Trust Co.of NY, Brood & Chestnut Sts., Philo., PA 19101 30 W. Broadway, NY, NY 10015 Transfer Agents: Philadelphia Electric Company, NewYork Agent: Irving Trust Co, One Woll Street, NY, 2301 Market St., Philo., PA 19101 NY 10015 Morgon Guaranty Trust Co. of NY, l 30 W. Broodway, NY, NY 10015 0I M r S reet, P.O. Box 8699, Philo., PA 19101. PHILADELPHIA ELECTRIC COMPANY-(215)841-4000. First and Refunding Mortgage Bonds Trustee: Fidelity Bank, National Association, Brood & Walnut Sts., Philo., PA 19109 New York Agent: Morgon Guaranty Trust Co. of NY, 30 W. Broodway, NY, NY 10015 NYSE-Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Shore) 1985 1984 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Ovarter Ovarter High Price $17% $16% $16% $16% $154 $13% $14% $16 Low Price $14 $14 $13% $14% $124 $9 $11% $14 Earnings 62c 59c 57c 79c 60c 73c $8e 81c Dividends 55c 55c 55c 55c 55c 55c 55e $5e 44

l D%ctors Ofhcers

  • John H. Austin, Jr.

James L Everett Lucy S. Binder President and Chief Operating Officer Chairman of the Board Secretory of the Company and Chief Executive Officer Morton W. Rimermor-William T. Coleman, Jr., Esq. John H. Austin, Jr. Treasurer SeniorPortner of the low firm President and Chief Operating Officer cf O'Melveny & Myers James D. Lynch Vncent S. Boyer Assistant Secretary M. Walter D'Alessio Senior Mce President President and Chiet Executive Officer Nuclear Power J. Robert Couston Lotimer & Buck,Inc. Assistont Treasurer (Mortgage Banking and Reof fstate Edward G. Bauer, Jr. Development) Mce Presidentand Jon A. Kotherine General Counsel Assistant Treosurer

  • James L Everett Chairman of the Board Oifford Brenner Williom M. Lennox, Jr.

and Chief hecutive Officer Yce President Assistant Treasurer of the Company Corporate communications William S. Fishmo, Thomas W. Coppock Chairman of the becutive Committee Vce President ARA Services. Inc. (Service Electric Transmission Management) and Distribution Director Changes: William S. Goither was elected Williams Goither Shields L Daltroff to the Board July ??,1985. President Yee President Drexel University Electric Production R, chord G.Gilmore wos re. elected to the Board

  • Robert F.Gilkeson Charles L Fritz December 23,1985.

Chairman of the Executive Committee Vee President of the Company PersonnelandIndustrial Relations Richard G.Gilmore Raymond F. Holmon Consultant Vice President General Administration (

  • Robert D. Horrison Mce Chairman John S. Kemper John Wonomaker, Philadelphio Yce thesident (Merchandising)

Enginvring and Research Paul R. Kaiser William B. Morlok Chairman Emeritus Vce President TostyBoking Company Commercial Operations (Diversified Manufacturing) Philip G. Mulligan

  • Joseph C. Lodd Yce President Chairman and Chief becutive Officer Gas Operations Fidelity Mutual Lile Insurance Company Joseph F. Poquette, Jr.

Edithe J. Levit, M.D. Mce President William W. Hogerty, o member President and Chief Executive Offjeer Finance and Accountm9 of the Board of Directors since National Board cf Medical hominers 1966, died on January 14,1986. A. Lewis Parry, Jr. Dr. Hagerty,69, served as

  • Joseph J.McLoughlin

%ce President President of Drewel University i President and Chief Executive Officer Purchosing and GeneralServices from 1963 to 1984.We are BeneficialMufvolSovings Bank grateful for his many years of service and are deeply saddened at his passing.

  • Memberof the Executive Committee

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Atlantic City Electnc Company is the 1-otheial name of the Company as it ap-pears in the Articles of incorporation. The Company also uses the registered trade name Atlantie Electric in various shareholder and customer publications and in its daily operations. PO Box I?64 1199 B'ack Horse Pike Pleasantville. New Jersey 08232 ~ 1 (fx)9) 645-41tX) t ~ ) 4'- + The 1986 Annual Meeting of Share- ? "H holders will be held on Wednesday, s' b -;. ~ April 23,1986 at the Quail HillInn, S. Smithsille. New Jersey. A Notice of s' ~ Annual Nieeting will be tnailed in March. to those shareholders entitled to vote. y s "~' 4' k g 3;\\9 + i e n N i i 1 1 + ~ Ji. g y y ', dn . z. 4 .c

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ya. ) '1 ^ Letter to Shareholders 2 ^ / Report for the Year 4 - Our Service Area 12~ I J-r ' c Customers A'-A-Glance 13 1 Financial Information 14 + Investor Informaoon 37 Statistical Review 1985-1975 38 ~~ Iloard of Directors 40 Director Committees 40 Corporate Officers 40 l This yeari cover design represents a significant milestone for the Company. The Electric Light Cc,mpany of Atlantic City and the llridgeton Electric Light company were each incorporated in IM6 Over the one hundred years which rollowed. these and other wmpanies g rew merged and matured into Atlantic Electrit whic h today prosides sersice for more than one nullion people in Southern New Jersey

FINANCIAL IIIGilLIGHTS Results of Operations 1985-1983 % Change % Change 1985 1985-1984 1984 1984-1983 1983 Electric Operating Revenues (000's) $ 579,733 5.5 5 549,531 6.3 $ 517,142 Operating Expenses (000's) $ 490,327 7.0 $ 458,140 8.0 $ 424,040 Net income (000's) $ 60,519 (4.4) $ 63,277 (4.3) $ 66,152 Earnings Per Common Share 3,00 (6.3) 3.20 (8.0) 3.48 I Dividends Paid Per Common Share 2.53 4.5 2.42 5.2 2.30 l Total Assets (000's) $1,299,633 6.5 $1,220,503 7.1 $1,139.978 l l Cash Construction Expenditures (000's) $ 94,017 11.1 $ 84,630 13.7 5 74,457 Sales of Electricity (KWH)(000's) 6,199,672 2.4 6,053,791 3.5 5,851,434 Price Paid Per KWH-(All Customers) 9.481c 5.4 8.999e 7.6 8.360c Total Customer Service lastallations (Year-end) 417,625 2.5 407,277 2.2 398,526 Number of Sharenolders-Common Stocl. (Year-end) 48,635 2.5 47,446 (l.8) 48,299 Number of Employees (Year-end) 2,099 4.3 2,012 .9 1,995 Book Value 24.76 2.0 24.27 2.9 23.58 Earnings & Dhidends Per Share of Common Stock (in dollan) l I i .,.,.,. ?,l. ~ l l ~ 1 pas l i i i I 1902 l i i i i l9g3 J i i i i 19u I k L,, _. _J, _ _. _ l. i s 1945 0.00 l 1.50! 2.00! 2.50 t I 3.00 3.50i Market Price Per Share of Common Stock (year.<ndin dollan) I l 7,. 1t01 l l l n. g.- - y.- ~ - 1992 i l I, l 1 i

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Reporting to you upon the wmpletion in earnmps resulted f rom the tA t that. t ent s. to h4 tents W ith this m of 1985. we can cite maior accom despite ou citorts. base rate reliet h.is t reasc. the Jn idends pani per share phshments for the year. and opportu-not kept pat e w ith gener al me reases m lW amounted to %2 s ; nities for the f uture f rom a santage m the costs of pros idint se n it e pomt umque in the Company 's Af ter consideratnin.I carnmps Dris represents the thirty-third history prospects and the unpor tant e of consecutiw scar o/ growth in Earnings per share for 19S5 totaled steady dnidend performance. the dividends prud. 53 00. compared with 53 20 per Board of Ihrectors raised the quar share achiesed in 19X1 This decrease terly dnidena rate last June by 2 ()ur annu.d dn niend rate is now $2 55 per share l nergs sales tin iiur t u sh imer s in t reasCd 2 M t 111 l'35 5. ti!.1 ti lt a l f i 2 bdhon kilow att hours We h.nc w n nessed renewed streneth m our rCsidClltlal and t itillnlCr < ial s ilsfiillic t NC g inellt s I he aserace riuri>ber ist rCsidClllial t usltilliCr s 16 it the scal grew bs inore than s 'iiii aint we ret airded an inticase int nuire th.in blN)ttif u nier t tal s ll'r illier s \\ f)w h si stern peak denland t il 1 412 tilcea w att s was re( iirdt d in \\aeust I hls nCw [Y ik rCph NCols an mttcasetil lIl 2 < t is CI lhe pCak rcts il(lCil til j; l')h I. athl LI ls h hlchcr thall tf h ( 't illlpa n ' rC( t it t i pe a k sC I I t) l' Ah I s WU hJsC hCCn QullC sih tesstul In { the rilanageiiient ist f ut ; alui ;itil t hased w.u c r s i nt s in los; sut h t (lis t s lTr kiIniw a!I Ihital (lct Ilrictl hs 5 l'r t riitti the se.ir carlici \\initio l'lhh t iur Cfler g s adltist rtic ht T ite s reflet line the s i nts ist tth I uni pur t hasco [w wcr bioin h s iiin us tome r s h.nc heen reduted hs a pprii s linate!', h l ! it n !! n m har the sectond Vent In a reru, restd and nut frar scources esl prourr proruded more than Xin of total systrin retjutrtinents. 3 r_. y% i Nes cr al ret iirits ti er., cr afin: unit and starnin per! it rnalu c acri .cl m l l')h 5.trnl NJICf fl I nit I tith i 'l tilli y puntls iia nca nus icar mot s c stab lishcil ali.ill tit!w ilat n qul rct oil fi er i [w iw C r

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I' i i I The only generating capacity which $63.3 million, to reflect more current And, we have taken a closer look at we have under construction is a 5% cost levels; and the second phase, for our business environment, observing interest in the Hope Creek Nuclear a net amount of $28.5 million, to that deregulation, competition and Generating Station. Construction of recover costs associated with the changing technology are having ever the unit is virtually finished. Fuel forthcoming operation of Hope greater effects upon our industry. loading and testing are yet to be Creek. M anticipate a decision by Almost a century ago, the Electric completed, and Public Service Elec-the BPU on the first-phase request in Light Company of Atlantic City and tric and Gas Company, which owns the first quarter of 1986, and are the Bridgeton Electric Light Com-the other 95% of the unit and is re-seeking to have the second-phase pany were fi>rmed. Customers sought sponsible for its construction, has increase timed to coincide with the out these corporate predecessors of advised the Company that Hope commercial start-up of the Hope ours for the service and convenience Creek should be operational in late Creek unit. that electric lighting could provide, 1986. A cost containment agreement The legislature in New Jersey has and not the electricity that was pro-for the Hope Creek unit was approved mandated periodic management audits duced. As we celebrate a centennial by the New Jersey Board of Public of electric and gas utilities in the of service, we do well to remind Utilities in 1983. It established a State, and the Company was among ourselves of that fact, and to find in it targ;ted in-service date of December the first to have a comprehensive the essence of success which lies 1986 and a targeted cost for the plant management audit completed in 1985, ahead. M believe that the years to at the time it would begin commercial On balance, the findings of the inde-come are filled with challenges and operation. The agreement provided pendent auditors confirmed the opportunities fi>r the Company. Our for incentives and penalties based effectiveness and efficiency of the future progress will be built upon a j upon the final cost of the unit. Our Company's operations. competitive spirit, with renewed l portion of the originally targeted emphasis on service, performance and amount was approximately $198 mil-The audit report noted that decisions the effective management of costs. lion, and at December 31,1985 we and actions by corporate reanagement The Company's commitment to be had recorded approximately $204 haw sawa customers hurdirds of alert to the opportunities of the million of costs. Our cost of the unit mi# ions ofdo#ars. future, and its ability to respond to at completion is currently expected them and manage them, will guide it to be approximately $226 million. Audit recommendations suggested the toward the success of a new century. Based upon developments to date, we potential for a modest reduction in do not currently expect that the cost overall expenses. Many corporate Ihr the lloard of Directors, cont-inment provisions will have a projects designed to cut costs and significant negative impact on improve efficiency had already been carnings. underway at the time of the audit, and 7 Improvement and support of corpo-other effi>rts based upon the audit rate earnings depend upon receiving findings and recommendations have ( adequate base rate relief. We are been started. J. D. Feehan continuing our efforts to obtam the in large measure, we would charac-Chairman of the Board needed increases in base rates. Our terize 1985 as a year of reflection and appeal from the BPU's denial of rate assessment of future opportunities. reliefin August 1984, and the affir-While others evaluated us in a man-N" mance of the BPU's action by the agement audit, we took a closer kmk New Jersey Superior Court, have now at ourselves and set out to enhance ~d been taken to New Jersey Supreme our operating and planning practices. E. D. Huggard Court. Last April, we filed requests M have worked to better understand President and Chief Executive Officer with the BPU for rate increases in two our customers' needs, making phases: a first phase, in the amount of changes within the organization to January 31,1986 more effectively meet those needs. 3

== = 7 1 P m E hold charactenstics and energy use easier for customers to selett our Although single tannly homes remam consenation sen ites. and to pros ide [' the donunant type of housing. there greater mcentnes for them to do so has been a shitt m new housmg umts We mtroduced shop-at home conse m [ The contmumg success of Atlantic to multipic-tanuly dweihngs, such as nience for customers desinng our Electnc depends on its bihty to condonumums and apartments I here Seallp program senices in addi measure and mtert ret customers-has also been a shit. f rom the use of tion. we ottered to install electnt needs. and then to dedicate resources tul to electncity for central heanng. water heater msulanon w raps at no to meet those needs while changes in the use or natural tharge. gn mg us the opnortumt) to P in early 19X5. the Company s gas hae saned shghtly oser a tne otter other quic k and mespensne E ettorts to assess customers' needs was year penod Electncity surrently consen anon measuies in 1985. oser ( supported by means of a residential appears to be the predonunant 2.mo residennal customers took customer attitude sune) it pros ided heatmg source m duplexet ads antage of sanous Seal l p ser important information on pubhc per condonumums and tow nhouses Sur s n es More than Tim home energy f ceptions ot energy use. tonsenation sey mtornution with respett to audits were performed. and more than r-and the Company Customen said changes m apphante usage helps us 200 other < ustomen toms ad s antage they preferred ;oabrired generation to address s ustomer needs. fores ast o1 energs audits nailable throuch a -W and consen ation as the means of tuture energy requ rements and nien new ('ommercial and Apartment f noidmg t'uture energy shortages uty addinonal opportunines for Consenanon Program Although s ustomers mdkated an marketmg consenation programs For the nrst tune m sescul sean, y mereased awareness of the impor Fm 19X5. the l'ompany soucht to the Compans tondut ted a suncy of tance of tonsenanom there was no greatly expand sustomer par ta ipanon tonuneraal m ustomers to exanune the y e increase m the repor ted leset of in its s anous < onsen anon programs relationship of energy use at sarious A acnon taken bs them to see encre..s Some iraproseuents oser the 19X4 ts pes of busmesses to facion sut h as lesels of participation were noted. thior space. hghtmg. heatmg and The suney results suggested that r e more immediate econonuc msentnes although 19M results ihd not meet all toohng needs A better undentand E may be needed to encourage sonser or our goals Dunng the year. the mg of these relationships will assist E sanon ettorts Generally. < ustomers Company made thanges to ruke it the Company m foretastmp the f uture appeared to hold a r ore teorable . Q, j 3 (.<F [J. M ",.Y,T, c L.J fs. 9... g <g ..-..r ,3, f pkg%*,,.4 - 4 n; 3. : ..G 6 v, ' "P...,. ' < %.,," Y oplmon of the Company than m the y j. g. : y a.. . ' ~ '- ',: V.q: *%r.J-6 ,l ,ss-past Howeser. suney results mdi. . y?.a.. _ 9s., c.... ;k

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I C E L E (' T R I C needs of this rapidly growing seg-ment of our customer base, as well as aiding in the development of better energy management smices. Concern with improving customer service was exemplified with the opening of two pilot customer cour-tesy centers in 1985. The results of a i special telephone poll had overw helm-ingly indicated that personalized cus-I tomer service at remote locations could complement the Company's 3 4 centralized customer service opera- } tion. Visitors to these centers have r i access to a full range of services, I from help with energy conservation .,b {x to bill payment assistance. The expe-rience with these two trial k) cations will be used to guide decisions on the potential opening of additional cus-tomer courtesy centers. Offering various rate schedules enables the Company to meet specific j customer needs. Recently the Com, Roadside stands have become a trademark of the southern portion of the " Garden State." pany re-established a street lighting j tariff which gives communities the tlic allocation of charges for electric the need to af ford customers a choice choice of renting or owning energy-ser ice, and the Company has asked of home heating methods. efficient street lighting. In 1985, a the Board of Public Utilities to recon-In September 1985. Iturricane I small group of residential customers sider a decision which the Company Gloria struck our service area. Com- ) agreed to participate in a one-year believes would adversely atiect a pany personnel were able to restore pilot program to test the effectiveness majority of its customer classes and 959 of the customers affected by of time-of-use rates. l'hese rates are the economic vitality of the service the storm in less than 24 hours. Once l intended to provide an incentive for area. In another State regulatory the situation in Southern New customers to shift energy usage from forum, a proposal was made which Jersey was controlled, volunteers from times of peak demand, thereby redue-would ban the use of electric ing the need for costly additional resistance heating in favor of natural ', y_ M ~ i 4 generating capacity. gas. The proposal was ultimately ' ' ' 4" g s s r~jN /y. . g-The Company's concerns with withdrawn, liollowing efforts by the regulation are not only related to Company to demonstrate the cost- ' n

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also related to the interests of its 3( W? ba continumg through 1985 has involved W L ~ h~ *l customers. One of the proceedings .,py k t Empto>ees or the Safety Department i volunteer their dime to esplain high I voltage hasards. l l l f l 5 L

A T 1. A N T ? the Company work force went to radio-equipped Company schicles Stations set new records for plant help restore service to Long Island have helped summon life-sasing ser-output. Compared with the use of oil-Lighting Company customers, w ho vices and assistance in emergen-tired power generation, the use of were more seriously hit by the cies such as car accidents and fires relatively low-cost coal and nuclear hurricane. through its Radio Watch Program. fuel saved the Company and its cus-For the Company, community in. For customers with limited financial tomers more than $136 million in 1985. volvement has long been an exten-resources, the Company has partici. Units I and 2 at the IL L. England sion of customer service. In 1985, the patd in town meetings to discuss Station are the largest of the Com-Speakers Bureau made oser 240 pre-the availability of free or low-cost pany's coal-fired units. There are sentations to community organiza-weatherization services. certain unusual weather conditions tions and schools on such topics as which can create a downwash of plant energy conservation, electrical safety emissions in the nearby area. In order and environmental concerns. Also in to assure compliance with regulatory Childwatch, by distributing informa- __ P l{R A 'l IO N S requirements, many alternatise oper-1985, the Company began supporting ~ - - - - - ating configurations were evaluated, '~ tion on missing children in monthly For 1985, the Company's cost of fuel and the Company decided that con-customer mailings. The Good Neigh-and purchased power per kilowatt-g,. b g.[{Qy 6 bor Fund, now in its third year, helps hour, by far the largest single element .3 V jf.hj.y {d'. 4 deserving South Jersey residents meet of the cost of service, declined by s winter heating costs. In the summer 8.39. Output from our nuclear ld, y.qj J 4 ii' .I.J4 0.h ?! ' ?.M ([ ' G(; months, the Company has opened its sources of energy improved substan-doors at the B. L. England Generat-tially during the year and, together ing Station to let visitors "see electric-with our coal-fired sources, helped W 4 i. ' c 1 ,gy..ft.( ity being made." Employees in contain the cost of energy. In 1985, h.,' ' '.,u.. s, s. "~'.. g~ g (~ "'+ M .4 ,.f. Salem Unit I, one of our jointly-Osq .J a ow ned nuclear units, set a new record 3 9 s 1 for 277 consecutive days' operation, i. k g. y% JS p f A and it also set an all-time national V v L s w $. p - record for energy generated by a unit w. j. 3 % l jf c .T M4 .';Y c. s;.~....z. in a calendar year. Nuclear power t g;g f.N ' 1.'., s j f T ': .U.p:.. s. g h$. C Wig.e - ypS / f purchased under contract from IVnn-ij if h [ 4 [t yys . y-W[ 5)lvania Power & Light Company in D[- j. 4 1985 was double the 19S4 amount, Cw s 3 yi.g[" M.:.N. /h due to the start-up of Susquehanna ~ vi ~~ +O )~ Unit 2 in February. That unit set a The company's open hou.e tours at ~ J w o p/~ D ,rs.. record in 1985 for the most power B. I. England Station provide an ./ oppodunHy An visiton to m hint ' 'I Y 1 produced by reactors of its t}pe. In electricity is enade. .{. jg addition, both of the j..omtly-ow ned. J ': # coal-fired Keystone and Conemaugh %(? .,l.; .,;;.;;.. ::;'y. a...,, The new customer courtesy centers provide an extra opportunity for personal contact out in the service area. 6

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a ,i, p. . r is I f ;< II [ A p. l, i s i, n 3, r. - is m' s t! :n < n. < p b t; ? i p' r.it' ai. nk i[- k ,t, f ( i. j i,1 l t. N s' Iu,.os \\1 *- r 5;* '.t!' 5 Y N a:h ' 0 Growth in the Cornpany's sersice territory in, udes the construction of rnodern and cfncient public buildings, such as the AtlantL County Of6ce fluilding and Atlantic City l Free Public Library 1 ( l. '1 l x

t I C E L li C T R I C ?- 5 L g operation of the radio-controlled sys-r NERGYSYSTEM n C tem will begin in 1986, and results P L A N N I N G .. ;,%. %P"f from the trial program will be used to 0:5.8 determine the value of offering the 4 x.V w.. F R. In effect, our customers are buying ~ -2 service to more customers. E "~ necessities and conveniences such as h Cogeneration insolves the pnWue. [ lighting, heating and air conditioning. 4 .. y ( O' tion of electricity and other fi>rms of prosided by other means. The poten- [._$ ' g' h[., ' [T Some of these "end-uses" can be v- '- N energy, such as hot water and steam. = Successful applications of cogenera-r tial for substitution, together with tion may help reduce the need fi>r deregulation and technological devel-One of our customers Airwork other more costly forms of generating I opments, present many challenges Ce"poration, is an industry leader in capacity. For more than 50 years, the e_ contract maintenance and repair of and opportunities for the Company. gas turbine engines for aircraft and C,ompany has provided cogeneration 7 P Our planning process has been devel-industrial applications, sersices to Dulbnt. Additional [ oped to enable us to recognize the cogeneration opportunities in the ser-E options created by this changing busi-Different techniques fi>r controlling vice territory are dependent upon { ness environment. demand and energy usage from the customeri use of steam and hot h.,b. ' customer's side of the meter can hase water. In 1985, the Company sup-yh. [ a wide range of effects upon the costs ported cogeneration feasibility studies ]-p y.W(;e ~ and ti>rms of customer service, as at more than 20 mid-sized commer-

f. q e.% C 1 n.

F l%1 well as the financial well-being of the cial and industrial facilities. The 7 gb I 7.g Y.. - -Q~, Company. A special study to insesti-Company aho helped fund a major E b gate demand-side management was study of the cogeneration potential o = No: .lA'- completed in late 1985, and the of a district hot water heating 9 stem . f ] ',y results will aid us in desetoping in Atlantic City. Such a system f.', T effective strategies for managing appeared to be feasible, and the a f L. ~ ; " 1 growth and delisering sersiees Company is insobed in more ". h ' ' e pp g, desired by customers at the lowest detailed negotiations with the project R40.jpg.' reasonable cost. sponsor. Major cogeneration oppor-g y".';'jg# One of the methoth which should tunities with certain large industrial L r "i, be helpful in controlling costly customers are also being esaluated. g J ;, growth in peak demand is the direct One of the more promising future g 5 L E, 'e control of appliance load. In 1985, alternate energy technologies is the Company enlisted more than 500 photosoltaic generation. This means v: residential customers ia its " Peak of conserting solar energy directly a +y I ~' Saser Club " to test the effectiseness into electricity may pnne to be cost. p K Tron Corporation, a major of radio-controlled switches for air ef fectise by the early 1990 s. Ior k Iy ten s h7s f conditioners and electric water heat-lears, the bompany has been collect-n t e Co p ny's [ service area ideal for expansion. ers. When demand approacnes a peak ing hical solar data and resiewing level, the Company will be able to turn these appliances off and on for short periods without perceptible dis-comfort or inconsenience. Test e I P f I. j

= = () r i E ~ des elopments in solar technology in { FQ " ?pWM*mtwenvr;*"mm]%., p ^ 1985. the Compans combmed the t: 2 j ^ %t-h

  • k M h' 'v results of its data gathering with

.W tindmps of an alternate energy tech-e g "g nology study to deselop a bettei M s assessment of the potential of thn (j:; technology I'he Company has plans b' 4 tor f urther research m solar enercy. N and would hope to confirm the com-s mercial teasibihty of photosolt.n< generation in our sers he area hs i means of test programs and iomt s ent u re s I he Compans has also studied the , /F I teasibihts of using retuse Jern ed f uel CVbe at its generating f acilities l hese stud 3 ie s responded to the mterest and wn-cerns of munhipalitics seeking tii j i manage waste Jnposal and hase g,b 7 helped deselop <riteria for the sate and et th ient use of thn potent ul l source.it cnergs \\ g ,( l !!}'i i; i 1 6. t i' Personalized shareholder service has been enhanced this year by bringing all transfer agent Iranster agent and regntrar ser, aes and registrar functio is in-house. wer: brought wmpletch m hi use m = late l4%b tt' pri s lJe nn >tc tiriicls a'hi in >it.it the 5t.ite s liftiiteit tas exciiipt tnt es pir it o ni.it I ederal ta x he nc tit s t etthient turnar >und < >t shareholder hnan<mgtap.h n s for finant m e H ope af h odcd Ju ultnds rennestcJ m new t r_ o_ i mt y c,_ e mc#%m.im w,mo cm e, - ~. a ,h o.,np. (n n it sharch.LJers parth ipored m a 19 6 but a t an <iim mume n > seck . unended the Plan m ;an n' sursey w hh n has helped us k n'iw the nc< c uar s aih s at o >n m l'Wh lic m mmne in 19%h n !.h them better. undesland thc u m se'l 1)u r m t lud w e i s sued a n ota;,it dends ar e hc m e appi' d ' Mn -ememJ ccomdm. e-o m_ sm - r, m. o h m - s,c n i shareholder publa ations appr nunatch sli 2 n din.n thn uct, m.u k e t l T he (lonpany .ud tman<me the 1).$ ulend Rc an c sn ient and % w L I ht nr a phec. I an Intccrated pr. ' era n .nt iudcd the muans t. >t Pur< hec Plan and th< l mphisc< ( u + oner Scn u 5 '. s t c

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l I C E L E C T R I C t I 1 c This past year, the Company com-promote self-confidence, healthful improvement, and will also be used i pleted its evaluation and selection of lifestyles and general well-being. as a benchmark for comparnon with a new automated general ledger Voluntary skill refresher courses future surveys. accounting system. When imple-proved to be a source of accomplish-The President's Award was estab-l mented as an integral part of the Cost ment and incentise for many of our lished to recognize outstanding Center Management System currently employees to pursue more advanced achievement by employees. The being developed, it will provide more education. The Company made avail-award for 1985 was presented to one detailed budget information, and help able its facilities for a program of the Company's customer service establish clear-cut lines of cost con-promoting good eating habits and trol responsibility. sensible weight control, and an after-L~, Company-wide performance indi-hours aerobic exercise program was cators were established in 1985 to started by employees at Company keep track of progress in achieving headquarters, long-term goals. Approximately 20 ( i l indicators were selected to measure 4 performance in such areas as service -y l reliability, safety and dividend growth. The use of performance indi-cators is now being expanded to The production of reports to shareholders and members of the include measurements at the deEart-anancial community involves a mental level. coordinated team effort of anancial, Atlantic Electric's promotion of accounting and production skills. safe work habits involves not only l formal training, but also informal employees for the interested, car-recognition, encouragement and ing approach she has demonstrated to group incentives. One of the most far-customers. Iler spirit of thought-reaching safety training programs in fulness and dedication to customer the Company's history, the Conti-service were cited as the strengths, j dence with Chemicals Program, shared by all of her fellow employees. l briefed more than 1,400 employees in upon which the future prosperity of j l the safe handling of potentially haz-Atlantic Electric's customers and i } ardous chemicals. Dinners have been shareholders will be built. used by the Company to honor employees working together to set Laser scannins techniques permit new safety records. In 1985, several rapid, accurate sathering of operating groups celebrated more information for meter records. than ten years without a lost-time accident, with one of them setting a A comprehensive employee attitude record of more than sixteen > cars, suncy was conducted by the Com-Throughout 1985, the Company pany in 1985. Almost 1,800 physical has sponsored and encouraged vari-workers and office personnel ous employee programs designed to responded to the survey, which cov-cred such matters as work relations, communication, pay and opportunity for growth and advancement. The i results have suggested some areas for l - -. -.- -- _ -.. - _ - _ ~ _ ~ _. - l 11

OUR SERVICE AREA 9 Ds + ~.. New M M ...~.s ??,,,.:,(. 4 ++ nand @ 4 .. - ~ 3 h i 'O .v..,,.,.a t .. -,,-.A ap.. ' h'},. tiensk City Battumore Q .g g . A. ' M$..,,.

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o gr, g i X j mul8%rtn't i Jil s 3t j, L -.4 Atlantic Electric's service territory, commercial and light industrial cus-representing the southern one third of tomers are situated in the western part the State of New Jersey, is situated of our territory. Iarming and agri-near such major cities as New York, cultux continue as a significant Philadelphia, Baltimore and Washing-customer base in the central and l ton, D.C. The majority of our custo-western regions of our sersice area. mers are residential and commercial. Tourism plays a major part in the economy of the castern shore, while 12

CUSTOMERS AT-A-GLANCE i r- ~ averste % of h RESIDENTIAL "d*' d ((E10 keh) The average number of Atlantic Electric residential cus-

    1. qw-ma tomers increased 2.6% in 1985, while average use per 78 44 i_

customer declined 2.8%. Over 9,100 new dwelling units ,,,, %-*lf- - l o ^ 7'4 43 were connected in 1985, of which 36% were electrically g{ heated. The majority of 1985 new home construction 19a3 7.7 4} occurred in the eastem part of the service area. g q tw ' 7.9 '44 l g-Est.1985-2000 1935 q 7.6 43 Annual Growth 1985 2000 Rate 0% , mm sw ' -~ 7.3 44 I Energy (billion kwh) 2.638 3.473 1.85 % 0 1 2 3 'billioru oj'kwh Peak (Mw) 680 874 1.69 % r COMMERCIAL Sales to commercial customers increased 6.9% in 1985. ,,s, qgg 42.8 33 Eleven casino-hotels were in operation at year-end. Sales to ( that segment increased almost 19% from 1984 and f,,y __,;L 44.2 34 represented almost 6% of total energy sales. Approx-NEE' t imately 1,700 of the 44,256 commercial customers 1941 46.8 35 engaged in farming and related activities during 1985. qgg NE,M% Est.1985-2000 i,33 $ 3,9 37 = E Annual Grow th . _._syg;ad 1985 2000 Rate y Energy (billion kw h) 2.299 3.094 2.00% 0 I 2 J billioru c3 kwh n_.* Peak (Mw) 562 765 2.08% K 5 E INDUSTRIAL & OTilER l I The Company's 1,020 industrial customers are located w ms primarily in the inland and western portions of th: service MI -~ -- = 1240.0* 23 area. Industries include the manufxture of chemical, 3m - g97,g, 'y glass, plastic and rubber products. Sales to this segment f i NM4 increased slightly in 1985. i,33 1200.4* 22 L EN E II79# 2I Est.1985-2000 lh 1181.3* 20 m 1985 2000 Ra e IW I Energy (billion kwh) Im263 1.282 0.10% 3m % l A im 9 16 e [ Peak (Mw) 190 198 0.28 % outio,is gAwh I ^ r 1 I 'Induurial l t uuomers '. i imly i n 4 m u mmum mummmumm si

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MANAGEMENT'S DISCUSSION AND ANAIXSIS OF An.Asuc cHY FINANCIAL CONDIT!ON AND RESULTS OF OPERATION memc cmtMY b'EM Cash Requirements and Internal Generation of l'unds The nature of the Company's operations is capital inten-h*[aN E f,n sive. We imest a significant amount of our funds in l property and plant to generate, transmit and distribute "[*f_ f,y % Eh ~ electric energy service to our customers. At December 31 Reqmremenu 1985 our gross imestment in property and plant was over = g;. ,,y q M _. a $1.4 bilhon. As a utility, our business is generally subject ana to regulation by the New Jersey Board of Public Utilities 5'"'"8 N"* q . gg (BPU), including regulation of the rates which are charged jag" 1 for providing electric service. The Company's ability to qm Genermon finance its construction program, maintain service reliabil-i i ity, meet its working capital requirements and provide a o 30 60 901 1201 150 fair rate of return on imestment to its shareholders is j dependent upon adequate rate relief. Year.End Capitalization i l il on omenn 9 p LIQUIDITY AND CAPITAL RESOURCES e Common Eqnty 9 m m .e,eu,,a s m ,,n Construction Program .ionperm oes I I During 1985, cash construction expenditures aggregated swerm Dew f,o { $94 million, which is an 11% increase from the $85 million q expenditure level experienced in 1984 and a 27% increase 19u from the $74 million level in 1983. Jncluded in the above q amounts are cash construction expenditures associated with

    • j
  • j "j

3" the Company's 5% interest in the Hope Creek Generating Station, the only additional generating capacity of the Company under construction. Such cash construction through the DRP and $2.6 million of Common Stock sold expenditures amounted to $31 milhon m 1985, and $23 through the ESOP. Interim financing of our construction milhon m exh of the >rars 1984 and 1983. The five->rar program and working capital needs was provided by the issuance of short term debt. (1986-1990) cash constmetion expenditures are currently projected to be $388 million. The construction program Approximately 41% of the cash requirements for con-has been developed in response to the need to improve or struction, debt maturities and sinking fund requirements replace existing production plant, upgrade our transmission during the period 1983-1985 was generated from operations and distribution system and provide for projected growth. after deductions for dividends and working capital needs, The current forecast of peak load growth for the penod but exclusive of changes in temporary cash imestments. r 1986-1990 is 2.1% per year. The Company estimates that with adequate rate relief, more than 70% of its total cash construction requirements, Financing Program debt maturities and sinking fund requirements will be in 1985, the Company's external financings totaled $81.2 generated internally during the five-year period from million, represented by $70.0 million of First Mortgage 1986-1990. Additional cash requirements will be satisfied Bonds, $10.8 million of Common Stock issued through the through extemal financing. Capitalization ratios at Dividend Reinvestment and Stock Purchase Plan (DRP) December 31,1985 are 47% long term debt,45% common and 5.4 million of Common Stock issued through the equity and 8% preferred stock. The Company will Employee Stock Ownership Plan (ESOP) In 1984, $54.4 continue to use short term debt financing on an interim million was raised in the capital markets, with three basis and currently maintains aggregate lines of credit of pollution control series of First Mortgage Bonds totalling $115 million. $42.2 million; $11.4 million of Common Stock sold Provisions of the Company's charter, mortgage and through the DRP and 5.8 million of Common Stock sold debenture agreements c:n limit, in certain cases, the through the ESOP. In 1983, $64.3 million was raised in the amount and types of additional financing which may be 1 capital markets from the sale of $50 million of First employed. Estimated additional funding capacities at 3 Mortgage Bonds, $11.7 million of Common Stock sold December 31,1985, giving effect to such provisions, J l 15

= MANAGEMENT'S DISCUSSION AND ANAIXSIS OF 2 FIN ANCIAL CONDITION AND RESUlTS OF OPERATION %nonua, j r l [ i h = j would amount to more than $400 million for First revenue increases, changes in Leselized Energy Clause [ l l Mortgage Bonds, or $150 million for Preferred Stock or revenues and changes in kilowatt-hour sales. The effects of

-l

$140 million for unsecured debt, and may not necessarily the above factors on 1985 end 1984 revenues are shon 5 be additive, below: I ; c l f c i RESULTS OF OPERATIONS (Thousands of Dotzars) 1985 1984 t 4 The tabulation on page 36 includes key historical indicators Base Revenues $24,112 4.4 ", $12,971 2.4% ( which are helpful in evaluating the performance of the Levelized Energy Clause (7,039) t1.3) 1,972 .4 y Company over the past five ) tars. Kilowatt-hop; Sales 13,099 2.4 17,446 3.5 Earnings increase $30.202 5.5 9 $32.389 63% Eamings per share of Common Stock, based on the ? E weighted average number of shares outstanding, were Future changes in operating revenues will reflect the I $3.00 in 1985, compared to $3.20 in 1984 and $3.48 in timeliness and adequacy of rate relief, general economic 1983. The decrease in earnings per share in 1985 and 1984 c nditions in our service area and the results of load y is attributable to increases in operating expenses without management and conservation programs. 7 6) corresponding rate relief. In addition to rate relief, our Sales E camings are sensitive to other changes in revenues and Changes in kilowatt-hour sales are generally due to = expenses as discussed below. changes in the average number of customers and average E Rennues customer use, which is also affected by weather Operating revenues increased by 5.5% in 1985 to $579.7 conditions. W million compared to $549.5 million in 1984. The 1984 Energy sales statistics, stated as percentage changes level of revenues represented a 6.3% increase compared to from prior years, are shown below: 4 1983. These overall increases reflect the net results of base increase (Decrease) from Prior Year a 1985 1984 =- Total Energy Sales $7M. ofn) 198; NbC- ~~ Customer of

  1. of Class Sales INe Cust. Sales Use Cust.

= e- __- ]' Residential (.3)q (2.M)9 2.69 4.0% 2.0% 2.0% 1982 _.= [ Industrial .6 .I .5 (2.3) 't.8) (.5) -[ Commercial 6.9 5.4 1.5 6.5 5.4 1.1

    • q 7;;7 g I

f,y % W ili% __ Other (2.4) (4.2) 1.N (3.0) (2.2) (1.1) j-E Total 2.4 2.5 3.5 1.6 1.9 j,g %@ lR MWah_ m Alth 3 5.5l The 2.4% and 3.5% increase in total kilowatt-hour sales in 2 E l 0 4.5 5.0 6.0 6.5 1985 and 1984, respectively, is largely attributable to the i-riumber of new customers added to the Company's system 3 I Ascrage Annual Prke Per Kilowatt-flour l l l in those years, and increased commercial activity in the 5 service territory. Sales to residential customers in 1985 1981 g u m a w. m m p- ] remained virtually unchanged from 1984 which, in turn, ,,,, miiiipa.dm@l usxn%, had increased 4.0% from 1983. In 1985, mild weather E _ l l l conditions and a lower average use per customer acted to f,u H9M9N"MF offset the effects of an average of 8,700 new residential F_ I I f I customers. In 1984, the effects of 6,500 new customers, 5 f,u M M P FE N together with an increased use per customer, resulted in a 2 increased kilowatt-hour sales. Sales to commercial custom-f,35 y. a.mu. masw..wg-8[1 ers increased 6.9% and 6.5% in 1985 and 1984, t 0 21 41 61 10 respectively. Business activities related to the expansion of g the hotel / casino industry contributed to this commercial 2 sales growth in both years. Sales to industrial customers J = increased by.6% in 1985 and declined 2.3% in 1984 as the M result of changes in the number of customers and changes y N h 16 g-;

ATLANTIC CirY incmc coMi%NY p F [ 1 ( h r 2 E Pre-Tax interest Cmrare Ratio At December 31,1985 $4,466,000 is shown on the balance ( sheet as Deferred Energy Revenues associated with the h ~ f,y current energy clause. p The Company's annual fuel, interchange and purchased A Eu 19u power costs reflect changes in availability of low-cost + . g g generation from Company-owned and purchased fources, i 19e g y. as well as changes m the needs of other utihties g Nd g m g participating in energy interchange. Certain costs associ- ] i e ated with purchased power are deferred on the balance ,,y %ii[M 2'ib sheet since rates are levelized to collect these costs over the l 2 3l 4 5 17-year life of the PP&L Agreements (see Note 3 to the o Financial Statements). AFDC as a Percent of Net Income Power production operation and maintenance costs include the cost of maintenance of both wholly-and T - -lg[ jointly-owned generating units. In addition, the Company f,y 7- __l a l has embarked on an aggressive program to upgrade our y. I - - m ar % production and other facilities to insure efficiency and 'r ,,g l. . l extend service life. Other operatien and maintenance costs r 19e V' consist of the price of materials, supplies and services, as 1 well as wages and employee benefits. 7 1984 g g j-Changes in depreciation expense generally represent i ' tol isl changes in the amounts of electric utility plant in service 'W 5l and the respective in-service dates. ~' o 20 25 The components of federal income taxes are detailed in / 7 the notes to the financial statements. m the use of energy. Overall, however, the comb.med p effects of the changes in our sales and rates have resulted in Interest charges before the allowance for borrowed funds an merease m revendes per kilowatt-hour of 2.3% m 1985 used during construction rose to $41.6 million in 1985 compared to 1984 and 4.2% m 1984 compared to 1983. compared to $40.3 million in 1984, and $37.0 million in m 1983. The increase of $3.3 million in interest expense in 5 Costs and Expenses 1984 from the 1983 lesel reflects a full year's effect of f Total operating expenses increased 7.0% in 1985 compared interest on the Company's 11%% First Mortgage Bonds to 1984. The 1984 operating expenses represented an which were issued in November 1983, the issuance in 1984 ? increase of 8.0% compared to 1983. Excluding deprecia-of an aggregate $42.2 million principal amount of several tion and taxes, operating expenses rose to $332.8 million pollution control series of First Mortgage Bonds, and in 1985, an increase of 6.9% over 1984, which had higher average short term borrowing rates, offset by the increased 13% from 1983. retirement and maturities of First Mortgage Bonds and by Net Energy Costs reflect the amount of energy pro-lower average short term debt outstanding. The increase of J duced, as well as the various fuel and purchased power $1.3 million in interest expense in 1985 from the 1984 level 5 sources used to produce it. Information on the sources and reflects a full year's effect of interest expense associated costs per kilowatt-hour of energy are set forth in the with the pollution control series of First Mortgage Bonds accompanying graph. In 1984 Net Energy Costs were issued in 1984, the issuance of $70 million principal reduced by S6,969,000 reflecting the deferral of fuel costs amount of Ilh% First Mortgage Bonds issued in October incurred in excess of revenues collected under the fuel 1985 and higher average short term debt outstanding, offset clause effective for that year. For 1985, Net Energy Costs by the maturities of First Mortgage Bonds and lower include $5,865,000 of previously Deferred Energy Costs average short term borrowing rates. Interest rates on our representing fuel costs recovered under our energy clause. debt offerings are sensitive to the timing at which such ( financings are undertaken. Pollution control series of bonds ji and variable rate debt have been used to moderate the general upward pressures on interest rates. The embedded cost of our long term debt at December 31,1985, was 9.6%, compared to 9.2% in 1984 and 1983. ] L 17

MANAGEMENT'S DISCUSSION AND ANAIXSIS OF 3,t3yyc c,1y FINANCIAL CONDITION AND RESULTS OF OPERATION unman metnic courass ,e z 3 y; 6 d 1l ; The Allowance for Funds Used During Construction Total Sources and Costs of Energy 1 (AFDC) including both the Borrowed Funds portion. which is used to reduce interest charges, and th: Equity it t-Funds portion, shown under Other income, was $11.2 3i million in 1985 compared to $10.8 million in 1984 and wo==<r-w I _.t = _5 N 2 $9.2 million in 1983. The increases are due to increases in s i the average balances of construction work in progress. AFDC as a percent of net income for 1985,1984 and 1983 ,,, N NA I E

{

was 18.5%,17.0% and 13.9%, respectively. 4ss 22 5 20s 4s ss Inflation t Supplementary unaudited financial infonnation showing l' the estimated effects of inflation on the Company's 3, 3- _J > operations is shown on pages 34 through 36. These data, g 3i which should be viewed as estimates of the approximate [ $, T @ A: I [ effects of inflation, rather than as precise measures, N2 y demonstrate the need to control costs and the responsibility g 34 3, for regulatory agencies to provide timely and adequate rate relief. 2] Accounting Standards 3o h The Financial Accounting Standards Board has issued an .I ,a - %{\\ Exposure Draft of a Proposed Accounting Standard 2,o Plans Abandonments, and Disallowances of Plant Costs" 19 0 f entitled " Regulated Enterprises-Accounting for Phase-in wc j.gmh ; ms 62s nas 2:s 2s which is a proposed amendment to existing accounting standards for regulated enterprises, including clcctric utilities such as the Company. This proposal, if adopted in its present form, would modify current accounting stan-yg dards for the types of events enumerated. While the y 2" Company is still evaluating this proposal, it belieses its io operating results and fiaancial position will be impacted if '*T' ' . "A i \\ applied to certain past events such as the abandonment of e 60s 22s s 11 ope Creek Unit No. 2. The Company intends to submit wcitten comments to the Financial Accounting Standards Board concerning this 22 proposal. % 'N <3 qwU 3 'i"\\\\ 19 6 anunluummme 49s 325 los 2s 7s 0 1 2 3 4 5 6 7 in bullons of kilowatt-hours L Y a Coal e.Vasarel Gas ~ .%uclear e Intmhang, a Oil Y a 18

Uh l REPORT OF MANAGD1ENT AUDITORS' OPINION ~ r-- E 3 The management of Atlantic City Electric Company is g s responsible for the financial statements presented herein, p These financial statements were prepared by management gg one worio Trade cente< L in ecnformity with generally accepted accounting princi. cetded P#c Accour,tants New Ybrk, New York 10048 ples applicable to public utilities which are consistent in all n-material respects with the accounting prescribed by the To the Shareholders and the Board of Directors State cf New Jersey, Board of Public Utilities and the Federal Energy Regulatory Commission. In preparmg the of Atlantic City Electric Company: financial statements, management made informed judg-We have examined the balance sheets of Atlantic City 7 ments and estimates relating to events and transactions Electric Company as of December 31,1985 and 1984 and f being reported. the related statements of income and retained camings and The Company has established a system of internal of changes in financial position for each of the three years s accounting and financial controls and procedures designed in the period ended December 31,1985. Our examinations y to insure that the financial records reflect the transactions were made in accordance with generally accepted auditing of the Company and that assets are safeguarded. This standards and, accordingly, included such tests of the system is examined by management on a continuing basis accounting records and such other auditing procedures as for effectiveness and efficiency and is reviewed on a regular we considered necessary in the circumstances. basis by an internal audit staff that reports directly to the In our opinion, the accompanying financial statements 7 Audit Committee of the Board of Directors. present fairly the financial position of the Company at The financial statements have been examined by Deloitte December 31,1985 and 1984 and the results of its i Haskins & Sells, Certified Public Accountants. The operations and the changes in its financial position for each B auditors provide an objective, independent review as to of the three years in the period ended December 31,1985, t management's discharge of its responsibilities insofar as in conformity with generally accepted accounting princi-J they relate to the fairness of reported operating results and ples applied on a consistent basis. { financial condition. Their examination includes procedures believed by them to provide reasonable assurance that the financial statements are not misleading and includes a M% 4d review of the Company's system of internal accounting and financial controls and a test of transactions. 2 The Board of Directors has oversight responsibility for January 31,1986 determining that management has fulfilled its obligation in = the preparation of financial statements and the ongoing examination of the Company's system of internal account-ing controls. The Audit Committee, which is composed r solely of outside directors, meets regularly with manage-g ment, Deloitte Haskins & Sells and the internal audit staff to discuss accounting, auditing and financial reporting matters. The Audit Committee reviews the program of r audit work performed by the internal audit staff. To insure auditor independence, both Deloitte Haskins & Sells and = the internal audit staff have complete and free access to the ? Audit Committee. r-2 m F s E 19

E 6 ATt. ANTIC CITY p STATEMENT OF INCOME AND RETAINED EARNINGS cucinic cOMhNY = e h For the Yean F'+ded December 31 N !Thousanh of Dollars Ettept hr S%re Amounts t 1985 1984 1983 ~ [ Operating Rewnues-Electrie $579,733 $549,531 $511,142 i Operating Expenses: } Energy: Fuel 133,437 178,681 167,988 Interchange 17,272 (15,558) (1,697) Deferred Costs 5,865 (6,969) (15,055) Net Energy 156,574 156,154 151,236 Purchased Power-Exclusive of Fuel 42,636 28,905 12,435 ~ ~ Power Production-Operation and Maintenance 55,329 56,124 48,794 Other Operation and Maintenance 78.236 69,989 62,800 Depreciation and Amortization 41,985 38,318 38,383 t u New Jersey Gross Receipts and Franchise Taxes 71,100 60,769 55,324 [; Federal Income Tax Expense 36,308 41,227 48,728 L Other Taxes 8,159 6,654 6,340 Total Operating Expenses 490,327 458,140 424,N0 Operating Income 89,406 91,391 93,102 Other Income: 5 Allowance for Equity Funds Used During Construction 5,216 4,821 4,320 Miscellaneous Income-Net 1,502 1,424 833 Total Other Income 6,718 6,245 5,153 Income Before Interest Charges 96,124 97.636 98,255 Interest Charges: Interest on Long Term Debt 39,604 38,231 33,795 Interest on Short Term Debt 1.565 1,861 2,669 Other Interest Frpenz 416 2N $35 Total Interest Charges 41,585 40,296 36,999 Allowance for Borrowed Funds Used During Construction 15,980) (5,937) (4,8%) Net Interest Charges 35,605 34,359 32,103 6-Net Income 60,519 63,277 66,152 Retained Earnings at Beginning of Year 161,629 148,454 128,825 [ y 222,14M 211.731 194,977 7 Dividends Declared: Cumulative Preferred Stock 6,282 6,949 7,171 Common Stock 46,220 43,153 39,352 7 Total Dividends Declared 52,502 50,102 46,523 Retained Earnings at End of Year $169.646 $161.629 $148.454 = r Earnings for Common Stock: L Net Income $ 60,519 $ 63,277 $ 66,152 Less Preferred Dividend Requirements 6,369 6,968 7,20] R Balance Available for Common Stock $ 54,150 $ 56.309 $ 58.951 Average Number of Shares of Common Stock Outstanding (in thousands) 1 N.069 17.581 16.923 { Per Common Share: Earnings $ 3.00 3.20 3.48 Dividends Declared 5 2.555 5 2.45 2.32 E Dividends Paid $ 2.53 2.42 5 2.30 The accompanying Nues to Financial Statements are an mtegral part of these statements. m ~~~ m 20 =__

STATEMENT OF CIIANGES IN FINANCIAL POSITION ERC R C -= l ~ For the lears Ended December 3I (Tn*ousands ofDonars) 1985 I984 1983 Source of Funds: 4 Fends fro'n Operations: Net inemne $ 60,519 $ 63,277 $ 66,152 Principal Non-Cash Chstges (Credits) to income: -Z Depreciation and Amortiration 41,985 38,318 38,383 Allowance for Funds Used During Construction (11,196) (10,758) (9,216) e Deferred Federal income Taxes-Net 16,865 20,304 18,359 investment Tax Cr-dit Adjustments-Net 7,261 2,765 6,114 l Other-Net 738 264 1,353 Total Funds from Operations 116,172 114,170 121,145 Funds from Outside Sources: Long Term Debt 70,000 42,200 50,000 Pollution Control Funds (Held) Released by Trustees 7,718 (5,539) 7,885 Subtotal 77,718 36,661 57,885 Sale of Common Stock 11,515 12,487 15.060 Total Funds from Outside Sources 89,233 49,148 72,945 Other-Net 1,802 (2,517) (1,978) Total Source of Funds $207,207 5160,801 $192.112 Application of Funds: Gross Additions to Utility Plant $105,213 $ 95,388 $ 83,673 Allowance for Funds Used During Construction (11,1961 (10,758) (9.216) Net 94,017 84,630 74,457 Dividends on Preferred Stock 6,282 6,949 7,171 Dividends on Common Stock 46,220 43,153 39,352 Retirement and Maturity of Long Term Debt 10,000 26,000 50,300 Unrecowred Purchased Power Costs 14,680 6,530 11,450 Unrecovered Nuclear Fuel Advances 5,215 Conversion of Preferred Stock 353 267 711 Redemption of Preferred Stock II,850 2,100 2,100 increase (Decrease) in Working Capital

  • 18,590 (8,828) 6,57i Total Application of Funds

$207.207 $160,801 $192.112 increase (Decrease) in Working Capital

  • Cash and Cash items

$ 14,245 (751) $ (11,616) Accounts Receivable 6,247 6,576 6,858 Unbilled Revenue 3,076 (1,340) 5,671 Fuel (2,614) 10,657 (5,146) Materials and Supplies (569) 597 974 Nuclear Fuel Disposal Costs 8,481-(8,481) Deferred Energy Costs and Revenue (22,190) 6,967 26,626 Accounts Payable 630 (5,261) (1,647) Taxes Accrued 6,850 (3,923) (3,831) Deferred Taxes 1,136 (2,589) (7,557) Other 3,298 (l1.280) (3,761) Increase (Decrease) in Working Capital $ 18,590 $ (8,828) $ 6,571

  • Excludes short Term Debt, Notes and Current Marunties of Long Term Debt and Cumulanve Preferred stod Subject to Mandaiory Redemption.

The accompanying Notes to Financial statements are an integra: part of thew statements. .= 21 ?

I L llALANCE SHEET l f' I December 31 ~ l985 I984 (Thousanis ofDollars) Assets Electric Utility Plant: la Service: Production $ 553,253 $ 515,637 Transmission 200,517 19C,969 Distribution 345,177 326,466 General 63,590 52,987 Total 1,162,537 1,086,059 Less Accumulated Depreciation 330,895 300,037 Net 831,642 7A6,022 Construction Work in Progress 237,310 216,026 Land Held for Future Use 6,849 6,957 Nuclear Fuel 628 Electric Utility Plant-Net I,075,801 1,009,633 l Non Utility Property and lavestments 4,298 5,901 Fellation Control Construction Funds 2,871 11.076 l Current Assets: Cash and Working Funds 5,379 5,234 T3mporary Cash Investments 18,500 4,400 Accounts Receivable: Utility Service 42,899 36,276 Miscellaneous 8,386 8,662 Allowance for Doubtful Accounts (1,600) (I,500) Unbilled Revenues 26,401 23,325 Fuel (at average cost) 29,828 32,442 Materials and Supplies (at average cost) 17,223 17,792 Prepayments 8,382 5,066 Unrecovered Nuclear Fuel Disposal Costs 2,407 Deferred Energy Costs-Net 17,724 Total Current Assets 155,398 151,828 Deferred Debits: Property Abandonment Costs 19,878 17,029 Unrecovered Purchased Power Costs 32,660 17,980 Unamortized Debt Expense 5,220 4,343 Other 3,507 2,713 Total Deferred Debits 61,265 42,065 Total Assets $1,299,633 51,220,503 i The accompanying Notas to Financial Statements are an integral part of these statements. 22

ATt>NTIC CITY FifCTCIC UAf PANY December 3: (Nasands q'Doilan) 1985 1934 Liabihties and Capitalization Capitaitaation: Common Shareholders' Equity: Common Stock 5 54,771 $ 53,464 Premium on Capital Stock 229,287 219,078 Capital Stock Expense (1,607) (1,660) Retained Eamings 169,646 161,629 Total Common Shareholders' Equity 452,097 432,511 Cumulative Preferred Stock Not Subject to -Mandatory Redemption 41,353 41,706 Cumulative Preferred Stock Subject to Mandatory Redemption 34,100 49,550 Long Term Debt 437,462 412,462 Total Capitalization 965,012 936,229 Current Liabilities: Current Portion: Cumulative Preferred Stock Subject to Mandatory Redemption 5,050 1,450 Long Term Debt 45,000 10,000 Accounts Payable 28,755 29,385 Taxes Accrued 5,372 12,222 Interest Accrued 12,865 11,721 Dividends Declared 13,224 12,757 ! Customer Deposits 2,945 2,737 Deferred Taxes 17,747 18,883 Nuclear Fuel Disposal Costs 10,888 Deferred Energy Revenues-Net 4,466 Other 5,681 7,482 Total Current Liabilities 141,105 117,525 Deferred Credits: Deferred Investment Tax Credits 65,412 58,151 Deferred Income Taxes 120,464 103,599 Other 7,640 4,999 Total Deferred Credits 193,516 166,749 Commitments and Contingest Liabilities (Note 11) Total Liabilities and Capitalization $1,299,633 $1.220.503 23 r,i ___m,,._.___

NOTES TO FIN ANCI AL STATEMENTS NOTE 1. SIGNIFICANT ACCOUNTING Pol.lCIES Regulation Nuclear Wel 7 The accounting policies and rates of the Company are Enel costs associated with the Company's participation in subject to the regulations of the State of New Jersey, Board jomtly-owned nuclear genercring stations, including a of Pt.blic Utilities (BPU) and in certain respects to the provision for estimated spent fuel disposal costs, are Federal Energy Regulatory Commission (FERC). All charged to Fuel Expense based on the units of thermal significant accosmting policies and practices used in the energy produced. determination of rates are also used for financial reporting Federal Income Tases purposes. The financial statements are prepared on the The Company provides deferred Federal Income Taxes on basis of the Uniform System of Accounts presenbed all significant current transactions for which the timing of by FERC. reporting differs for book and tax purposes. Investment tax Operating Revenues credits, which are used to reduce current federal income Revenues are recognized when electric energy services are taxes, are deferred on the balance sheet and are recognized rendered, and include estimates for amounts unbilled at the in book income over the life of the related property. end of the period for energy used subsequent to the last Retirement Plan billing cycle. The Company has a noncontributory defined benefit Electric Utility Plant retirement plan covering all regular employees. The Property is stated at original cost. Generally the plant is Company's policy is to fund pension costs as accrued. subject to a first mortgage lien. The cost of property Costs of the plan are determined actuarially under the additions, including replacement of units of property and aggregate cost method. betterments. is capitalized. Included in certain additions is PNPaty Abandonment Costs an Allowance for Funds Used During Construction These costs consist principally of the Company,s (AFDC) which is defined in the applicable regulatory un m rtized investment in llope Creek Unit No. 2, a system of accounts as the cost during the period of nuclear gener ting unit which was cancelled in 1981, construction of borrowed funds used for construction ffshore nuclear units which were cancelled in 1978 and purposes and a reasonable rate on other funds when so unrec vered nuclear fuel advances associated with three used. AFDC has been calculated using a rate of 8.5% and uranium supply c ntracts which were terminated in 1985. was semi-annually compounded on Hope Creek Unit No. I The 11 ope Creek Unit No. 2 investment is being expenditures beginning in 1984. Such rates are less than am rtized over a 15-year pen d that began m, 1983. The e the maximum allowed by FERC. investment in the offshore nuclear units is bemg amortized Deferred Energy Costs and Revenues over a 20-year period that began in 1979. Unrecovered The Company has a Levelized Energy Clause which is nuclear fuel advances are being amortized, subject to BPU based on projected energy costs and includes a provision approval of their recovery, over 5 years, beginning in 1985. for prior period under or over recoveries. The recovery of The unamortized amounts are $12,765,000, $2,745,000, energy costs is made through levelized monthly charges and $4,172,000, respectively, at December 31,1985. over the period of projection. Any under or over recoveries Unrecowred Purchased Power Costs are deferred in balance sheet accounts as a current asset or g g gg current liability as appropriate. These deferrals are Company's purchased power agreements with Itnnsylvania recognized in the Statement of Income during the period in Power & Light Company, which are not being recovered which they are subsequently recovered through the clause. currently, but for which recovery has been specifically Depreciation provided in a levelized component of future rates. The Company provides for straight-line depreciation based Other on the estimated remaining life of transmission and Debt premium, discount and expenses are amortized over distribution property and, based on the estimated average the life of the related debt. Gams and losses relating to service life, for all other depreciable property. Depreciation reacquired debt are recognized currently. applicable to nuclear plant includes amounts provided for Certam 1984 and 1983 amounts have been reclassified to decommissioning. The overall composite rate of depre-e nf rm w th 1985 presentations. ciation was approximately 3.7% for 1985,3.6% for 1984 and 3.7% for 1983. Accumulated depreciation is charged with the cost of depreciable property retired together with removal costs less salvage and other recoveries. 24

ATLANTIC CITY ELECrRtc COMPANY NOTE 2. FEDERAL INCOME TAX Federal income tax expense is less than the amot nt computed by applying the statutory rate on book income sut ject to tax for the following reasons: Years Ended December 31 (Thousands ofDollars) 1985 1984 1983 Net Income $60,519 $ 63,277 $ 66,152 Federal Income Tax Expense (as below) 36,317 41,876 49,061 Book Income Subject to Tax $96,836 $105.153 $115.213 Income Tax Computed at the Statutory Rate $44,544 5 43,370 $ 52,998 Items for which deferred taxes are not provided: Difference between Tax and Book Depreciation 2,801 (250) I,896 Allowance for Funds Used During Construction (5,029) (4,832) (4,211) Capitalized Overheads (1,209) (1,221) (1,245) Izvestment Tax Credits (2,178) (1,842) (1,775) Other 12,612) 1,651 1,398 Total Federal Income Tax Expense $36,317 5 41.876 5 49.061 Components of Federal Income Tax Expense: Federal Income Taxes Currently Payable $12,956 $ 15.512 $ 15,072 Deferred Federal Income Taxes: Liberalized Depreciation 11,899 18,335 10,438 Unbilled Revenues 1,415 (616) 2,609 Unrecovered Purchased Power Costs 6,753 3,0M 5,267 Deferred Energy Costs (2,551) 3.205 4,948 Other (1,787) (1,034) 2,654 Deferred Investment Tax Credits 7,261 2,765 6,114 Employee Stock Ownership Plan Credits 371 705 1,959 Total Deferred Federal income Tax Expense 23,361 26,364 33,989 Totcl Federal Income Tax Expense 36,317 41,876 49,061 Less Federal Income Taxes included in Other Income 9 649 333 Federal Income Taxes Included in Operating Expenses $36,308 5 41,227 $ 48.728 In 1984, the Company filed amended federal income tax Service (IRS) and the Company's federal incomc tax retums for 1981 and 1982 reflecting the election of the liabilities for all years through 1976 have been determined Asset Guideline Repair Allowance. The effect of this and settled. The IRS has proposed certain deficiencies in election is included in Deferred Federal Income Taxes-tax for the pars 1977 through 1981. The Company has Liberalized Depreciation and Deferred Investment Tax protested the proposed deficiencies and is of the opinion Credits. that the final settlement of its federal income tax liabilities The Company purchased tax benefits on equipment for these years will not have a material adverse effect on its having an aggregate tax basis of approximately results of operations or financial position. $10,400,000 and $2,900,000 in 1983 and 1982, At December 31,1985 the cumulative amount of respectively. These tax benefits include depreciation and deferred income taxes which have not been provided on investment tax credits. timing differences, principally depreciation, amounted to The Company's federal income tax returns for 1981 and approximately $85,000,000 computed at the current prior years have been examined by the Internal Revenue statutory rate of 46%. 25

NOTES nomimo s N NOTE 3. RATE MATTERS 4 Base Rate Case Decisions I During the three year period ended December 31,1985 base 7 [ rate case dechions of the New krsey Board of Public Utilities f (BPU) are shewn below: bT n } Date of Amount Date Amaunt increase Test y j Pctition Requested Effectise Approved in Revenue Year 7 (mdlions) ( nillioru) ~1 January 1983 $ 30.8 October 7,1983 $ 24.5 4.5% September 50,1982 r October 1983 25.3 August 17,1984 December 31,1983 m October 1984 24.1 February 13. 1985 24.0 4.3% September 30,1982 [ The October 1983 increase relates to the first half of the decision by the BPU was affirmed by the New Jersey Z purchase of 125 megawatts of capacity and related energy Superior Court. The Company has filed a request with the from Pennsylvania Power & Light Company (PP&L) under New hrsey Supreme Court for review of the appellate r two Capacity and Energy Sales Agreements (the PP&L ruling. The Company cannot predict the final outcome of 2 Agreements), which commenced with the start of commer-the proceedings or the ultimate effect upon the Company. 4-cial operation of PP&L's Susquehanna Unit 1. The PP&L The Feb:uary 1985 increase relates to the second half of [ Agreements provide for the purchase by the Company of the Company's agreements with PP&L and commenced E capacity and energy from the Susquehanna Units through with the start of commercial operation of PP&L's Susqt:e-September 30,1991, and then from certain PP&L coal-hanna Unit 2. w m fired units through September 30, 2000. Through Sep-In April 1985 the Company filed a petition requesting a = tember 30,1991, the estimated costs to be incurred by the net increase of $91,850,000 to be implemented in two Company for purchases of capacity and associated energy phases. The first phase request, for $63,316,000,is related ~ from the Susquehanna Units will exceed the levelized costs to increased operations and maintenance costs and capital r to be recovered by the Company from its customers. Such investment, and is based upon a test year of September 30, unrecovered costs will be accumulated and deferred. Such 1985. The Company anticipates a decision on this request costs are included in the balance sheet as Unrecovered in the first quarter of 1986. The second phase request, for a Purchased Power Costs along with related provision for net increase of $28,534,000, relates to the Company's 5'a deferred taxes. The level of rates approved by the BPU is ownership in the Hope Creek Generc:ing Station, and designed to enable the Company to recover these deferred would become effective upon commercial operation of the costs and associated carrying charges during the balance of unit. m the 17-year period. The stipulation provided that any Energy Clauses difference between actual costs meurred by the Company The Company's energy clauses are reviewed annually by under the agreements and the estimated costs on which the the BPU and the most recent decisions are shown below: g increased rates were based will be recognized in future base rate proceedings if such costs are found to be Date of Amount Date Amount reasonable. The BPU order prescribes a revenue reduction Petition Requested Effective Approved formula in the event that both Susquehanna Units fail to m meet a combined minimum performance standard estab-October 1983 $ 28.1 January 20,1984 $ 28.1 I lished by the stipulation which could subject the Company, October 1984 25.4 February 13,1985 4.8 under the most adverse circumstances, to a revenue September 1985 (37.1) January 1,1986 (44.0) reduction not to exceed $15,000,000 per unit per year. In August 1984 the BPU denied the Company's October As part of the February 1985 energy clause approval, j-1983 request for the $25,300,000 increase in base rates. $1,639,000 of the costs associated with an extended outage The BPU, in denying rate :elief, made several adjustments of Salem Unit I during 1983 were excluded from recovery, o to the Company's requested rate base, test year operating and $4,298,000 of Desirred Energy Costs were reclassified income and rate of return, providing for an overall rate of to Unrecovered Purchased Power Costs. The Company also return of 11.35% and a return on common equity of agreed to defer $7,500,000 of Deferred Energy Costs, 5-- er 14.30%. Prior to the BPU decision, the Company had been relating to costs associated with certain nuclear unit O authorized to earn an overall rate of return of 11.7% and a outages in 1984. return on common equity of 15.0%. In November 1985, the m 26 'T

= ATLANTIC CITY LLECTRIC COMPANY I r [ As part of the January 1986 energy clause approval, the These costs represent the Company's pro rata impact of Company agreed to expense $3,975,000 of replacement BPU findings in proceedings related to other co-owners a E power costs associated with maintenance and repair with respect to replacement power costs associated with outages at Pexh Bottom Unit 2 and Salem Unit 2. Al:0, certain outages at the Salem Nuclear Generating Station the Company agreed toincrease the deferral of $7,500,000 (see Note 11). ..j t of Deferred Energy Costs to $12,179,000. g NOTE 4. RETIRE 31ENT BENEFITS The cost to the Company in providing a retirement plan for In addition to providing pension benefits, the Company its employees was $6,465,000, $7,555,000 and provides certain health care and life insurance benefits for $6,563,000 in 1985,1984 and 1933, respectively. Approx-retired employees. Substantially all of the Company's ? imately 80% of these costs were charged to operating employe:s may become eligible for those benetits if they 7 expense and the remaining 20%, which was associated reach noimal retirement age while working for the with construction labor, was charged to the cost of new Company. Those and similar benefits for actise employees j utility plant. are provided through insurance companies and other plan y The weighted average assumed rate of return used in providers whose premiums and related plan costs are based determining the actuarial present value of accumulated plan on the benefits paid during the year. The Company benefits was 8% for 1985 and 7% for 1984. The Company's recognizes the cost of providing those benefits by expens-l- Plan is in compliance with the Employee Retir: ment ing the annual insurance premiums and related plan costs. Income Security Act of 1974 as amended. The cost of providing those benefits for retirees totalled A comparison of xcumulated plan benefits and plan net $992,000 for 1985 and $845,000 for 1984. assets (including purchased annuity contract amounts) for In December 1985 the Financial Accounting Standards J the Company's Plan, as of the most recent actuarial Board adopted an accounting standard which will require valuation dates, is as follows: the Company to modify the financial accounting and reporting for its retirement plan beginning in 1987. The l'""*0 3 Company believes the adoption of this new standard will (Thousands of Dollars) 1985 1984 not have a matenal adverse effect on its results of Actuarial present value of accumu. operations or financial position. lated plan benefits: Vested $ 84,563 $ 86,758 L Nonvested 4,459 3,846 Total 5 89,022 $ 90.604 Net Assets available for benefits $121,778 $115.596 [ NOTE 5. JOINTISOWNED GENERATING STATIONS The Company participates with other utilities in the The amounts shown represent the Company's share of = construction and operation of several electric production each plant at December 31, and includes an allowance for facilities. funds used during construction. E b Energy Company's Electric Plant Construction Station Source Share in Service Work in Progress Generation E 1985 1984 19555 1984 1985 1984 (Thousands of Dollars) tMWil) Keystone Coal 2.47% $ 7,306 $ 6,893 976 798 258,436 237,233 Conemaugh Coal 3.83 12,355 11,684 210 332 400,790 423,653 E Peach Bottom Nuclear 7.51 91,010 77,292 2,490 8,873 420,469 738,447 h Salem Nuclear 7.41 160,977 154,806 2,605 4,751 1,039,420 395,037 Hope Creek Nuclear 5.00 203,656 162,676 R 27

NOTES tconnnuca k The operators of the Salem and Peach Bottom Nuclear recovery of these spent nuclear fuel disposal costs is Generating Stations entered into contracts with the United provided as part of the Company's energy clause. States Department of Energy for spent nuclear fuel The Company provides its own financing during the disposal. These contracts require the payment of a one-construction period for its share of the joint'y-owned plants i time fee related to the Company's ownership in:erest in the and includes its share of direct operations and main (enance Salem and Itach Bottom Stations, wnich was r.tade m June expenses in its Statement of Income. { 1985,as well as ongoing quanerly chargn. Current NOTE 6. INVESTMENT IN OPERATING SUllSIDIARY [ The Company's investment in Deepwater Operating Com-which the equity of the Company is fairly represented by pany (Deepwater), a wholly-owned subsidiary which its investment. The net production costs of Deepwater are [ operates generating and process steam units owned by the included in the Company's accounts classified as to 1-Company, was $3,291,000 at December 31,1985 and 1984. operation, maintenance and taxes. The principal asset of Deepwater is working capital in e t NOTE 7. COMMON STOCK i As of December 31,1985 and 1984, the Company's Common [ Stock included 25,000,000 authorized shares of Common Stock ($3 par value). Shares Issued and Outstanding: 1985 1984 1983 [ Beginning of Year 17,821,346 17,250,882 16,574,021 Dividend Reinvestment and Stock Purchase Plan 408,999 525,118 535,614 Employee Stock Ownership Plan 14,306 36,009 116,347 Conversion of Preferred Stock 12,358 9,337 24,900 End of year 18.257,009 17.821,346 17,250.882 At $3 Par Value $54,771,027 $53.464.038 $51,752.646 Premium on Capital Stock was credited in 1985 and 1984 Stock authorized for issuance pursuant to the Employee c with $10,209,000 and $10,799,000, respectively, repre-Stock Ownership Plan and 47,375 shares of Common senting the excess of proceeds over the par value of shares Stock reserved for the conversion of 5%% Convertible of Common Stock issued, sold and converted. At Series of Preferred Stock.f ] December 31,1985 there were 57,179 shares of Common e NOTE 8. CUMULATIVE PREFERRED STOCK 4 The Company has authorized 799,979 shares of upon issuance. In certain circumstances, if dividends on Cumulative Preferred Stock, $100 Par Value,2,000.000 issued Preferred Stock are in arrears, voting rights for the shares of No Par Preferred Stock and 3,000,000 shares of election of a majority of the Board of Directors becomes -1 Preference Stock, No Par Value. Unissued shares may, or operative. may not, possess mandatory redemption characteristics 4 t h 4 = 0 28

ATLANTIC CITY ELECTRIC CoMihNY NOTE 8(A). Cumulative Preferred Stock Not Subject To Mandatory Redemption: Decenser 31 Current $100 Par Value-Comulative and Non-1985 1984 Redemption participating shares issued and outstanding: (musa,Js </ Dollars) Price Per Share Series: 4% 77,000 Shares 5 7,700 $ 7,700 $105.50 t 4.10% 72,000 Shares 7,200 7,200 101.00 4.35 % 15.000 Shares 1,503 1,500 101.(A) f 4.35% 36,000 Shares 3,600 3,t>00 101.00 4/75% 50,000 Shares 5,000 5.000 101.00 t 5% 50,000 Shares 5,000 5,000 100.00 5%% Convertible Series: l 13,530 Shares (1985) 1,353 101.50 17,061 Shares (1984) 1,706 7.52 % 100,000 Shares 10,000 10,000 IN.89 Total $41,353 $4I.706 Cumulative Preferred Stock Not Subject to Mandatory The 5%% Convertible Series, of which 3,531 and 2,668 Redemption is redeemable solely at the option of the shares were converted in 1985 and 1984, respectively, is Company upon payment of the redemption price plus convertible, subject to adjustment in certain events, into accumulated and unpaid dividends to the date fixed for Common Stock at the rate of 3.5 shares of Common Stock tedemption. Premium on such Preferred Stock was for each share of Preferred. $93,000 at December 31,1985 and 1984. NOTE 8(B). Cumulative Preferred Stock Subject To Mandatory Redemption: Decenter 3i Current Refunding Par 1985 1984 Redemption Restricted Shares Issued and Outstanding: Value (Nusands c(Dottars) Price Per Share Prior to Series: 8.40% 100,000 Shares (1984) $100 $10,000 9.96% IM,000 Shares (1985) 100 $10,400 $106.06 120,000 Shares (1984) 12,000 $8.25 87,500 Shares (1985) None 8,750 106.56 November 1,1987 90,000 Shares (1984) 9,000 $9.45 200,000 Shares Nwe 20,000 20.000 IN.20 November 1,1989 39,150 $1,000 Less Portion due within one year 5,050 1,450 Total $34.100 549.550 On February 1,1985, t!.e Company redeemed 8,000 shares fund at a redemption price of $100 per share. At the option of the 8.40% Preferred Stock series through the operation of the Company, an additional 8,000 shares may be of the sinking fund and optional redemption provisions at a redeemed on any sinking fund date, without premium, up redemption price of $100 per share. On August 2,1985 the to 40,000 shares in the aggregate. The Company redeemed Company reacquired all of the then outstanding shares 16,000 shares at par in 1985 and 1984 through the (92,000) of this series, with an aggregate par value of operation of the sinking fund and optional redemption $9,200,000 for $9,177,000. provisions. As of December 31,1985 the Company had On August I of each year 8,000 shares of the 9.96% redeemed the maximum 40,000 shares pursuant to the Series must be redeemed through the operation of a sinking optional redemption without premium provisions. 29

_.~ NOTES <continuem c i- = On November I of each year,2,500 shares of the $8.25 shares of the 59.45 No Pat Preferred Stock Series must be No Par Preferred Stock Series must be redeemed through redeemed through the operation of a sinking fund at a the operation of a sinking fund at a redemption price of redemption price of $100 per share. At the option of the $100 per share. At the option of the Company, not more Company, not more than an additional 40,000 shares may than an additional 2,500 shares may be redeemed on any be redeemed on any sinking fund date, without premium, sinking fund date without premium. The Company up to 50,000 shares in the t,ggregate. redeemed 2,500 and 5,000 shares at par in 1985 and 1984, The annual minimum sinking fund prosisions of the respectively. above series aggegate $5,050,000 each year from 1986 ( On Novemter 1,1986, and annually thereafter,40,000 through 1990. E. [ NOTE 9, LONG TERN 1 DEBT December 31, i iThousamis of Dollarsb I985 I98$ First Mortgage Bonds: 3%4 Series due (March 1) 1985 $ 10,000 m 4%% Series due (January 1) 1987 $ 10,000 10,000 3%% Series due t April I) 1988 10,000 10,000 4%% Series due (April 1) 1989 2,775 2.775 4%% Series due (March 1) 1991 10,000 10,000 4%% Series due (July I) 1992 10,350 10,350 4%% Series due (March 1) 1993 9,540 9,540 F 11%% Series due (November 1) 1993 50,000 50,000 5%% Series due (February I) 1996 9,980 9,980 8%% Series due (September 1) 2000 19,000 19,(K)0 84 Series due (May 1) 2001 27,000 27,000 7%% Series due (April 1) 2002 20,000 20,000 ~ 7%% Series due (June 1) 2003 29,976 29,976 7%% Pollution Control Series due (January 1) 2005 6,500 6,500 6%% Pollution Control Series due (December I) 2006 2,500 2,500 12%% Series due (January I) 2010 63,750 63,750 1 11%% Pollution Control Series due (May I) 2011 39,000 39,000 10%% Pollution Control Series B due (July 15) 2012 850 850 Adjustable Rate Pollution Control Series A due (April 15) 2014 (7%% Until 4-15-87) 18,200 18,200 10%% Pollution Control Series C due (July 15) 2014 23,150 23,150 11%% Series due (October I) 2015 70,000 Total 432,571 372,571 Debentures: 5%% Sinking Fund Debentures due (February 1) 1996 2,267 2,267 7%% Sinking Fund Debentures due (May I) 1998 2,619 2,619 Total 4,886 4,886 { Notes-Variable Rate Notes due ( April 30) 1986 45,000 45,(XN) Unamortized Premium and Discount-Net 5 5 Total 482,462 422,462 Less Long Term Debt due within one year 45,000 10,000 Total $437,462 5412.462 m 30 m

~ ~ ~ - ' ArLANTIC cIrY I.I.LCIRIC coMMNY ^ Deposits in sinking funds for retirement of debentures are December 31,1985 the Company had reacquired and required on February I of each year through 1995 for the cancelled $11,250,000 principal amount of the 12%% 5%% debentures, and on hiay 1 of each year through 1997 Series which may be applied toward its requirements for for the 7%% debentures in amounts in each case sufficient 1986 and subsequent periods. On January 1,1986 the to redeem $100,000 principal amount plus, at the election Company redeemed an additional $6,000,000 of thew S of the Company. up to an additional $100,000 principal bonds through the operation of the sinking fund and amount in each ear. At December 31,1985 the Company optional redemption provisions. Current sinking fund 3 had reacquired and cancelled $1,233,000 and $1,081,000 requirements of $750,000 in connection with certain First ( principal amount of the 5%% and 7%% debentures, Stortgage Bonds outstaading may be satisfied by certifica-t respectively, toward its requirements for 1986 and subse-tion of property additions as provided for in the related quent periods. mortgage indentures. E"- A sinking fund requiremer.t of $3,000,000 each year The aggregate amount of debt maturities, in addition to reiztive to the 12%% First htortgage Bonds begins in 1986 sinking fund requirements, of all long term debt outstand-aI and continues through 2009. The Company abo has the ing at December 31,1985 are $45,000,000 in 1986, option to redeem an additional $3,000,000 principal $10,000,000 in 1987 and 1988, and $2.775,000 in 1989, = amount on any sinking fund date without premium. At No maturities of long term debt occur in 1990. I g NOTE 10. SIIORT TER51 DEHT AND COMPENSATING HALANCES As of December 31,1985, the Company had bank lines of ments. With respect to the remaining available credit lines, credit available for use of $115,000,000. The Company is the Company pays commitment fees (generally %%) for Y required, with respect to $15,000,000 of these credit lines, which charges amounted to $235,000 for 1985, $242,000 1 to maintain average compensating balances of $487,500. for 1984 and $269,000 for 1983. The Company had no y These compensating balances are maintained in demand outstanding short term debt at December 31,1985,1984 or = deposits which are not legally restricted. The Company is 1983. Additional information regarding short term debt in compliance with such compensating balance arrange-follows: (Thousands of Dollars) I985 I984 1983 For the year ended-Maximum amount of total short term debt at any month-end: Commercial Paper $55,700 $35,000 $50,000 Notes Payable to Banks $10,000 5 7,000 Average amount of short term debt (based on daily outstanding balances): Commercial Paper $19,905 $17,519 $23,954 Notes Payable to Banks $ 4,239 $ 301 $ 2,567 Weighted daily average interest rates on short term debt: y Commercial Paper 7.9 % 10.6% 9.0% 6 Notes Payable to Banks 8.19 9.2% 9.39 b w I c h E =- 31 Y

NOTES wonnnuedi NOTE 11. CO31311 TALENTS AND CONTINGENCIES Construction Program construction ad approximately 93% complete.is to < tart-Total cash construction expenditures for 1986 are estimated up, and scheduled for completion in the secand half of at approximately $86,082,000, which includes 1986. The cost containment agreement established a $18,796,000 forjointly-owned facilities. Cu* rent commit-targeted in-service date of December 1986 and a targeted ments for the construction of major production and cost of $3.7952 billion, and provides for penalties for transmission facilities amount to approximately overruns based on the final cost of the unit. The $12,380,000 of which it is estimated approximately Company's portion of the criginally targeted cost is $8,905,000 will be expended in 1986. These amounts approximately $198.1 million, including the Allowance for exclude allowance for f mds used during construction and Funds Used During Construction ( AFDC). Ilowever, the customer contributions. targeted amount may be sutject to adjustme it on account Nuclear Insurance Programs f changes in the regulatory treatment of Construction The Company is a member of certain insurance programs Work In Progress and AFDC, as well as chanFes due to which provide coverage for property damage to members, certain extrao.dinary events not contemplated by the nuclear generating plants. Facilities at the Peach Bottom parties in 1981 At December 31,1935 the Company,s and Salem Stations are insured against property damage e sts associated with llope Creek amount to approximately losses up to $1.1 billion per site under these programs. $204 million and the Company has recently been advised The Company is also a member of an insurance program by PSE&G that the estimated overall cost for flope Creek which provides insurance coverage for the cost of replace-is expected to be between $4.15 and $4.30 billion. The ment power during prolonged outaces of nuclear units Company cannot predict the fmal cost of the llope Creek caused by certain specific conditioils. Under the property un t, N date of commencena d commercial openn, and replacement power insurance programs, the Company r the ultimate effects thereof on its operations. Ilowever, could be assessed retrospective premiums in the event the hian gement believes the final outcome of this matter will insurers' losses exceed their reserves. As of December 31, n t have a material adverse effect on the Company's I"*"Ci"I P 'i'i "" 1985, the maximum amount of retrospective premiums the Company could be assessed for losses during the current Nuclear Plant Outages policy year was $8.2 million under these programs. The BPU has deferred consideration of $12,179,000 of In the event of a nuclear incident at any of the facilities replacement power costs associated with certain nuclear covered by the federal government's third-party liability outages relating to generator failures at Salem Station indemnification program, the Company could be assessed pending the development of the record on such outages in up to S2.1 million per incident, but not more than the next energy clause adjustment proceeding of the $4.2 mi: lion in a calendar year, in the event more than one operator of the station, Public Service Electric & Gas iwident is experienced. Company. The co-owners of the station have instituted Purchase Power Agreements litigation against the supplier of the affected equipment. The Company has an arrangement for a limited term The Company cannot predict the outcome of this matter or purchase of energy and capacity from Allegheny Power its ultimate effect on the Company. System which was effective for 1985 and subject to annual Nuclear Fuel extensions. The Company also has agreements to purchase The Company's contractual liability to purchase nuclear certain capacity and energy output from units of Pennsyl-fuel from Pearl Fuel Corporation for Salem and Hope vania Power & Light Company. Creek Generating Stations as of December 31,1985 was llope Creek Cost Containment ppr xim tely $31,000,000. Under certain conditions of The Company owns 5% of the the Hope Creek Nuclear termination, the Company will be required to purchase all Generating Station, currently under construction by Public nuclear fuel then existing at a price which will allow Pearl Service Electric & Gas Company (PSE&G), which owns Fuel Corporation to recover its net investment costs. the other 95% of the unit. In July 1983 the BPU approved Nuclear fuel requirements for Peach Bottom Generating an Agreement between the Company, PSE&G, the New Station are being provided by the operating company Jersey Department of Energy and the New Jersey Depart-through a fuel purchase contract. The Company is ment of the Public Advocate which establishes a program resp nsible for payment of its share of fuel consumed and to contain the continuing construction costs of flope related operating costs and interest expense. These costs Creek, which is currently 99% complete as to physical are included in fuel expense. 32

AT1. ANTIC CITY ELECTRIC COMPANY NOTE 12. LEASES The Company has certain obligations which, in accordance not have a material effect on assets or liabilities, and would with criteria established by the Financial Accounting not affect income, since the total amortization of Lhe leased Standards Board (FASB), are capital leases, but are assets and the interest on the lease obligation would equal accounted for as operating leases in accordance with the the rental expense currently allowed for ratemaking pur-ratemaking treatment. An accounting standard issued by poses. Rentals charged to operating expenses for the years the FASB requires that the Company record such leases on ended December 31 were as follows: its balance sheet by 1987. Recording capital leases would (Thousands ofDollars) I985 1984 I983 Nuclear Fuel $11,800 $ 8.457 $ 6,364 'Aer 4,511 4,759 5.268 Total $16,311 $13.216 $11.632 The future minimum rental commitments under all non-cancelable lease agreements are not significant. i 1 NOTE 13. SUPPLEMENTARY INCOME STATE 31ENT INFOR3t ATION Operating expenses include maintenance costs of 1984 and 1983 respectively. Charges to income for royalties $43,378,000, $39,247,000 and $35,066,000 for 1985, and advertising are less than 1% of gross revenue. l NOTE 14. QUARTERLY FINANCIAL RESULTS (UNAUDITED) Quarterly financial data, reflecting all adjustments necessary in the opinion of the Cornpany for a fair presentation of such amounts, are as follows: Operating Operating Net Earnings For Earnings Quarter Revenues Income Income Common Stock Per Share (Thousands of Dollars Except PVr Share Amountsp 1985 ist $140,491 $19,104 $12,658 $10,%2 $.61 2nd 134,214 15,683 8,866 7,176 40 3rd I80,411 35,630 27,815 26,283 1.45 4th 124,617 18,989 11,180 9,729 .53 $579,733 $89.406 $60.519 $54.150 $3.00m 1984 ist $133,649 $21,527 $15,360 $13,588 $.78 2nd 125,073 18,448 11.431 9,660 .55 3rd 163,929 36,275 28,330 26,586 1.51 4th 126,880 15,141 8,156 6,475 .36 $549.531 $91.391 $63.277 $56.309 $3.20 (1)The individual quarters may not add to the total due to the increasing average number of Common shares outstanding at the end of emh quarter. The revenues of the Company are subject to seasonal fluctuations due to increased sales and higher residential rates during the summer months. 33

SUPPLEMENTARY INFORMATION CONCERNING THE EFFECTS OF CHANGING PRICES axu pintn The following supplementary information about the effects certain recommendations it believes would simplify both of changing prices is presented in accortlance with the presentation and understanding of the effects of standards issued by the Financial Accounting Standards inflation on a business enterprise. The effects of changing Board (FASB). The Company cautions readers on using prices are calculated by adjusting the financial data for this information to draw any conclusions concerning the changes in specific prices of the components of the Company or its operations, since the Company's rates are Company's utility plant by applying the Handy-Whitman subject to regulation. Additionally, this information is still Index of Public Utility Construction Costs to historical cost considered experimental in nature and under continuing by vintage years, reflecting the current cost of replacing review by the FASB. The Company has expressed its views resources actually used in the Company's operations. to the FASB concerning these disclosures and has made STATEMENT OF INCOME FROM CONTINUING OPERATIONS ADJUSTED FOR CH ANGING PRICES (In Average 1985 Dollars) Results of Operations: (Thousands gDollars) Year Ended December 31,1985 At Current llistorical Cost Operating Revenues $579,733 5579,733 Operating Expenses: Operation and Maintenance Espenses 412,034 412,034 Depreciation and Amortization Expense 41,985 89,273 Federal Income Tax Expense 36,308 36,308 Other 28,887 28,887 income from Continuing Operations 5 60.519 $ 13.231 34

ATLANTIC CITY I1.I.cTRIC COMPANY Depreciation and amortization expense expressed in current Net Utility Plant Costs Recoverable cost amount; were determined using the rates and methods Under rate making prescribed by the regulatory commis-used for computing book depreciation and amortization sions to w hich the Company is subject, only the historical applied to utility plant balances re-expressed in terms of cost of utility plant is recoverable in revenues as deprecia-current costs. tion. Therefore, the excess of the cost of utility plant stated Operating revenues and expenses, other than deprecia-in terms of cunent cost over the historical cost of plant is tion and amortization, were incurred ratably during the not presently recoverable. Due to this feature, the value of year and are, in effect, stated in average 1985 dollars. utility plant and its effect on income from continuing Income taxes were not adjusted because the present tax operations adjusted for changing prices must be considered laws do not allow a deduction for depreciation and in terms of its net recoverable cost which is historical cost. amortization adjusted for the impact of inflation. There-While the rate n'aking process gives no recognition to the fore, the Company's effective tax rate rises from 37.59 current cost of :rplacing utility plant, based on past under the historical cost basis to 73.3% under current cost practices the Company believes it will be allowed to earn a basis. return on the increased cost of its act investment w hen This supplementary information should not be used to replacement of fxilities actually occurs. assess the probability of future cash flows when existing utility plant is replaced. The estimates do not retlect the Current Year Decline in Purchasing Iber of Net effects of the regulatory process nor the specific plans of Am unts Owed the Company for the replacement or modernization of The current year decline in purchasing power of net utility plant. A meaningful estimate of the estimated level amounts owed was $28,980,000. During a period of of future capital expenditures is set forth on page 15 of the inflation, holders of monetary assets such as cash and annual report. receivables suffer a loss of gencral purchasing power while Current Year Effect of Increased Price Le els holders of monetary liabilities, generally long term debt, experience a gain because debt will be repaid in dollars (h5 ands ofoottars; having less purchasing power. The Company's gain from Increase in General Price Levels on the decline in purchasing power of its net amounts owed is Utility Plant Held $63.611 Primarily attributable to the substantial amount of debt and Increases in Specific Prices cumulative preferred stock subject to mandatory redemp-on Utihty Plant Held 29.406 tion which has been used to finance utility plant. This gain, however, should not be considered as providing funds = Excess of increase in General Price Levels Over to the Company, since the Company is limited under rate Increases in Specific Prices $34.105 making procedure to the recovery only of its embedded cost of debt. At December 31,1985 the cost of utility plant, net of accumulated depreciation was $1,835,324,000 on a current cost basis, while historical cost was $1,075,801,000. The accumulated provision for depreciation and amortization under the current cost method wa3 estimated for each major class of utility plant (production, transmission, distribution and general plant) by multiplying the respec-tive cost data by a percentage representing the expired life of existing facilities of each class at December 31,1985. Fuel inventories. the cost of fossil fuels used in generation, have not been restated from their historical cost. New Jersey regulation controls fuel costs, through the operation of a levelized energy clause, such that recovery is ultimately limited to actual cost. For this reason fuel inventories are effectively monetary assets. 35

r FIVE-YEAR COMPARISON OF SELECTED FINANCIAL DATA INCLUDING UNAUDITED SUPPLEMENTARY DATA ADJUSTED FOR CilANGING PRICES Euc Iticco$PN ^' Thousands of Dollars Except Per Share Amounts-Current Cost Amounts Expressed in 1981 Dollars Years Ended December 31 j 1985 1984 1983 1982 1981 Operating Revenue -historical $ 579,733 $ 549,531 $ 517,142 $ 444,178 $ 469,683 -trended in 1981 dollars 490,128 481,016 471,925 418,231 469,683 Income from Continuing Operations -historical $ 60,519 $ 63,277 $ 66.152 $ 49,055 5 46,988 -at current cust (a) i1,186 15,740 19,846 3,805 7,648 Income from Continuing Operations per Share of Common Stock (b) -historical 3.00 3.20 3.48 2.76 5 3.03 -at current cost .32 .55 .79 (.21) .01 Effective income Tax Rate -historical 37.5 % 39.8 % 42.6% 35.5 % 36.8% -current cost basis 76.5 82.3 94.7 112.7 102.3 Excess ofincreases in General Price Levels Over increases in Specific Prices (a) $ 28,918 $ 49,792 290 $ (6.724) $ (25,204) Decline in Purchasing Power of Amounts Owed (a) $ 24,501 $ 26,795 16,948 5 20,401 5 39,572 Net Assets at Year End -historical 5 493,450 $ 474,217 5 448,894 5 414,834 $ 338,846 -trended in average 1981 dollars 410,179 408.270 402,895 386.460 327,892 Net Income as a Percent of Operating Revenue (b) -historical 10.44 % 11.51 % 12.79 % 11.04 % 10.00% -trended in 1981 dollars H.83 10.07 11.67 10.40 10.00 Earned Rate of Return on Shareholders' Equity -historical 11.98 % 13.02 % 14.49 % 11.20 % 12.21% -trended in 1981 dollars 10.13 11.10 13.22 10.55 12.21 Total Assets at Year End -historical $1,299,633 $1,220,503 $1,139,978 $1,077,969 $1,013,789 long Term Debt and Cumulative Preferred Stock Subject to Mandatory Redemption -historical $ 521,612 $ 473,462 $ 459,366 $ 462,470 $ 447,389 Dividends Declared per Share of Common Stock -historical 2.555 $ 2.45 2.32 5 2.24 2.08 -trended in 1981 dollars 2.16 2.14 2.12 2.11 2.08 Market Price per Common Share at Year End -historical 28.50 $ 24.13 23.25 5 20.75 17.25 -trended in 1981 dollars 24.48 21.47 21.56 19.98 17.25 Average Consumer Price Inder 322.2 311.2 298.5 289.3 272.4 Certain comparative per share data trended in 1985 dollars (without adjustment of earnings for the pro forma effects of i:flation on depreciation amounts) are as follows: 1985 1984 1983 1982 1981 Earnings (b) 3.00 3.31 5 3.76 3.07 3.58 Dividends Declared 2.555 2.54 2.50 2.49 2.46 Market Price (Year End) 28.50 24.99 25.10 23.26 20.08 (a) These anmunts will differ from those shoen in Statement of income From Contmums Operamns Adjusted kw Changing Pnces because a different base year has been nsed in the data presented above (1981) and in the changmg pnce informaton (1985 p in order to illustrate the impact of changmg pnces in ahernahve forms. (b) Income from Continuing Operations. Wt f aceme and tarn.ngs Per share data kr 1982 include the cumulative effect of a change in accounung nrthod. 36

L u INVESTOR INFOR51ATION accEi$EoEE e Where should I send inquiries concerning my investment in Is additional information about the Company available? Atlantic City Electric Companyi The annual report to the Securities and Exchange Commis-The Company staffs an Investor Records Department sion on Form 10-K and other reports containing financial which serses as recordkeeping agent, dividend disbursing data are available to shareholders. Specific requests should agent and also as Transfer Agent for Common and be addressed to hir. ht. R. hieyer, Secretary, or the Preferred Stocks. Correspondence concerning such matters Investor Records Department, at the address shown abose. as the replacement of dividend checks or stock certificates, address changes, transfer of Common and Preferred Stock Who is the trustee and interest paying agent for the certificates, Dividend Reinvestment and Stock Purchase Company's Bonds and Debentures? t-Plan inquiries or any general information about the First hfortgage Bond recordkeeping and interest disbursing Company should be addressed to: are performed by Irving Trust Company, One %hli Street, m New York, New York 10015. Debenture services are Atlantic City Electric Company 7 Investor Records Department performed by First Fidelity Bank, N.A.,765 Broad Street, P.O. Box 1334,1199 Black Horse Pike Newark, New Jersey 07101. a Pleasantville, New Jersey 08232 When are dividends paid? Telephone (609) 645-4506 or (609) 645-4507 The proposed record dates and payable dates for upcoming + Afr. hi. R. hieyer, Secretary, is the Corporate Officer dividends on Common Stock are as follows: responsible for all investor services-hir. R. E. hioeller is Record Dates Payable Dates hianager of Investor Sernces and hirs. hl. T. Lindsay is Supervisor of Shareholder Recordkeeping. hlarch 20,1986 April 15,1986 June 19,1986 July 15,1986 Does the Company have a Dividend Reinnstment and September 18, 1986 October 15, 1986 Stock Purchase Plan? December 18, 1986 January 15,1987 Yes. The Plan allows shareholders and employees t p automatically inwst their cash dividends and/or optional The followin8 table indicates dividends Paid in 1985 and 1984 n Common Stock: cash payments in shares of the Company's Common Stock. Holders of record of Common Stock interested in enrolling 1985 1984 in the Plan should contact the Investor Records Depart-ment. See our address above. First Quarter $.62 $.59 Second Quarter $.62 $.59 0 Where is the Company stock listed? Third Quarter $.645 $.62 Common Stock and 5%% Cumulative Convertible Pre-Fourth Quarter 5.645 i.62 ferred Stock are listed on the New York Stock Exchange. The Company's Common Stock is also listed on the Pacific Annual Total $2.53 $2.42 and Philadelphia Stock Exchanges. The trading symbol of the Company's Common Stock is ATE; however, news-Dividends paid on Common Stock in 1985 and 1984 paper listings generally use AtCyEl. were fully taxable. I The high and low sales prices of the Common Stock as t reported in the Wall Street Journal as New York Stock Exchange-Composite Transactions for the periods indi-cated were as follows: 1985 1984 High Low High Low E First Quarter 25 % 23 % 23 % 20 % Second Quarter 29 % 24 % 21 % 19 % Third Quarter 29 % 25 % 23 20 % Fourth Quarter 29 % 26 25 22 % E W 37

, ~,,,,,.,, _ _ STATISTICAL REVIEW 1985-1975 1985 1984 1983 1982 Facilities for Service Total Utility Plant (Thousands) $1,406,696 $1,309,670 $1,226,165 $1,153,321 Gross Additions to Utility Plant (Thousands) $ 105,213 $ 95,388 $ 83,673 $ 126,893 Pole Miles of Transmission and Distribution Lines 6,977 6,958 6,925 6,918 Generating Capacity (Kilowatts) (a) (b) 1,605,700 1,594,200 1,594,200 1,531,200 Maximum Utility System Demand-kw I,432,000 1,298,800 1,346,700 1,264,200 Capacity Resent at Time of Peak (% of Instal. Gen.) 10.8 % 18.5 % 15.5 % 17.4 % Energy Supply (Thouunds of kwh): Net Generation 5,817,254 6,237,724 5,913,196 5,676,118 Purchased and Interchanged-Net 1,049,393 393,175 579,488 466,667 Total System Load 6,866,647 6,630,899 6,492,684 6,142,785 Electric Sales (Thousands of kwh) Residential 2,638,121 2,646,813 2,545,351 2,415,292 Commercial 2,298,895 2,150,464 2,019,468 1,894,535 Industrial 1,204,971 1,197,392 1,225,637 1,218.520 All Others 57,685 59,122 60,978 6?,770 Total 6,199,672 6,053,791 5,851,434 5,592.117 Residential Electric Service (Average per Customer) Amount of Electricity used during the year (kwh) 7,643 7,866 7,715 7,444 Revenue for a year's service $ 778.77 5 783.47 5 735.66 5 644.77 Revenue per Kilowatt-hour 10.19c 9.96c 9.54e 8.66e Customer Data (Average) Residential With Electric Heating 68,87i 65,261 62,272 59,319 Residential Without E:ectric Heating 276,305 271,207 267,642 265.124 Total Residential 345,176 336,468 329,914 324,443 Commercial 44,256 43,615 43,152 42,885 Industrial 1,020 1,015 1,021 1,018 Other 554 544 549 627 Total Customers 391,006 381,642 374,636 368,973 Total Service Locations 417,625 407,277 398,526 391,989 Population Served 1,142,000 1,112,000 1,092,000 1,069,000 Financial Data (Thousands of Dollars) Energy Reveaues: Residential $ 268,814 $ 263,612 $ 242,705 $ 209,191 Commercial 209,880 190,435 175,520 154,792 Industrial 80,392 79,123 76,109 71,255 All Others 10,315 10,405 10,133 9.255 Total Energy Revenues 569,401 543,575 504,467 444,493 Unbilled Revenues-Net 3,076 (1,340) 5,671 (6,795) Other Electric Revenue 7,256 7,296 7,0(M 6,480 Total $ 579.733 $ 549,531 $ 517,142 $ 444,178 Investor Information Earnings per Average Common Share 3.00 3.20 3.48 2.76(c) Average Number of Shares Outstanding (in Thousands) 18,069 17,581 16,923 15,116 Dividends Paid on Common Stock 2.53 2.42 2.30 2.20 Dividend Payout Ratio 84'Tr 76% 66 % 80% Book Value Per Share (Year End) 24.76 24.27 23.58 5 22.45 Price Earnings Ratio (Year End) 10 8 7 8 Times Fixed Charges Earned (before income taxes) 3.33 3.61 4.11 2.27(c) Shareholders and Employees (Year End) Common Shareholders 48,635 47,446 48,299 48,790 Employees 2,099 2,012 1,995 2,022 (a) Excludes capacity allocated to a large industrial customer (b) Includes rnit purchase of capacity under contracts with Pennsylvania Power & Light Company (commencing in 1983) and Delmarva Pbwer & Light Company (from 1940 through 1984L (c) Earnings calculation includes the cumulative effect of an accounting change. Financial rarm is computed culuding the cumulative effect. 38

ATLANTIC CITY ELECTRIC COMPANY 1981 1980 1979 1978 1977 1976 1975 $1,064,928 $ 962,052 $ 870,075 $ 802,473 $ 753,269 $ 710,343 $ 675,617 $ 123,318 $ 97,330 $ 72,773 $ 58,073 $ 48,733 $ 41,702 $ 46,745 6,910 6,879 6,831 6,786 6.735 6,696 6,645 1,524,600 1,431,600 1,384,700 1,414,700 1,414,700 1,334,700 1,334,700 1,263,800 1,261,700 1,192,600 1,177,400 1,176,000 1,030,300 1,069,400 17.1% 11.9 % 13.9 % 16.7 % 16.9 % 22.8 % 19.9 % 5,302,023 5,533,178 5,397,338 5,625,988 5,293,019 4,918,906 4,715,357 946,241 643,106 464,143 130,037 224,169 324,196 190,852 6.248,264 6,176,284 5,861,481 5,756,025 5,517,188 5,243,102 4,906,209 2,480,225 2,514,738 2,411,732 2,377,202 2,221,250 2,070,766 1,938,724 1,849,863 1,769,208 1,580,384 1,586,097 1,478,559 1,392,029 1,346,216 1,279,724 1,286,205 1,255,304 1,250,636 1,220,260 1,143,170 1,036,755 65,555 63,753 60,799 60,705 58,866 57,667 56,465 5,675,367 5,633,9N 5,308,219 5,274,M0 4,978,935 4,663,632 4,378,160 7,751 8,003 7,849 7,951 7,653 7,320 7,0I8 5 670.66 5 536.99 5 439.92 $ 406.18 5 378.36 5 349.64 5 329.25 8.65e 6.71e 5.61e 5.IIe 4.94c 4.78e 4.69e I $6,10r. 52,225 48,339 44,387 40,318 37,581 35,235 263,904 261,988 258,941 254,592 749,927 245,296 241,019 320,004 314,213 307,280 298,979 290,245 282,877 276,254 43,219 43,267 43,219 42,672 42,033 41,170 40,608 1,032 1,041 1,048 1,034 1,047 1,071 1,100 634 654 667 673 676 681 684 364,889 359,175 352,214 343,358 334,001 325,799 318,646 386,046 379,242 371,362 362.131 352,205 343,147 336,105 1,056,000 1,037,000 1,015,000 990,000 961,000 937,000 915,000 $ 214,614 $ 168,733 $ 135,178 $ 121,440 $ 109,818 98,9N $ 90,956 156,624 115,973 88,819 80,539 73,354 66,354 63.544 82,908 60,512 47,590 42,185 40,885 36,438 34,974 9,700 7,836 6,624 5,973 5,630 5,406 4,881 463,846 353,054 278,211 250,137 229,687 207,102 194,355 5,837 5,337 4,895 4,921 J 508 4,925 4.724 5 469,683 $ 358,391 $ 283,106 5 255,058 $ 234,995 $ 212,027 $ 199,079 3.03 2.62 2.36 2.21 5 2.06 2.60 2.41 13,034 12,372 11,980 10,791 10,630 9.747 9,490 2.04 1.90 1.765 1.67 1.62 1.56 1.51 67 % 73 % 75 % 76 % 79% 60 % 63 % 22.40 22.22 5 21.63 21.27 5 20.71 5 20.25 19.34 6 6 7 8 11 9 7 2.84 3.03 3.62 3.62

3. I 7 3.14 2.88 48,424 47,762 48,194 44,490 43,826 42,516 39,232 2,035 1,968 1,903 I.797 i,739 1,714 1,741 This Annual Report has been prepared for the purpose of providing general and swintual informanon concerning the Company and not in connectuin mih any sale. offer k,r sale or sohcitation of an offer to buy any securities.

39

BOARD OF DIRECTORS ELEANOR S. DANIEL DIRECTOR 3+- p f+* &+ Self.employd, Vice President and director of COMMITTEES + sewral realestate corporations y 4 4 y m 4Y +Y I

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[O RICHARD M. DICKE 3 o+ + 4 Counselor.at. law, partner of the lawfrm of Simpson Thacher & Bartlett Audit CX JOHN D. FEEHAN Chairman of the Board of the Company Corporate I E M JOS. MICHAEL GALVIN, JR. Development President and Chief Executin Offcer of Salem County Memorial Hospital g,,,g,, GERALD A. HALE Operations M gg President of HHH, Inc., an innstment and & Research management company MATTHEW HOLDEN, JR. Finance r M MM Professor of Gowrnment and Foreign Affairs, Uninrsity of birginia E. DOUGLAS HUGGARD Pension & m President and Chief Executin Offcer Insurance ~- of the Company Personnel M MM M e ir Forme utin Yke President, RCA Corporation MADELINE H. McWHINNEY President of Dale, Elliott & Company, a ,lf,',I, M M g management ecnsultingfim providing g,y,ggna, servkes to the bankingindustry JOHN M. MINER t=;33 Committee Chairman Financial Consultant M Commi,see Memsership Ex Of5cle Membership OFFICERS Years of Years of Years of Servke Service Serske E. DOUGLAS HUGGARD DAVID V. BONEY JOSEPH T. KELLY, JR. President and Vke President-Customer Assistant Vice President-Chief Executtw Offcer 30 and Community Serskes 31 Operations 35 JERROLD L. JACOBS JOHN E BORN HENRY K. LEVARI JR. Senior Vke President-Yke Pr:sident-Vice President-Operations and Engineering 24 Electric Operations 33 Corporate Plannsng 14 MICHAEL A. JARRETT LANCE E. COOPER J. DAVID McCANN Senior Vke President-Yke President-Control Vke President. Treasurer Corporate Services 10 and Assistant Treasurer 3 and Assistant Secretary 13 BRIAN A. PARENT THOMAS E. FREEMAN MARTIN R. MEYER Senior Vice President-Vke President-Secretary and Assistant Planning and Rates 18 Human Resources 5 Treasurer 37 J. G. S ALOMONE MEREDITH I. HARLACHER, JR. HENRY C. SCHWEMM. JR. Senior Vke President-Vke President-Vke President-Finan e and Accounting 9 Engineering 20 Production 16 40

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