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| issue date = 12/31/1987
| issue date = 12/31/1987
| title = Delmarva 1987 Annual Rept.
| title = Delmarva 1987 Annual Rept.
| author name = CURTIS N
| author name = Curtis N
| author affiliation = DELMARVA POWER & LIGHT CO.
| author affiliation = DELMARVA POWER & LIGHT CO.
| addressee name =  
| addressee name =  
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=Text=
=Text=
{{#Wiki_filter:DELMARVA :::8(1:3210505 PDR ADOCK I P 0 W E R Annual
{{#Wiki_filter:DELMARVA P 0 W E R Annual
* Report 
* Report
.:# -. .... 
:::8(1:3210505 PDR     ADOCK I
,,---,, FINANCIAL HIGHLIGHTS Revenues Net Income Earnings Per Share Dividends Declared A MAJOR CHALLENGE FACING DELMARVA POWER IS TO PROVIDE ENERGY FOR THE FUTURE AT THE LOWEST REASONABLE COST. PART OF OUR REPORT THIS YEAR DISCUSSES HOW WE INTEND TO MEET THIS CHALLENGE SO OUR CHILDREN, SUCH AS THE ONES ON THE COVER OF OUR ANNUAL REPORT, CAN CONTINUE TO GROW AND RELY ON ENERGY TODAY AND TOMORROW.  
 
$ $ $ 1987 712.5 million 79.8 million 1.60 $ l.42Vz $ $ $ $ 1986 714.9 million 96.1 million 1.94 1.36113 Common Stock Outstanding Average Shares 45,717,450 45,717,450 Common Stock Book Value Construction Expendituresc 1 i Internally Generated Funds<2 i Electric Sales Electric Customers (year end) Average Annual Residential Usage Gas Sales Gas Customers (year end) Average Annual Residential Usage <1 J Excludes Allowance for Funds Used During Construction.  
    *r~
$ 13.01 $ 142.2 $ 123.2 ., I 9.57 341,308 9,\52 15.41 79,002 86.9 I <2 J Net cash flow from operating activities less prefeiTed and commoi:i dividends.  
 
''*_, $ 12.85 million $ 102.6 million million $ 159.0 million billionkwh 9.21 billionkwh 329,911 kwh 8,605 kwh millionmcf 15.95 million mcf 77,551 mcf 86.3 mcf Percent Increase (Decrease)
A MAJOR CHALLENGE FACING DELMARVA POWER IS TO PROVIDE ENERGY FOR THE FUTURE AT THE LOWEST REASONABLE COST.
(0.3) (17.0) (17.S) 4.S 1.2 38.6 (22.S) 3.9 3.5 6.4 (3.4) 1.9 0.7 2 CENTRALLY LOCATED WITHIN THE MAJOR EAST COAST MARKETS, THE DELMARVA PENINSULA HAS A UNIQUE BLEND OF COMMERCIAL, AGRICULTURAL, INDUSTRIAL, AND RECREATIONAL ACTIVITIES.
PART OF OUR REPORT THIS YEAR DISCUSSES HOW WE INTEND TO MEET THIS CHALLENGE SO OUR CHILDREN, SUCH AS THE ONES ON THE COVER OF OUR ANNUAL REPORT, CAN CONTINUE TO GROW AND RELY ON ENERGY TODAY AND TOMORROW.
DELMARVA POWER SERVES 341,000 ELECTRIC CUSTOMERS THROUGHOUT MOST OF THE 5, 700 SQUARE MILE PENINSULA AND 79,000 NATURAL GAS CUSTOMERS IN A 275 SQUARE MILE AREA IN NORTHERN DELAWARE.
Percent Increase FINANCIAL HIGHLIGHTS                                                                    1987                        1986            (Decrease)
THE COMPANY EMPLOYS 2,625 PEOPLE.
Revenues                                                                  $       712.5   million   $      714.9    million       (0.3)
THE CHAIRMAN'S PERSPECTIVE 1987 was an extraordinary year at Delmarva Power. The most significant events were:
Net Income                                                                $       79.8    million    $       96.1     million     (17.0)
* Earnings decreased for the first time in seven years, primarily because of rate reductions in all electric regulatory jurisdictions.
Earnings Per Share                                                        $        1.60              $        1.94                (17.S)
* The summer peak grew beyond expectations because of the strong economy on the Delmarva Peninsula.
Dividends Declared                                                          $        l.42Vz            $        1.36113                4.S Common Stock Outstanding Average Shares                                     45,717,450                 45,717,450 Common Stock Book Value                                                   $      13.01              $      12.85                    1.2 Construction Expendituresc1i                                              $      142.2    million    $      102.6    million      38.6 Internally Generated Funds< 2i                                            $      123.2    million    $      159.0    million      (22.S)
These events brought two challenges ahead into crisp focus:
Electric Sales                                                                       9.57    billionkwh        9.21    billionkwh      3.9 Electric Customers (year end)                                                     341,308                    329,911                    3.5 Average Annual Residential Usage                                               .,  9,\52    kwh              8,605    kwh            6.4 Gas Sales                                                                      I   15.41   millionmcf        15.95    million mcf    (3.4)
* Restore earnings to at least the 1986 level despite lower allowed rates of return.
Gas Customers (year end)                                                          79,002                    77,551                    1.9 Average Annual Residential Usage                                                    86.9   mcf               86.3     mcf             0.7
* Provide reliable, competitively priced new capacity in a rapidly growing and changing world. As the accomplishments discussed in this report strate, Delmarva Power has the peoplewith the skills, participative style, and drive to meet these challenges.
  <1J Excludes Allowancefor Funds Used During Construction.                           I
While the text of this report discusses the events and plishments of this unusual year, the remainder of this letter discusses how we will meet the challenges ahead. Restoring Earnings Although sales increased, earnings in 1987 were $1.60 per share compared to $1.94 per share in 1986, marily because of rate reductions ordered by the four commissions regulating the company's tric rates. The regulators were responding to the decline in capital costs nationally.
  <2J Net cash flow from operating activities less prefeiTed and commoi:i dividends.
Also tributing was the write off of replacement power costs related to the shutdown of the Peach Bottom nuclear power plant ordered by the Nuclear Regulatory Commission (NRC). Nev Curtis Though earnings decreased this year, key financial indicators show Delmarva Power is still financially strong. AFUDC is low. External financing in 1987 was minimal. Coverage ratios remain good. During the past five years, we have used cash available during the period between major power plant construction programs to position ourselves for the future by augmenting earnings through investments and catching up on bringing support facilities to efficient levels. Though subsidiaries uted only 1 cent to 1987 earnings, we expect subsidiary earnings to grow modestly over the next few years. Also, as the com-pany enters a period of building new power plants, most of our support facilities will be in good shape and will not require additional investments.
 
However, without higher authorized returns on equity, 3 earnings growth will be slow. In addition to rate relief, the major factors for improving earnings are continued tight cost control and growth. The Delmarva Peninsula is strong economically.
2 CENTRALLY LOCATED WITHIN THE MAJOR EAST COAST MARKETS, THE DELMARVA PENINSULA HAS A UNIQUE BLEND OF COMMERCIAL, AGRICULTURAL, INDUSTRIAL, AND RECREATIONAL ACTIVITIES.
In ware, employment grew by 4% and the unemployment rate aged 3.1 %, the second lowest in the nation. New businesses, spurred by a favorable business climate, continue to locate and expand in northern Delaware, and the shore and bay areas tinue to develop. Delmarva Power has more customers using more electricity than ever before. In 1987, the company connected 11,397 new electric customers.
DELMARVA POWER SERVES 341,000 ELECTRIC CUSTOMERS THROUGHOUT MOST OF THE 5, 700 SQUARE MILE PENINSULA AND 79,000 NATURAL GAS CUSTOMERS IN A 275 SQUARE MILE AREA IN NORTHERN DELAWARE. THE COMPANY EMPLOYS 2,625 PEOPLE.
Residential sales creased 9.5% and use per customer increased 6.4%. mercial sales increased 7% and use per customer increased 2.6%. Growth is expected to continue at a moderate rate. Providing CapacUy The other major challenge facing us is to supply adequate amounts of energy in a future where elec-Oscar L Carey john R Cooper tric load growth appears to be coming much more rapidly than expected.
 
The key element of our strategy is flexibility.
THE           CHAIRMAN'S                       PERSPECTIVE Though earnings decreased this year, key financial indicators show Delmarva Power is still 1987 was an extraordinary year                                                  financially strong. AFUDC is at Delmarva Power. The most                                                     low. External financing in 1987 significant events were:                                                         was minimal. Coverage ratios
The major factors for improving earnings, in addition to rate relief, are continued tight cost control and growth. The Delmarva Peninsula is strong economically.
* Earnings decreased for the first       While the text of this report            remain good.
In 1987, peak summer demand grew 13.3%. At the summer peak, reserve levels were half their normal levels, indicating that expected reserve margins in 1988, 1989, and 1990 are likely to be below normal. Historically, electric companies satisfied such needs by building more power plants. However, today we see no single source for supplying additional energy Howard E Cosgrove needs. Base load plants are coming increasingly expensive and, on a national level, ingly difficult to include in rate base. We also see volatility in the economy, energy costs, energy supplies, and governmental lations. Thus, the company is working to minimize capital investment and match capacity expansion to load growth as much as possible.
time in seven years, primarily       discusses the events and accom-                During the past five years, we because ofrate reductions in all     plishments of this unusual                  have used cash available during the electric regulatory jurisdictions. year, the remainder of this letter          period between major power
Delmarva Power's plan to meet future energy needs is called Challenge 2000 and is described in more detail on pages 16 and 17. It is a combination of options designed to provide as much bility as possible in responding to changing conditions.
* The summer peak grew beyond         discusses how we will meet the              plant construction programs to expectations because of the          challenges ahead.                          position ourselves for the future strong economy on the Delmarva       Restoring Earnings Although                by augmenting earnings through Peninsula.                           sales increased, earnings in 1987          investments and catching up These events brought two         were $1.60 per share compared              on bringing support facilities to 3
In response to the rapid growth in peak demand in 1987, the company has moved ahead with the purchase of two, 100 megawatt Sally V. Hawkins Donald W. Mabe combustion turbines which we expect to run between 500 and 3000 hours per year, depending on circumstances.
challenges ahead into crisp focus:   to $1.94 per share in 1986, pri-            efficient levels.
Assuming timely permitting, one would be installed by mid 1989, and the other, a few months later. This project will cost about $44 million. The $220 per kilowatt cost of this project is extremely low compared to alternatives.
* Restore earnings to at least the     marily because of rate reductions              Though subsidiaries contrib-1986 level despite lower allowed     ordered by the four commissions            uted only 1 cent to 1987 earnings, rates ofreturn.                     regulating the company's elec-              we expect subsidiary earnings
The company also accelerated the development of several programs designed to reduce customers' use at peak periods such as special peak agement rates for industrial customers and appliance control devices for residential customers.
* Provide reliable, competitively     tric rates. The regulators were            to grow modestly over the next priced new capacity in a rapidly     responding to the decline in                few years. Also, as the com-growing and changing world.         capital costs nationally. Also con-        pany enters a period of building As the accomplishments           tributing was the write off of              new power plants, most of our discussed in this report demon-      replacement power costs related            support facilities will be in good strate, Delmarva Power has the       to the shutdown of the Peach                shape and will not require peoplewith the skills, participative Bottom nuclear power plant                  additional investments.
On another matter, the directors and managers of the company have wrestled for some time with the serious ramifications of the shutdown of the Peach Bottom Nuclear Generating Station ordered by the NRC. Delmarva Power owns 7.51 % of Peach Bottom which is operated by Philadelphia Electric Co. (PE). We were generally aware before fames T. McKinstry fames 0. Pippin,]r.
style, and drive to meet these       ordered by the Nuclear Regulatory              However, without higher challenges.                         Commission (NRC).                          authorized returns on equity, Nev Curtis
the March shutdown that there were problems at the plant. However, as a minority owner, we were not privileged to mation indicating the gravity of the problems until February, 1988, In response to rapid growth, the company has moved ahead with the purchase of two, 100 megawatt combustion turbines ... when a report from the Institute of Nuclear Power Operations (INPO) was made public. As a result of the seriousness of the charges in the INPO report and considering alternatives facing the company, the board of directors, on management's recommendation, decided not to seek recovery from customers of replacement power costs related to the NRC-ordered down ofabout $1 million a month. For 1987, the effect on earnings was 11 cents per share. William G. Simeral Other alternatives for recovery of these costs are being sidered. While 1987 served to shape the challenges ahead, it also strated that we have people with the abilities to meet those challenges.
 
The rest of this report discusses their achievements.
earnings growth will be slow. In addition to rate relief, the major factors for improving earnings are continued tight cost control and          tric load growth appears to be growth. The Delmarva Peninsula            coming much more rapidly than is strong economically. In Dela-          expected. The key element of ware, employment grew by 4%                our strategy is flexibility.          needs. Base load plants are be-and the unemployment rate aver-                                                  coming increasingly expensive aged 3.1 %, the second lowest                  The major factors for            and, on a national level, increas-in the nation. New businesses,                                                  ingly difficult to include in rate improving earnings, in spurred by a favorable business                                                  base. We also see volatility in the climate, continue to locate and addition to rate relief, economy, energy costs, energy expand in northern Delaware,                are continued tight cost            supplies, and governmental regu-and the shore and bay areas con-                                                lations. Thus, the company is control and growth. The tinue to develop. Delmarva                                                      working to minimize capital Power has more customers                    Delmarva Peninsula is              investment and match capacity using more electricity than ever              strong economically.              expansion to load growth as much before. In 1987, the company                                                    as possible.
There are reasons to be confident.
connected 11,397 new electric                In 1987, peak summer demand            Delmarva Power's plan to meet customers. Residential sales in-          grew 13.3%. At the summer            future energy needs is called creased 9.5% and use per                  peak, reserve levels were one-        Challenge 2000 and is described customer increased 6.4%. Com-              half their normal levels, indicating  in more detail on pages 16 and 17.
Flexible strategies are in place and are working. A participative work style has been developed and is yielding creativity and efficiencies.
mercial sales increased 7% and use        that expected reserve margins in      It is a combination of options per customer increased 2.6%.              1988, 1989, and 1990 are likely to    designed to provide as much flexi-Growth is expected to continue            be below normal.                      bility as possible in responding at a moderate rate.                          Historically, electric companies  to changing conditions.
The people are talented.
Providing CapacUy The other                satisfied such needs by building          In response to the rapid growth major challenge facing us is              more power plants. However,           in peak demand in 1987, the to supply adequate amounts of              today we see no single source for    company has moved ahead with energy in a future where elec-            supplying additional energy          the purchase of two, 100 megawatt Oscar L Carey                john R Cooper              Howard E Cosgrove      Sally V. Hawkins              Donald W. Mabe
Success will come from this combination.
 
Management appreciates the efforts of all our employees for they are truly the creative and effective force moving the company. David D. Wakefield Sincerely, NEV CURTIS FebrualJ' 11, 1988 * *.
the March shutdown that there were problems at the plant.
..... . . , . . r5:* .. .
combustion turbines which we              However, as a minority owner, expect to run between 500 and            we were not privileged to infor-3000 hours per year, depending on        mation indicating the gravity of circumstances. Assuming timely            the problems until February, 1988,          Other alternatives for recovery permitting, one would be installed                                                of these costs are being con-by mid 1989, and the other, a                  In response to rapid                sidered.
HarlandM Wakefield,fr.
few months later. This project will                                                    While 1987 served to shape the growth, the company has cost about $44 million. The $220                                                    challenges ahead, it also demon-per kilowatt cost of this project            moved ahead with the                  strated that we have people with is extremely low compared to                                                       the abilities to meet those purchase of two, 100 alternatives. The company also                                                      challenges. The rest of this report megawatt combustion accelerated the development of                                                     discusses their achievements.
5 6 SEVERAL HOT SUMMER DAYS, ALONG WITH THE STRONG ECONOMY OF THE DELMARVA PENINSULA, HAD A SIGNIFICANT IMPACT ON THE COMPANY IN 1987. THE PEAK DEMAND FOR ELECTRICI1Y GREW BY AN UNEXPECTEDLY HIGH 13.3%. WHILE MANY PEOPLE FOUND COMFORT THROUGH AIR CONDITIONING, AN ICE CREAM CONE AT THE BEACH COULD WORK TOO.
several programs designed to                         turbines ...                  There are reasons to be confident.
THE STOCKHOLDERS' PERSPECTIVE Please note that the numbers in this report reflect the 3 for 2 common stock split that was tive April 29, 1987. Historical numbers used for comparisons have been restated to reflect this split. Financial Position Delmarva Power increased quarterly dends for the 11th consecutive year. Quarterly dividends increased by 3.3% to 36.5 cents per share for an indicated annual rate of $1.46. Earnings decreased to $1.60 per share from $1.94 per share a year ago. The decline in earnings resulted primarily from rate reductions ordered by the four commissions regulating the pany's rates and the write off of the Peach Bottom replacement power costs. The factors for improving earnings to at least the 1986 level are discussed in the chairman's letter in the front of this report. The price of common stock decreased to $18 from $22, mainly because of the rate actions. of the commissions and the decline in financial markets. The company's bond rating also declined, in the differing terms of the different agencies, from a strong "AA:.' to the combination of a lower "AA:.' and a strong "A", again primarily because of the rate actions of the commissions.
reduce customers' use at peak                                                       Flexible strategies are in place and periods such as special peak man-        when a report from the Institute          are working. A participative work agement rates for industrial              of Nuclear Power Operations              style has been developed and is 5
Electric sales increased 3.9% over 1986 levels, despite the down of a large steel mill, because of a strong economy on the Delmarva Peninsula, favorable weather, and a 3.5% increase in customers.
customers and appliance control          (INPO) was made public.                   yielding creativity and efficiencies.
Residential electric sales increased 9.5%, and mercial electric sales increased 7%. Gas sales decreased 3.4%, mainly because of the shutdown of the steel mill. However, adjusted for the loss of the mill, gas sales increased 6.2%. This increase reflects growth in the residential and commercial sectors and the rise in the price of oil. The company paid for 87% of its construction expenses with internally-generated cash. The 2200 1200 AFUDC ratio, a key indicator for financial analysis, remained low at 5.8% of net income. Facilities Since there had been little significant upgrading of support facilities in the past 30 years, the company has used the period since the completion of its last major power plant in 1981 to modernize several of its port facilities.
devices for residential customers.          As a result of the seriousness        The people are talented. Success On another matter, the directors      of the charges in the INPO report        will come from this combination.
Projects completed in 1987 included a new data processing building and new office and locker room facilities at the Edge Moor power plant. Projects underway include grading of general offices of the company's corporate quarters in Wilmington and divisional headquarters in Salisbury, Maryland.
and managers of the company              and considering alternatives                Management appreciates the have wrestled for some time with          facing the company, the board of          efforts of all our employees the serious ramifications of the         directors, on management's                for they are truly the creative shutdown of the Peach Bottom              recommendation, decided not              and effective force moving the Nuclear Generating Station                to seek recovery from customers          company.
Peach Bottom On March 31, 1987, the Nuclear Regulatory Commission (NRC) ordered the plant shut down for a variety of problems including operator inattention.
ordered by the NRC.                       of replacement power costs                              Sincerely, Delmarva Power owns 7.51 % of          related to the NRC-ordered shut-Peach Bottom which is operated            down ofabout $1 million a month.
Delmarva Power owns 7.51 % of Peach Bottom which is operated by Philadelphia Electric Co. (PE). Summer and winter peaks 0 grew in 1987 compared to 1986. JFMAMJJASOND Monthly Peak in Megawatts 7
by Philadelphia Electric Co. (PE).        For 1987, the effect on earnings NEV CURTIS We were generally aware before            was 11 cents per share.                                  FebrualJ' 11, 1988
8 On February 2, 1988, PE made public a report from the Institute of Nuclear Power Operations (INPO) that was critical of Philadelphia Electric's operation of Peach Bottom during the last several years. As a result of the seriousness of the INPO report and in con-sideration of alternatives facing Delmarva Power, the company decided not to seek recovery of the approximately
:***~~..
$1 million a month in replacement power costs from customers.
                                                                                                                                *~**
For 1987, this decision reduced earnings by 11 cents per share. The company will continue to consider other alternatives for recovery of these costs. The company believes that the safe and expeditious startup of the units at Peach Bottom is important to both stockholders and customers.
                                                                                                                                ~......
The NRC has reacted favorably to some of PE's startup plans, and PE has stated that it is committing the resources to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. Harley Wakefield ifrom left) inspects the Data Center's new storage cooling system with the company's Duane Taylor and Charlie Frampton.
fames T. McKinstry            fames 0. Pippin,]r.          William G. Simeral        David D. Wakefield r5 HarlandM Wakefield,fr.
PE officials have informed Delmarva Power that they expect board is recommending the elec-the plant to resume operations tion ofH. R. Landon, executive later in 1988. However, this vice president of the company, depends on permission from the Lida W. Wells, director and presi-NRC which Delmarva Power dent of Wells Agency, Inc., and Dr. can not predict. Elwood P. Blanchard, a director Rate Matters As a result of and executive vice president of declining capital costs nationally the Du Pont Company. and the revisions of the federal Simeral, who will retire effective tax laws, regulators reduced April 26, 1988, was elected to Delmarva Power's rates. From the Board of Directors in 1981. August, 1986, throughJanuary, His extensive experience and 1988, the reductions have been knowledge as a businessman and $34.3 million in Delaware, $12.6 community leader have benefitted million in Maryland, $805,000 the company immeasurably.
 
in Virginia, and $6.4 million for Carey, who will resign effective wholesale customers regulated April 26, 1988, has served on by the Federal Energy Regulatory the Board for 17 years. His good Commission (FERC). judgement and keen wisdom The company filed a $3.4 million have been valuable assets. rate increase request with the Wakefield will retire as senior FERC to recover higher expenses vice president and director effec-and earn a reasonable return on tive April 1, 1988. He worked its investment.
6 SEVERAL HOT SUMMER DAYS, ALONG WITH THE STRONG ECONOMY OF THE DELMARVA PENINSULA, HAD A SIGNIFICANT IMPACT ON THE COMPANY IN 1987. THE PEAK DEMAND FOR ELECTRICI1Y GREW BY AN UNEXPECTEDLY HIGH 13.3%. WHILE MANY PEOPLE FOUND COMFORT THROUGH AIR CONDITIONING, AN ICE CREAM CONE AT THE BEACH COULD WORK TOO.
The company also 3 7 years for the company. He was sought $5.0 million over two elected a director in 1984. His years as part of the settlement of extensive operating knowledge the Summit Nuclear Power Plant. and utility perspective have helped Director Changes WilliamG.
 
the company greatly. Simeral, Harland M. Wakefield, Jr., These people will be missed. and Oscar L. Carey will leave the Other management changes board of directors in 1988. The are detailed on page 48.
THE          STOCKHOLDERS'                        PERSPECTIVE The price of common stock decreased to $18 from $22, mainly because of the rate actions. of the       AFUDC ratio, a key indicator for commissions and the decline in              financial analysis, remained low financial markets. The company's            at 5.8% of net income.
THE ARTIST'S SKETCH SHOWS THE B URNING POWER PLANT BEING DEVELOPED IN THE HILLS OF BURNEY, CALIFORNIA, BY DELMARVA CAPITAL TECHNOLOGY CO., ONE OF DELMARVA POWER'S SUBSIDIARY COMPANIES.
Please note that the numbers in    bond rating also declined, in the          Facilities Since there had this report reflect the 3 for 2    differing terms of the different            been little significant upgrading common stock split that was effec-  agencies, from a strong "AA:.' to           of support facilities in the past 30 tive April 29, 1987. Historical    the combination of a lower "AA:.'          years, the company has used the numbers usedfor comparisons        and a strong "A", again primarily          period since the completion of its have been restated to reflect      because of the rate actions of             last major power plant in 1981 this split.                        the commissions.                            to modernize several of its sup-Financial Position Delmarva            Electric sales increased 3.9%            port facilities. Projects completed Power increased quarterly divi-    over 1986 levels, despite the shut-         in 1987 included a new data dends for the 11th consecutive    down of a large steel mill, because        processing building and new year.                               of a strong economy on the                 office and locker room facilities Quarterly dividends increased    Delmarva Peninsula, favorable              at the Edge Moor power plant.
THE PHILOSOPHY OF THE SUBSIDIARY EFFORTS IS TO SEEK RETURNS WHICH EXCEED THOSE OF THE REGULATED BUSINESS AND NOT DETRACT FROM THE CORE OPERATION OF THE PARENT ENERGY COMPANY. 9 IO A NEW AUTOMATED DISPATCH SYSTEM WILL BE INSTALLED IN MANY COMPANY SERVICE VEHICLES IN 1988 TO PROVIDE CUSTOMERS WITH BETTER INFORMATION ABOUT WHEN SERVICE PERSONNEL WILL ARRIVE. OTHER EXAMPLES OF WHERE THE USE OF NEW TECHNOLOGY HAS BEEN USED TO IMPROVE EFFICIENCY INCLUDE RECORDING OF METER READINGS, INJECTING FUEL INTO POWER PLANT BOILERS, AND DISPENSING FUEL INTO COMPANY VEHICLES.
by 3.3% to 36.5 cents per share for weather, and a 3.5% increase in            Projects underway include up-an indicated annual rate of $1.46. customers. Residential electric            grading of general offices of 7
THE CUSTOMERS' PERSPECTIVE The price of energv continues to be a major concern of most customers and the company. Delmarva Power's prices are among the lowest in the region. Electric comparisons (in cents/ kwh) are: New York, il.53; Boston, 9.36; Philadelphia, 8.98; Newark, N ]., 8.49; Delmarva Peninsula, 6.34; Baltimore, 6.15. For natural gas (in cents/ccf):
Earnings decreased to $1.60 per    sales increased 9.5%, and com-              the company's corporate head-share from $1.94 per share a year  mercial electric sales increased            quarters in Wilmington and ago. The decline in earnings        7%. Gas sales decreased 3.4%,               divisional headquarters in resulted primarily from rate        mainly because of the shutdown              Salisbury, Maryland.
Baltimore, 61.80; New York, 60.05; Newark, NJ., 56.68; Philadelphia, 53.91; Wilmington, 50.22; Boston, 50.04. Throughout the service territory, rates have declined.
reductions ordered by the four      of the steel mill. However, adjusted        Peach Bottom On March 31, commissions regulating the com-    for the loss of the mill, gas sales        1987, the Nuclear Regulatory pany's rates and the write off of  increased 6.2%. This increase              Commission (NRC) ordered the the Peach Bottom replacement        reflects growth in the residential          plant shut down for a variety of power costs.                       and commercial sectors and the              problems including operator The factors for improving        rise in the price of oil.                  inattention. Delmarva Power earnings to at least the 1986 level    The company paid for 87% of              owns 7.51 % of Peach Bottom are discussed in the chairman's    its construction expenses with              which is operated by Philadelphia letter in the front of this report. internally-generated cash. The              Electric Co. (PE).
In Delaware, for example, the price of tricity for a residential customer using 750 kilowatt hours of electricity per month is 11 % less than it was in 1983. The reasons include the company's conversion from primarily an oil-burning utility to primarily a coal-burning utility; aggressive internal cost-control and team-effectiveness programs; the renegotiation of several fuel contracts; the strong economy in the service territory; and reduced rates caused by lower allowed rates of return due to reduced capital costs nationally.
2200 1200 Summer and winter peaks 0                                grew in 1987 compared to 1986.
As the price of electricity declines, customers use more of it. Average residential customer use increased 6.4% in 1987 and average commercial customer use increased 2.6%. Customer Information The company provides general mation to customers through the monthly residential newsletter, "Energy News You Can Use," the quarterly commercial letter, "Energy Exchange," and the quarterly senior citizens letter, "Silver Bulletin." Marketing representatives and customer representatives offer one-to-one help to customers.
JFMAMJJASOND Monthly Peak in Megawatts
For those customers having culty paying their bills, customer representatives can provide information about budget billing, Meter reader Sharon Broum records a customer's energy use with a new computerized device. installment payments, load limi-ters, and community sources of funds. The individualized approach has enabled the pany to achieve both reduced cut offs and reduced write offs. Customer Opinions The pany's customer approval rating increased for the fifth consecutive year. In the 1987 survey, 78% of residential customers gave the company a favorable rating compared with 74% in 1986; 71 % in 1985; 66% in 1984; 59% in 1983; and 46% in 1982. Reliable service and stable utility rates were the characteristics mentioned most frequently in the survey. II As the sun sets, the lights come on at a home near Rehoboth Beach, Delaware.
 
On February 2, 1988, PE made public a report from the Institute          PE officials have informed of Nuclear Power Operations              Delmarva Power that they expect    board is recommending the elec-(INPO) that was critical of               the plant to resume operations      tion ofH. R. Landon, executive Philadelphia Electric's operation        later in 1988. However, this        vice president of the company, of Peach Bottom during the last          depends on permission from the     Lida W. Wells, director and presi-several years.                            NRC which Delmarva Power            dent of Wells Agency, Inc., and Dr.
As a result of the seriousness of     can not predict.                    Elwood P. Blanchard, a director the INPO report and in con-              Rate Matters As a result of         and executive vice president of sideration of alternatives facing        declining capital costs nationally  the Du Pont Company.
Delmarva Power, the company              and the revisions of the federal      Simeral, who will retire effective decided not to seek recovery of         tax laws, regulators reduced        April 26, 1988, was elected to the approximately $1 million a          Delmarva Power's rates. From        the Board of Directors in 1981.
month in replacement power costs        August, 1986, throughJanuary,       His extensive experience and from customers. For 1987, this            1988, the reductions have been      knowledge as a businessman and decision reduced earnings by 11          $34.3 million in Delaware, $12.6   community leader have benefitted cents per share.                         million in Maryland, $805,000      the company immeasurably.
The company will continue to          in Virginia, and $6.4 million for     Carey, who will resign effective consider other alternatives for          wholesale customers regulated      April 26, 1988, has served on 8     recovery of these costs.                 by the Federal Energy Regulatory    the Board for 17 years. His good The company believes that the         Commission (FERC).                 judgement and keen wisdom safe and expeditious startup of            The company filed a $3.4 million have been valuable assets.
the units at Peach Bottom is            rate increase request with the         Wakefield will retire as senior important to both stockholders          FERC to recover higher expenses    vice president and director effec-and customers. The NRC has              and earn a reasonable return on    tive April 1, 1988. He worked reacted favorably to some of PE's        its investment. The company also    3 7 years for the company. He was startup plans, and PE has stated        sought $5.0 million over two        elected a director in 1984. His that it is committing the resources      years as part of the settlement of extensive operating knowledge to correct the problems and their        the Summit Nuclear Power Plant. and utility perspective have helped root causes. It is clearly PE's         Director Changes WilliamG.          the company greatly.
responsibility to implement a           Simeral, Harland M. Wakefield, Jr.,   These people will be missed.
recovery plan to return Peach          and Oscar L. Carey will leave the     Other management changes Bottom to service.                      board of directors in 1988. The     are detailed on page 48.
Harley Wakefield ifrom left) inspects the Data Center's new ice-storage cooling system with the company's Duane Taylor and Charlie Frampton.
 
9 THE ARTIST'S SKETCH SHOWS THE WOOD-BURNING POWER PLANT BEING DEVELOPED IN THE HILLS OF BURNEY, CALIFORNIA, BY DELMARVA CAPITAL TECHNOLOGY CO.,
ONE OF DELMARVA POWER'S SUBSIDIARY COMPANIES. THE PHILOSOPHY OF THE SUBSIDIARY EFFORTS IS TO SEEK RETURNS WHICH EXCEED THOSE OF THE REGULATED BUSINESS AND NOT DETRACT FROM THE CORE OPERATION OF THE PARENT ENERGY COMPANY.
 
IO A NEW AUTOMATED DISPATCH SYSTEM WILL BE INSTALLED IN MANY COMPANY SERVICE VEHICLES IN 1988 TO PROVIDE CUSTOMERS WITH BETTER INFORMATION ABOUT WHEN SERVICE PERSONNEL WILL ARRIVE.
OTHER EXAMPLES OF WHERE THE USE OF NEW TECHNOLOGY HAS BEEN USED TO IMPROVE EFFICIENCY INCLUDE RECORDING OF METER READINGS, INJECTING FUEL INTO POWER PLANT BOILERS, AND DISPENSING FUEL INTO COMPANY VEHICLES.
 
THE            CUSTOMERS'                        PERSPECTIVE The price ofenergv continues to be a major concern ofmost customers and the company.
Delmarva Power's prices are among the lowest in the region.     in the service territory; and Electric comparisons (in cents/  reduced rates caused by lower kwh) are: New York, il.53;          allowed rates of return due to Boston, 9.36; Philadelphia, 8.98;    reduced capital costs nationally.
Meter reader Sharon Broum records a customer's Newark, N ]., 8.49; Delmarva            As the price of electricity    energy use with a new computerized device.
Peninsula, 6.34; Baltimore, 6.15. declines, customers use more of For natural gas (in cents/ccf):  it. Average residential customer Baltimore, 61.80; New York,         use increased 6.4% in 1987 and     installment payments, load limi-60.05; Newark, NJ., 56.68;          average commercial customer use    ters, and community sources Philadelphia, 53.91; Wilmington,     increased 2.6%.                     of funds. The individualized 50.22; Boston, 50.04.               Customer Information The            approach has enabled the com-Throughout the service territory, company provides general infor-    pany to achieve both reduced rates have declined. In Delaware,    mation to customers through the     cut offs and reduced write offs.                     II for example, the price of elec-      monthly residential newsletter,    Customer Opinions The com-tricity for a residential customer  "Energy News You Can Use,"          pany's customer approval rating using 750 kilowatt hours of          the quarterly commercial news-      increased for the fifth consecutive electricity per month is 11 % less  letter, "Energy Exchange," and      year. In the 1987 survey, 78% of than it was in 1983.                 the quarterly senior citizens news- residential customers gave the The reasons include the          letter, "Silver Bulletin."          company a favorable rating company's conversion from                Marketing representatives and  compared with 74% in 1986; 71 %
primarily an oil-burning utility to  customer representatives offer      in 1985; 66% in 1984; 59% in primarily a coal-burning utility;    one-to-one help to customers. For  1983; and 46% in 1982.
aggressive internal cost-control    those customers having diffi-      Reliable service and stable utility and team-effectiveness programs;    culty paying their bills, customer  rates were the characteristics the renegotiation of several        representatives can provide        mentioned most frequently fuel contracts; the strong economy  information about budget billing,  in the survey.
As the sun sets, the lights come on at a home near Rehoboth Beach, Delaware.
 
I2 MARINE LIFE THRIVES NEAR AN UNDERWATER ARTIFICIAL REEF BUILT IN THE ATLANTIC OCEAN USING BLOCKS OF COAL ASH FROM THE COMPANY'S POWER PLANTS. DEVELOPED IN CONJUNCTION WITH THE UNIVERSITY OF DELAWARE, THE REEF PROJECT EARNED AN "OUTSTANDING CONSERVATION AWARD" FROM THE INSTITUTE OF URBAN WILDLIFE.
I2 MARINE LIFE THRIVES NEAR AN UNDERWATER ARTIFICIAL REEF BUILT IN THE ATLANTIC OCEAN USING BLOCKS OF COAL ASH FROM THE COMPANY'S POWER PLANTS. DEVELOPED IN CONJUNCTION WITH THE UNIVERSITY OF DELAWARE, THE REEF PROJECT EARNED AN "OUTSTANDING CONSERVATION AWARD" FROM THE INSTITUTE OF URBAN WILDLIFE.
MAJOR New Peak -On July 21 at 5 p.m., customers demanded 2,084 watts of electricity, 13.3% more than they have at any one time before. This year's growth in summer peak was dramatic.
 
During this summer, the previous peak of 1,840 megawatts was exceeded 14 times including one Saturday.
MAJOR               OPERATING                            EVENTS natural gas; and 11 % nuclear through nuclear power plants partially owned by Delmarva          System Reliability The people Power but run by other com-          in and associated with the system New Peak - On July 21 at 5 p.m.,   panies. Generating reserves at the  operations groups put forth a customers demanded 2,084 mega-      unusually high 1987 summer          special effort in 1987 to prepare watts of electricity, 13.3% more     peak were 9.3%.                      for any problem which could than they have at any one time       Environment - The company,          have been caused by the loss of before. This year's growth in       the Delaware Citizens for Clean      the line across the Delaware River summer peak was dramatic.           Air, and federal and state envi-    and the unplanned shutdown During this summer, the previous     ronmental officials are working      of the Peach Bottom Nuclear peak of 1,840 megawatts was         together to develop a cost-effective  Generating Station.
Much of the increased growth was caused by the strong omy of the Delmarva Peninsula.
exceeded 14 times including one     plan to solve an infrequent            As the summer progressed, Saturday.                            "downwash" air pollution prob-      there were several tense moments.
In 1987, the company connected 11,397 new electric customers.
Much of the increased growth       lem at the Indian River power        However, employees who had was caused by the strong econ-      plant. Since the federal Environ-    anticipated problems used con-omy of the Delmarva Peninsula.       mental Protection Agency has        tingencies and coped well. On In 1987, the company connected       issued an order requiring a solu-    the day of the 13.3% increase in 13 11,397 new electric customers.       tion by 1992, a decision on the      peak demand, customers did Power Plant Operations               technology to be used will be        not experience major interrup-Delmarva Power's wholly-owned       made in 1988.                        tions or voltage reductions.
Power Plant Operations Delmarva Power's wholly-owned and operated coal and oil-fired power plants ran well. The average availability rate for these plants was 84.4% compared to the most recent industry average of 83 .1 % . This record placed the company among the top companies of the P]M interconnection.
and operated coal and oil-fired         Also, most of the waste water      Natural Gas Delmarva Power power plants ran well. The average   streams at the Edge Moor plant        completed its connection to a availability rate for these plants   were connected to the Wilmington      major interstate pipeline be-was 84.4% compared to the most       sewage treatment plant, reducing      longing to the Columbia Gas recent industry average of 83 .1 % . discharges into the Delaware        Transmission Corporation. The This record placed the company       River. More than 11,000 baby rock-    connection gives the company two among the top companies of the       fish reared by employees at the      suppliers of natural gas, thereby P]M interconnection.                 Vienna power plant with company      increasing the reliability, flexi-The company's fuel mix is         facilities were released into        bility, and economy of the balanced: 67% coal; 22% oil and     the Nanticoke River.                 company's gas supply.
The company's fuel mix is balanced:
Employeesfinished.first again in a contestforfewest fleet accidents.
67% coal; 22% oil and OPERATING natural gas; and 11 % nuclear through nuclear power plants partially owned by Delmarva Power but run by other panies. Generating reserves at the unusually high 1987 summer peak were 9.3%. Environment
 
-The company, the Delaware Citizens for Clean Air, and federal and state ronmental officials are working together to develop a cost-effective plan to solve an infrequent "downwash" air pollution lem at the Indian River power plant. Since the federal mental Protection Agency has issued an order requiring a tion by 1992, a decision on the technology to be used will be made in 1988. Also, most of the waste water streams at the Edge Moor plant were connected to the Wilmington sewage treatment plant, reducing discharges into the Delaware River. More than 11,000 baby fish reared by employees at the Vienna power plant with company facilities were released into the Nanticoke River. EVENTS System Reliability The people in and associated with the system operations groups put forth a special effort in 1987 to prepare for any problem which could have been caused by the loss of the line across the Delaware River and the unplanned shutdown of the Peach Bottom Nuclear Generating Station. As the summer progressed, there were several tense moments. However, employees who had anticipated problems used tingencies and coped well. On the day of the 13.3% increase in peak demand, customers did not experience major tions or voltage reductions.
River Crossing At 4:19 p.m.
Natural Gas Delmarva Power completed its connection to a major interstate pipeline longing to the Columbia Gas Transmission Corporation.
on Sunday, March 1, 1987, a rain of steel and wire poured into the Delaware River as a tanker Also, the training for Delmarva rammed a 43-story tower carrying Power's participative skills      a 500,000 volt transmission line program was expanded to include    from Delaware to New Jersey.
The connection gives the company two suppliers of natural gas, thereby increasing the reliability, bility, and economy of the company's gas supply. 13 Employees finished.first again in a contestfor fewest fleet accidents.
all employees. A gain-sharing      Within hours, a massive cleanup, program, called the Corporate      planning, and $25 million res-Performance Incentive Plan,        toration project was underway.
14 A unique.floating crane was used to help rebuild the damaged towers. The gas division also began to install gas distribution facilities along U.S. Route 40 to take advantage of an area of growth southwest of the city of ton. Progress was also made on the company's multi-year plan to replace deteriorating, uncoated, steel gas main. In 1987, the pany connected 1,451 new gas customers.
A unique.floating crane was used              was begun to reward team          Nine months later, the line was to help rebuild the damaged towers.
Employees A new job review system was developed by ployees for non-bargaining unit employees.
accomplishments.                  back in service. Senior managers There continues to be a high    and joint owners praised the The gas division also began to            degree of cooperation between      project team for setting and install gas distribution facilities          union leadership and company      achieving an ambitious restora-along U.S. Route 40 to take                  management to improve              tion goal.
The new system puts increased emphasis on how jobs are done as well as on bottom-line accomplishments.
advantage of an area of growth                productivity, wellness, and          The line is a major link in the southwest of the city of Wilming-            working environments.              regional power grid.
It allows larger rewards for higher performance.
ton. Progress was also made on              Community Activities Through          The forces unleashed at the the company's multi-year plan to              the contributions of stockholders  moment of the accident required 14 replace deteriorating, uncoated,              and customers, the Good Neigh-    the total replacement of the two steel gas main. In 1987, the com-            bor Energy Fund contributed        towers in the center of the river, pany connected 1,451 new gas                  more than $208,000 to the com-    the replacement of one foun-customers.                                    munity for customers having        dation, the replacement of parts Employees A new job review                    trouble paying utility bills. The  of two other towers, and the system was developed by em-                  highly successful Radio Watch      reconstruction of another tower.
Also, the training for Delmarva Power's participative skills program was expanded to include all employees.
ployees for non-bargaining unit              program continued to summon          A curtain of air bubbles was employees. The new system                    aid, through company vehicles      created in the river to protect puts increased emphasis on how                with radios, for people throughout marine life while damaged foun-jobs are done as well as on                  the peninsula. Employees sur-      dations were removed.
A gain-sharing program, called the Corporate Performance Incentive Plan, was begun to reward team accomplishments.
bottom-line accomplishments. It              passed their goal by 54% and          Litigation is underway to allows larger rewards for higher              contributed $241,000 to the        recover damages from the ship's performance.                                  United Way.                        owners.
There continues to be a high degree of cooperation between union leadership and company management to improve productivity, wellness, and working environments.
A "wellness expo" was heldfor 60 Plus customers.
Community Activities Through the contributions of stockholders and customers, the Good bor Energy Fund contributed more than $208,000 to the com-munity for customers having trouble paying utility bills. The highly successful Radio Watch program continued to summon aid, through company vehicles with radios, for people throughout the peninsula.
 
Employees passed their goal by 54% and contributed
15 FROM ON TOP OF THE TOWER ABOUT 400 FEET ABOVE THE DELAWARE RlvER, THE PASSING TANKER LOOKS LIKE A TOY TO THE WORKMEN REBUILDING THE DAMAGED HIGH VOLTAGE TRANSMISSION LINE. THE MASSIVE RESTORATION PROJECT WAS COMPLETED ON BUDGET AND A MONTH EARLY, SAVING ABOUT $2.3 MILLION IN REPLACEMENT POWER COST FOR REGIONAL UTILITIES.
$241,000 to the United Way. A "wellness expo" was held for 60 Plus customers.
 
River Crossing At 4:19 p.m. on Sunday, March 1, 1987, a rain of steel and wire poured into the Delaware River as a tanker rammed a 43-story tower carrying a 500,000 volt transmission line from Delaware to New Jersey. Within hours, a massive cleanup, planning, and $25 million toration project was underway.
16 HOMES RISING OUTSIDE WIIMINGTON ILLUSTRATE THE SIGNIFICANT GROWTH OCCURRING ON THE DELMARVA PENINSULA.
Nine months later, the line was back in service. Senior managers and joint owners praised the project team for setting and achieving an ambitious tion goal. The line is a major link in the regional power grid. The forces unleashed at the moment of the accident required the total replacement of the two towers in the center of the river, the replacement of one dation, the replacement of parts of two other towers, and the reconstruction of another tower. A curtain of air bubbles was created in the river to protect marine life while damaged dations were removed. Litigation is underway to recover damages from the ship's owners.
FROM ON TOP OF THE TOWER ABOUT 400 FEET ABOVE THE DELAWARE RlvER, THE PASSING TANKER LOOKS LIKE A TOY TO THE WORKMEN REBUILDING THE DAMAGED HIGH VOLTAGE TRANSMISSION LINE. THE MASSIVE RESTORATION PROJECT WAS COMPLETED ON BUDGET AND A MONTH EARLY, SAVING ABOUT $2.3 MILLION IN REPLACEMENT POWER COST FOR REGIONAL UTILITIES.
15 16 HOMES RISING OUTSIDE WIIMINGTON ILLUSTRATE THE SIGNIFICANT GROWTH OCCURRING ON THE DELMARVA PENINSULA.
MORE CUSTOMERS ARE USING MORE ELECTRICI1YTHAN EVER BEFORE. THE PLAN TO PROVIDE ELECTRICI1Y FOR THIS GROWTH IS CALLED CHALLENGE 2000. IT INCLUDES A COMBINATION OF ALTERNATIVES DESIGNED TO PROVIDE FLEXIBILI1Y AT TIMES OF RAPID CHANGES.
MORE CUSTOMERS ARE USING MORE ELECTRICI1YTHAN EVER BEFORE. THE PLAN TO PROVIDE ELECTRICI1Y FOR THIS GROWTH IS CALLED CHALLENGE 2000. IT INCLUDES A COMBINATION OF ALTERNATIVES DESIGNED TO PROVIDE FLEXIBILI1Y AT TIMES OF RAPID CHANGES.
T H The key challenge for the future is to supply adequate amounts of electricity at the lowest reasonable cost throughout the seroice territory.
 
E Challenge 2000
T         H           E                     F         u             T         u        R        E as possible to allow emerging power plant technology to develop so that the most cost-effective plants could be built at a time of The key challenge for the future                increasing competition. How-is to supply adequate amounts                  ever, at the unusually high peak of electricity at the lowest                    in 1987, reserve levels were one-reasonable cost throughout the                  half their normal levels, indicating             mental regulations. Licensing seroice territory.                              that reserve margins in 1988,                   activities are underway. The com-Challenge 2000
* Delmarva Power's plan, calle,d Challenge 2000, is a combination of options designed to enable the company to be as flexible as possible in responding quickly to changing demand for energy, emerging technologies, fluctuating fuel costs, and changing governmental regulations.
* Delmarva                      1989, and 1990 are likely to be                 pany is also talking with industrial Power's plan, calle,d Challenge                below normal and some additional                 cogeneration developers about 2000, is a combination of options              sources of electricity (called                   new projects that might provide designed to enable the company                  supply-side options) needed to                   base load generation beyond 1990.
The company sees no single solution to supplying future energy needs. Rather, it foresees a blend of small power plants using the most advanced nology and customer programs to reduce use at peak periods. Previous annual reports discussed the need to emphasize customer conservation alternatives (called demand-side options) for as long 3250 3000 2500 F u T as possible to allow emerging power plant technology to develop so that the most cost-effective plants could be built at a time of increasing competition. ever, at the unusually high peak in 1987, reserve levels were one-half their normal levels, indicating that reserve margins in 1988, 1989, and 1990 are likely to be below normal and some additional sources of electricity (called supply-side options) needed to be developed quickly. For the future, both supply and demand options will be needed, and the board of directors accelerated programs within each strategy.
to be as flexible as possible in                be developed quickly. For the                       On the demand-side, the responding quickly to changing                  future, both supply and demand                   company has received approval demand for energy, emerging                    options will be needed, and the                 of rate structures designed to technologies, fluctuating fuel                  board of directors accelerated                   encourage industrial customers 17 costs, and changing governmental                programs within each strategy.                   to use their own diesel generators regulations.                                      To meet peak demands from the                 at peak times. It has also acceler-The company sees no single                  supply-side, the company                         ated its program to install devices solution to supplying future                    purchased rwo, 100-megawatt                     in customers' homes which energy needs. Rather, it foresees              combustion turbines to run                       synchronize the normal cycling a blend of small power plants                  berween 500 and 3000 hours a                     of air conditioners and water using the most advanced tech-                  year depending on circumstances.                heaters to reduce peak usages.
To meet peak demands from the supply-side, the company purchased rwo, 100-megawatt combustion turbines to run berween 500 and 3000 hours a year depending on circumstances.
nology and customer programs                    The first would be installed by                 Customers in New Castle County, to reduce use at peak periods.                  mid 1989 and the second, a few                   Delaware, can volunteer for the Previous annual reports discussed              months later. They will be located               program in early 1988. The com-the need to emphasize customer                  at the Edge Moor Power Station,                 pany is also encouraging small conservation alternatives (called              use natural gas or oil, and comply               power production and conserva-demand-side options) for as long              with all applicable environ-                     tion by all customers.
The first would be installed by mid 1989 and the second, a few months later. They will be located at the Edge Moor Power Station, use natural gas or oil, and comply with all applicable environ-2250 2000 1750 (Reserve Margin is 15%) 1980 1982 1984 1986 1988 1990 1992 1994 Capacity Requirement Forecast in Megawatts u R E mental regulations.
3250 3000 1987 Capacity Requirement Forecast 2500 I~~Cfllect,,Sapacity 2250 2000 Programs to manage electricity used 1750                                                                    during peak periods can delay the need (Reserve Margin is 15%)
Licensing activities are underway.
for new generating capacity.
The pany is also talking with industrial cogeneration developers about new projects that might provide base load generation beyond 1990. On the demand-side, the company has received approval of rate structures designed to encourage industrial customers to use their own diesel generators at peak times. It has also ated its program to install devices in customers' homes which synchronize the normal cycling of air conditioners and water heaters to reduce peak usages. Customers in New Castle County, Delaware, can volunteer for the program in early 1988. The pany is also encouraging small power production and tion by all customers.
1980    1982      1984  1986  1988      1990      1992 1994 Capacity Requirement Forecast in Megawatts
1987 Capacity Requirement Forecast Programs to manage electricity used during peak periods can delay the need for new generating capacity.
 
17 20 Financial Review and Analysis 25 Report of Management 25 Report of Independent Accountants 26 Consolidated Financial Statements 32 Notes to Consolidated Financial Statements 46 Consolidated Statistics 48 Officers 49 Directors 50 Stockholder Information
20 Financial Review and Analysis 25 Report ofManagement 25 Report ofIndependent Accountants 26 Consolidated Financial Statements 32 Notes to Consolidated Financial Statements 46 Consolidated Statistics 48 Officers 49 Directors 50 Stockholder Information
, Delman:a Po1cer C-Lig/J1 Company SELECTED FINANCIAL DATA (Dollars in Thousands)
 
For t/Je Years Ended December 31 1987 1986 1985 1984 1983 OPERATING Operating Revenues $ 712,479 $ 714,863 $ 722,834 $ 702,593 I $ 649,799 Operating Income 124,967 134,738 135,515 133,209 I 129,138 Net Income 79,803 96,123 96,638 92,110 85,063 EARNINGS Earnings Per Share 1.60 1.84 I 1.75 I 1.63 AND Dividends Declared on i.292;,I DMD ENDS Common Stock 1.42v, 1.361 1.22 I 1.12 Average Shares Outstanding (000) 45,717 45,717 45,717 45,372 44,312 Total Assets 1,799,822 1,742,827 I 1,681,256 1,591,630 1,533,263 Construction I Expenditures<ll 142,239 102,597 I 94,923 I 79,488 I 76,056 I Internal Generation ofFunds<2 J 123,198 158,951 148,880 100,493 98,517 CAPITALIZATION Long-Term-Debt<
Delman:a Po1cer C- Lig/J1 Company SELECTED FINANCIAL DATA (Dollars in Thousands)
3 J 670,738 666,979 638,090 I 567,761 567,935 Preferred Stock without mandatory redemption 103,306 103,306 105,000 I 105,000 105,000 Preferred Stock with I mandatory redemption<
For t/Je Years Ended December 31           1987               1986           1985             1984         1983 OPERATING                       Operating Revenues                 $   712,479           $ 714,863     $ 722,834         $ 702,593     $ 649,799 Operating Income                                                                                       I    129,138 124,967             134,738       135,515           133,209 Net Income                               79,803             96,123         96,638           92,110 I      85,063 EARNINGS AND Earnings Per Share Dividends Declared on                        1.60   J~                        1.84   I       1.75 I
4 J 3,277 4,077 5,992 47,836 49,383 Common Equity 594,975 587,449 561,811 539,650 I . 503,513 Total $1,372,296  
1.63 DMD ENDS                           Common Stock Average Shares 1.42v,             1.361           i.292;,I        1.22 I       1.12 Outstanding (000)                     45,717             45,717         45,717           45,372       44,312 Total Assets                           1,799,822           1,742,827 I   1,681,256         1,591,630     1,533,263 Construction                                                           I Expenditures<ll                     142,239             102,597         94,923           79,488       76,056 Internal Generation ofFunds<2J                          123,198             158,951 I    148,880 I        100,493 I      98,517 I CAPITALIZATION                 Long-Term-Debt<3J                      670,738             666,979       638,090           567,761       567,935 Preferred Stock without                                                                 I mandatory redemption               103,306             103,306       105,000           105,000       105,000 Preferred Stock with                                                 I                  I mandatory redemption<4J                  3,277             4,077         5,992           47,836       49,383 Common Equity                           594,975             587,449       561,811           539,650 I . 503,513 Total                             $1,372,296           $1,361,811     $1,310,893       $1,260,247 I $1,225,831 CAPITALIZATION               Long-Term Debt                                 49%               49%             49%             45%           46%
$1,361,811  
RATIOS                       Preferred Stock without                                                 I mandatory redemption                       8%                 8%               8%             8%           9%
$1,310,893  
Preferred Stock with mandatory redemption                       0%                 0%               0%             4%           4%
$1,260,247 I $1,225,831 CAPITALIZATION Long-Term Debt 49% 49% I 49% 45% 46% RATIOS Preferred Stock without mandatory redemption 8% 8% 8% 8% 9% Preferred Stock with mandatory redemption 0% 0% 0% 4% 4% Common Equity 43% 43% I 43% 43% 41% Total 100% 100% 100% 100% 100% ELECTRIC/GAS Electric Sales (kwh 000) 9,565,276 9,205,795 8,530,520 8,308,233 7,878,476 I SALES Gas Sales (mcfOOO) 15,411 15,952 15,708 17,239 16,449 ! <1 J Excludes Allowance for Funds Used During Construction.  
Common Equity                                   43%               43%             43%             43%           41%
<2 J Net cas/J flow from operating activities less preferred and common dividends.
Total                                       100%                 100% I        100%             100%         100%
C3J Includes long-term debt due within one year. <4 J Includes mandatory redemption due within one year. 19 Delmarva Power & Ligbt Company FINANCIAL REVIEW AND ANALYSIS RESULTS OF OPERATIONS Earnings and Dividends Declared (cents) 200
ELECTRIC/GAS                   Electric Sales (kwh 000)             9,565,276             9,205,795     8,530,520         8,308,233     7,878,476 I SALES                         Gas Sales (mcfOOO)                         15,411             15,952         15,708           17,239       16,449 !
                                <1JExcludes Allowancefor Funds Used During Construction.
                                <2JNet  cas/J flow from operating activities less preferred and common dividends.
C3J Includes   long-term debt due within one year.
                                <4J Includes mandatory redemption due within one year.
19
 
Delmarva Power & Ligbt Company FINANCIAL REVIEW AND ANALYSIS RESULTS OF                 EARNINGS OPERATIONS Earnings per share of common stock decreased to $1.60 in 1987 from $1.94 in 1986. The 34&#xa2; decrease was principally attributed to electric rate decreases and the write-off of the Peach Bottom replacement power expenses. Increased electric sales partially offset the impact of these unfavorable factors.
The Peach Bottom Nuclear Generating Stati9n, in which Delmarva Power has a 7.51 % ownership interest, remains shut down due to a March 31, 1987, Nuclear Regulatory Commission (NRC) order as discussed in Note 11 on page 41. For the plant to receive authorization to return to service, Philadelphia Electric Company (PE), operator and partial owner of Peach Bottom, must provide the NRC with an acceptable plan which will assure that Peach Bottom will operate safely and comply with all NRC regulations. Part one of a two part plan to restart Peach Bottom was submitted to the NRC in November 1987. PE plans to submit the second part of the restart plan in the first quarter of 1988.
On February 2, 1988, PE officials made public a report from the Institute of Nuclear Power Operations (INPO) that was very critical of PE's operation of Peach Bottom over the last several years. Due to the seriousness of the new information, not previously made available to Delmarva Power as a minority owner, the Company decided not to pursue recovery of replacement power costs from customers. Accordingly, the Company expensed $9.2 million (11 &#xa2; per share) of replacement power costs in the fourth quarter. Future replacement power costs resulting from the NRC mandated shutdown of Peach Bottom are estimated at about $1 million per month and Earnings and Dividends     will be expensed as incurred. The Company shall continue to consider other alternatives for Declared                   recovery of these costs, as appropriate.
(cents)
The Company believes that the safe and expeditious startup of the units at Peach Bottom is 200 important to both our customers and our stockholders. The NRC has reacted favorably to some of PE's startup plans and PE has stated that it is committing the resources necessary to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. PE expects the plant to resume operations later this year.
However, this depends upon permission from the NRC, which Delmarva Power cannot predict.
Earnings per share of common stock for 1986 increased 10&#xa2; from $1.84 in 1985, primarily due to higher electric sales, increased investment income and lower financing costs, partially offset by rate decreases and higher operation and maintenance expenses.
DMD ENDS On December 29, 1987, the Board of Directors raised the quarterly dividend on common stock to 36112&#xa2; per share ($1.46 indicated annual rate) from 35113&#xa2; per share. This 3.3% improvement marks eleven consecutive years of increasing dividends and reflects the Company's goal to moderately increase dividends annually, earnings permitting, in order to provide stockholders with a fair and competitive return on their investment.
* Earnings
* Earnings
* Dividends 20 EARNINGS Earnings per share of common stock decreased to $1.60 in 1987 from $1.94 in 1986. The 34&#xa2; decrease was principally attributed to electric rate decreases and the write-off of the Peach Bottom replacement power expenses.
* Dividends 20
Increased electric sales partially offset the impact of these unfavorable factors. The Peach Bottom Nuclear Generating Stati9n, in which Delmarva Power has a 7.51 % ownership interest, remains shut down due to a March 31, 1987, Nuclear Regulatory Commission (NRC) order as discussed in Note 11 on page 41. For the plant to receive authorization to return to service, Philadelphia Electric Company (PE), operator and partial owner of Peach Bottom, must provide the NRC with an acceptable plan which will assure that Peach Bottom will operate safely and comply with all NRC regulations.
 
Part one of a two part plan to restart Peach Bottom was submitted to the NRC in November 1987. PE plans to submit the second part of the restart plan in the first quarter of 1988. On February 2, 1988, PE officials made public a report from the Institute of Nuclear Power Operations (INPO) that was very critical of PE's operation of Peach Bottom over the last several years. Due to the seriousness of the new information, not previously made available to Delmarva Power as a minority owner, the Company decided not to pursue recovery of replacement power costs from customers.
Del111arl'a Power & Ligbt Company FINANCIAL REvlEW AND ANALYSIS RESULTS OF                    ELECTRIC REVENUES AND SALES OPERATIONS (continued)
Accordingly, the Company expensed $9.2 million (11 &#xa2; per share) of replacement power costs in the fourth quarter. Future replacement power costs resulting from the NRC mandated shutdown of Peach Bottom are estimated at about $1 million per month and will be expensed as incurred.
Electric revenues, net of fuel costs, increased $4.4 million or 1.1%in1987. Excluding the effect of the $28.1 million December 1986 Delaware Summit credit payment (See Note 4, page 35), net electric revenues decreased $23.7 million or 5.3%. Major factors contributing to the decrease were a $34.4 million decrease in rates and $9.2 million of Peach Bottom replacement power expenses, which were partially offset by a $26.4 million increase from higher sales. Electric rates in all the Company's jurisdictions have been reduced from early 1986 levels, mainly due to the effects of the Tax Reform Act of 1986 and lower rates of return authorized by regulatory commissions. (See Note 10 on page 40 for a discussion of rate matters.) Electric sales continued to benefit from the strength and diversity of the service territory's economy. Residential sales increased 9.5% largely due to new residential construction and warmer summer weather. A commercial sales increase of7.0% resulted from customer growth in banking, business services and retail trade. Industrial sales recorded a 5.2% decline primarily due to the closing of a major customer, Phoenix Steel, in January 1987. Excluding the closing of Phoenix Steel, industrial sales increased 3.9% as a result of a broad-based increase in customer usage.
The Company shall continue to consider other alternatives for recovery of these costs, as appropriate.
Net electric revenues for 1986 decreased $9.8 million or 2.3% from 1985. The 1986 decrease was primarily due to the $28.1 million Delaware Summit credit payment and a $13.5 million decrease in rates, offset by a $31.5 million sales increase. The Delaware Summit credit payment did not affect 1986 earnings due to a corresponding reduction in operating expenses related to the payment.
The Company believes that the safe and expeditious startup of the units at Peach Bottom is important to both our customers and our stockholders.
The NRC has reacted favorably to some of PE's startup plans and PE has stated that it is committing the resources necessary to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. PE expects the plant to resume operations later this year. However, this depends upon permission from the NRC, which Delmarva Power cannot predict. Earnings per share of common stock for 1986 increased 10&#xa2; from $1.84 in 1985, primarily due to higher electric sales, increased investment income and lower financing costs, partially offset by rate decreases and higher operation and maintenance expenses.
DMD ENDS On December 29, 1987, the Board of Directors raised the quarterly dividend on common stock to 36112&#xa2; per share ($1.46 indicated annual rate) from 35113&#xa2; per share. This 3.3% improvement marks eleven consecutive years of increasing dividends and reflects the Company's goal to moderately increase dividends annually, earnings permitting, in order to provide stockholders with a fair and competitive return on their investment.
Del111arl'a Power & Ligbt Company FINANCIAL REvlEW AND ANALYSIS RESULTS OF OPERATIONS (continued)
Generation Fuel Mix (percent)
Generation Fuel Mix (percent)
JOO 40 20
GAS REVENUES AND SALES JOO Gas revenues, net of fuel costs, decreased $0.4 million or 1.1%in1987. The decrease was due to a 3.4% sales decrease that resulted from the closing of Phoenix Steel. Excluding the effect of Phoenix Steel, gas sales increased 6.2%. The largest factor contributing to the increase was a rise in oil prices, which caused customers with dual-fuel capability to use gas for most of the year.
* OilandGas  
Also, the continued trend of residential and commercial customer growth increased sales in both of these sales classes.
In 1986, netgas revenues increased $2.7 million or 9.4% over 1985. $1.1 million of the increase was attributed to a 1985 rate increase that was effective for only ten months of 1985, compared to a full year in 1986. The remainder of the net increase was primarily attributed to increased residential and commercial sales, partially offset by lower sales to dual-fuel customers, who used more oil due to its relatively lower cost in 1986.
40                         FUEL MIX In 1987, generation from coal, nuclear, and oil and gas sources was 67%, 11 %, and 22%,
respectively. The average fuel cost, which includes fuel, interchange and purchased power costs, increased to 1.98&#xa2;/kwh in 1987 from 1.84&#xa2; in 1986 and 1.94&#xa2; in 1985. Nuclear generation, which 20                         has the lowest fuel cost of all energy sources available to the Company, declined 37% in 1987, principally due to the NRC ordered shutdown of Peach Bottom. To replace the decrease in nuclear generation, increased generation from higher cost energy sources and increased power purchases were necessary. A rise in 1987 oil prices also increased the average fuel cost. The increase in the average fuel cost was mitigated by a $4.4 million reduction in coal costs, mostly due to renegotiation of various contracts for the purchase and transportation of coal.
* OilandGas
!ill Nuclear
!ill Nuclear
* Coal ELECTRIC REVENUES AND SALES Electric revenues, net of fuel costs, increased
* Coal 21
$4.4 million or 1.1%in1987.
 
Excluding the effect of the $28.1 million December 1986 Delaware Summit credit payment (See Note 4, page 35), net electric revenues decreased
Del111m1*a Poll'er C:- Ligbt Co111pmzv FINANCIAL REvlEW AND ANALYSIS RESULTS OF                          OPERATING EXPENSES OPERATIONS (continued)                        In 1986, the Summit credit payment resulted in a $14.3 million tax benefit and $13.5 million of additional amortization of the Summit credit. Excluding the effects of this transaction, operating expenses, other than fuel costs, decreased $12.9 million or 3.5% in 1987. This decrease resulted from lower income taxes due to the lower 1987 federal tax rate and lower pre-tax earnings.
$23.7 million or 5.3%. Major factors contributing to the decrease were a $34.4 million decrease in rates and $9.2 million of Peach Bottom replacement power expenses, which were partially offset by a $26.4 million increase from higher sales. Electric rates in all the Company's jurisdictions have been reduced from early 1986 levels, mainly due to the effects of the Tax Reform Act of 1986 and lower rates of return authorized by regulatory commissions. (See Note 10 on page 40 for a discussion of rate matters.)
The income tax decrease was partial~y offset by increases in operation, maintenance, and depreciation expenses. Increased costs incurred at the Company's jointly owned nuclear generating units and higher payroll costs were the primary factors contributing to the increase in operation and maintenance expenses. Depreciation continued to increase due to capital additions.
Electric sales continued to benefit from the strength and diversity of the service territory's economy. Residential sales increased 9.5% largely due to new residential construction and warmer summer weather. A commercial sales increase of7.0% resulted from customer growth in banking, business services and retail trade. Industrial sales recorded a 5.2% decline primarily due to the closing of a major customer, Phoenix Steel, in January 1987. Excluding the closing of Phoenix Steel, industrial sales increased 3.9% as a result of a broad-based increase in customer usage. Net electric revenues for 1986 decreased
Excluding the effects of the 1986 Summit credit payment, 1986 operating expenses, other than fuel costs, increased 5.9% from 1985. This increase was due to higher annual overhaul expenses for the Company's generating units, increased insurance costs and higher payroll costs.
$9.8 million or 2.3% from 1985. The 1986 decrease was primarily due to the $28.1 million Delaware Summit credit payment and a $13.5 million decrease in rates, offset by a $31.5 million sales increase.
OTHER INCOME (Net ofIncome Taxes)
The Delaware Summit credit payment did not affect 1986 earnings due to a corresponding reduction in operating expenses related to the payment. GAS REVENUES AND SALES Gas revenues, net of fuel costs, decreased
Other income, excluding allowance for funds used during construction, decreased $6.4 million in 1987. During 1987, the market value of the Company's interest rate sensitive investments decreased due to an overall rise in interest rates. This effect combined with the October 1987 stock market decline resulted in a $1.6 million write-down of securities to current market value and $1.1 million ofrealized securities' losses. A $2.0 million decrease in interest on tax refunds and a $0.8 million increase in initial expenses of subsidiary research and development projects also contributed to the reduction in 1987 other income. A $0.7 million interest and dividend income increase partially offset these decreases.
$0.4 million or 1.1%in1987.
Other income, excluding allowance for funds used during construction, increased $6.9 million in 1986 principally due to increased leveraged leasing income, higher interest and dividend income, interest on tax refunds, and investment tax credits on subsidiary investments.
The decrease was due to a 3.4% sales decrease that resulted from the closing of Phoenix Steel. Excluding the effect of Phoenix Steel, gas sales increased 6.2%. The largest factor contributing to the increase was a rise in oil prices, which caused customers with dual-fuel capability to use gas for most of the year. Also, the continued trend of residential and commercial customer growth increased sales in both of these sales classes. In 1986, netgas revenues increased
FINANCING COSTS Financing costs for 1987 remained relatively unchanged from 1986. In 1986, interest on long-term debt increased $7.2 million primarily due to the refinancing of $41.9 million of preferred stock with long-term debt in December 1985. During 1986, $87.1 million of bonds and preferred stock were refinanced with lower cost securities. The refinancings resulted in a net of tax savings of
$2.7 million or 9.4% over 1985. $1.1 million of the increase was attributed to a 1985 rate increase that was effective for only ten months of 1985, compared to a full year in 1986. The remainder of the net increase was primarily attributed to increased residential and commercial sales, partially offset by lower sales to dual-fuel customers, who used more oil due to its relatively lower cost in 1986. FUEL MIX In 1987, generation from coal, nuclear, and oil and gas sources was 67%, 11 %, and 22%, respectively.
                                    $2.3 million in 1986.
The average fuel cost, which includes fuel, interchange and purchased power costs, increased to 1.98&#xa2;/kwh in 1987 from 1.84&#xa2; in 1986 and 1.94&#xa2; in 1985. Nuclear generation, which has the lowest fuel cost of all energy sources available to the Company, declined 37% in 1987, principally due to the NRC ordered shutdown of Peach Bottom. To replace the decrease in nuclear generation, increased generation from higher cost energy sources and increased power purchases were necessary.
IMPACT OF                          As a regulated utility, the Company's utility revenues provide for recovery of operating costs INFLATION                          and a return on rate base. The Company's rates of return authorized by regulatory commissions are affected by the impacts of inflation. The overall decline in interest rates during the past several years combined with lower rates of inflation have resulted in lower rates of return authorized by regulatory commissions. Inflation can also affect tl1e Company's financial performance if rate relief is not granted on a timely basis for increased operating costs. However, inflation's impacts on operating costs has moderated in recent years due to lower inflation rates.
A rise in 1987 oil prices also increased the average fuel cost. The increase in the average fuel cost was mitigated by a $4.4 million reduction in coal costs, mostly due to renegotiation of various contracts for the purchase and transportation of coal. 21 Del111m1*a Poll'er C:-Ligbt Co111pmzv FINANCIAL REvlEW AND ANALYSIS RESULTS OF OPERATIONS (continued)
The cost of replacing utility plant will be significantly higher than the historical cost reflected in the financial statements. Based on past practices of regulatory commissions, the Company anticipates it will recover the increased cost of facilities when replacement actually occurs.
IMPACT OF INFLATION 22 OPERATING EXPENSES In 1986, the Summit credit payment resulted in a $14.3 million tax benefit and $13.5 million of additional amortization of the Summit credit. Excluding the effects of this transaction, operating expenses, other than fuel costs, decreased
22
$12.9 million or 3.5% in 1987. This decrease resulted from lower income taxes due to the lower 1987 federal tax rate and lower pre-tax earnings.
 
The income tax decrease was offset by increases in operation, maintenance, and depreciation expenses.
Delmarva Power & Ligbt Company FINANCIAL REVIEW AND ANALYSIS INCOME TAXES                In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes, which is required to be implemented by 1989. This Statement establishes a new method of computing deferred taxes and other changes in accounting for income taxes. The Company has not yet determined the effects this new Statement may have on its results of operations and financial position, except for the impact on unprovided deferred taxes as discussed in Note 2 on page 35.
Increased costs incurred at the Company's jointly owned nuclear generating units and higher payroll costs were the primary factors contributing to the increase in operation and maintenance expenses.
LIQUIDITY AND              OVERVIEW CAPITAL RESOURCES The Company's liquidity is affected principally by its construction program and to a lesser degree, by other capital requirements such as maturing debt and sinking fund requirements. The capital resources available to meet these requirements are internally generated funds (cash from operations less common and preferred dividends) and external financing. The Company anticipates that internally generated funds will continue to be its primary capital resource.
Depreciation continued to increase due to capital additions.
Internally generated funds decreased $35.8 million in 1987 mainly due to electric rate reductions, a one-time $31.1million1986 refund of taxes and interest (related to taxation of the Summit credit), and the effects of the Tax Reform Act of 1986. Increased electric sales partially offset these decreases in internally generated funds. The Company's future levels of internally generated funds will depend significantly upon economic conditions and regulatory actions.
Excluding the effects of the 1986 Summit credit payment, 1986 operating expenses, other than fuel costs, increased 5.9% from 1985. This increase was due to higher annual overhaul expenses for the Company's generating units, increased insurance costs and higher payroll costs. OTHER INCOME (Net of Income Taxes) Other income, excluding allowance for funds used during construction, decreased
Ratio of Earnings to Fixed Interest Charges (SEC metbod)
$6.4 million in 1987. During 1987, the market value of the Company's interest rate sensitive investments decreased due to an overall rise in interest rates. This effect combined with the October 1987 stock market decline resulted in a $1.6 million write-down of securities to current market value and $1.1 million ofrealized securities' losses. A $2.0 million decrease in interest on tax refunds and a $0.8 million increase in initial expenses of subsidiary research and development projects also contributed to the reduction in 1987 other income. A $0.7 million interest and dividend income increase partially offset these decreases.
FINANCING AND CAPITALIZATION 5.0                      The Company's capital structure, which has maintained an appropriate balance between debt and equity, changed little from 1986. The Company's ratepayers continued to benefit from 1985 and 1986 refinancings which lowered the overall cost of capital. A variety of factors may have an impact on future capital costs. The Company's ratio of pre-tax earnings to fixed charges (computed according to SEC regulations) declined from 3.70 in 1986 to 3.16 in 1987, principally due to electric rate reductions. Despite this decline, the Company's ratio of pre-tax earnings to fixed charges continues to indicate a strong ability to make interest payments to bondholders.
Other income, excluding allowance for funds used during construction, increased
A further decrease may occur in 1988 since pre-tax income will be adversely affected by electric rate reductions resulting from the lower 1988 federal tax rate. During 1987 various bond rating agencies lowered the Company's bond and preferred stock ratings. Moody's Investor Service and 3.0                      Standard and Poors downgraded the Company's senior debt to Aa2 and A+ , respectively, and preferred stock to Aa3 and A, respectively. Although these ratings are lower than recent years, they are still strong and will enable the Company to raise capital in the future at a reasonable cost.
$6.9 million in 1986 principally due to increased leveraged leasing income, higher interest and dividend income, interest on tax refunds, and investment tax credits on subsidiary investments.
2.0                      External financing requirements are estimated to be $56 million and $66 million in 1988 and 1989, respectively. The need for external financing in 1988 is partly due to the June 1988 maturity of $25 million in bonds carrying a 3'l's% interest rate. The financing requirements will be satisfied through a mix of debt and equity. An amendment to the shareholder's Dividend Reinvestment Plan, that provides for the issue of new shares as an alternative to buying existing shares on the I.O                      open market, has been approved by the Board of Directors as one of the possible methods of raising equity capital. A total of $30 million of tax exempt variable rate demand bonds are planned to be issued during 1988 and 1989. These bonds normally carry a very favorable interest rate in comparison to other types of debt.
FINANCING COSTS Financing costs for 1987 remained relatively unchanged from 1986. In 1986, interest on long-term debt increased
0 83 84 85 86 87 23
$7.2 million primarily due to the refinancing of $41.9 million of preferred stock with long-term debt in December 1985. During 1986, $87.1 million of bonds and preferred stock were refinanced with lower cost securities.
 
The refinancings resulted in a net of tax savings of $2.3 million in 1986. As a regulated utility, the Company's utility revenues provide for recovery of operating costs and a return on rate base. The Company's rates of return authorized by regulatory commissions are affected by the impacts of inflation.
De/111an;c1 Pon*er & Ligbt Company FINANCIAL REvlEW AND ANALYSIS FINANCING AND                                  Other capital resources available to the Company include commercial paper and lines of credit.
The overall decline in interest rates during the past several years combined with lower rates of inflation have resulted in lower rates of return authorized by regulatory commissions.
CAPITALIZATION                                The Company can issue commercial paper, supported by adequate lines of credit, to meet (continued)                                    fluctuations in working capital requirements and for interim financing of construction projects.
Inflation can also affect tl1e Company's financial performance if rate relief is not granted on a timely basis for increased operating costs. However, inflation's impacts on operating costs has moderated in recent years due to lower inflation rates. The cost of replacing utility plant will be significantly higher than the historical cost reflected in the financial statements.
At December 31, 1987, the Company had $6 million of commercial paper outstanding. The Company has lines of credit with banks in the amount of $54.5 million. These lines are available for bank loans and to secure commercial paper borrowings as the need arises.
Based on past practices of regulatory commissions, the Company anticipates it will recover the increased cost of facilities when replacement actually occurs.
In October 1987, the Company issued, through the Delaware Economic Development Authority,
Delmarva Power & Ligbt Company FINANCIAL REVIEW AND ANALYSIS INCOME TAXES LIQUIDITY AND CAPITAL RESOURCES Ratio of Earnings to Fixed Interest Charges (SEC metbod) 5.0 3.0 2.0 I.O 0 83 84 85 86 87 In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes, which is required to be implemented by 1989. This Statement establishes a new method of computing deferred taxes and other changes in accounting for income taxes. The Company has not yet determined the effects this new Statement may have on its results of operations and financial position, except for the impact on unprovided deferred taxes as discussed in Note 2 on page 35. OVERVIEW The Company's liquidity is affected principally by its construction program and to a lesser degree, by other capital requirements such as maturing debt and sinking fund requirements.
                                              $8 million of Variable Rate Demand Exempt Facilities Revenue Bonds, which had an average interest rate of 5.1%in1987. The proceeds were used to finance additions to the Company's gas system. The Company's subsidiaries issued $11 million of 15 year 9.65% First Mortgage Notes in October 1987 to finance a new office building and, in December 1987, repaid $15 million of a $43 million bank loan.
The capital resources available to meet these requirements are internally generated funds (cash from operations less common and preferred dividends) and external financing.
CAPITAL AND CONSTRUCTION REQUIREMENTS For the period 1985-1987, the Company had total capital requirements of $470 million, including
The Company anticipates that internally generated funds will continue to be its primary capital resource.
                                              $340 million for construction (excluding AFUDC). During the same period, $431 million was Construction                                  generated internally (i.e., cash from operations less common and preferred dividends) which Expenditures and                             represents 92% of the capital requirements and 127% of the construction requirements. Capital Internally                                   requirements for the period 1988-1990 are estimated to be $517 million, including $490 million Generated Funds                              for construction (excluding AFUDC). The Company presently anticipates that, for the period (millions of dollars) 1988-1990, internally generated funds will be $321 million which equals 62% of the total capital requirements and 66% of its construction requirements. Actual construction expenditures may 180 vary from the above estimates due to, among other factors, the rate of inflation, regulation and legislation, rates of load growth, licensing and construction delays, results of rate proceedings, and the cost and availability of capital.
Internally generated funds decreased
The Company estimates that its annual energy and peak load growth for the next 10 years will 150 be at a rate of 2.25% and 2.0%, respectively. The Company's present generating capacity of 2,277 megawatts provides a reserve of 9% against the Company peak of 2,084 megawatts experienced in the summer of 1987. In 1986, the Company peak was 1,840 megawatts.
$35.8 million in 1987 mainly due to electric rate reductions, a one-time $31.1million1986 refund of taxes and interest (related to taxation of the Summit credit), and the effects of the Tax Reform Act of 1986. Increased electric sales partially offset these decreases in internally generated funds. The Company's future levels of internally generated funds will depend significantly upon economic conditions and regulatory actions. FINANCING AND CAPITALIZATION The Company's capital structure, which has maintained an appropriate balance between debt and equity, changed little from 1986. The Company's ratepayers continued to benefit from 1985 and 1986 refinancings which lowered the overall cost of capital. A variety of factors may have an impact on future capital costs. The Company's ratio of pre-tax earnings to fixed charges (computed according to SEC regulations) declined from 3.70 in 1986 to 3.16 in 1987, principally due to electric rate reductions.
The Company's approach to supplying adequate amounts of electricity in the future is to match capacity expansion and load growth as closely as possible. The Company plans to delay its next base load unit until the mid-1990's due to the high cost of adding new capacity and possible future technological developments. The plan to achieve this delay includes various demand and supply side options. The accelerated load growth over the past several years has caused the Company to move ahead with the installation of two 100 megawatt combustion turbine generating units, costing an approximate total of $44 million. The first unit is scheduled to be operational by mid 1989, assuming timely permitting, followed a few months later by the second unit. Demand side options being implemented include voluntary residential load control devices and rate incentives for load management by industrial and commercial customers.
Despite this decline, the Company's ratio of pre-tax earnings to fixed charges continues to indicate a strong ability to make interest payments to bondholders.
Additionally, the Company has various other options that could be employed if future load growth is significantly different than forecasted. The Company's strategy is designed to provide an adequate and reliable supply of electricity at the lowest reasonable cost.
A further decrease may occur in 1988 since pre-tax income will be adversely affected by electric rate reductions resulting from the lower 1988 federal tax rate. During 1987 various bond rating agencies lowered the Company's bond and preferred stock ratings. Moody's Investor Service and Standard and Poors downgraded the Company's senior debt to Aa2 and A+ , respectively, and preferred stock to Aa3 and A, respectively.
Although these ratings are lower than recent years, they are still strong and will enable the Company to raise capital in the future at a reasonable cost. External financing requirements are estimated to be $56 million and $66 million in 1988 and 1989, respectively.
The need for external financing in 1988 is partly due to the June 1988 maturity of $25 million in bonds carrying a 3'l's% interest rate. The financing requirements will be satisfied through a mix of debt and equity. An amendment to the shareholder's Dividend Reinvestment Plan, that provides for the issue of new shares as an alternative to buying existing shares on the open market, has been approved by the Board of Directors as one of the possible methods of raising equity capital. A total of $30 million of tax exempt variable rate demand bonds are planned to be issued during 1988 and 1989. These bonds normally carry a very favorable interest rate in comparison to other types of debt. 23 De/111an;c1 Pon*er & Ligbt Company FINANCIAL REvlEW AND ANALYSIS FINANCING AND CAPITALIZATION (continued)
Construction Expenditures and Internally Generated Funds (millions of dollars) .............................................
180 150
* Internally Generated Funds
* Internally Generated Funds
* Construction Expenditures (excluding AFUDC) 24 Other capital resources available to the Company include commercial paper and lines of credit. The Company can issue commercial paper, supported by adequate lines of credit, to meet fluctuations in working capital requirements and for interim financing of construction projects.
* Construction Expenditures (excluding AFUDC) 24
At December 31, 1987, the Company had $6 million of commercial paper outstanding.
                                                                                                                                                  ,j
The Company has lines of credit with banks in the amount of $54.5 million. These lines are available for bank loans and to secure commercial paper borrowings as the need arises. In October 1987, the Company issued, through the Delaware Economic Development Authority, $8 million of Variable Rate Demand Exempt Facilities Revenue Bonds, which had an average interest rate of 5.1%in1987.
 
The proceeds were used to finance additions to the Company's gas system. The Company's subsidiaries issued $11 million of 15 year 9.65% First Mortgage Notes in October 1987 to finance a new office building and, in December 1987, repaid $15 million of a $43 million bank loan. CAPITAL AND CONSTRUCTION REQUIREMENTS For the period 1985-1987, the Company had total capital requirements of $470 million, including
Delmarua Pou*er & Ligbt Company REPORT OF                   Management is responsible for the information ~d representations contained in the Company's MANAGEMENT                  financial statements. Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.
$340 million for construction (excluding AFUDC). During the same period, $431 million was generated internally (i.e., cash from operations less common and preferred dividends) which represents 92% of the capital requirements and 127% of the construction requirements.
Capital requirements for the period 1988-1990 are estimated to be $517 million, including
$490 million for construction (excluding AFUDC). The Company presently anticipates that, for the period 1988-1990, internally generated funds will be $321 million which equals 62% of the total capital requirements and 66% of its construction requirements.
Actual construction expenditures may vary from the above estimates due to, among other factors, the rate of inflation, regulation and legislation, rates of load growth, licensing and construction delays, results of rate proceedings, and the cost and availability of capital. The Company estimates that its annual energy and peak load growth for the next 10 years will be at a rate of 2.25% and 2.0%, respectively.
The Company's present generating capacity of 2,277 megawatts provides a reserve of 9% against the Company peak of 2,084 megawatts experienced in the summer of 1987. In 1986, the Company peak was 1,840 megawatts.
The Company's approach to supplying adequate amounts of electricity in the future is to match capacity expansion and load growth as closely as possible.
The Company plans to delay its next base load unit until the mid-1990's due to the high cost of adding new capacity and possible future technological developments.
The plan to achieve this delay includes various demand and supply side options. The accelerated load growth over the past several years has caused the Company to move ahead with the installation of two 100 megawatt combustion turbine generating units, costing an approximate total of $44 million. The first unit is scheduled to be operational by mid 1989, assuming timely permitting, followed a few months later by the second unit. Demand side options being implemented include voluntary residential load control devices and rate incentives for load management by industrial and commercial customers.
Additionally, the Company has various other options that could be employed if future load growth is significantly different than forecasted.
The Company's strategy is designed to provide an adequate and reliable supply of electricity at the lowest reasonable cost. ,j Delmarua Pou*er & Ligbt Company REPORT OF MANAGEMENT REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Management is responsible for the information representations contained in the Company's financial statements.
Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.
Delmarva Power & Light Company maintains a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified personnel.
Delmarva Power & Light Company maintains a system of internal controls designed to provide reasonable, but not absolute, assurance of the reliability of the financial records and the protection of assets. The internal control system is supported by written administrative policies, a program of internal audits, and procedures to assure the selection and training of qualified personnel.
Coopers & Lybrand, independent certified public accountants, are engaged to examine the financial statements and express their opinion thereon. Their examination was conducted in accordance with generally accepted auditing standards which include a review of internal controls.
Coopers & Lybrand, independent certified public accountants, are engaged to examine the financial statements and express their opinion thereon. Their examination was conducted in accordance with generally accepted auditing standards which include a review of internal controls.
The audit committee of the Board of Directors, composed of outside Directors only, meets with management, internal auditors and independent accountants to review accounting, auditing and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the audit committee, subject to shareholder approval.
The audit committee of the Board of Directors, composed of outside Directors only, meets with management, internal auditors and independent accountants to review accounting, auditing and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the audit committee, subject to shareholder approval.
Nevius M. Curtis Chairman, President and Chief Executive Officer TO THE BOARD OF DIRECTORS AND STOCKHOLDERS DELMARVA POWER & LIGHT COMPANY WILMINGTON, DELA WARE Paul S. Gerritsen Vice President and Chief Financial Officer We have examined the consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company as of December 31, 1987 and 1986, and the related consolidated statements of income, changes in common stockholders' equity and changes in financial position, for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing_
                              ~~~k Nevius M. Curtis                                             Paul S. Gerritsen Chairman, President and                                      Vice President and Chief Executive Officer                                     Chief Financial Officer REPORT OF                    TO THE BOARD OF DIRECTORS AND STOCKHOLDERS INDEPENDENT                  DELMARVA POWER & LIGHT COMPANY CERTIFIED PUBLIC            WILMINGTON, DELAWARE ACCOUNTANTS                  We have examined the consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company as of December 31, 1987 and 1986, and the related consolidated statements of income, changes in common stockholders' equity and changes in financial position, for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing_ standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.
In our opinion, the financial statements referred to above present fairly the consolidated financial position of Delmarva Power & Light Company at December 31, 1987 and 1986 and the consolidated results of its operations and changes in its financial position for each of the three years in the period ended December 31, 1987 in conformity with generally accepted accounting principles applied on a consistent basis.
In our opinion, the financial statements referred to above present fairly the consolidated financial position of Delmarva Power & Light Company at December 31, 1987 and 1986 and the consolidated results of its operations and changes in its financial position for each of the three years in the period ended December 31, 1987 in conformity with generally accepted accounting principles applied on a consistent basis. 2400 Eleven Penn Center Philadelphia, Pennsylvania February 5, 1988 25 Delmarva Poil'er & Light Company CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)
2400 Eleven Penn Center Philadelphia, Pennsylvania February 5, 1988 25
For tbe Years Ended December 31 OPERATING REVENUES Electric Gas Steam OPERATING EXPENSES Operation:
 
Fuel for electric generation Net interchange and purchased power Purchased gas Deferred energy costs Other Maintenance Depreciation Amortization of Summit credit Taxes on income Taxes other than income OPERATING INCOME OTHER INCOME Allowance for other funds used during construction Other, net INCOME BEFORE INTEREST CHARGES
Delmarva Poil'er & Light Company CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)
* INTEREST CHARGES Long-term debt Other Allowance for borrowed funds used during construction EARNINGS Net income Dividends on preferred stock Earnings applicable to common stock COMMON STOCK Average shares outstanding (Thousands)
For tbe Years Ended December 31                                 1987          1986          1985 OPERATING REVENUES           Electric                                                     $612,367        $602,240      $605,581 Gas                                                              78,233        91,802        95,256 Steam                                                            21,879        20,821        21,997 712,479        714,863      722,834 OPERATING EXPENSES            Operation:
Earnings per average share Dividends declared per share See accompanying Notes to Consolidated Financial Statements.
Fuel for electric generation                                211,006        207,862      240,901 Net interchange and purchased power                        (10,162)        (28,098)      (63,962)
1987 $612,367 78,233 21,879 712,479 211,006 (10,162) 45,208 (8,994) 132,914 65,738 68,907 (907) 53,450 30,352 587,512 1;24,967 3,453 6,889 10,342 135,309 54,989 1,667 (1,150) 55,506 79,803 6,814 $ 72,989 45,717 $ 1.60 $ 1.42 1/21 1986 1985 $602,240 $605,581 91,802 95,256 20,821 21,997 714,863 722,834 207,862 240,901 (28,098) (63,962) 57,012 69,847 7,767 (2,549) 128,116 121,105 62,621 59,406 64,657 61,183 (15,707) (7,202) 65,208 77,836 30,687 30,754 580,125 587,319 134,738 135,515 I 2,750 2,428 13,267 6,382 16,017 8,810 150,755 144,325 54,478 47,236 922 1,059 (768) (608) I 54,632 47,687 I 96,123 96,638 7,405 12,599 $ 88,718 $ 84,039 45,717 45,717 $ 1.94 $ 1.84 $ 1.36 1 131 $ 1.292/3 Delmarva Power & Lig/Jt Company CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Dollars in Thousands)
Purchased gas                                                45,208        57,012        69,847 Deferred energy costs                                        (8,994)         7,767        (2,549)
For the Years Ended December 31 1987 1986 1985 CASH FROM Net Income $ 79,803 $ 96,123 $ 96,638 OPERATIONS Items not requiring (providing) cash: Depreciation 68,907 64,657 61,183 Amortization of Summit credit (907) (15,707) (7,202) Amortization of nuclear fuel 6,027 5,405 6,594 Allowance for funds used during construction (AFUDC) (4,603) (3,518) (3,036) Investment tax credits, net (3,132) (956) 21,878 Deferred income taxes, net 33,616 54,535 47,462 Other 3,378 206 (2,307) Refundable taxes and interest 31,111 (:Z-,981)
Other operati~n                                            132,914         128,116      121,105 Maintenance                                                    65,738         62,621        59,406 Depreciation                                                    68,907        64,657        61,183 Amortization of Summit credit                                      (907)       (15,707)      (7,202)
Net change in: Receivables, inventory
Taxes on income                                                  53,450         65,208        77,836 Taxes other than income                                          30,352        30,687        30,754 587,512         580,125      587,319 OPERATING INCOME                                                                            1;24,967       134,738      135,515 I
& payables 16,012 17,228 20,915 Other current assets & liabilities*
OTHER INCOME                  Allowance for other funds used during construction                                      3,453          2,750        2,428 Other, net                                                        6,889        13,267        6,382 10,342        16,017        8,810 INCOME BEFORE INTEREST CHARGES
(4,471) (21,154) (19,140) Net cash flow from operating activities 194,630 227,930 220,004 INVESTING ACTMTIES Construction expenditures (excluding AFUDC) (142,239)  
* 135,309        150,755      144,325 INTEREST CHARGES              Long-term debt                                                  54,989        54,478        47,236 Other                                                            1,667            922        1,059 Allowance for borrowed funds used during construction                                      (1,150)          (768)         (608)   I 55,506        54,632        47,687 I
(102,597)  
EARNINGS                      Net income                                                      79,803        96,123        96,638 Dividends on preferred stock                                      6,814          7,405        12,599 Earnings applicable to common stock                          $ 72,989        $ 88,718      $ 84,039 COMMON STOCK                  Average shares outstanding (Thousands)                           45,717        45,717        45,717 Earnings per average share                                  $      1.60      $    1.94    $    1.84 Dividends declared per share                                $      1.42 1/21 $    1.361131 $    1.292/3 See accompanying Notes to Consolidated Financial Statements.
(94,923) Investment in leveraged leases (8,067) (28,682) (45,006) Investment in partnerships (16,091) (5,372) Decrease (increase) in marketable securities 33,497 (51,249) (32,308) Construction funds held by trustee (180) 9,186 6,392 Other (1,137) (3,314) (8,313) Net cash used by investing activities (134,217)  
 
(182,028)  
Delmarva Power & Lig/Jt Company CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Dollars in Thousands)
(174,158)
For the Years Ended December 31                                        1987              1986              1985 CASH FROM                    Net Income                                                          $ 79,803          $ 96,123         $ 96,638 OPERATIONS                  Items not requiring (providing) cash:
FINANCING ACTMTIES Dividends:
Depreciation                                                        68,907              64,657            61,183 Amortization of Summit credit                                          (907)        (15,707)            (7,202)
Common (64,618) (61,574) C58,525) I Preferred (6,814) (7,405) (12,599) Redemptions:
Amortization of nuclear fuel                                          6,027            5,405              6,594 Allowance for funds used during construction (AFUDC)                                              (4,603)            (3,518)            (3,036)
Term loan (33,000) Long-term debt (15,205) (114,250)
Investment tax credits, net                                          (3,132)              (956)           21,878 Deferred income taxes, net                                          33,616              54,535            47,462 Other                                                                  3,378              206            (2,307)
(10,100) Preferred stock (800) (31,635) (41,573) Premium on redemption of securities (6,218) (2,814) Issuances:
Refundable taxes and interest                                                              31,111            (:Z-,981)
First mortgage bonds 126,000 Variable rate demand bonds 8,000 33,500 Other _long-term debt 11,000 18,000 80,000 Preferred stock 28,000 Net change in short-term debt 6,000 Net cash used by financing activities (62,437) ( 49,082) (45,111) Net increase (decrease) in cash $ (2,024) $ (3,180) $ 735 I *Other than long-tenn debt due and preferred stock redeemable within one year and current deferred income taxes. See accompanying Notes to Consolidated Financial Statements.
Net change in:
27 _J Delmcm:a Power & Ligbt Company CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
Receivables, inventory & payables                                  16,012              17,228            20,915 Other current assets & liabilities*                                  (4,471)         (21,154)           (19,140)
ASSETS As of December 31 UTILITY PLANT-Electric AT ORIGINAL COST Gas Steam Common Less: Accumulated depreciation Net utility plant in service Plant held for future use Construction work in progress Nuclear fuel, at amortized cost OTHER INVESTMENTS Investment in leveraged leases Other CURRENT ASSETS Cash Marketable securities, at lower of cost or market Accounts receivable:
Net cash flow from operating activities                              194,630            227,930          220,004 INVESTING ACTMTIES          Construction expenditures (excluding AFUDC)                                                (142,239)          (102,597)           (94,923)
Customers Other Inventories, at average cost: Fuel (coal, oil and gas) Materials and supplies Prepayments Deferred energy costs, net Deferred income taxes, net DEFERRED CHARGES Unamortized debt expense AND OTHER ASSETS Deferred recoverable plant costs Other Total See accompanying Notes to Consolidated Financial Statements.
Investment in leveraged leases                                          (8,067)          (28,682)          (45,006)
28 1987 1986 $1,739,339
Investment in partnerships                                            (16,091)             (5,372)
$1,689,767 103,788 96,782 24,913 24,746 103,011 97,624 -1,971,051 1,908,919 647,728 596,747 1,323,323 1,312,172 6,838 6,830 80,850 45,467 20,791 19,461 1,431,802 1,383,930 70,071 60,716 40,533 11,178 110,604 71,894 12,204 14,228 76,081 111,205 44,492 46,844 10,023 19,433 45,703 43,745 22,820 21,284 5,882 4,999 2,471 (6,229) 116 1,326 219,792 256,835 6,307 6,233 9,120 8,145 22,197 15,790 37,624 30,168 $1,799,822
Decrease (increase) in marketable securities                          33,497            (51,249)           (32,308)
$1,742,827 Delmarva Power & Ligbt Company CONSOLIDATED BALANCE SHEETS CAPITALIZATION (Dollars in Thousands)
Construction funds held by trustee                                        (180)           9,186              6,392 Other                                                                  (1,137)           (3,314)           (8,313)
AND LIABILITIES Asa/December 31 CAPITALIZATION Common stock (see Statements Additional paid-in capital of Capitalization)
Net cash used by investing activities                                (134,217)         (182,028)         (174,158)
Retained earnings Total common stockholders' equity Preferred stock: Without mandatory redemption With mandatory redemption Long-term debt CURRENT LIABILITIES Short-term debt Long-term debt due and preferred stock redeemable within one year Accounts payable Taxes accrued Interest accrued Dividends declared Other DEFERRED CREDITS Deferred income taxes, net AND OTHER Deferred investment tax credits LIABILITIES Other OTHER Commitments and Contingencies (Notes 7and11) Total See accompanying Notes to Consolidated Financial Statements.
FINANCING ACTMTIES          Dividends: Common                                                    (64,618)           (61,574)           C58,525) I Preferred                                                (6,814)            (7,405)         (12,599)
1987 1986 $ 102,864 $ 102,876 234,890 235,187 257,221 249,386 594,975 587,449 103,306 103,306 2,477 3,277 645,270 666,829 1,346,028 1360,861 6,000 26,268 950 39,691 31,947 6,394 1,961 11,051 10,937 16,687 16,155 10,625 10,060 116,716 72,010 263,706 231,360 66,328 69,460 7,044 9,136 337,078 309,956 $1,799,822
Redemptions: Term loan                                                                                      (33,000)
$1,742,827 29 _J Delmarva Power & Light Company CONSOLIDATED STATEMENTS OF CAPITALIZATION COMMON STOCKHOLDERS' EQUI1Y CUMULATIVE PREFERRED STOCK LONG-TERM DEBT (Dollars in Thousands)
Long-term debt                                      (15,205)         (114,250)           (10,100)
Asa/December 31 1987 Common stock, par value $2.25 per share, authorized 90,000,000 shares, outstanding 45,717,450 shares $ 102,864 Additional paid-in capital 234,890 Retained earnings 257,221 Total Common Stockholders' Equity 594,975 43% Without Mandatory Redemption:
Preferred stock                                          (800)         (31,635)           (41,573)
Par value $1 per share, 10,000,000 shares authorized, none outstanding Par value $25 per share, 3,000,000 shares authorized, none outstanding Par value $100 per share, 1,800,000 shares authorized:
Premium on redemption of securities                                                          (6,218)           (2,814)
Series Shares Issued (1987 and 1986) 3.70%-4.56%
Issuances: First mortgage bonds                                                          126,000 Variable rate demand bonds                                8,000                              33,500 Other _long-term debt                                   11,000              18,000            80,000 Preferred stock                                                             28,000 Net change in short-term debt                                            6,000 Net cash used by financing activities                                (62,437)           ( 49,082)         (45,111)
240,000 and 240,000 5.00%-7.84%
Net increase (decrease) in cash                                    $    (2,024)       $    (3,180)       $        735 I
330,000 and 330,000 7.88%-8.96%
                            *Other than long-tenn debt due and preferred stock redeemable within one year and current deferred income taxes.
200,000 and 200 1 000 Adjustable-6.06%C 1 J 280,000 and 280,000 Less: Cost of shares (17,200) held in treasury Preferred Stock without Mandatory Redemption With Mandatory Redemption:
See accompanying Notes to Consolidated Financial Statements.
9.00% Seriesc 2 i 32,766 and 40,766 shares Amount to be redeemed within one year Preferred Stock with Mandatory Redemption First Mortgage and Collateral Trust Bonds: Maturity Interest Rates Jun. 1, 1988 37;8% 1994-1997 4s/s%-63/s%
27
1998-2002 7%-113/4%
_J
2003-2005 6.6%-10%%
 
2008-2016 9%%-12% Pollution Control Notes: Series, 1973 5.7% effective rate, due 1988-1998 Series, 1976 7.3% effective rate, due 1992-2006 Variable Rate Demand Series, due 2014-2017-4.73%Cll First Mortgage Notes, 9.65%<3 J Other Long-Term Debt, 9.89%, due 1989 Unamortized premium and discount, net Long-term debt due within one year Total Long-Term Debt Total Capitalization
Delmcm:a Power & Ligbt Company CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)
<1 lAverage rate during 1987. 24,000 33,000 20,000 28,000 105,000 1,694 103,306 8% 3,277 0% (800) 2,477 25,000 50,000 158,100 92,150 207,900 533,150 7,400 34,500 41,900 57,000 10,945 28,000 (257) 670,738 49% (25,468) 645,270 $1,346,028 100% 1986 $ 102,876 235,187 249,386 587,449 43% 24,000 33,000 20,000 28,000 105,000 1,694 103,306 8% 4,077 0% (800) 3,277 25,000 50,000 158,100 92,150 207,900 533,150 7,550 34,500 42,050 49,000 -43,000 (221) 666,979 49% (150) 666,829 $1,360,861 100% <2 J Redemption price at December 31, 1987 is $107. <3 lRepaid through monthly payments of principal and interest over 15 years ending November 2002. 30 See accompanying Notes to Consolidated Financial Statements.
ASSETS                      As ofDecember 31                                                  1987      1986 UTILITY PLANT-              Electric                                                    $1,739,339  $1,689,767 AT ORIGINAL COST            Gas                                                              103,788      96,782 Steam                                                            24,913      24,746 Common                                                          103,011      97,624
Delmarua Power & Ligbt CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY BALANCE AS OF JANUARY 1, 1985 BALANCE AS OF DECEMBER 31, 1985 BALANCE AS OF DECEMBER 31, 1986 BALANCE AS OF DECEMBER 31, 1987 (Dollars in Thousands)
                                                                                          -1,971,051  1,908,919 Less: Accumulated depreciation                                  647,728    596,747 Net utility plant in service                                   1,323,323  1,312,172 Plant held for future use                                         6,838      6,830 Construction work in progress                                     80,850    45,467 Nuclear fuel, at amortized cost                                   20,791      19,461 1,431,802  1,383,930 OTHER INVESTMENTS           Investment in leveraged leases                                   70,071      60,716 Other                                                             40,533      11,178 110,604    71,894 CURRENT ASSETS              Cash                                                              12,204      14,228 Marketable securities, at lower of cost or market                 76,081    111,205 Accounts receivable:
For the Three Years Ended December 31, 1987 Net Income Cash dividends declared:
Customers                                                     44,492    46,844 Other                                                         10,023      19,433 Inventories, at average cost:
Commonstock($1.29 2 13)* Preferred stock Redemption of preferred stock Common Shares* 45,717,450 Par Value $102,876 45.717.450 I 102,876 .1 Net Income Cash dividends declared:
Fuel (coal, oil and gas)                                       45,703    43,745 Materials and supplies                                         22,820      21,284 Prepayments                                                       5,882      4,999 Deferred energy costs, net                                         2,471      (6,229)
J Commonstock($1.36113)*_
Deferred income taxes, net                                           116      1,326 219,792    256,835 DEFERRED CHARGES           Unamortized debt expense                                           6,307      6,233 AND OTHER ASSETS           Deferred recoverable plant costs                                   9,120      8,145 Other                                                             22,197      15,790 37,624    30,168 Total                                                       $1,799,822  $1,742,827 See accompanying Notes to Consolidated Financial Statements.
Preferred stock Issuance of preferred stock Redemption of preferred stock Net Income Cash dividends declared:
28
Commonstock($1.42Y2)*
 
Preferred stock Three for two stock split: Cash paid for fractional shares Other expenses Redemption of preferred stock 45,717,450 102,876 (12) Additional Paid-in Capital $235,473 325 235,798 Retained Earnings $201,301 96,638 (59,287) I (12,599) (2,916) 223,137 96,123 (62,336) I (7,405) (650) 39 I c133) 235,187 249,386 79,803 (65,149) (6,814) I (302)1 _J 5 I (5) _4_5,7_1_7,_45_o.......
Delmarva Power & Ligbt Company CONSOLIDATED BALANCE SHEETS CAPITALIZATION            (Dollars in Thousands)
$102,864 I $234,890 I *Restated retroactively for April 29, 1987 tbree for two stock split. See accompanying Notes to Consolidated Financial Statements.
AND LIABILITIES            Asa/December 31                                                  1987     1986 CAPITALIZATION              Common stock                                                $   102,864 $ 102,876 (see Statements            Additional paid-in capital                                      234,890    235,187 of Capitalization)          Retained earnings                                              257,221    249,386 Total common stockholders' equity                            594,975    587,449 Preferred stock:
Total $539,650 96,638 (59,287) (12,599) (2,591) 561,811 96,123 (62,336) (7,405) (650) (94) 587,449 79,803 (65,149) (6,814): (12)1 (302) _I $594,975 31 Delman*a Power & Lig/Jt Compan1
Without mandatory redemption                                  103,306    103,306 With mandatory redemption                                      2,477      3,277 Long-term debt                                                  645,270    666,829 1,346,028  1360,861 CURRENT LIABILITIES        Short-term debt                                                  6,000 Long-term debt due and preferred stock redeemable within one year                                    26,268        950 Accounts payable                                                  39,691    31,947 Taxes accrued                                                    6,394      1,961 Interest accrued                                                11,051    10,937 Dividends declared                                              16,687    16,155 Other                                                            10,625    10,060 116,716     72,010 DEFERRED CREDITS            Deferred income taxes, net                                      263,706    231,360 AND OTHER                  Deferred investment tax credits                                  66,328    69,460 LIABILITIES                Other                                                            7,044      9,136 337,078    309,956 OTHER                      Commitments and Contingencies (Notes 7and11)
* NOTES To CONSOLIDATED FINANCIAL STATEMENTS I. SIGNIFICANT ACCOUNTING POLICIES 32 FINANCIAL STATEMENTS The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Delmarva Energy Company, Delmarva Industries Inc., Delmarva Services Company, and Delmarva Capital Investments, Inc. and its subsidiaries.
Total                                                        $1,799,822  $1,742,827 See accompanying Notes to Consolidated Financial Statements.
In conformity with generally accepted accounting principles, the accounting policies reflect the financial effects of rate decisions issued by regulatory commissions having jurisdiction over the Company's utility business.
29
Certain reclassifications, not affecting income, have been made to amounts reported in prior years to conform to the presentations used in 1987. REVENUES Revenues are recorded at the time billings are rendered to customers on a monthly cycle basis. At the end of each month, there is an amount of unbilled electric and gas service which has been rendered from the last meter reading to the month-end.
_J
 
Delmarva Power & Light Company CONSOLIDATED STATEMENTS OF CAPITALIZATION (Dollars in Thousands)
Asa/December 31                                                      1987                    1986 COMMON                      Common stock, par value $2.25 per share, STOCKHOLDERS'                  authorized 90,000,000 shares, outstanding EQUI1Y                        45,717,450 shares                                    $ 102,864                  $ 102,876 Additional paid-in capital                                  234,890                    235,187 Retained earnings                                          257,221                    249,386 Total Common Stockholders' Equity                          594,975      43%          587,449    43%
CUMULATIVE                  Without Mandatory Redemption:
PREFERRED STOCK            Par value $1 per share, 10,000,000 shares authorized, none outstanding Par value $25 per share, 3,000,000 shares authorized, none outstanding Par value $100 per share, 1,800,000 shares authorized:
Series      Shares Issued (1987 and 1986) 3.70%-4.56%          240,000 and 240,000                24,000                    24,000 5.00%-7.84%          330,000 and 330,000                33,000                    33,000 7.88%-8.96%          200,000 and 200 1000                20,000                    20,000 Adjustable-6.06%C1J 280,000 and 280,000                      28,000                    28,000 105,000                    105,000 Less: Cost of shares (17,200) held in treasury                1,694                    1,694 Preferred Stock without Mandatory Redemption                103,306        8%          103,306      8%
With Mandatory Redemption:
9.00% Seriesc2i      32,766 and 40,766 shares              3,277      0%            4,077      0%
Amount to be redeemed within one year                          (800)                    (800)
Preferred Stock with Mandatory Redemption                      2,477                    3,277 LONG-TERM DEBT              First Mortgage and Collateral Trust Bonds:
Maturity          Interest Rates Jun. 1, 1988          37;8%                              25,000                    25,000 1994-1997          4s/s%-63/s%                          50,000                    50,000 1998-2002          7%-113/4%                            158,100                    158,100 2003-2005          6.6%-10%%                            92,150                    92,150 2008-2016          9%%-12%                              207,900                    207,900 533,150                    533,150 Pollution Control Notes:
Series, 1973 5.7% effective rate, due 1988-1998                7,400                    7,550 Series, 1976 7.3% effective rate, due 1992-2006              34,500                    34,500 41,900                    42,050 Variable Rate Demand Series, due 2014-2017-4.73%Cll          57,000                    49,000 First Mortgage Notes, 9.65%<3J                                10,945                        -
Other Long-Term Debt, 9.89%, due 1989                        28,000                     43,000 Unamortized premium and discount, net                          (257)                    (221) 670,738      49%          666,979    49%
Long-term debt due within one year                          (25,468)                      (150)
Total Long-Term Debt                                        645,270                    666,829 Total Capitalization                                    $1,346,028      100%        $1,360,861  100%
                            <1lAverage rate during 1987.
2
                            < JRedemption price at December 31, 1987 is $107.
                            <3lRepaid through monthly payments ofprincipal and interest over 15 years ending November 2002.
30 See accompanying Notes to Consolidated Financial Statements.
 
Delmarua Power & Ligbt Compm~J' CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Dollars in Thousands)
Additional For the Three Years Ended              Common                    Par          Paid-in     Retained December 31, 1987                        Shares*                Value        Capital    Earnings      Total BALANCE AS OF JANUARY 1, 1985                                                    45,717,450                $102,876      $235,473    $201,301    $539,650 Net Income                                                                                    96,638      96,638 Cash dividends declared:
Commonstock($1.29 213)*                                                                  (59,287) I  (59,287)
Preferred stock                                                                          (12,599)    (12,599)
Redemption of preferred stock                                                                  325      (2,916)    (2,591)
BALANCE AS OF DECEMBER 31, 1985 Net Income 45.717.450            I    102,876  .1 235,798    223,137      561,811 96,123      96,123 Cash dividends declared:                                    J Commonstock($1.36113)*_                                                                  (62,336) I  (62,336)
Preferred stock                                                                            (7,405)    (7,405)
Issuance of preferred stock Redemption of (650)  ~                (650) preferred stock                                                                    39 I      c133)        (94)
                                                                                            ----~
BALANCE AS OF DECEMBER 31, 1986                                                  45,717,450                102,876        235,187    249,386      587,449 Net Income                                                                                    79,803      79,803 Cash dividends declared:
Commonstock($1.42Y2)*                                                                    (65,149)    (65,149)
Preferred stock                                                                            (6,814) I  (6,814):
Three for two stock split:
Cash paid for fractional shares Other expenses Redemption of preferred stock (12)
(302)1 _J                (12)1 (302)
_I 5 I        (5)
                                                                                                                        ~
BALANCE AS OF DECEMBER 31, 1987                                                _4_5,7_1_7,_45_o.......    $102,864 I    $234,890 I              $594,975
                            *Restated retroactively for April 29, 1987 tbree for two stock split.
See accompanying Notes to Consolidated Financial Statements.
31
 
Delman*a Power & Lig/Jt Compan1
* NOTES  To CONSOLIDATED FINANCIAL STATEMENTS I. SIGNIFICANT              FINANCIAL STATEMENTS ACCOUNTING POLICIES                  The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Delmarva Energy Company, Delmarva Industries Inc., Delmarva Services Company, and Delmarva Capital Investments, Inc. and its subsidiaries. In conformity with generally accepted accounting principles, the accounting policies reflect the financial effects of rate decisions issued by regulatory commissions having jurisdiction over the Company's utility business.
Certain reclassifications, not affecting income, have been made to amounts reported in prior years to conform to the presentations used in 1987.
REVENUES Revenues are recorded at the time billings are rendered to customers on a monthly cycle basis.
At the end of each month, there is an amount of unbilled electric and gas service which has been rendered from the last meter reading to the month-end.
FUEL COSTS Fuel costs (electric and gas) are deferred and charged to operations on the basis of fuel costs included in customer billings under the Company's tariffs, which are subject to periodic regulatory review and approval.
FUEL COSTS Fuel costs (electric and gas) are deferred and charged to operations on the basis of fuel costs included in customer billings under the Company's tariffs, which are subject to periodic regulatory review and approval.
DEPRECIATION AND MAINTENANCE The annual provision for depreciation of utility property is computed on the straight-line basis using composite rates by classes of depreciable property.
DEPRECIATION AND MAINTENANCE The annual provision for depreciation of utility property is computed on the straight-line basis using composite rates by classes of depreciable property. Provision for the costs of decommissioning of nuclear plant is made to the extent of the net cost of removal allowed for rate purposes (approximately 20% of original plant cost). The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.7%
Provision for the costs of decommissioning of nuclear plant is made to the extent of the net cost of removal allowed for rate purposes (approximately 20% of original plant cost). The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.7% for 1987, 3.5% for 1986 and 3.6% for 1985. The cost of maintenance and repairs, including renewals of minor items of property, is charged to operating expenses.
for 1987, 3.5% for 1986 and 3.6% for 1985.
A replacement of a unit of property is accounted for as an addition to and a retirement from utility plant. The original cost of the property retired is charged to accumulated depreciation together with the net cost of removal. For income tax purposes, the cost of removing retired property is deducted as an expense. NUCLEAR FUEL The Company's share of nuclear fuel costs relating to jointly-owned nuclear generating stations is charged to fuel expense on a unit of production basis, which includes a factor for spent nuclear fuel disposal costs pursuant to the Nuclear Waste Policy Act of 1982. The Company is collecting future storage and disposal costs for spent fuel as authorized by the regulatory commissions in each jurisdiction and is paying such amounts quarterly to the United States Department of Energy.
The cost of maintenance and repairs, including renewals of minor items of property, is charged to operating expenses. A replacement of a unit of property is accounted for as an addition to and a retirement from utility plant. The original cost of the property retired is charged to accumulated depreciation together with the net cost of removal. For income tax purposes, the cost of removing retired property is deducted as an expense.
Delmarva Power & Light Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
NUCLEAR FUEL The Company's share of nuclear fuel costs relating to jointly-owned nuclear generating stations is charged to fuel expense on a unit of production basis, which includes a factor for spent nuclear fuel disposal costs pursuant to the Nuclear Waste Policy Act of 1982. The Company is collecting future storage and disposal costs for spent fuel as authorized by the regulatory commissions in each jurisdiction and is paying such amounts quarterly to the United States Department of Energy.
: 1. SIGNIFICANT ACCOUNTING POLICIES (continued)
32
LEVERAGED LEASES The Company's net investment in leveraged leases includes the aggregate of rentals receivable (net of principal and interest on nonrecourse indebtedness) and estimated residual values of the leased equipment less unearned and deferred income (including investment tax credits).
 
Unearned and deferred income is recognized at a level rate of return during the periods in which the net investment is positive.
Delmarva Power & Light Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS
INCOME TAXES The Company and its wholly-owned subsidiaries file a consolidated federal income tax return. Income taxes are allocated to the Company's utility business and subsidiaries based upon their respective taxable incomes, tax credits, and the effects of the alternative minimum tax, if any. Deferred income taxes are provided on timing differences between the tax and financial accounting recognition of certain income and expenses.
: 1. SIGNIFICANT             LEVERAGED LEASES ACCOUNTING POLICIES                 The Company's net investment in leveraged leases includes the aggregate of rentals receivable (continued)              (net of principal and interest on nonrecourse indebtedness) and estimated residual values of the leased equipment less unearned and deferred income (including investment tax credits). Unearned and deferred income is recognized at a level rate of return during the periods in which the net investment is positive.
The principle timing difference arises from accelerated depreciation methods used for income tax purposes.
INCOME TAXES The Company and its wholly-owned subsidiaries file a consolidated federal income tax return.
Investment tax credits from regulated operations utilized to reduce federal income taxes are deferred and generally amortized over the useful lives of the related utility plant. Investment tax credits of the Company's non-regulated operations (excluding leveraged leases) are accounted for by the flow-through method. ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Allowance for funds used during construction (AFUDC) is a non-cash item and is defined in the regulatory system of accounts as the "net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds so used." AFUDC is segregated into two components:  
Income taxes are allocated to the Company's utility business and subsidiaries based upon their respective taxable incomes, tax credits, and the effects of the alternative minimum tax, if any.
(1) the interest on debt component  
Deferred income taxes are provided on timing differences between the tax and financial accounting recognition of certain income and expenses. The principle timing difference arises from accelerated depreciation methods used for income tax purposes. Investment tax credits from regulated operations utilized to reduce federal income taxes are deferred and generally amortized over the useful lives of the related utility plant. Investment tax credits of the Company's non-regulated operations (excluding leveraged leases) are accounted for by the flow-through method.
("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 FUNDS USED DURING CONSTRUCTION Allowance for funds used during construction (AFUDC) is a non-cash item and is defined in the regulatory system of accounts as the "net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds so used." AFUDC is segregated into two components: (1) the interest on debt component ("allowance for borrowed funds used during construction"), which is net of taxes and classified as a credit to interest charges, and (2) the common stock equity and preferred dividend component ("allowance for other funds used during construction"), which is classified as an item of other income. AFUDC is considered a cost of utility plant with a concurrent credit to income. It is excluded from taxable income for tax purposes. The rates used in determining AFUDC, which includes semi-annual compounding, were 8.5% in 1987 and 9.2% in 1986 and 1985.
("allowance for other funds used during construction"), which is classified as an item of other income. AFUDC is considered a cost of utility plant with a concurrent credit to income. It is excluded from taxable income for tax purposes.
33
The rates used in determining AFUDC, which includes semi-annual compounding, were 8.5% in 1987 and 9.2% in 1986 and 1985. 33 Def111rm:a Pou*er & Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
 
: 2. INCOME TAXES 34 (Dollars in Thousands) 1987 1986 1985 Operations:
Def111rm:a Pou*er & Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS
Federal: Current $28,592 $29,278 $32,557 Deferred 18,635 26,779 28,638 State: Current 5,934 5,051 6,320 Deferred 3,543 4,596 4,978 Investment tax credit adjustments, net (3,254) (496) 5,343 Other income: Current (16,177) (27,223) (29,788) Deferred 11,438 23,160 13,846 Investment tax credit adjustments, net 15,724 Total income tax expense $48,711 $61,145 $77,618 Investment tax credits utilized to reduce federal income taxes payable amounted to $1,835,000 in 1987, $5,450,000 in 1986 and $24,992,000 in 1985. The amounts for 1986 and 1985 include Employee Stock Ownership Plan credits of $464,000 and $535,000, respectively, which did not affect net income. The following is a reconciliation of the difference between income tax expense and the amount computed by multiplying income before tax by the federal statutory rate: (Dollars in Thousands)
: 2. INCOME TAXES               (Dollars in Thousands)                                           1987           1986           1985 Operations:
Statutory income tax expense Increase (decrease) in taxes resulting from: Exclusion of AFUDC for income tax purposes Depreciation not normalized ITC amortization/flow-through State income taxes, net of federal tax benefit Amortization of credit arising from sale of contracts Other, net Income tax expense 1987 Amount Rate $51,406 40% (1,842) (1) 1,504 1 (5,089) (4) 5,455 4 (354) (2,369) (2) $48,711 38% 1986 Amount Rate $72,343 46% (1,619) (1) 2,852 2 (5,947) (4) 5,333 3 (7,225) (5) (4,592) (3) $61,145 38% 1985 Amount Rate $80,158 46% (1,397) (1) 2,196 1 (4,028) (2) 6,160 3 (3,313) (2) (2,158) (1) $77,618 44% In 1987, the Tax Reform Act of 1986 substantially modified the Alternative Minimum Tax (AMT). The new AMT is based on 20% of alternative minimum taxable income as defined by the tax law. The AMT is paid only if it exceeds the regular corporate tax. Generally, the AMT is carried forward as a reduction of subsequent-year regular corporate tax in excess of the minimum tax. In 1987, the Company incurred an AMT liability of $2.6 million which did not affect income. The $2.6 million AMT in 1987 qualifies for carry forward treatment.
Federal: Current                                         $28,592         $29,278         $32,557 Deferred                                         18,635         26,779           28,638 State: Current                                               5,934           5,051           6,320 Deferred                                             3,543           4,596           4,978 Investment tax credit adjustments, net                       (3,254)           (496)         5,343 Other income: Current                                         (16,177)       (27,223)         (29,788)
De/J1wn'a P011'er Ec Light Coli/pany NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
Deferred                                     11,438         23,160           13,846 Investment tax credit adjustments, net                                                       15,724 Total income tax expense                                     $48,711         $61,145         $77,618 Investment tax credits utilized to reduce federal income taxes payable amounted to $1,835,000 in 1987, $5,450,000 in 1986 and $24,992,000 in 1985. The amounts for 1986 and 1985 include Employee Stock Ownership Plan credits of $464,000 and $535,000, respectively, which did not affect net income.
: 2. INCOME TAXES (continued)
The following is a reconciliation of the difference between income tax expense and the amount computed by multiplying income before tax by the federal statutory rate:
J. TAXES OTHER THAN INCOME 4. SUMMIT CREDIT The components of deferred income taxes relate to the following tax effects of timing differences between book and tax income: (Dollars in Thousands) 1987 1986 1985 Depreciation  
(Dollars in Thousands)                         1987                1986                  1985 Amount    Rate      Amount    Rate        Amount    Rate Statutory income tax expense             $51,406    40%      $72,343    46%        $80,158      46%
$30,013 $43,443 $33,394 Deferred energy costs 3,541 (2,082) 1,163 Capitalized overhead costs (1,296) 1,143 1,432 Deferred recoverable plant costs (254) 3,488 Pollution control amortization 2,717 3,076 3,629 ADR repair allowance 3,788 2,337 4,295 Unbilled revenues (2,331) Alternative.minimum tax (2,600) Other, net 38 I . 3,130 3,549 Total  
Increase (decrease) in taxes resulting from:
$47,462 $33,616 $54,535 The Company has not provided deferred income taxes of approximately  
Exclusion of AFUDC for income tax purposes                 (1,842)    (1)       (1,619)    (1)         (1,397)    (1)
$88 million, based on current income tax rates, related to cumulative timing differences of $221 million arising before the adoption of full tax normalization for ratemaking purposes by regulatory authorities.
Depreciation not normalized            1,504       1        2,852      2          2,196      1 ITC amortization/flow-through        (5,089)     (4)       (5,947)    (4)         (4,028)   (2)
The Company is collecting the unnormalized taxes in I.ts rate jurisdictions either on a levelized basis, over the life of the related plant facilities, or when actually paid to taxing authorities.
State income taxes, net of federal tax benefit              5,455      4        5,333      3          6,160      3 Amortization of credit arising from sale of contracts                (354)               (7,225)   (5)         (3,313)   (2)
Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes, requires the Company to record a liability for the unrecorded deferred taxes beginning in 1989. However, since the Company expects to recover the taxes through rates, an asset for the same amount would also be recorded. (Dollars in Thousands) 1987 1986 1985 Delaware utility $10,212 $11,869 $12,168 *property 7,481 6,787 6,784 Other gross receipts 5,777' 5,881 5,799 Payroll, franchise and other 6,882 6,150 6,003 ' Total $30,352 $30,687 The net proceeds received by the Company for the sale in 1975 of the contracts for a nuclear steam supply system (Summit) were initially deferred as a credit on the balance sheet. Since 1982, the Company has amortized the credit to income, offsetting the related reduction in customer revenue. In December 1986, the Company paid $28.1 million to Delaware retail electric customers primarily for the $13.5 million Delaware unamortized Summit credit balance and the $14.3 million income tax benefit of the payment. The effects of this payment are reflected in the 1986 income statement as a $28.1 million electric revenue reduction, $13.5 million additional Summit amortization and a $14.3 reduction of income taxes. 35 Delmarm Pou*er & Lig/Jt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
Other, net                            (2,369)     (2)       (4,592)   (3)         (2,158)   (1)
: 5. PENSION PLAN RETIREMENT BENEFITS 36 The Company has a trusteed noncontributory pension plan covering all regular employees.
Income tax expense                      $48,711      38%    $61,145    38%        $77,618     44%
The benefits are based on years of service and the employee's compensation.
In 1987, the Tax Reform Act of 1986 substantially modified the Alternative Minimum Tax (AMT).
The Company's funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum required contribution nor greater than the maximum tax deductible contribution.
The new AMT is based on 20% of alternative minimum taxable income as defined by the tax law. The AMT is paid only if it exceeds the regular corporate tax. Generally, the AMT is carried forward as a reduction of subsequent-year regular corporate tax in excess of the minimum tax.
There were no pension contributions in 1987 and 1986; the 1985 contribution was $3,284,000.
In 1987, the Company incurred an AMT liability of $2.6 million which did not affect income.
During 1987, the Company adopted Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions".
The $2.6 million AMT in 1987 qualifies for carry forward treatment.
Under the new method, the Company uses the projected unit credit method; previously, the entry age actuarial cost method had been used. The following table reconciles the plan assets and liabilities to the funded status of the plan as of December 31, 1987. Pension plari assets consist primarily of equity and public bond securities.
34
ACTIJARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS Accumulated benefit obligation Vested Nonvested Total Projected benefit obligation Plan assets at fair value Excess of plan assets over projected benefit obligation Unrecognized prior service cost Unrecognized net (gain) Unrecognized net transition (asset) Prepaid pension cost COMPONENTS OF 1987 NET PENSION COST Service cost-benefits earned during period Interest cost on projected benefit obligation Actual return on plan assets
 
* Net amortization and deferral Net pension cost 1987 (In Millions)
De/J1wn'a P011'er Ec Light Coli/pany NOTES To CONSOLIDATED FINANCIAL STATEMENTS
$136.5 21.1 157.6 229.0 293.2 64.2 1.5 (9.2) (56.4) $ 0.1 1987 (In Millions)  
: 2. INCOME TAXES                   The components of deferred income taxes relate to the following tax effects of timing differences (continued)                    between book and tax income:
$ 9.5 16.2 (15.8) (10.0) $. (0.1) The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation and the expected long-term rate of return on plan assets were 7.75% (7% at January 1, 1987) and 8%, respectively.
(Dollars in Thousands)                                             1987           1986           1985 Depreciation                                                     $30,013         $43,443       $33,394 Deferred energy costs                                             3,541         (2,082)         1,163 Capitalized overhead costs                                       (1,296)         1,143           1,432 Deferred recoverable plant costs                                   (254)         3,488 Pollution control amortization                                     2,717           3,076           3,629 ADR repair allowance                                               3,788           2,337           4,295 Unbilled revenues                                                 (2,331)
The rate of increase in future compensation ranges from 5.5% to 7.1%, graded by age. The January 1, 1986 act&#xb5;arial present value of accumulated plan benefits, using a discount rate of 8%, was $l18.7 million ($102.8 million vested). The market value of assets available for plan benefits was $253.5 million. The Company provides health care and life insurance benefits for retired employees.
Alternative.minimum tax                                           (2,600)
Substantially all of the Company's employees may become eligible for these benefits if they reach normal retirement age while still working for the Company. The Compapy recognizes the cost of providing these benefits by expensing the insurance claims as they are paid. These costs totalled $2,144,000, $2,009,000, and $2,094,000for1987, 1986and1985, respectively.
Other, net                                                             38 I .     3,130           3,549 Total                                                         ~-~--~
Delmarm Pou*er & Lig/Jt NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
                                                                                                  $33,616         $54,535       $47,462 The Company has not provided deferred income taxes of approximately $88 million, based on current income tax rates, related to cumulative timing differences of $221 million arising before the adoption of full tax normalization for ratemaking purposes by regulatory authorities. The Company is collecting the unnormalized taxes in I.ts rate jurisdictions either on a levelized basis, over the life of the related plant facilities, or when actually paid to taxing authorities. Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes, requires the Company to record a liability for the unrecorded deferred taxes beginning in 1989. However, since the Company expects to recover the taxes through rates, an asset for the same amount would also be recorded.
: 6. CAPITALIZATION COMMON STOCK On April 28, 1987, the stockholders approved (1) an increase in the number of authorized shares from 35,000,000 to 90,000,000, (2) a decrease in the par value per share from $3.3 75 to $2.25, and (3) a 3 for 2 stock split, effective April 29, 1987. As a result of the split, the number of shares issued and outstanding increased from 30,481,925 to 45,717,450.
J. TAXES OTHER                    (Dollars in Thousands)                                             1987           1986           1985 THAN INCOME                    Delaware utility                                                 $10,212         $11,869         $12,168
Cash payments were made to stockholders in lieu of issuing fractional shares. All per common share disclosures and the number of common shares stated in this report have been adjusted to reflect the stock split. RETAINED EARNINGS The current first mortgage bond indenture restricts the amount of consolidated retained earnings available for cash dividend payments on common stock to $35,000,000 plus accumulations
                                *property                                                           7,481           6,787           6,784 Other gross receipts                                               5,777'         5,881           5,799 Payroll, franchise and other                                       6,882           6,150           6,003 '
* after June 30, 1978, of which the available amount at December 31, 1987 was approximately  
Total                                                           $30,352         $30,687     ~0,7541
$177,894,000.
: 4. SUMMIT CREDIT                  The net proceeds received by the Company for the sale in 1975 of the contracts for a nuclear steam supply system (Summit) were initially deferred as a credit on the balance sheet. Since 1982, the Company has amortized the credit to income, offsetting the related reduction in customer revenue. In December 1986, the Company paid $28.1 million to Delaware retail electric customers primarily for the $13.5 million Delaware unamortized Summit credit balance and the $14.3 million income tax benefit of the payment. The effects of this payment are reflected in the 1986 income statement as a $28.1 million electric revenue reduction, $13.5 million additional Summit amortization and a $14.3 reduction of income taxes.
PREFERRED STOCK The annual preferred dividend requirements on all outstanding preferred stock at December 31, 1987 are $7,004,000.
35
If preferred dividends are in arrears, the Company may not declare common stock dividends or acquire its common stock On April 28, 1987, the stockholders authorized a new class ofl0,000,000 shares of preferred stock, $1.00 par value, which is junior to the existing classes of preferred stock with $25 and $100 par values per share. No shares of this new class of preferred stock have been issued. WITHOUT MANDATORY REDEMPTION These series may be redeemed at the option of the Company at any time, in whole or in part at the various redemption prices fixed for each series (ranging from $103 to $106 at December 31, 1987). WITH MANDATORY REDEMPTION The 9% series has a sinking fund requirement to redeem -8,000 shares annually at $100 per share. At the option of the Company, art additional 8,000 shares may be redeemed on any sinking fund date, without premium. The Company redeemed 8,000 shares in December 1987 at $100 per share. Under certain conditions, the 9% series may also be redeemed at the option of the Company. Mandatory sinking fund redemptions are $800,000 per year during the next four years and $77,000 in 1992. 37 1Je/111a1n1 Power & Lig/Jt Compwzy NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
 
: 6. CAPITALIZATION (continued)
Delmarm Pou*er & Lig/Jt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS
LONG-TERM DEBT 1) Sinking fund requirements for the First Mortgage and Collateral Trust Bonds may be reduced by an amount not exceeding sixty percent ( 60%) of the bondable value of property additions.
: 5. PENSION PLAN             The Company has a trusteed noncontributory pension plan covering all regular employees.
For the years 1985-1987, property additions satisfied the sinking fund requirements.
ANDPOST-                  The benefits are based on years of service and the employee's compensation. The Company's RETIREMENT                funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum required contribution nor greater BENEFITS than the maximum tax deductible contribution. There were no pension contributions in 1987 and 1986; the 1985 contribution was $3,284,000.
Substantially all utility plant of the Company now or hereafter owned is subject to the lien of the related Mortgage and Deed of Trust. 2) Pursuant to a bank loan agreement, the Company has a $33,000,000 revolving credit commitment through November 1, 1989, convertible into a term loan due November 1, 1992. The loan agreementrequires a commitment fee of 0.2% on any unused portion of the revolving credit commitment.
During 1987, the Company adopted Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". Under the new method, the Company uses the projected unit credit method; previously, the entry age actuarial cost method had been used.
Loans under the agreement may be prepaid at any ti.me without penalty and would bear interest at 100% of the prime rate. 3) On October 1, 1987, the Company issued, through the Delaware Economic Development Authority, $8 million ofVariable Rate Demand Exempt Facilities Revenue Bonds (the Bonds), due October 1, 2017. The proceeds were used to finance additions to the Company's gas system. The Bonds are secured by $9 million of First Mortgage and Collateral Trust Bonds. The Bonds will bear interest, which is tax exempt to the Bond owner, at a variable or fixed rate as determined by the Company from time to time. The Bond owners may sell the Bonds to the Company each time the interest rate is and the remarketing agent can resell any Bonds purchased by the Company. As of December 31, 1987, $57,000,000 Rate Demand Bonds were outstanding.
The following table reconciles the plan assets and liabilities to the funded status of the plan as of December 31, 1987. Pension plari assets consist primarily of equity and public bond securities.
The Company has sufficient long-term financing agreements available to redeem any bonds not remarketed.
1987 ACTIJARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS                                           (In Millions)
In recognition of the long-term financing capability, these Variable Rate Demand Bonds have been classified as long-term debt. 4) On October 15, 1987, a subsidiary of the Company issued $11 million of 9.65% First Mortgage Notes to finance a new office building.
Accumulated benefit obligation Vested                                                                                     $136.5 Nonvested                                                                                     21.1 Total                                                                                     157.6 Projected benefit obligation                                                                     229.0 Plan assets at fair value                                                                       293.2 Excess of plan assets over projected benefit obligation                                           64.2 Unrecognized prior service cost                                                                     1.5 Unrecognized net (gain)                                                                           (9.2)
The Notes will be repaid through fixed monthly payments of principal and interest over 15 years ending November 2002. 5) In December 1987, a subsidiary of the Company repaid $15.million of a $43 million bank loan, classified as other long-term debt on the Consolidated Statements of Capitalization.  
Unrecognized net transition (asset)                                                             (56.4)
: 6) Maturities oflong-term debt during the next five years are: 1988-$25.468,000; 1989-$28,532,000; 1990-$570,000; 1991-$612,000; 1992-$1,959,000.  
Prepaid pension cost                                                                     $    0.1 1987 COMPONENTS OF 1987 NET PENSION COST                                                       (In Millions)
Service cost-benefits earned during period                                                   $    9.5 Interest cost on projected benefit obligation                                                     16.2 Actual return on plan assets *                                                                   (15.8)
Net amortization and deferral                                                                   (10.0)
Net pension cost                                                                       $. (0.1)
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation and the expected long-term rate of return on plan assets were 7.75%
(7% at January 1, 1987) and 8%, respectively. The rate of increase in future compensation ranges from 5.5% to 7.1%, graded by age.
The January 1, 1986 act&#xb5;arial present value of accumulated plan benefits, using a discount rate of 8%, was $l18.7 million ($102.8 million vested). The market value of assets available for plan benefits was $253.5 million.
The Company provides health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach normal retirement age while still working for the Company. The Compapy recognizes the cost of providing these benefits by expensing the insurance claims as they are paid. These costs totalled $2,144,000,
                              $2,009,000, and $2,094,000for1987, 1986and1985, respectively.
36
 
Delmarm Pou*er & Lig/Jt Compm~r NOTES To CONSOLIDATED FINANCIAL STATEMENTS
: 6. CAPITALIZATION           COMMON STOCK On April 28, 1987, the stockholders approved (1) an increase in the number of authorized shares from 35,000,000 to 90,000,000, (2) a decrease in the par value per share from $3.3 75 to $2.25, and (3) a 3 for 2 stock split, effective April 29, 1987. As a result of the split, the number of shares issued and outstanding increased from 30,481,925 to 45,717,450. Cash payments were made to stockholders in lieu of issuing fractional shares.
All per common share disclosures and the number of common shares stated in this report have been adjusted to reflect the stock split.
RETAINED EARNINGS The current first mortgage bond indenture restricts the amount of consolidated retained earnings available for cash dividend payments on common stock to $35,000,000 plus accumulations
* after June 30, 1978, of which the available amount at December 31, 1987 was approximately
                            $177,894,000.
PREFERRED STOCK The annual preferred dividend requirements on all outstanding preferred stock at December 31, 1987 are $7,004,000. If preferred dividends are in arrears, the Company may not declare common stock dividends or acquire its common stock On April 28, 1987, the stockholders authorized a new class ofl0,000,000 shares of preferred stock, $1.00 par value, which is junior to the existing classes of preferred stock with $25 and $100 par values per share. No shares of this new class of preferred stock have been issued.
WITHOUT MANDATORY REDEMPTION These series may be redeemed at the option of the Company at any time, in whole or in part at the various redemption prices fixed for each series (ranging from $103 to $106 at December 31, 1987).
WITH MANDATORY REDEMPTION The 9% series has a sinking fund requirement to redeem -8,000 shares annually at $100 per share.
At the option of the Company, art additional 8,000 shares may be redeemed on any sinking fund date, without premium. The Company redeemed 8,000 shares in December 1987 at $100 per share. Under certain conditions, the 9% series may also be redeemed at the option of the Company. Mandatory sinking fund redemptions are $800,000 per year during the next four years and $77,000 in 1992.
37
 
1Je/111a1n1 Power & Lig/Jt Compwzy NOTES To CONSOLIDATED FINANCIAL STATEMENTS
: 6. CAPITALIZATION             LONG-TERM DEBT (continued)
: 1) Sinking fund requirements for the First Mortgage and Collateral Trust Bonds may be reduced by an amount not exceeding sixty percent ( 60%) of the bondable value of property additions.
For the years 1985-1987, property additions satisfied the sinking fund requirements. Substantially all utility plant of the Company now or hereafter owned is subject to the lien of the related Mortgage and Deed of Trust.
: 2) Pursuant to a bank loan agreement, the Company has a $33,000,000 revolving credit commitment through November 1, 1989, convertible into a term loan due November 1, 1992. The loan agreementrequires a commitment fee of 0.2% on any unused portion of the revolving credit commitment. Loans under the agreement may be prepaid at any ti.me without penalty and would bear interest at 100% of the prime rate.
: 3) On October 1, 1987, the Company issued, through the Delaware Economic Development Authority, $8 million ofVariable Rate Demand Exempt Facilities Revenue Bonds (the Bonds), due October 1, 2017. The proceeds were used to finance additions to the Company's gas system.
The Bonds are secured by $9 million of First Mortgage and Collateral Trust Bonds. The Bonds will bear interest, which is tax exempt to the Bond owner, at a variable or fixed rate as determined by the Company from time to time. The Bond owners may sell the Bonds to the Company each time the interest rate is res~t, and the remarketing agent can resell any Bonds purchased by the Company.
As of December 31, 1987, $57,000,000 ofVar~able Rate Demand Bonds were outstanding. The Company has sufficient long-term financing agreements available to redeem any bonds not remarketed.
In recognition of the long-term financing capability, these Variable Rate Demand Bonds have been classified as long-term debt.
: 4) On October 15, 1987, a subsidiary of the Company issued $11 million of 9.65% First Mortgage Notes to finance a new office building. The Notes will be repaid through fixed monthly payments of principal and interest over 15 years ending November 2002.
: 5) In December 1987, a subsidiary of the Company repaid $15.million of a $43 million bank loan, classified as other long-term debt on the Consolidated Statements of Capitalization.
: 6) Maturities oflong-term debt during the next five years are: 1988-$25.468,000; 1989-
                                $28,532,000; 1990-$570,000; 1991-$612,000; 1992-$1,959,000.
: 7) The annual interest requirements on all borrowings classified as long-term debt at December 31, 1987 are $54,504,000.
: 7) The annual interest requirements on all borrowings classified as long-term debt at December 31, 1987 are $54,504,000.
UNAMORTIZED DEBT DISCOUNT, PREMIUM AND EXPENSE These amounts are amortized on a straight-line basis over the lives of the long-term debt issues to which they pertain.
UNAMORTIZED DEBT DISCOUNT, PREMIUM AND EXPENSE These amounts are amortized on a straight-line basis over the lives of the long-term debt issues to which they pertain.
Delma rm Poil'er E-Light Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
 
: 7. COMMITMENTS  
Delmarm Poil'er E- Light Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS
: 8. LINES OF CREDIT The Company estimates that approximately  
: 7. COMMITMENTS               The Company estimates that approximately $156,816,000 excluding AFUDC, will be expended for construction purposes in 1988. The Company also has commitments under long-term fuel supply contracts.
$156,816,000 excluding AFUDC, will be expended for construction purposes in 1988. The Company also has commitments under long-term fuel supply contracts.
The Company leases certain distribution facilities, transportation equipment and various other facilities and equipment under long-term lease agreements. Rentals charged to operating expenses aggregated $9,191,000in1987, $7,439,000in1986 and $6,634,000in1985. During 1987, the Company retroactively recorded its capital leases, as required by SFAS No. 71. As a result of recording the capital leases, total assets and total liabilities increased $4,689,000 and $6,504,000 as of December 31, 1987 and 1986, respectively. Net income was not affected.
The Company leases certain distribution facilities, transportation equipment and various other facilities and equipment under long-term lease agreements.
Minimum commitments as of December 31, 1987 under all non-cancellable lease agreements are as follows:
Rentals charged to operating expenses aggregated  
1988                         $ 2,885,000 1989                            2,597,000 1990                            1,605,000 1991                              676,000 1992                              552,000 Remainder                      3.660.000 Total                        $11,975,000 Nuclear fuel requirements for Peach Bottom Generating Station are being provided by the operating company through a fuel purchase contract. The Company is responsible for payment of its share of fuel consumed and related interest expense. Nuclear fuel expense for Peach Bottom totalled $3,190,000in1987, $8,372,000 in 1986 and $4,520,000in1985.
$9,191,000in1987, $7,439,000in1986 and $6,634,000in1985.
During 1987, the Company retroactively recorded its capital leases, as required by SFAS No. 71. As a result of recording the capital leases, total assets and total liabilities increased  
$4,689,000 and $6,504,000 as of December 31, 1987 and 1986, respectively.
Net income was not affected.
Minimum commitments as of December 31, 1987 under all non-cancellable lease agreements are as follows: 1988 1989 1990 1991 1992 Remainder Total $ 2,885,000 2,597,000 1,605,000 676,000 552,000 3.660.000  
$11,975,000 Nuclear fuel requirements for Peach Bottom Generating Station are being provided by the operating company through a fuel purchase contract.
The Company is responsible for payment of its share of fuel consumed and related interest expense. Nuclear fuel expense for Peach Bottom totalled $3,190,000in1987, $8,372,000 in 1986 and $4,520,000in1985.
The Company has an agreement providing for the availability of fuel oil storage and oil pipeline facilities through 1999. Under the agreement, the Company must make specified minimum payments monthly, which totalled $2,165,000in1987, $2,766,000in1986 and $1,682,000in1985.
The Company has an agreement providing for the availability of fuel oil storage and oil pipeline facilities through 1999. Under the agreement, the Company must make specified minimum payments monthly, which totalled $2,165,000in1987, $2,766,000in1986 and $1,682,000in1985.
* The estimated amount of required payments is $1,701,000in1988, $1,489,000in1989, $1,145,000 in 1990, $1,916,000in1991, $1,828,000in1992 and $12,384,000between1993and1999.
* The estimated amount of required payments is $1,701,000in1988, $1,489,000in1989, $1,145,000 in 1990, $1,916,000in1991, $1,828,000in1992 and $12,384,000between1993and1999.
In 1987, Columbia Gas System, Inc. constructed a natural gas pipeline, which connects to Delmarva's gas system, under an agreement that obligates Delmarva to purchase $6.7 million of sales or transportation services over a ten year period. If Delmarva's purchases are less than $6. 7 million over the ten year period, then Delmarva will make aid-in-construction payments to the extent of the shortfall.
In 1987, Columbia Gas System, Inc. constructed a natural gas pipeline, which connects to Delmarva's gas system, under an agreement that obligates Delmarva to purchase $6.7 million of sales or transportation services over a ten year period. If Delmarva's purchases are less than $6. 7 million over the ten year period, then Delmarva will make aid-in-construction payments to the extent of the shortfall.
Delmarva Capital Investments, Inc. (DCI), the Company's primary investment subsidiary, has various commitments to m'ake equity contributions and loan funds under certain conditions to partnerships in which DCI has invested.
Delmarva Capital Investments, Inc. (DCI), the Company's primary investment subsidiary, has various commitments to m'ake equity contributions and loan funds under certain conditions to partnerships in which DCI has invested. The maximum amounts that DCI could be required to provide as loans or equity commitments over the next five years are as follows: $8,593,000-1988;
The maximum amounts that DCI could be required to provide as loans or equity commitments over the next five years are as follows: $8,593,000-1988;  
                              $8,913,000-1989; $6,873,000-1990; $6,621,000-1991; $3,600,000-1992.
$8,913,000-1989;  
: 8. LINES OF CREDIT          As of December 31, 1987, the Company had unused bank lines of credit of $54,500,000, with
$6,873,000-1990;  
                              $6 million supporting commercial paper borrowings. The Company is generally required to pay commitment fees for these lines. Such lines of credit are periodically reviewed by the Company, at which time they may be renewed or cancelled.
$6,621,000-1991;  
39
$3,600,000-1992.
_J
As of December 31, 1987, the Company had unused bank lines of credit of $54,500,000, with $6 million supporting commercial paper borrowings.
 
The Company is generally required to pay commitment fees for these lines. Such lines of credit are periodically reviewed by the Company, at which time they may be renewed or cancelled.
- Delman*a Power & Ligbt Compcm_r NOTES To CONSOLIDATED FINANCIAL STATEMENTS
39 _J
: 9. JOINTLY-OWNED           Information with respect to the Company's share of jointly-owned plant, including nuclear fuel PLANT                  for the Salem plant, as of December 31, 1987, is as follows:
-Delman*a Power & Ligbt Compcm_r NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
(Dollars in Thousands)                                                                     Construction Ownership         Plant in   Accumulated       Work in Share         Service   Depreciation     Progress Nuclear:
: 9. JOINTLY-OWNED PLANT JO. RATE MATTERS 40 Information with respect to the Company's share of jointly-owned plant, including nuclear fuel for the Salem plant, as of December 31, 1987, is as follows: (Dollars in Thousands)
Peach Bottom                                   7.51%       $ 94,079       $ 33,372       $ 6,426 Salem                                           7.41%         208,351         76,234       10,488 Coal-Fired:
Construction Ownership Plant in Accumulated Work in Share Service Depreciation Progress Nuclear: Peach Bottom 7.51% $ 94,079 $ 33,372 $ 6,426 Salem 7.41% 208,351 76,234 10,488 Coal-Fired:
Keystone                                       3.70%         12,062           4,903           727 Conemaugh                                       3.72%         13,269           5,231           324 Merrill Creek Reservoir                           11.91 %                                       24,635 Transmission Facilities                           Various           4,462         1,321 Total                                                           $332,223       $121,061       $42,600 The Company provides its own financing for its share of improvements to jointly-owned plant.
Keystone 3.70% 12,062 4,903 727 Conemaugh 3.72% 13,269 5,231 324 Merrill Creek Reservoir 11.91 % 24,635 Transmission Facilities Various 4,462 1,321 Total $332,223 $121,061 $42,600 The Company provides its own financing for its share of improvements to jointly-owned plant. In addition, the Company is a joint guarantor of loans ($526,000 proportionate share) advanced for operation of the coal mines that supply the Keystone plant. The Company's share of operating and maintenance expenses of the jointly-owned plant is included in the corresponding expenses in the statements of income. The Company is subject to regulation with respect to its retail sales of electricity by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission, which have broad powers over rate matters, accounting and terms of service. The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting systems and policies and the transmission and sale at wholesale (resale) of electric energy. I) DELA WARE ELECTRIC RETAIL On April 14, 1987, the Delaware Public Service Commission (DPSC) issued a final order regarding its investigation into the level of the Company's earnings.
In addition, the Company is a joint guarantor of loans ($526,000 proportionate share) advanced for operation of the coal mines that supply the Keystone plant. The Company's share of operating and maintenance expenses of the jointly-owned plant is included in the corresponding expenses in the statements of income.
The order further reduced electric rates by $7.3 million effective April 15, 1987. The Company's rates had been reduced on a temporary basis on August 20, 1986, by $22.8 million. The order reflected a reduction in the interim authorized return on equity from 13.0% to 12.5%, lower tax rates due to the Tax Reform Act of 1986 and resolution of certain accounting issues. An additional reduction in rates of approximately  
JO. RATE MATTERS            The Company is subject to regulation with respect to its retail sales of electricity by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission, which have broad powers over rate matters, accounting and terms of service. The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting systems and policies and the transmission and sale at wholesale (resale) of electric energy.
$4.2 million became effective on January 1, 1988, primarily to reflect the lower 1988 federal income tax rate. A Power Plant Performance Program is in effect through 1988. The program measures performance at the Company's twelve largest power units and can result in a financial reward or penalty. The potential reward or penalty for 1987and1988 performance is limited to $1.5 million per year, which would be reflected in 1989 and 1990 electric rates, respectively.
I) DELAWARE ELECTRIC RETAIL On April 14, 1987, the Delaware Public Service Commission (DPSC) issued a final order regarding its investigation into the level of the Company's earnings. The order further reduced electric rates by $7.3 million effective April 15, 1987. The Company's rates had been reduced on a temporary basis on August 20, 1986, by $22.8 million. The order reflected a reduction in the interim authorized return on equity from 13.0% to 12.5%, lower tax rates due to the Tax Reform Act of 1986 and resolution of certain accounting issues. An additional reduction in rates of approximately
1988 electric rates reflect a $605,000 reward under this program for 1986 performance.  
                              $4.2 million became effective on January 1, 1988, primarily to reflect the lower 1988 federal income tax rate.
: 2) MARYLAND RETAIL In accordance with a 1986 settlement agreement, Maryland retail electric rates were reduced _ $3.3 million, effective January 1, 1987, to reflect the 1987 effects of the Tax Reform Act of1986. Maryland retail electric rates were also reduced by $3.8 million, effective January 1, 1988, to reflect the lower 1988 federal income tax rate.
A Power Plant Performance Program is in effect through 1988. The program measures performance at the Company's twelve largest power units and can result in a financial reward or penalty.
1Jel111a11*a Pozmr C-Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS-JO. RATE MATTERS * (continued)
The potential reward or penalty for 1987and1988 performance is limited to $1.5 million per year, which would be reflected in 1989 and 1990 electric rates, respectively. 1988 electric rates reflect a $605,000 reward under this program for 1986 performance.
: 11. CONTINGENCIES
: 2) MARYLAND RETAIL In accordance with a 1986 settlement agreement, Maryland retail electric rates were reduced
: 3) VIRGINIA RETAIL By order dated August 27, 1987, the Virginia State Corporation Commission (VSCC) approved a $0.8 million rate decrease which became effective on an interim basis on May 1, 1987. The decrease reflects a lower return on equity (13.0%) and the 1987 effects of the Tax Reform Act of 1986. Effective January 1, 1988, the VSCC has ordered the Company to reserve the effects of the lower 1988 federal income tax rate pending qisposition of the regulatory treatment of this matter. 4) RESALE On September 15, 1987, the Federal Energy Regulatory Commission approved the $2.4 million annual rate reduction filed by the Company on July 21, 1987. The lower. rates reflect the effects of the Tax Reform Act of1986 and became effective as of April 15, 1987. , OnJuly 31, 1987, the Company filed for a $3.4 million rate increase based on a 13% return on equity, with a proposed effective date of October 1, 1987. Since December 1978, in the resale jurisdiction, the pre-tax proceeds from the sale of the Summit contracts (see Note 4) have been distributed to customers through lower rates. In the Company's]uly1987 resale filing, recovery of the income taxes paid on the Summit proceeds and related carrying charges on the income tax payments (a total of $5 million) was also requested via a surcharge over a two year period. In September 1987, the FERC suspended implementation of the proposed rates and surcharge until March 1, 1988. 1) SHUTDOWN OF PEACH BOTTOM NUCLEAR GENERATING STATION On March 31, 1987, the Nuclear Regulatory Commission (NRC) ordered the shutdown of the Peach Bottom Nuclear Generating Station citing inattention by control room staff The Company has a 7.51 % ownership interest in the plant which is operated by Philadelphia Electric (PE). The NRC order stated that PE must provide a detailed and comprehensive plan and s_chedule to assure that the plant will operate safely and comply with all requirements prior to resuming operation of the plant. In August 1987, PE submitted a plan for the restart of Peach Bottom in response to the NRC order. The NRC criticized the plan primarily due to the NRC's disagreement with the plan's emphasis on solutions to problems related to the plant and its personnel without adequate emphasis on corporate management responsibility. .
_ $3.3 million, effective January 1, 1987, to reflect the 1987 effects of the Tax Reform Act of1986.
Maryland retail electric rates were also reduced by $3.8 million, effective January 1, 1988, to reflect the lower 1988 federal income tax rate.
40
 
1Jel111a11*a Pozmr C- Ligbt Company NOTES     To CONSOLIDATED FINANCIAL STATEMENTS-JO. RATE MATTERS
* 3) VIRGINIA RETAIL (continued)                By order dated August 27, 1987, the Virginia State Corporation Commission (VSCC) approved a
                                $0.8 million rate decrease which became effective on an interim basis on May 1, 1987. The decrease reflects a lower return on equity (13.0%) and the 1987 effects of the Tax Reform Act of 1986. Effective January 1, 1988, the VSCC has ordered the Company to reserve the effects of the lower 1988 federal income tax rate pending qisposition of the regulatory treatment of this matter.
: 4) RESALE On September 15, 1987, the Federal Energy Regulatory Commission approved the $2.4 million annual rate reduction filed by the Company on July 21, 1987. The lower. rates reflect the effects of the Tax Reform Act of1986 and became effective as of April 15, 1987.                       ,
OnJuly 31, 1987, the Company filed for a $3.4 million rate increase based on a 13% return on equity, with a proposed effective date of October 1, 1987. Since December 1978, in the resale jurisdiction, the pre-tax proceeds from the sale of the Summit contracts (see Note 4) have been distributed to customers through lower rates. In the Company's]uly1987 resale filing, recovery of the income taxes paid on the Summit proceeds and related carrying charges on the income tax payments (a total of $5 million) was also requested via a surcharge over a two year period.
In September 1987, the FERC suspended implementation of the proposed rates and surcharge until March 1, 1988.
: 11. CONTINGENCIES              1) SHUTDOWN OF PEACH BOTTOM NUCLEAR GENERATING STATION On March 31, 1987, the Nuclear Regulatory Commission (NRC) ordered the shutdown of the Peach Bottom Nuclear Generating Station citing inattention by control room staff The Company has a 7.51 % ownership interest in the plant which is operated by Philadelphia Electric (PE).
The NRC order stated that PE must provide a detailed and comprehensive plan and s_chedule to assure that the plant will operate safely and comply with all requirements prior to resuming operation of the plant. In August 1987, PE submitted a plan for the restart of Peach Bottom in response to the NRC order. The NRC criticized the plan primarily due to the NRC's disagreement with the plan's emphasis on solutions to problems related to the plant and its personnel without adequate emphasis on corporate management responsibility. .
* In October 1987, PE announced a major corporate reorganization of its entire nuclear operations and support services, intended to strengthen both corporate and nuclear plant site management.
* In October 1987, PE announced a major corporate reorganization of its entire nuclear operations and support services, intended to strengthen both corporate and nuclear plant site management.
In November 1987, PE submitted part one of a two part plan that will replace the plan submitted in August. Part one of the plan detailed the reorganization of nuclear operations announced in October. PE plans to submit the second part of its restart plan in the first quarter of 1988. On February 2, 1988, PE officials made public a report from the Institute of Nuclear Power Operations (INPO) that was very critical of PE's operatfon of Peach Bottom over the last several years. The report was highly critical of PE's senior management with respect to its effectiveness in preventing and resolving Peach Bottom problems and the lack of adequate corporate accountability.
In November 1987, PE submitted part one of a two part plan that will replace the plan submitted in August. Part one of the plan detailed the reorganization of nuclear operations announced in October. PE plans to submit the second part of its restart plan in the first quarter of 1988.
Due to the seriousness of the new information, not previously made available to Delmarva Power as a minority owner, the Company decided not to pursue recovery of replacement power costs from customers.
On February 2, 1988, PE officials made public a report from the Institute of Nuclear Power Operations (INPO) that was very critical of PE's operatfon of Peach Bottom over the last several years. The report was highly critical of PE's senior management with respect to its effectiveness in preventing and resolving Peach Bottom problems and the lack of adequate corporate accountability. Due to the seriousness of the new information, not previously made available to Delmarva Power as a minority owner, the Company decided not to pursue recovery of replacement power costs from customers. Accordingly, the Company expensed $9.2 million (11&#xa2; per share) ofreplacement power costs in the fourth quarter of1987. Future replacement power costs resulting from the NRC mandated shutdown of Peach Bottom will be expensed as incurred. The Company shall continue to consider other alternatives for recovery of these costs.
Accordingly, the Company expensed $9.2 million (11&#xa2; per share) ofreplacement power costs in the fourth quarter of1987. Future replacement power costs resulting from the NRC mandated shutdown of Peach Bottom will be expensed as incurred.
The Company believes that the safe and expeditious startup of the units at Peach Bottom is important to both our customers and our stockholders. The NRC has reacted favorably to some of PE's startup plans and PE has stated that it is committing the resources necessary to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. PE expects the plant to resume operations later this year.
The Company shall continue to consider other alternatives for recovery of these costs. The Company believes that the safe and expeditious startup of the units at Peach Bottom is important to both our customers and our stockholders.
However, this depends upon permission from the NRC, which Delmarva Power cannot predict.
The NRC has reacted favorably to some of PE's startup plans and PE has stated that it is committing the resources necessary to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. PE expects the plant to resume operations later this year. However, this depends upon permission from the NRC, which Delmarva Power cannot predict. 41
41
!Je/111wn1 l'ou*er f'. Ugbt Compn11y NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
 
: 11. CONTINGENCIES (continued) 42 2) PLANT HELD FOR FUTURE USE In 1982, the Company delayed the construction schedule for the coal-fired Nanticoke  
!Je/111wn1 l'ou*er f'. Ugbt Compn11y NOTES To CONSOLIDATED FINANCIAL STATEMENTS
#1 generating unit. During 1986, the Company downsized the planned unit and reclassified costs associated with the previously planned larger unit as a deferred asset ($7.6 million balance at December 31, 1987). Cost recovery has been approved in the Delaware and Virginia jurisdictions.
: 11. CONTINGENCIES               2) PLANT HELD FOR FUTURE USE (continued)                In 1982, the Company delayed the construction schedule for the coal-fired Nanticoke #1 generating unit. During 1986, the Company downsized the planned unit and reclassified costs associated with the previously planned larger unit as a deferred asset ($7.6 million balance at December 31, 1987).
The Company has applied for recovery of $1.3 million applicable to the resale jurisdiction and anticipates recovery of the $1.9 million Maryland jurisdiction portion. $6.2 million of costs associated with the smaller Nanticoke  
Cost recovery has been approved in the Delaware and Virginia jurisdictions. The Company has applied for recovery of $1.3 million applicable to the resale jurisdiction and anticipates recovery of the $1.9 million Maryland jurisdiction portion. $6.2 million of costs associated with the smaller Nanticoke #1 unit remain classified as plant held for future use. Recovery of these costs is anticipated through the ratemaking process.
#1 unit remain classified as plant held for future use. Recovery of these costs is anticipated through the ratemaking process. 3) NUCLEARINSURANCE The insurance coverages applicable to the nuclear power units are as follows: (Millions of Dollars) Type and Source of Coverage Public Liabilit:y<
: 3) NUCLEARINSURANCE The insurance coverages applicable to the nuclear power units are as follows:
1 J Private Price Anderson AssessmentC2l Property Damage:'5 J Peach Bottom<6 l Salem<7l All units<sJ Replacement Power: Nuclear Electric Insurance Limited (NEIL)<9 l Aggregate Maximum Coverage $620 $620 $775 $3.3-$3.5 Maximum Retrospective Assessment for a Single Incident''
Aggregate (Millions ofDollars)                                                 Maximum                    Maximum Retrospective Type and Source of Coverage                                           Coverage            Assessment for a Single Incident'' 0' Public Liabilit:y< 1J Private Price Anderson AssessmentC2l                                                                             $1,5C3)
0' $1,5C3) $2.9 I ---$2._1 _ _J* $1.9 1) Tbe Price-Anderson liability provisions of tbe Atomic Energy Act of 1954 (in notes 2, 3 and 4 below) expired on August 1, 1987. Howeve1; the limitation of liability and contribution provisions continue in effect for presently licensed plants, wbicb includes Peacb Bottom and Salem. Onjuly30, 1987, tbe U.S. House of Representatives approved a bill to amend tbe Price* Anderson Act. Tbe bill would raise the limit for pz 1blic liability claims that could arise from a nuclear incident from the current $715 million to  
Property Damage:'5J Peach Bottom<6l                                                          $620 Salem<7l                                                                 $620                          $2.9                  I All units<sJ                                                             $775 Replacement Power:
$7 billion for each licensed nuclear facility.
Nuclear Electric Insurance Limited (NEIL)< 9l                      $3.3-$3.5
Under tbe House bill, tbe maximum retrospective premium assessment for tbe Company would rise from $1.5 million to $18.9 million for one incident and $3.0 million to $37.8 million for more than one incident in a yeai: The Senate is expected to vote in the near future on similar bills, wbicb would also establisb a liability limit of approximately  
                                                                                                                                - - $ 2 . _ 1_
$7 billion. . 2) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of 1954 as amended. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in tbe United States. 3) Maximum assessment would be $3,000,000 in tbe event of more than one incident in any yeai: 4) Limit of liability under tbe Price-Anderson Act for each nuclear incident.  
                                                                                                                                              $1.9
: 5) Tbe Company is a self insure1; to the extent of its ownership interest.for any prope11)1 loss in excess of tbe stated amounts. 6) For prope11)i damage to tbe Peacb Bottom nuclear plant facilities, tbe Company and its co-owners have private insurance up to $620 million. 7) Forprope11)1 damage to tbe Salem nuclear facilities, tbe Company and its co-owners  
_J*
/Jave $500 million of insurance witb Nuclear Mutual Limited (NML), a utility-owned mutual insurance company, and $120 million witb private insurers.
: 1) Tbe Price-Anderson liability provisions of tbe Atomic Energy Act of1954 (in notes 2, 3 and 4 below) expired on August 1, 1987. Howeve1; the limitation of liability and contribution provisions continue in effect for presently licensed plants, wbicb includes Peacb Bottom and Salem. Onjuly30, 1987, tbe U.S. House ofRepresentatives approved a bill to amend tbe Price*Anderson Act. Tbe bill would raise the limit for pz 1blic liability claims that could arise from a nuclear incident from the current $715 million to approximate~)' $7 billion for each licensed nuclearfacility. Under tbe House bill, tbe maximum retrospective premium assessmentfor tbe Company would risefrom
NML bas a maximum retrospective assessment of ten times anm zal premium. 8) All units are insured by Nuclear Electric Insurance Limited (NEIL II) for losses in excess of $500 million. Ma.-.:imum retrospective assessment is seven and a balf times tbe annual premiums.  
                                      $1.5 million to $18.9 million for one incident and $3.0 million to $37.8 million for more than one incident in a yeai: The Senate is expected to vote in the nearfuture on similar bills, wbicb would also establisb a liability limit of approximately $7 billion.                                                                 .
: 2) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of1954 as amended. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in tbe United States.
: 3) Maximum assessment would be $3,000,000 in tbe event of more than one incident in any yeai:
: 4) Limit of liability under tbe Price-Anderson Act for each nuclear incident.
: 5) Tbe Company is a self insure1; to the extent of its ownership interest.for any prope11)1 loss in excess of tbe stated amounts.
: 6) For prope11)i damage to tbe Peacb Bottom nuclear plant facilities, tbe Company and its co-owners have private insurance up to $620 million.
: 7) Forprope11)1 damage to tbe Salem nuclearfacilities, tbe Company and its co-owners /Jave $500 million of insurance witb Nuclear Mutual Limited (NML), a utility-owned mutual insurance company, and $120 million witb private insurers. NML bas a maximum retrospective assessment of ten times anm zal premium.
: 8) All units are insured by Nuclear Electric Insurance Limited (NEIL II) for losses in excess of $500 million. Ma.-.:imum retrospective assessment is seven and a balf times tbe annual premiums.
: 9) Utility owned mutual insurance company provides coverage against extra expense incwred in obtaining replacement power during prolonged accidental outages of nuclear power units. Maximum weekzv indemnity for 52 weeks wbicb commences after tbe first 26 weeks of an outage. Also provides for an additional 52 weeks indemnity at one-balfmaximum level. Jl!laximum retrospective assessment is five times annual premiums.
: 9) Utility owned mutual insurance company provides coverage against extra expense incwred in obtaining replacement power during prolonged accidental outages of nuclear power units. Maximum weekzv indemnity for 52 weeks wbicb commences after tbe first 26 weeks of an outage. Also provides for an additional 52 weeks indemnity at one-balfmaximum level. Jl!laximum retrospective assessment is five times annual premiums.
1 O) Tbe Company's sbare of tbe maximum relrospective assessment for a single incident based on the ownersbip sbare of tbe nuclear power units. 4) OTHER The Company is involved in certain other legal and administrative proceedings before various courts and governmental agencies concerning rates, environmental issues, fuel contracts, ta,'{ filings and other matters. In the opinion of management, the ultimate disposition of these proceedings will not have a material effect onthe Company's financial position or results of operations.
1O) Tbe Company's sbare of tbe maximum relrospective assessment for a single incident based on the Compm~v*s ownersbip sbare of tbe nuclear power units.
Deh11a11*a Po1l'er E-Ligbt Compwzr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  
: 4) OTHER The Company is involved in certain other legal and administrative proceedings before various courts and governmental agencies concerning rates, environmental issues, fuel contracts, ta,'{ filings and other matters. In the opinion of management, the ultimate disposition of these proceedings will not have a material effect onthe Company's financial position or results of operations.
: 12. SEGMENT INFORMATION Segment information with respect to electric, gas and steam operations is as follows: (Dollars in Thousands) 1987 1986 1985 Operating Revenues:
42
Electric $ 612,367 $ 602,240 $ 605,581 Gas 78,233 91,802 95,256 Steam 21,879 20,821 21,997 Total $ 712,479 $ 714,863 $ 722,834 Operating Income: Electric $ 115,964 $ 126,007 $ 127,148 Gas 7,347 6,985 6,604 Steam 1,656 1,746 1,763 Total $ 124,967 $ 134,738 $ 135,515 Net Utility Plant:o&z)
 
Electric $1,355,168  
Deh11a11*a Po1l'er E- Ligbt Compwzr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$1,312,517  
: 12. SEGMENT                     Segment information with respect to electric, gas and steam operations is as follows:
$1,292,487 Gas 74,759 67,469 65,271 Steam 1,875 3,944 -4,142 $1,431,802  
INFORMATION (Dollars in Thousands)                                                     1987           1986                 1985 Operating Revenues:
$1,383,930  
Electric                                                             $ 612,367         $ 602,240           $ 605,581 Gas                                                                       78,233           91,802             95,256 Steam                                                                     21,879           20,821             21,997 Total                                                               $ 712,479         $ 714,863           $ 722,834 Operating Income:
$1,361,900 Other Identifiable Assets: Electric 121,654 105,575 144,544 Gas 11,760 18,341 32,890 Steam 1,405 409 418 134,819 I 124,325 177,852 Assets Not Allocated 234,572 141,504 Total Assets $1,799,822 I $1,742,827  
Electric                                                             $ 115,964         $ 126,007           $ 127,148 Gas                                                                         7,347           6,985               6,604 Steam                                                                       1,656           1,746               1,763 Total                                                               $ 124,967           $ 134,738           $ 135,515 Net Utility Plant:o&z)
$1,681,256 Depreciation Expense: I 56,577 I Electric $ 63,978 $ 59,725 $ Gas 4,004 4,016 I 3,699 I Steam 925 916 I 907 I ---------j Total $ 68,907 i $ 64,657 I $ 61,183 I Construction Expenditures:m I Electric $ 131,970 $ 94,337 $ 86,073 Gas 9,944 7,751 8,382 Steam 325 509 468 Total $ 142,239 $ 102,597 $ 94,923 m1ncludes plant held for ji1ture use, construction work in progress and allocation of common utility property.
Electric                                                             $1,355,168         $1,312,517         $1,292,487 Gas                                                                                         67,469 Steam 74,759 1,875           3,944         - 65,271 4,142
mstated net of the respective accumulated provisions for depreciation.
                                                                                                      $1,431,802         $1,383,930         $1,361,900 Other Identifiable Assets:
r 3'Excludes allowance for jimds used during construction.
Electric                                                                 121,654           105,575             144,544 Gas                                                                       11,760           18,341             32,890 Steam                                                                       1,405               409                 418 134,819     I 124,325             177,852
                                                                                                      ~
Assets Not Allocated                                                                       234,572             141,504 Total Assets                                                         $1,799,822       I $1,742,827         $1,681,256 Depreciation Expense:
Electric                                                             $     63,978       $   59,725         $   56,577 I Gas                                                                         4,004           4,016 I             3,699 I Steam                                                                         925               916 II              907
                                                                                                                                ---------j
                                                                                                      $   68,907 i $       64,657 I $         61,183 I Total                                                                                                                    I Construction Expenditures:m Electric                                                             $ 131,970         $   94,337 I $         86,073 Gas                                                                         9,944           7,751               8,382 Steam                                                                           325             509                 468 Total                                                                 $ 142,239         $ 102,597           $   94,923 m1ncludes plant heldfor ji1ture use, construction work in progress and allocation of common utility property.
mstated net ofthe respective accumulatedprovisions for depreciation.
r3'Excludes allowance for jimds used during construction.
Operating income by segments is reported in accordance with generally accepted accounting and ratemaking principles within the utility industry and, accordingly, includes each segment's proportionate share of taxes on income and general corporate expenses.
Operating income by segments is reported in accordance with generally accepted accounting and ratemaking principles within the utility industry and, accordingly, includes each segment's proportionate share of taxes on income and general corporate expenses.
43 Delman.*a Power E-Ligb! Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS  
43
: 13. CONDENSED FINANCIAL STATEMENTS OF CONSOLIDATED SUBSIDIARIES 44 The following is condensed financial information of the Company's wholly-owned subsidiaries, Delmarva Energy Company, Delmarva Industries Jnc. and Delmarva Capital Investments, Inc. Delmarva Services, a subsidiary which leases real estate to the Company's utility business, is excluded from these statements since its income is derived from intercompany transactions which are eliminated in consolidation.
 
CONSOLIDATED CONDENSED SUBSIDIARY STATEMENTS OF INCOME (Dollars In Thousands) 1987 Revenues and investment income $1,620 Operating expenses 2,453 Operating income (833) Interest expense 3,955 Income (loss) before income taxes ( 4,788) Income tax expense (benefit)  
Delman.*a Power E- Ligb! Company NOTES   To CONSOLIDATED FINANCIAL STATEMENTS
(5,448) I Net income $660 Contribution to Delmarva Power & Light's earnings per share of common stock $ 0.01 I CONSOLIDATED CONDENSED SUBSIDIARY BALANCE SHEETS At December 31, Liabilities and (Dollars In Thousands)
                                                                                                                                          . I
Assets 1987 1986 Stockholder's Equity Current assets Noncurrent assets Total I 1 Current liabilities
: 13. CONDENSED                 The following is condensed financial information of the Company's wholly-owned subsidiaries, FINANCIAL                Delmarva Energy Company, Delmarva Industries Jnc. and Delmarva Capital Investments, Inc.
$ 68,722 Noncurrent liabilities 92,705 70,229 Stockholder's equity $161,427 $141,579 1 Total 1986 1985 $3,261 $6,022 1,698 1,368 1,563 4,654 3,164 1,276 (1,601) 3,378 (6,426) (133) ' $4,825 $3,511 I $ 0.11 At December 31, 1987 1986 $ 258 80,948 80,221 $161,427 $ 157 82,132 59,290 $141,579 The 10&#xa2; decrease in subsidiary earnings per share in 1987 was the result of two major factors. An overall rise in interest rates during 1987 caused a decrease in the market value of interest rate sensitive investments (mainly preferred stocks). This effect combined with the October 1987 stock market decline resulted in a write-down of securities to current market value and losses on the sale of securities, which decreased earnings per share by 6.1&#xa2;. Expenses for research and . development projects and administrative and general functions increased primarily because several subsidiary projects are currently in the start-up phase. These start-up cost increases lowered earnings per share by 3.2&#xa2;. . I Delmarl'a Power & Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS
STATEMENTS OF Delmarva Services, a subsidiary which leases real estate to the Company's utility business, is excluded from these statements since its income is derived from intercompany transactions CONSOLIDATED which are eliminated in consolidation.
: 14. QUARTERLY FINANCIAL INFORMATION (Unaudited)
SUBSIDIARIES CONSOLIDATED CONDENSED SUBSIDIARY STATEMENTS OF INCOME (Dollars In Thousands)                                             1987         1986            1985 Revenues and investment income                                     $1,620       $3,261          $6,022 Operating expenses                                                   2,453       1,698          1,368 Operating income                                                     (833)       1,563          4,654 Interest expense                                                     3,955       3,164          1,276 Income (loss) before income taxes                                 ( 4,788)     (1,601)          3,378 Income tax expense (benefit)                                       (5,448) I   (6,426)            (133) '
The quarterly data presented below reflect all adjustments necessary in the opinion of the Company for a fair presentation of the interim results. Quarterly data normally vary seasonally with temperature variations, differences between summer and winter rates, the timing of rate orders and the scheduled downtime and maintenance of electric generating units. Earnings Earnings Applicable Average per Quarter Operating Operating Net to Common Shares Average Ended Revenue Income Income Stock Outstanding Share (Dollars in Thousands) (In Thousands) 1987 March31 $185,935 $ 35,689 $25,058 $23,394 45,717 $0.51 June 30 160,936 27,277 16,763 15,099 45,717 0.33 Sept. 30 200,482 44,279 32,880 31,164 45,717 0.68 Dec. 31 165,126 17,722 5,102 3,332 45,717 0.08 $712,479 $124,967 $79,803 $72,989 45,717 $1.60 1986 March31 $208,703 $ 38,235 $27,345 $25,405 45,717 $0.56 June30 171,341 29,966 19,183 17,125 45,717 0.37 Sept. 30 201,082 45,766 35,212 33,505 45,717 0.73 Dec. 31 133,737 20,771 14,383 12,683 45,717 0.28 $714,863.  
Net income                                                         $660         $4,825          $3,511 I
$134,738 $96,123 $88,718 45,717 $1.94 Electric rate decreases in the Company's jurisdictions, primarily due to lower authorized rates of return, decreased 1987 net income as follows: first quarter-$4,857,000 (10.6&#xa2; per share); second quarter-$4,587,000 (10.0&#xa2; per share); third quarter-$3,9l6,000 (8.6&#xa2; per share); fourth quarter-$442,000 (1.0&#xa2; per share); or a total of $13,802,000 (30.2&#xa2; per share). In the fourth quarter of1987, losses were realized on the sale of marketable securities, certain marketable securities were written down to their market value and 1987 replacement power costs attributable to the Nuclear Regulatory Commission ordered shutdown of Peach Bottom were expensed.
                                                                                                                          ~
The effect of these transactions decreased net income $7,813,000 (17&#xa2; per share). Electric rate decreases in the Company's jurisdictions, primarily due to lower authorized rates of return, reduced net income during 1986 as follows: first quarter-$528,000 (1.2&#xa2; per share); second quarter-$468,000 (1.0&#xa2; per share); third quarter-$1,578,000 (3.5&#xa2; per share); fourth quarter-$4,179,000 (9.1&#xa2; per share); or a total of $6,753,000 (14.8&#xa2; per share). In the fourth quarter of1986, the Company recorded the Delaware Summit credit payment, interest on tax refunds, ta.'{ accrual adjustments, and the impact of the Tax Reform Act of 1986 on its
Contribution to Delmarva Power & Light's earnings per share of common stock                             $ 0.01 I     $ 0.11 CONSOLIDATED CONDENSED SUBSIDIARY BALANCE SHEETS (Dollars In Thousands)      At December 31,       Liabilities and                 At December 31, Assets                   1987           1986   Stockholder's Equity         1987            1986 I
* leveraged lease investments.
1 Current liabilities        $    258      $      157 Current assets         $ 68,722     ~71,350      Noncurrent liabilities       80,948          82,132 Noncurrent assets        92,705         70,229   Stockholder's equity         80,221          59,290 Total                  $161,427       $141,579 1 Total                     $161,427        $141,579 The 10&#xa2; decrease in subsidiary earnings per share in 1987 was the result of two major factors.
The effect of these adjustments increased net income $1,119,000 (2.4&#xa2; per share). 45 Defmmi'a Power & Lig/Jt Compan1
An overall rise in interest rates during 1987 caused a decrease in the market value of interest rate sensitive investments (mainly preferred stocks). This effect combined with the October 1987 stock market decline resulted in a write-down of securities to current market value and losses on the sale of securities, which decreased earnings per share by 6.1&#xa2;. Expenses for research and .
* CONSOLIDATED STATISTICS 10 YEARS OF REvlEW ELECTRIC REVENUES Residential (thousands):
development projects and administrative and general functions increased primarily because several subsidiary projects are currently in the start-up phase. These start-up cost increases lowered earnings per share by 3.2&#xa2;.
Commercial Industrial Other utilities, etc. Miscellaneous revenues.
44
Total electric revenues ELECTRIC SALES Residential (J,000 kilowatt-hours):
 
Commercial Industrial Other utilities, etc. Total electric sales ELECTRIC CUSTOMERS Residential (end of period): Commercial Industrial Other utilities, etc. Total electric customers GAS REVENUES Residential (thousands):
Delmarl'a Power & Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS
Commercial Industrial Interruptible Other utilities, etc. Miscellaneous revenues Total gas revenues GAS SALES Residential (million cubic feet) Commercial Industrial Interruptible . Other utilities, etc. Total gas sales GAS CUSTOMERS Residential (end of period): Commercial Industrial Interruptible Other utilities, etc. Total gas customers STEAM SERVICE Electricity delivered (1,000 kilowatt-hours)
: 14. QUARTERLY                The quarterly data presented below reflect all adjustments necessary in the opinion of the Company FINANCIAL                for a fair presentation of the interim results. Quarterly data normally vary seasonally with INFORMATION temperature variations, differences between summer and winter rates, the timing of rate orders (Unaudited) and the scheduled downtime and maintenance of electric generating units.
Steam delivered (1,000 pounds) 1987 $ 231,439 $ 176,355 119,109 79,180 6,284 $ 612,367 $ 2,732,018 2,536,399 2,611,218 1,685,641 9,565,276 303,158 36,783 842 525 341,308 $ 39,614 $ 15,491 10,941 11,136 160 891 $ 78,233 $ 6,364 2,992 2,693 3,320 42 15,411 73,803 5,027 156 15 1 79,002 354,842 6,134,946 1986 1985 1984 217,393 $ 212,254 $ 205,910 169,157 168,957 156,507 127,900 135,141 128,833 80,291 79,399 79,235 7,499 9,830 13,678 I 602,240 $ 605,581 $ 584,163 2,496,099 2,256,922 2,249,270 2,370,775 2,165,685 2,073,457 2,753,902 2,606,466 2,569,572 1,585,019 1,501,447 1,415,934 9,205,795 8,530,520 8,308,233 293,452 283,911 275,175 35,089 33,189 31,548 853 893 929 517 492 502 329,911 318,485 308,154 43,145 $ 39,224 $ 40,933 18,523 17,901 18,663 16,995 19,762 22,940 11,464 17,419 18,098 142 130 160 1,533 820 784 91,802 $ 95,256 $ 101,578 6,201 5,622 6,213 2,906 2,742 2,971 3,338 3,579 4,245 3,471 3,734 3,769 36 31 41 15,952 15,708 17,239 72,685 70,804 70,183 4,693 4,417 4,233 158 160 165 14 15 19 1 1 1 77,551 75,397 74,601 370,802 335,308 298,203 6,627,130 6,794,105 6,922,416 Average Annual Compound%
Earnings                    Earnings Applicable        Average            per Quarter          Operating      Operating              Net to Common          Shares        Average Ended              Revenue        Income          Income        Stock  Outstanding          Share (Dollars in Thousands)                (In Thousands) 1987 March31          $185,935        $ 35,689          $25,058      $23,394        45,717          $0.51 June 30            160,936          27,277          16,763      15,099        45,717            0.33 Sept. 30          200,482          44,279          32,880      31,164        45,717            0.68 Dec. 31            165,126          17,722            5,102      3,332        45,717           0.08
1983 1982 1981 1980 1979 1978 1977 Rate of Growth $ 193,021 $ 183,258 $ 164,919 $ 144,637 $ 115,381 $ 105,237 $ 97,691 9.01 % 140,809 137,434 123,099 112,166 91,798 82,796 74,641 8.98 % 126,703 127,441 129,601 116,401 98,023 83,972 76,801 4.49 % 68,991 73,469 73,602 63,698 53,782 40,840 38,974 7.35 % 12,728 13,168 12,898 7,025 4,682 5,261 3,461 6.15 % $ 542,252 $ 534,770 $ 504,119 $ 443,927 $ 363,666 $ 318,106 $ 291,568 7.70 % 2,136,265 2,026,398 1,996,647 2,046,546 1,968,452 1,979,624 1,924,723 3.56 % 1,844,324 f,729,863 1,660,147 1,648,776 1,598,299 1,568,600 1,495,796 5.42 % 2,600,492 2,255,673 2,454,685 2,429,842 2,624,438 2,418,527 2,277,630 1.38 % 1,297,395 1,237,508 1,283,845 1,335,216 1,300,611 1,281,498 1,207,941 3.39 % 7,878,476 7,249,442 7,395,324 7,460,380 7,491,800 7,248,249 6,906,090 3.31 % 267,357 260,371 255,646 246,887 242,745 237,925 233,106 2.66 % 30,525 29,966 29,450 28,162 27,998 28,421 29,648 2.18 % 949 741 788 821 874 858 921 (0.89)% 434 434 434 440 478 480 561 (0.66)% 299,265 291,512 286,318 276,310 272,095 267,684 264,236 2.59 % $ 36,694 $ 36,505 $ 34,123 $ 26,525 $ 25,719 $ 28,370 $ 21,829 6.14 % 16,527 15,792 14,344 10,342 8,954 10,154 7,133 8.06 % 23,232 20,112 22,259 12,404 9,884 10,191 6,950 4.64 % 17,026 11,733 11,711 9,293 4,440 716 169 52.01 % '115 53 61 46 55 93 49 12.56 % 764 552 572 430 270 116 103 24.08 % $ 94,358 $ 84,747 $ 83,070 $ 59,040 $ 49,322 $ 49,640 $ 36,233 8.00 % 5,640 6,062 6,193 6,321 6,423 6,941 6,751 (0.59)% 2,677 2,768 2,704 2,683 2,415 2,593 2,439 2.07 % 4,378 4,108 4,809 3,937 3,388 3,290 2,811 (0.43)% 3,723 2,656 2,802 2,738 1,720 319 81 44.97 % 31 10 12 14 16 29 17 9.47 % 16,449 15,604 16,520 15,693 13,962 13,172 12,099 2.45 % 69,608 69,092 68,608 67,784 66,631 66,364 66,231 1.09 % 4,075 4,057 3,967 3,846 3,712 3,773 3,738 3.01 % 160 166 167 155 131 163 163 (0.44)% 19 18 16 16 16 21 21 (3.31)% 1 1 1 1 1 1 1 0.00 % 73,863 73,334 72,759 71,802 70,491 70,322 70,154 1.19 % 309,943 322,804 343,063 328,420 262,159 270,006 289,049 2.07 % 6,965,904 7,778,929 7,673,420 7,570,944 6;378,705 6,016,095 4,888,366 2.30 % 47 De!marua Power & lig/Jt Co111pa11y OFFICERS Asofjanuary11, 1988 NEVIUS M. CURTIS Chairman of the Board, President and Chief Executive Officer HOWARD E. COSGROVE Executive Vice President H. RAY LANDON Executive Vice President ROGER D. CAMPBELL Senior Vice President and President, Delmarva Capital Investments, Inc. HARLAND M. WAKEFIELD, JR. Senior Vice President DONALD E. CAIN Vice President PAULS. GERRITSEN Vice President and Chief Financial Officer WAYNE A. LYONS Vice President THOMAS S. SHAW, JR. Vice President DONALD P. CONNELLY Secretary RICHARD H. EVANS Vice President, Corporate Communications BARBARA S. GRAHAM Treasurer KENNETH KJONES Vice President, Planning RALPH E. KLESIUS Vice President, Engineering CHARLES MARCHYSHYN Comptroller FRANK). PERRY, JR. Vice President, Gas Division DUANE C. TAYLOR Vice President, Information Systems D. WAYNE YERKES Division Vice President, Southern Division Several management changes became effective January 1, 1988. H.R. Landon, formerly senior vice president, became executive vice president; Donald E. Cain, formerly northern division vice president became vice president with responsibility for human resources, information systems, and administration services; and Ralph E. Klesius, formerly general manager, engineering, became vice president, engineering.
                                              $712,479        $124,967          $79,803      $72,989        45,717         $1.60 1986 March31          $208,703        $ 38,235          $27,345      $25,405        45,717         $0.56 June30            171,341          29,966          19,183      17,125        45,717           0.37 Sept. 30          201,082          45,766          35,212      33,505        45,717           0.73 Dec. 31            133,737          20,771          14,383      12,683        45,717           0.28
Thomas S. Shaw Jr., vice president, joined the Company's senior management team, and Wayne A Lyons, vice president, assumed responsibility for division operations.
                                              $714,863.      $134,738          $96,123      $88,718        45,717         $1.94 Electric rate decreases in the Company's jurisdictions, primarily due to lower authorized rates of return, decreased 1987 net income as follows: first quarter-$4,857,000 (10.6&#xa2; per share);
On October 1, 1987, Paul S. Gerritsen, formerly vice president regulatory, practice and maFketing became vice president and chief financial officer.
second quarter-$4,587,000 (10.0&#xa2; per share); third quarter-$3,9l6,000 (8.6&#xa2; per share); fourth quarter-$442,000 (1.0&#xa2; per share); or a total of $13,802,000 (30.2&#xa2; per share).
In the fourth quarter of1987, losses were realized on the sale of marketable securities, certain marketable securities were written down to their market value and 1987 replacement power costs attributable to the Nuclear Regulatory Commission ordered shutdown of Peach Bottom were expensed. The effect of these transactions decreased net income $7,813,000 (17&#xa2; per share).
Electric rate decreases in the Company's jurisdictions, primarily due to lower authorized rates of return, reduced net income during 1986 as follows: first quarter-$528,000 (1.2&#xa2; per share);
second quarter-$468,000 (1.0&#xa2; per share); third quarter-$1,578,000 (3.5&#xa2; per share); fourth quarter-$4,179,000 (9.1&#xa2; per share); or a total of $6,753,000 (14.8&#xa2; per share).
In the fourth quarter of1986, the Company recorded the Delaware Summit credit payment, interest on tax refunds, ta.'{ accrual adjustments, and the impact of the Tax Reform Act of 1986 on its
* leveraged lease investments. The effect of these adjustments increased net income $1,119,000 (2.4&#xa2; per share).
45
 
Defmmi'a Power & Lig/Jt Compan1
* CONSOLIDATED STATISTICS 10 YEARS OF REvlEW                                            1987        1986        1985        1984 ELECTRIC REVENUES            Residential                $ 231,439    $ 217,393  $ 212,254  $ 205,910 (thousands):                Commercial                    176,355      169,157    168,957    156,507 Industrial                    119,109      127,900    135,141    128,833 Other utilities, etc.           79,180      80,291      79,399      79,235 Miscellaneous revenues.         6,284        7,499      9,830      13,678 I Total electric revenues    $ 612,367    $ 602,240  $ 605,581  $ 584,163 ELECTRIC SALES              Residential                  2,732,018  2,496,099  2,256,922  2,249,270 (J,000 kilowatt-hours):      Commercial                  2,536,399  2,370,775  2,165,685  2,073,457 Industrial                   2,611,218  2,753,902  2,606,466  2,569,572 Other utilities, etc.       1,685,641  1,585,019  1,501,447    1,415,934 Total electric sales        9,565,276  9,205,795  8,530,520  8,308,233 ELECTRIC CUSTOMERS          Residential                   303,158      293,452    283,911    275,175 (end ofperiod):             Commercial                     36,783      35,089      33,189      31,548 Industrial                         842          853        893        929 Other utilities, etc.             525          517        492        502 Total electric customers       341,308      329,911    318,485    308,154 GAS REVENUES                Residential                $   39,614  $    43,145 $   39,224 $   40,933 (thousands):                Commercial                      15,491      18,523      17,901      18,663 Industrial                      10,941      16,995      19,762      22,940 Interruptible                  11,136      11,464      17,419      18,098 Other utilities, etc.              160          142        130        160 Miscellaneous revenues            891       1,533        820        784 Total gas revenues        $    78,233 $    91,802 $   95,256 $ 101,578 GAS SALES                    Residential                      6,364       6,201      5,622      6,213 (million cubic feet)        Commercial                      2,992       2,906      2,742      2,971 Industrial                      2,693       3,338      3,579      4,245 Interruptible .                  3,320        3,471      3,734      3,769 Other utilities, etc.              42          36          31          41 Total gas sales                15,411      15,952      15,708      17,239 GAS CUSTOMERS                Residential                    73,803      72,685      70,804      70,183 (end ofperiod):              Commercial                      5,027        4,693      4,417      4,233 Industrial                        156          158        160        165 Interruptible                      15          14          15          19 Other utilities, etc.                1          1          1          1 Total gas customers            79,002      77,551      75,397      74,601 STEAM SERVICE                Electricity delivered          354,842      370,802    335,308    298,203 (1,000 kilowatt-hours)
Steam delivered (1,000 pounds)          6,134,946    6,627,130  6,794,105  6,922,416
 
Average Annual Compound%
1983        1982        1981        1980        1979        1978        1977 Rate of Growth
$ 193,021    $ 183,258    $ 164,919    $ 144,637    $ 115,381  $ 105,237    $    97,691        9.01  %
140,809      137,434      123,099      112,166      91,798      82,796      74,641        8.98  %
126,703      127,441      129,601      116,401      98,023      83,972      76,801        4.49  %
68,991      73,469      73,602      63,698      53,782      40,840      38,974        7.35  %
12,728      13,168      12,898        7,025      4,682        5,261        3,461        6.15  %
$ 542,252    $ 534,770    $ 504,119    $ 443,927    $ 363,666  $ 318,106    $ 291,568          7.70 %
2,136,265  2,026,398    1,996,647  2,046,546    1,968,452    1,979,624    1,924,723        3.56  %
1,844,324    f,729,863    1,660,147    1,648,776  1,598,299    1,568,600    1,495,796        5.42  %
2,600,492  2,255,673    2,454,685    2,429,842  2,624,438    2,418,527    2,277,630        1.38  %
1,297,395    1,237,508    1,283,845    1,335,216  1,300,611    1,281,498    1,207,941        3.39  %
7,878,476  7,249,442    7,395,324    7,460,380    7,491,800  7,248,249    6,906,090        3.31 %
267,357      260,371      255,646      246,887    242,745      237,925      233,106        2.66 %
30,525      29,966      29,450      28,162      27,998      28,421      29,648        2.18 %
949          741          788          821        874          858          921      (0.89)%
434          434          434          440        478          480          561      (0.66)%
299,265      291,512      286,318      276,310    272,095      267,684      264,236        2.59 %
$    36,694  $    36,505  $    34,123  $    26,525  $  25,719  $    28,370  $    21,829        6.14  %
16,527      15,792      14,344      10,342      8,954      10,154        7,133        8.06  %
23,232      20,112      22,259      12,404      9,884      10,191        6,950        4.64  %
17,026      11,733      11,711        9,293      4,440          716          169      52.01  %
      '115            53          61          46          55          93          49      12.56  %
764          552          572          430        270          116          103      24.08  %
$    94,358  $    84,747  $    83,070  $    59,040  $  49,322  $    49,640  $    36,233        8.00 %
5,640        6,062        6,193        6,321      6,423        6,941        6,751      (0.59)%
2,677        2,768        2,704        2,683      2,415        2,593        2,439        2.07 %
4,378        4,108        4,809        3,937      3,388        3,290        2,811      (0.43)%
3,723        2,656        2,802        2,738      1,720          319          81      44.97 %
31          10          12          14        16          29           17        9.47 %
16,449      15,604      16,520      15,693      13,962      13,172      12,099        2.45 %
69,608      69,092      68,608      67,784      66,631      66,364      66,231        1.09 %
4,075        4,057        3,967        3,846      3,712        3,773        3,738        3.01 %
160          166          167          155        131          163          163      (0.44)%
19          18          16         16          16          21          21      (3.31)%
1            1            1            1          1            1            1      0.00 %
73,863      73,334      72,759      71,802      70,491      70,322      70,154       1.19 %
309,943      322,804      343,063    328,420      262,159    270,006      289,049        2.07 %
6,965,904    7,778,929    7,673,420    7,570,944    6;378,705  6,016,095    4,888,366        2.30 %
47
 
De!marua Power & lig/Jt Co111pa11y OFFICERS Asofjanuary11, 1988            NEVIUS M. CURTIS                                    DONALD P. CONNELLY Chairman of the Board, President                    Secretary and Chief Executive Officer RICHARD H. EVANS HOWARD E. COSGROVE                                  Vice President, Corporate Communications Executive Vice President BARBARA S. GRAHAM H. RAY LANDON                                      Treasurer Executive Vice President KENNETH KJONES ROGER D. CAMPBELL                                  Vice President, Planning Senior Vice President and President, Delmarva                                RALPH E. KLESIUS Capital Investments, Inc.                           Vice President, Engineering HARLAND M. WAKEFIELD, JR.                          CHARLES MARCHYSHYN Senior Vice President                              Comptroller DONALD E. CAIN                                      FRANK). PERRY, JR.
Vice President                                      Vice President, Gas Division PAULS. GERRITSEN                                    DUANE C. TAYLOR Vice President and                                  Vice President, Information Systems Chief Financial Officer D. WAYNE YERKES WAYNE A. LYONS                                      Division Vice President, Vice President                                     Southern Division THOMAS S. SHAW, JR.
Vice President Several management changes became effective January 1, 1988. H.R. Landon, formerly senior vice president, became executive vice president; Donald E. Cain, formerly northern division vice president became vice president with responsibility for human resources, information systems, and administration services; and Ralph E. Klesius, formerly general manager, engineering, became vice president, engineering. Thomas S. Shaw Jr., vice president, joined the Company's senior management team, and Wayne A Lyons, vice president, assumed responsibility for division operations. On October 1, 1987, Paul S. Gerritsen, formerly vice president regulatory, practice and maFketing became vice president and chief financial officer.
* In the Company's subsidiary businesses, Roger D. Campbell, formerly chief financial officer of the parent company, was named President of Delmarva Capital Investments, Inc. Campbell remains a senior vice president of the Company. Hudson P. Hoen, formerly a general manager with Delmarva Capital Investments, Inc., was named vice president.
* In the Company's subsidiary businesses, Roger D. Campbell, formerly chief financial officer of the parent company, was named President of Delmarva Capital Investments, Inc. Campbell remains a senior vice president of the Company. Hudson P. Hoen, formerly a general manager with Delmarva Capital Investments, Inc., was named vice president.
* Delmarm l'oll'er {-Lig/Jt Compani* DIRECTORS OSCAR L. CAREY President and Director of Larmar Corporation (general real estate and home builders)
* Delmarm l'oll'er {- Lig/Jt Compani*
Salisbury, Maryland JOHNR. COQPER Director of Environmental Affairs of E. I. du Pont de Nemours & Company (a diversified chemical, energy and specialty products company) Wilmington, Delaware HOWARD E. COSGROVE Executive Vice President of the Company NEVIUS M. CURTIS Chairman of the Board, President and Chief Executive Officer of the Company SALLY V. HAWKINS Director, President and Chief Executive Officer of Delaware Broadcasting Company and President and General Manager of Station WIIM (radio broadcasting)
DIRECTORS OSCAR L. CAREY                       WILLIAM G. SIMERAL President and Director of Larmar     Director, Executive Vice Corporation (general real estate and President and member of the home builders) Salisbury, Maryland   Executive Committee ofE. I.
Wilmington, Delaware DONALD W. MABE President and Vice Chairman of Perdue Farms Incorporated (integrated poultry company) Salisbury, Maryland JAMES T. McKINSTRY Partner, Law Firm of Richards, Layton & Finger Wilmington, Delaware JAMES 0. PIPPIN, JR. Director, President and Chief Executive Officer of the Centreville National Bank of Marylan-d, Centreville, Maryland WILLIAM G. SIMERAL Director, Executive Vice President and member of the Executive Committee ofE. I. du Pont de Nemours & Company (a dtversified chemical, energy and specialty products company) Wilmington, Delaware DAVIDD. WAKEFIELD Senior Vice President of Morgan Guaranty Trust Company of New York, New York; Director of Continental American Life Insurance Company, Wilmington, Delaware HARLAND M. WAKEFIELD, JR. Senior Vice President of the Company EXECUTIVE COMMITTEE Nevius M. Curtis, Chairperson; Oscar L. Carey; William G. Simeral; David D. Wakefield; Harland M. Wakefield.Jr.
du Pont de Nemours & Company JOHNR. COQPER                          (a dtversified chemical, energy and Director of Environmental Affairs of specialty products company)
AUDIT COMMITTEE John R. Cooper, Chairperson; James T. McKinstry;James  
E. I. du Pont de Nemours & Company   Wilmington, Delaware (a diversified chemical, energy and specialty products company)           DAVIDD. WAKEFIELD Wilmington, Delaware                   Senior Vice President of Morgan Guaranty Trust Company of HOWARD E. COSGROVE                    New York, New York; Executive Vice President of the      Director of Continental American Company                              Life Insurance Company, Wilmington, Delaware NEVIUS M. CURTIS Chairman of the Board, President      HARLAND M. WAKEFIELD, JR.
: 0. Pippin, Jr. NOMINATING COMMITTEE SallyV. Hawkins, Chairperson; Nevius M. Curtis;James  
and Chief Executive Officer of the    Senior Vice President of the Company                               Company SALLY V. HAWKINS                      EXECUTIVE COMMITTEE Director, President and Chief        Nevius M. Curtis, Chairperson; Oscar Executive Officer of Delaware        L. Carey; William G. Simeral; David D.
: 0. Pippin.Jr.
Broadcasting Company and President  Wakefield; Harland M. Wakefield.Jr.
COMPENSATION COMMITTEE William G. Simeral, Chairperson; Oscar L. Carey; David D. Wakefield INVESTMENT COMMITTEE David D. Wakefield, Chairperson; Nevius M. Curtis; Donald W. Mabe; James 0. Pippin, Jr. SPECIAL DIRECTOR'S COMMITTEE ON PEACH BOTTOM William G. Simeral, Chairperson; John R. Cooper;James T. McKinstry 49 De/111arm Poll'er & Lig/Jt Co111pany STOCKHOLDER INFORMATION 50 QUARTERLY COMMON STOCK DIVIDENDS AND PRICE RANGES The Company's common stock is listed in the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges.
and General Manager of Station WIIM (radio broadcasting)            AUDIT COMMITTEE Wilmington, Delaware                John R. Cooper, Chairperson; James T. McKinstry;James 0. Pippin, Jr.
The Company had 53,465 holders of common stocks as of December 31, 1987. 1987 Dividend Declared First Quarter $.35 1/3 Second Quarter .35 1/3 Third Quarter .35 1/3 Fourth Quarter .36 1/2 SHAREHOLDER SERVICES Carol C. Conrad, Assistant Secretary Delmarva Power & Light Company 800 King Street, P.O. Box 231 Wilmington, Delaware 19899 Telephone (302) 429-3355.
DONALD W. MABE President and Vice Chairman of      NOMINATING COMMITTEE Perdue Farms Incorporated            SallyV. Hawkins, Chairperson; Nevius (integrated poultry company)        M. Curtis;James 0. Pippin.Jr.
STOCK SYMBOL Common Stock, DEW-listed on the New York and Philadelphia Stock Exchanges.
Salisbury, Maryland COMPENSATION COMMITTEE JAMES T. McKINSTRY                    William G. Simeral, Chairperson; Partner, Law Firm of                Oscar L. Carey; David D. Wakefield Richards, Layton & Finger Wilmington, Delaware                  INVESTMENT COMMITTEE David D. Wakefield, Chairperson; JAMES 0. PIPPIN, JR.                  Nevius M. Curtis; Donald W. Mabe; Director, President and              James 0. Pippin, Jr.
ANNUAL MEETING The Annual Meeting will be held on April 26 at 11 :00 a.m. in the Clayton Hall, University of Delaware, Newark, Delaware.
Chief Executive Officer of the Centreville National Bank of        SPECIAL DIRECTOR'S COMMITTEE Marylan-d, Centreville, Maryland      ON PEACH BOTTOM William G. Simeral, Chairperson; John R. Cooper;James T. McKinstry 49
ADDITIONAL REPORTS To supplement information in this Annual Report, a Financial and Statistical Review (1977-1987) and the Form 10-K are available upon request. Please write to Shareholder Services, Delmarva Power, 800 King Street, P.O. Box 231, Wilmington, Delaware 19899. TRUSTEES First Mortgage and Collateral Trust Bonds-Chemical Bank, New York, New York Pollution Control Revenue Mellon Bank (DE) N.A. Wilmington, Delaware Bank of Delaware, Wilmington, Delaware Wilmington Trust Company, Wilmington, Delaware Irving Trust Company New York, New York Price($) High Low 233/s 21 2l1/s 183/s 203/4 18 1/4 193/4 161/4 1986 Dividend Price($) Declared High $.33213 201/2 .33 2 13 231;8 .33 2 13 253/s .35 1 13 23 TRANSFER AGENTS AND REGISTRARS Preferred Stock Wilmington Trust Company, Corporate Trust Division Rodney Square North Wilmington, Delaware 19890. Common Stock Wilmington Trust Company, Corporate Trust Division Rodney Square North Wilmington, Delaware 19890. Low 16Vs 19llz 201/4 201/2 Manufacturers Hanover Trust Company Stock Transfer Department P.O. Box 24935 Church Street Station New York, New York 10249. REGULATORY COMMISSIONS Federal Energy Regulatory Commission, 825 North Capitol Street, N.E., Washington, D.C. 20426. Delaware Public Service Commission, 1560 S. du Pont Highway, Dover, Delaware 19901. Maryland Public Service Commission, American Building, 231 East Baltimore Street, Baltimore, Maryland21202.
 
Virginia State Corporate Commission, P.O. Box1197, Richmond, Virginia 23209
De/111arm Poll'er & Lig/Jt Co111pany STOCKHOLDER INFORMATION QUARTERLY COMMON STOCK DIVIDENDS AND PRICE RANGES The Company's common stock is listed in the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges.
* I i *) . ' ' ' : I Delmarva Power 800 King Street P.O. Box 231 Wilmington, Delaware 19899 Bulk Rate U.S. Postage Paid Pennit No. 68}}
* i I
The Company had 53,465 holders of common stocks as of December 31, 1987.
1987                                           1986 Dividend        Price($)                      Dividend         Price($)
Declared    High      Low                    Declared     High      Low First Quarter             $.35 1/3   233/s    21                        $.33213      201/2    16Vs Second Quarter             .35 1/3   2l1/s    183/s                      .33 213    231;8    19llz Third Quarter               .35 1/3   203/4    18 1/4                      .33 213    253/s    201/4 Fourth Quarter             .36 1/2  193/4    161/4                      .35 113    23      201/2 SHAREHOLDER SERVICES                                   TRANSFER AGENTS AND REGISTRARS Carol C. Conrad, Assistant Secretary                   Preferred Stock Delmarva Power & Light Company                         Wilmington Trust Company, 800 King Street, P.O. Box 231                         Corporate Trust Division Wilmington, Delaware 19899                             Rodney Square North                            *)
Telephone (302) 429-3355.                              Wilmington, Delaware 19890.
STOCK SYMBOL                                           Common Stock Common Stock, DEW-listed on                           Wilmington Trust Company, the New York and Philadelphia Stock Exchanges.
Corporate Trust Division Rodney Square North                              .  '
Wilmington, Delaware 19890.
ANNUAL MEETING Manufacturers Hanover Trust Company The Annual Meeting will be held                       Stock Transfer Department on April 26 at 11 :00 a.m. in                         P.O. Box 24935                                    '
                                                                                                                                          ~.
the Clayton Hall, University of                       Church Street Station                              '
Delaware, Newark, Delaware.                            New York, New York 10249.
ADDITIONAL REPORTS                                     REGULATORY COMMISSIONS To supplement information in this                     Federal Energy Regulatory Commission,              :I Annual Report, a Financial and                         825 North Capitol Street, N.E.,
Statistical Review (1977-1987) and                     Washington, D.C. 20426.
the Form 10-K are available upon request. Please write to Shareholder                   Delaware Public Service Commission, Services, Delmarva Power,                              1560 S. du Pont Highway, 800 King Street, P.O. Box 231,                         Dover, Delaware 19901.
Wilmington, Delaware 19899.                           Maryland Public Service Commission, American Building, TRUSTEES                                               231 East Baltimore Street, First Mortgage and Collateral Trust                   Baltimore, Maryland21202.
Bonds-Chemical Bank,                                  Virginia State Corporate Commission, New York, New York P.O. Box1197, Pollution Control Revenue Bonds-                      Richmond, Virginia 23209 Mellon Bank (DE) N.A.
Wilmington, Delaware Bank of Delaware, Wilmington, Delaware Wilmington Trust Company, Wilmington, Delaware Irving Trust Company New York, New York 50
 
Delmarva Power                 Bulk Rate 800 King Street           U.S. Postage Paid P.O. Box 231 Pennit No. 68 Wilmington, Delaware 19899}}

Latest revision as of 07:44, 3 February 2020

Delmarva 1987 Annual Rept.
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Text

DELMARVA P 0 W E R Annual

  • Report
8(1:3210505 PDR ADOCK I
  • r~

A MAJOR CHALLENGE FACING DELMARVA POWER IS TO PROVIDE ENERGY FOR THE FUTURE AT THE LOWEST REASONABLE COST.

PART OF OUR REPORT THIS YEAR DISCUSSES HOW WE INTEND TO MEET THIS CHALLENGE SO OUR CHILDREN, SUCH AS THE ONES ON THE COVER OF OUR ANNUAL REPORT, CAN CONTINUE TO GROW AND RELY ON ENERGY TODAY AND TOMORROW.

Percent Increase FINANCIAL HIGHLIGHTS 1987 1986 (Decrease)

Revenues $ 712.5 million $ 714.9 million (0.3)

Net Income $ 79.8 million $ 96.1 million (17.0)

Earnings Per Share $ 1.60 $ 1.94 (17.S)

Dividends Declared $ l.42Vz $ 1.36113 4.S Common Stock Outstanding Average Shares 45,717,450 45,717,450 Common Stock Book Value $ 13.01 $ 12.85 1.2 Construction Expendituresc1i $ 142.2 million $ 102.6 million 38.6 Internally Generated Funds< 2i $ 123.2 million $ 159.0 million (22.S)

Electric Sales 9.57 billionkwh 9.21 billionkwh 3.9 Electric Customers (year end) 341,308 329,911 3.5 Average Annual Residential Usage ., 9,\52 kwh 8,605 kwh 6.4 Gas Sales I 15.41 millionmcf 15.95 million mcf (3.4)

Gas Customers (year end) 79,002 77,551 1.9 Average Annual Residential Usage 86.9 mcf 86.3 mcf 0.7

<1J Excludes Allowancefor Funds Used During Construction. I

<2J Net cash flow from operating activities less prefeiTed and commoi:i dividends.

2 CENTRALLY LOCATED WITHIN THE MAJOR EAST COAST MARKETS, THE DELMARVA PENINSULA HAS A UNIQUE BLEND OF COMMERCIAL, AGRICULTURAL, INDUSTRIAL, AND RECREATIONAL ACTIVITIES.

DELMARVA POWER SERVES 341,000 ELECTRIC CUSTOMERS THROUGHOUT MOST OF THE 5, 700 SQUARE MILE PENINSULA AND 79,000 NATURAL GAS CUSTOMERS IN A 275 SQUARE MILE AREA IN NORTHERN DELAWARE. THE COMPANY EMPLOYS 2,625 PEOPLE.

THE CHAIRMAN'S PERSPECTIVE Though earnings decreased this year, key financial indicators show Delmarva Power is still 1987 was an extraordinary year financially strong. AFUDC is at Delmarva Power. The most low. External financing in 1987 significant events were: was minimal. Coverage ratios

  • Earnings decreased for the first While the text of this report remain good.

time in seven years, primarily discusses the events and accom- During the past five years, we because ofrate reductions in all plishments of this unusual have used cash available during the electric regulatory jurisdictions. year, the remainder of this letter period between major power

  • The summer peak grew beyond discusses how we will meet the plant construction programs to expectations because of the challenges ahead. position ourselves for the future strong economy on the Delmarva Restoring Earnings Although by augmenting earnings through Peninsula. sales increased, earnings in 1987 investments and catching up These events brought two were $1.60 per share compared on bringing support facilities to 3

challenges ahead into crisp focus: to $1.94 per share in 1986, pri- efficient levels.

  • Restore earnings to at least the marily because of rate reductions Though subsidiaries contrib-1986 level despite lower allowed ordered by the four commissions uted only 1 cent to 1987 earnings, rates ofreturn. regulating the company's elec- we expect subsidiary earnings
  • Provide reliable, competitively tric rates. The regulators were to grow modestly over the next priced new capacity in a rapidly responding to the decline in few years. Also, as the com-growing and changing world. capital costs nationally. Also con- pany enters a period of building As the accomplishments tributing was the write off of new power plants, most of our discussed in this report demon- replacement power costs related support facilities will be in good strate, Delmarva Power has the to the shutdown of the Peach shape and will not require peoplewith the skills, participative Bottom nuclear power plant additional investments.

style, and drive to meet these ordered by the Nuclear Regulatory However, without higher challenges. Commission (NRC). authorized returns on equity, Nev Curtis

earnings growth will be slow. In addition to rate relief, the major factors for improving earnings are continued tight cost control and tric load growth appears to be growth. The Delmarva Peninsula coming much more rapidly than is strong economically. In Dela- expected. The key element of ware, employment grew by 4% our strategy is flexibility. needs. Base load plants are be-and the unemployment rate aver- coming increasingly expensive aged 3.1 %, the second lowest The major factors for and, on a national level, increas-in the nation. New businesses, ingly difficult to include in rate improving earnings, in spurred by a favorable business base. We also see volatility in the climate, continue to locate and addition to rate relief, economy, energy costs, energy expand in northern Delaware, are continued tight cost supplies, and governmental regu-and the shore and bay areas con- lations. Thus, the company is control and growth. The tinue to develop. Delmarva working to minimize capital Power has more customers Delmarva Peninsula is investment and match capacity using more electricity than ever strong economically. expansion to load growth as much before. In 1987, the company as possible.

connected 11,397 new electric In 1987, peak summer demand Delmarva Power's plan to meet customers. Residential sales in- grew 13.3%. At the summer future energy needs is called creased 9.5% and use per peak, reserve levels were one- Challenge 2000 and is described customer increased 6.4%. Com- half their normal levels, indicating in more detail on pages 16 and 17.

mercial sales increased 7% and use that expected reserve margins in It is a combination of options per customer increased 2.6%. 1988, 1989, and 1990 are likely to designed to provide as much flexi-Growth is expected to continue be below normal. bility as possible in responding at a moderate rate. Historically, electric companies to changing conditions.

Providing CapacUy The other satisfied such needs by building In response to the rapid growth major challenge facing us is more power plants. However, in peak demand in 1987, the to supply adequate amounts of today we see no single source for company has moved ahead with energy in a future where elec- supplying additional energy the purchase of two, 100 megawatt Oscar L Carey john R Cooper Howard E Cosgrove Sally V. Hawkins Donald W. Mabe

the March shutdown that there were problems at the plant.

combustion turbines which we However, as a minority owner, expect to run between 500 and we were not privileged to infor-3000 hours per year, depending on mation indicating the gravity of circumstances. Assuming timely the problems until February, 1988, Other alternatives for recovery permitting, one would be installed of these costs are being con-by mid 1989, and the other, a In response to rapid sidered.

few months later. This project will While 1987 served to shape the growth, the company has cost about $44 million. The $220 challenges ahead, it also demon-per kilowatt cost of this project moved ahead with the strated that we have people with is extremely low compared to the abilities to meet those purchase of two, 100 alternatives. The company also challenges. The rest of this report megawatt combustion accelerated the development of discusses their achievements.

several programs designed to turbines ... There are reasons to be confident.

reduce customers' use at peak Flexible strategies are in place and periods such as special peak man- when a report from the Institute are working. A participative work agement rates for industrial of Nuclear Power Operations style has been developed and is 5

customers and appliance control (INPO) was made public. yielding creativity and efficiencies.

devices for residential customers. As a result of the seriousness The people are talented. Success On another matter, the directors of the charges in the INPO report will come from this combination.

and managers of the company and considering alternatives Management appreciates the have wrestled for some time with facing the company, the board of efforts of all our employees the serious ramifications of the directors, on management's for they are truly the creative shutdown of the Peach Bottom recommendation, decided not and effective force moving the Nuclear Generating Station to seek recovery from customers company.

ordered by the NRC. of replacement power costs Sincerely, Delmarva Power owns 7.51 % of related to the NRC-ordered shut-Peach Bottom which is operated down ofabout $1 million a month.

by Philadelphia Electric Co. (PE). For 1987, the effect on earnings NEV CURTIS We were generally aware before was 11 cents per share. FebrualJ' 11, 1988

      • ~~..
  • ~**

~......

fames T. McKinstry fames 0. Pippin,]r. William G. Simeral David D. Wakefield r5 HarlandM Wakefield,fr.

6 SEVERAL HOT SUMMER DAYS, ALONG WITH THE STRONG ECONOMY OF THE DELMARVA PENINSULA, HAD A SIGNIFICANT IMPACT ON THE COMPANY IN 1987. THE PEAK DEMAND FOR ELECTRICI1Y GREW BY AN UNEXPECTEDLY HIGH 13.3%. WHILE MANY PEOPLE FOUND COMFORT THROUGH AIR CONDITIONING, AN ICE CREAM CONE AT THE BEACH COULD WORK TOO.

THE STOCKHOLDERS' PERSPECTIVE The price of common stock decreased to $18 from $22, mainly because of the rate actions. of the AFUDC ratio, a key indicator for commissions and the decline in financial analysis, remained low financial markets. The company's at 5.8% of net income.

Please note that the numbers in bond rating also declined, in the Facilities Since there had this report reflect the 3 for 2 differing terms of the different been little significant upgrading common stock split that was effec- agencies, from a strong "AA:.' to of support facilities in the past 30 tive April 29, 1987. Historical the combination of a lower "AA:.' years, the company has used the numbers usedfor comparisons and a strong "A", again primarily period since the completion of its have been restated to reflect because of the rate actions of last major power plant in 1981 this split. the commissions. to modernize several of its sup-Financial Position Delmarva Electric sales increased 3.9% port facilities. Projects completed Power increased quarterly divi- over 1986 levels, despite the shut- in 1987 included a new data dends for the 11th consecutive down of a large steel mill, because processing building and new year. of a strong economy on the office and locker room facilities Quarterly dividends increased Delmarva Peninsula, favorable at the Edge Moor power plant.

by 3.3% to 36.5 cents per share for weather, and a 3.5% increase in Projects underway include up-an indicated annual rate of $1.46. customers. Residential electric grading of general offices of 7

Earnings decreased to $1.60 per sales increased 9.5%, and com- the company's corporate head-share from $1.94 per share a year mercial electric sales increased quarters in Wilmington and ago. The decline in earnings 7%. Gas sales decreased 3.4%, divisional headquarters in resulted primarily from rate mainly because of the shutdown Salisbury, Maryland.

reductions ordered by the four of the steel mill. However, adjusted Peach Bottom On March 31, commissions regulating the com- for the loss of the mill, gas sales 1987, the Nuclear Regulatory pany's rates and the write off of increased 6.2%. This increase Commission (NRC) ordered the the Peach Bottom replacement reflects growth in the residential plant shut down for a variety of power costs. and commercial sectors and the problems including operator The factors for improving rise in the price of oil. inattention. Delmarva Power earnings to at least the 1986 level The company paid for 87% of owns 7.51 % of Peach Bottom are discussed in the chairman's its construction expenses with which is operated by Philadelphia letter in the front of this report. internally-generated cash. The Electric Co. (PE).

2200 1200 Summer and winter peaks 0 grew in 1987 compared to 1986.

JFMAMJJASOND Monthly Peak in Megawatts

On February 2, 1988, PE made public a report from the Institute PE officials have informed of Nuclear Power Operations Delmarva Power that they expect board is recommending the elec-(INPO) that was critical of the plant to resume operations tion ofH. R. Landon, executive Philadelphia Electric's operation later in 1988. However, this vice president of the company, of Peach Bottom during the last depends on permission from the Lida W. Wells, director and presi-several years. NRC which Delmarva Power dent of Wells Agency, Inc., and Dr.

As a result of the seriousness of can not predict. Elwood P. Blanchard, a director the INPO report and in con- Rate Matters As a result of and executive vice president of sideration of alternatives facing declining capital costs nationally the Du Pont Company.

Delmarva Power, the company and the revisions of the federal Simeral, who will retire effective decided not to seek recovery of tax laws, regulators reduced April 26, 1988, was elected to the approximately $1 million a Delmarva Power's rates. From the Board of Directors in 1981.

month in replacement power costs August, 1986, throughJanuary, His extensive experience and from customers. For 1987, this 1988, the reductions have been knowledge as a businessman and decision reduced earnings by 11 $34.3 million in Delaware, $12.6 community leader have benefitted cents per share. million in Maryland, $805,000 the company immeasurably.

The company will continue to in Virginia, and $6.4 million for Carey, who will resign effective consider other alternatives for wholesale customers regulated April 26, 1988, has served on 8 recovery of these costs. by the Federal Energy Regulatory the Board for 17 years. His good The company believes that the Commission (FERC). judgement and keen wisdom safe and expeditious startup of The company filed a $3.4 million have been valuable assets.

the units at Peach Bottom is rate increase request with the Wakefield will retire as senior important to both stockholders FERC to recover higher expenses vice president and director effec-and customers. The NRC has and earn a reasonable return on tive April 1, 1988. He worked reacted favorably to some of PE's its investment. The company also 3 7 years for the company. He was startup plans, and PE has stated sought $5.0 million over two elected a director in 1984. His that it is committing the resources years as part of the settlement of extensive operating knowledge to correct the problems and their the Summit Nuclear Power Plant. and utility perspective have helped root causes. It is clearly PE's Director Changes WilliamG. the company greatly.

responsibility to implement a Simeral, Harland M. Wakefield, Jr., These people will be missed.

recovery plan to return Peach and Oscar L. Carey will leave the Other management changes Bottom to service. board of directors in 1988. The are detailed on page 48.

Harley Wakefield ifrom left) inspects the Data Center's new ice-storage cooling system with the company's Duane Taylor and Charlie Frampton.

9 THE ARTIST'S SKETCH SHOWS THE WOOD-BURNING POWER PLANT BEING DEVELOPED IN THE HILLS OF BURNEY, CALIFORNIA, BY DELMARVA CAPITAL TECHNOLOGY CO.,

ONE OF DELMARVA POWER'S SUBSIDIARY COMPANIES. THE PHILOSOPHY OF THE SUBSIDIARY EFFORTS IS TO SEEK RETURNS WHICH EXCEED THOSE OF THE REGULATED BUSINESS AND NOT DETRACT FROM THE CORE OPERATION OF THE PARENT ENERGY COMPANY.

IO A NEW AUTOMATED DISPATCH SYSTEM WILL BE INSTALLED IN MANY COMPANY SERVICE VEHICLES IN 1988 TO PROVIDE CUSTOMERS WITH BETTER INFORMATION ABOUT WHEN SERVICE PERSONNEL WILL ARRIVE.

OTHER EXAMPLES OF WHERE THE USE OF NEW TECHNOLOGY HAS BEEN USED TO IMPROVE EFFICIENCY INCLUDE RECORDING OF METER READINGS, INJECTING FUEL INTO POWER PLANT BOILERS, AND DISPENSING FUEL INTO COMPANY VEHICLES.

THE CUSTOMERS' PERSPECTIVE The price ofenergv continues to be a major concern ofmost customers and the company.

Delmarva Power's prices are among the lowest in the region. in the service territory; and Electric comparisons (in cents/ reduced rates caused by lower kwh) are: New York, il.53; allowed rates of return due to Boston, 9.36; Philadelphia, 8.98; reduced capital costs nationally.

Meter reader Sharon Broum records a customer's Newark, N ]., 8.49; Delmarva As the price of electricity energy use with a new computerized device.

Peninsula, 6.34; Baltimore, 6.15. declines, customers use more of For natural gas (in cents/ccf): it. Average residential customer Baltimore, 61.80; New York, use increased 6.4% in 1987 and installment payments, load limi-60.05; Newark, NJ., 56.68; average commercial customer use ters, and community sources Philadelphia, 53.91; Wilmington, increased 2.6%. of funds. The individualized 50.22; Boston, 50.04. Customer Information The approach has enabled the com-Throughout the service territory, company provides general infor- pany to achieve both reduced rates have declined. In Delaware, mation to customers through the cut offs and reduced write offs. II for example, the price of elec- monthly residential newsletter, Customer Opinions The com-tricity for a residential customer "Energy News You Can Use," pany's customer approval rating using 750 kilowatt hours of the quarterly commercial news- increased for the fifth consecutive electricity per month is 11 % less letter, "Energy Exchange," and year. In the 1987 survey, 78% of than it was in 1983. the quarterly senior citizens news- residential customers gave the The reasons include the letter, "Silver Bulletin." company a favorable rating company's conversion from Marketing representatives and compared with 74% in 1986; 71 %

primarily an oil-burning utility to customer representatives offer in 1985; 66% in 1984; 59% in primarily a coal-burning utility; one-to-one help to customers. For 1983; and 46% in 1982.

aggressive internal cost-control those customers having diffi- Reliable service and stable utility and team-effectiveness programs; culty paying their bills, customer rates were the characteristics the renegotiation of several representatives can provide mentioned most frequently fuel contracts; the strong economy information about budget billing, in the survey.

As the sun sets, the lights come on at a home near Rehoboth Beach, Delaware.

I2 MARINE LIFE THRIVES NEAR AN UNDERWATER ARTIFICIAL REEF BUILT IN THE ATLANTIC OCEAN USING BLOCKS OF COAL ASH FROM THE COMPANY'S POWER PLANTS. DEVELOPED IN CONJUNCTION WITH THE UNIVERSITY OF DELAWARE, THE REEF PROJECT EARNED AN "OUTSTANDING CONSERVATION AWARD" FROM THE INSTITUTE OF URBAN WILDLIFE.

MAJOR OPERATING EVENTS natural gas; and 11 % nuclear through nuclear power plants partially owned by Delmarva System Reliability The people Power but run by other com- in and associated with the system New Peak - On July 21 at 5 p.m., panies. Generating reserves at the operations groups put forth a customers demanded 2,084 mega- unusually high 1987 summer special effort in 1987 to prepare watts of electricity, 13.3% more peak were 9.3%. for any problem which could than they have at any one time Environment - The company, have been caused by the loss of before. This year's growth in the Delaware Citizens for Clean the line across the Delaware River summer peak was dramatic. Air, and federal and state envi- and the unplanned shutdown During this summer, the previous ronmental officials are working of the Peach Bottom Nuclear peak of 1,840 megawatts was together to develop a cost-effective Generating Station.

exceeded 14 times including one plan to solve an infrequent As the summer progressed, Saturday. "downwash" air pollution prob- there were several tense moments.

Much of the increased growth lem at the Indian River power However, employees who had was caused by the strong econ- plant. Since the federal Environ- anticipated problems used con-omy of the Delmarva Peninsula. mental Protection Agency has tingencies and coped well. On In 1987, the company connected issued an order requiring a solu- the day of the 13.3% increase in 13 11,397 new electric customers. tion by 1992, a decision on the peak demand, customers did Power Plant Operations technology to be used will be not experience major interrup-Delmarva Power's wholly-owned made in 1988. tions or voltage reductions.

and operated coal and oil-fired Also, most of the waste water Natural Gas Delmarva Power power plants ran well. The average streams at the Edge Moor plant completed its connection to a availability rate for these plants were connected to the Wilmington major interstate pipeline be-was 84.4% compared to the most sewage treatment plant, reducing longing to the Columbia Gas recent industry average of 83 .1 % . discharges into the Delaware Transmission Corporation. The This record placed the company River. More than 11,000 baby rock- connection gives the company two among the top companies of the fish reared by employees at the suppliers of natural gas, thereby P]M interconnection. Vienna power plant with company increasing the reliability, flexi-The company's fuel mix is facilities were released into bility, and economy of the balanced: 67% coal; 22% oil and the Nanticoke River. company's gas supply.

Employeesfinished.first again in a contestforfewest fleet accidents.

River Crossing At 4:19 p.m.

on Sunday, March 1, 1987, a rain of steel and wire poured into the Delaware River as a tanker Also, the training for Delmarva rammed a 43-story tower carrying Power's participative skills a 500,000 volt transmission line program was expanded to include from Delaware to New Jersey.

all employees. A gain-sharing Within hours, a massive cleanup, program, called the Corporate planning, and $25 million res-Performance Incentive Plan, toration project was underway.

A unique.floating crane was used was begun to reward team Nine months later, the line was to help rebuild the damaged towers.

accomplishments. back in service. Senior managers There continues to be a high and joint owners praised the The gas division also began to degree of cooperation between project team for setting and install gas distribution facilities union leadership and company achieving an ambitious restora-along U.S. Route 40 to take management to improve tion goal.

advantage of an area of growth productivity, wellness, and The line is a major link in the southwest of the city of Wilming- working environments. regional power grid.

ton. Progress was also made on Community Activities Through The forces unleashed at the the company's multi-year plan to the contributions of stockholders moment of the accident required 14 replace deteriorating, uncoated, and customers, the Good Neigh- the total replacement of the two steel gas main. In 1987, the com- bor Energy Fund contributed towers in the center of the river, pany connected 1,451 new gas more than $208,000 to the com- the replacement of one foun-customers. munity for customers having dation, the replacement of parts Employees A new job review trouble paying utility bills. The of two other towers, and the system was developed by em- highly successful Radio Watch reconstruction of another tower.

ployees for non-bargaining unit program continued to summon A curtain of air bubbles was employees. The new system aid, through company vehicles created in the river to protect puts increased emphasis on how with radios, for people throughout marine life while damaged foun-jobs are done as well as on the peninsula. Employees sur- dations were removed.

bottom-line accomplishments. It passed their goal by 54% and Litigation is underway to allows larger rewards for higher contributed $241,000 to the recover damages from the ship's performance. United Way. owners.

A "wellness expo" was heldfor 60 Plus customers.

15 FROM ON TOP OF THE TOWER ABOUT 400 FEET ABOVE THE DELAWARE RlvER, THE PASSING TANKER LOOKS LIKE A TOY TO THE WORKMEN REBUILDING THE DAMAGED HIGH VOLTAGE TRANSMISSION LINE. THE MASSIVE RESTORATION PROJECT WAS COMPLETED ON BUDGET AND A MONTH EARLY, SAVING ABOUT $2.3 MILLION IN REPLACEMENT POWER COST FOR REGIONAL UTILITIES.

16 HOMES RISING OUTSIDE WIIMINGTON ILLUSTRATE THE SIGNIFICANT GROWTH OCCURRING ON THE DELMARVA PENINSULA.

MORE CUSTOMERS ARE USING MORE ELECTRICI1YTHAN EVER BEFORE. THE PLAN TO PROVIDE ELECTRICI1Y FOR THIS GROWTH IS CALLED CHALLENGE 2000. IT INCLUDES A COMBINATION OF ALTERNATIVES DESIGNED TO PROVIDE FLEXIBILI1Y AT TIMES OF RAPID CHANGES.

T H E F u T u R E as possible to allow emerging power plant technology to develop so that the most cost-effective plants could be built at a time of The key challenge for the future increasing competition. How-is to supply adequate amounts ever, at the unusually high peak of electricity at the lowest in 1987, reserve levels were one-reasonable cost throughout the half their normal levels, indicating mental regulations. Licensing seroice territory. that reserve margins in 1988, activities are underway. The com-Challenge 2000

  • Delmarva 1989, and 1990 are likely to be pany is also talking with industrial Power's plan, calle,d Challenge below normal and some additional cogeneration developers about 2000, is a combination of options sources of electricity (called new projects that might provide designed to enable the company supply-side options) needed to base load generation beyond 1990.

to be as flexible as possible in be developed quickly. For the On the demand-side, the responding quickly to changing future, both supply and demand company has received approval demand for energy, emerging options will be needed, and the of rate structures designed to technologies, fluctuating fuel board of directors accelerated encourage industrial customers 17 costs, and changing governmental programs within each strategy. to use their own diesel generators regulations. To meet peak demands from the at peak times. It has also acceler-The company sees no single supply-side, the company ated its program to install devices solution to supplying future purchased rwo, 100-megawatt in customers' homes which energy needs. Rather, it foresees combustion turbines to run synchronize the normal cycling a blend of small power plants berween 500 and 3000 hours0.0347 days <br />0.833 hours <br />0.00496 weeks <br />0.00114 months <br /> a of air conditioners and water using the most advanced tech- year depending on circumstances. heaters to reduce peak usages.

nology and customer programs The first would be installed by Customers in New Castle County, to reduce use at peak periods. mid 1989 and the second, a few Delaware, can volunteer for the Previous annual reports discussed months later. They will be located program in early 1988. The com-the need to emphasize customer at the Edge Moor Power Station, pany is also encouraging small conservation alternatives (called use natural gas or oil, and comply power production and conserva-demand-side options) for as long with all applicable environ- tion by all customers.

3250 3000 1987 Capacity Requirement Forecast 2500 I~~Cfllect,,Sapacity 2250 2000 Programs to manage electricity used 1750 during peak periods can delay the need (Reserve Margin is 15%)

for new generating capacity.

1980 1982 1984 1986 1988 1990 1992 1994 Capacity Requirement Forecast in Megawatts

20 Financial Review and Analysis 25 Report ofManagement 25 Report ofIndependent Accountants 26 Consolidated Financial Statements 32 Notes to Consolidated Financial Statements 46 Consolidated Statistics 48 Officers 49 Directors 50 Stockholder Information

Delman:a Po1cer C- Lig/J1 Company SELECTED FINANCIAL DATA (Dollars in Thousands)

For t/Je Years Ended December 31 1987 1986 1985 1984 1983 OPERATING Operating Revenues $ 712,479 $ 714,863 $ 722,834 $ 702,593 $ 649,799 Operating Income I 129,138 124,967 134,738 135,515 133,209 Net Income 79,803 96,123 96,638 92,110 I 85,063 EARNINGS AND Earnings Per Share Dividends Declared on 1.60 J~ 1.84 I 1.75 I

1.63 DMD ENDS Common Stock Average Shares 1.42v, 1.361 i.292;,I 1.22 I 1.12 Outstanding (000) 45,717 45,717 45,717 45,372 44,312 Total Assets 1,799,822 1,742,827 I 1,681,256 1,591,630 1,533,263 Construction I Expenditures<ll 142,239 102,597 94,923 79,488 76,056 Internal Generation ofFunds<2J 123,198 158,951 I 148,880 I 100,493 I 98,517 I CAPITALIZATION Long-Term-Debt<3J 670,738 666,979 638,090 567,761 567,935 Preferred Stock without I mandatory redemption 103,306 103,306 105,000 105,000 105,000 Preferred Stock with I I mandatory redemption<4J 3,277 4,077 5,992 47,836 49,383 Common Equity 594,975 587,449 561,811 539,650 I . 503,513 Total $1,372,296 $1,361,811 $1,310,893 $1,260,247 I $1,225,831 CAPITALIZATION Long-Term Debt 49% 49% 49% 45% 46%

RATIOS Preferred Stock without I mandatory redemption 8% 8% 8% 8% 9%

Preferred Stock with mandatory redemption 0% 0% 0% 4% 4%

Common Equity 43% 43% 43% 43% 41%

Total 100% 100% I 100% 100% 100%

ELECTRIC/GAS Electric Sales (kwh 000) 9,565,276 9,205,795 8,530,520 8,308,233 7,878,476 I SALES Gas Sales (mcfOOO) 15,411 15,952 15,708 17,239 16,449  !

<1JExcludes Allowancefor Funds Used During Construction.

<2JNet cas/J flow from operating activities less preferred and common dividends.

C3J Includes long-term debt due within one year.

<4J Includes mandatory redemption due within one year.

19

Delmarva Power & Ligbt Company FINANCIAL REVIEW AND ANALYSIS RESULTS OF EARNINGS OPERATIONS Earnings per share of common stock decreased to $1.60 in 1987 from $1.94 in 1986. The 34¢ decrease was principally attributed to electric rate decreases and the write-off of the Peach Bottom replacement power expenses. Increased electric sales partially offset the impact of these unfavorable factors.

The Peach Bottom Nuclear Generating Stati9n, in which Delmarva Power has a 7.51 % ownership interest, remains shut down due to a March 31, 1987, Nuclear Regulatory Commission (NRC) order as discussed in Note 11 on page 41. For the plant to receive authorization to return to service, Philadelphia Electric Company (PE), operator and partial owner of Peach Bottom, must provide the NRC with an acceptable plan which will assure that Peach Bottom will operate safely and comply with all NRC regulations. Part one of a two part plan to restart Peach Bottom was submitted to the NRC in November 1987. PE plans to submit the second part of the restart plan in the first quarter of 1988.

On February 2, 1988, PE officials made public a report from the Institute of Nuclear Power Operations (INPO) that was very critical of PE's operation of Peach Bottom over the last several years. Due to the seriousness of the new information, not previously made available to Delmarva Power as a minority owner, the Company decided not to pursue recovery of replacement power costs from customers. Accordingly, the Company expensed $9.2 million (11 ¢ per share) of replacement power costs in the fourth quarter. Future replacement power costs resulting from the NRC mandated shutdown of Peach Bottom are estimated at about $1 million per month and Earnings and Dividends will be expensed as incurred. The Company shall continue to consider other alternatives for Declared recovery of these costs, as appropriate.

(cents)

The Company believes that the safe and expeditious startup of the units at Peach Bottom is 200 important to both our customers and our stockholders. The NRC has reacted favorably to some of PE's startup plans and PE has stated that it is committing the resources necessary to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. PE expects the plant to resume operations later this year.

However, this depends upon permission from the NRC, which Delmarva Power cannot predict.

Earnings per share of common stock for 1986 increased 10¢ from $1.84 in 1985, primarily due to higher electric sales, increased investment income and lower financing costs, partially offset by rate decreases and higher operation and maintenance expenses.

DMD ENDS On December 29, 1987, the Board of Directors raised the quarterly dividend on common stock to 36112¢ per share ($1.46 indicated annual rate) from 35113¢ per share. This 3.3% improvement marks eleven consecutive years of increasing dividends and reflects the Company's goal to moderately increase dividends annually, earnings permitting, in order to provide stockholders with a fair and competitive return on their investment.

  • Earnings
  • Dividends 20

Del111arl'a Power & Ligbt Company FINANCIAL REvlEW AND ANALYSIS RESULTS OF ELECTRIC REVENUES AND SALES OPERATIONS (continued)

Electric revenues, net of fuel costs, increased $4.4 million or 1.1%in1987. Excluding the effect of the $28.1 million December 1986 Delaware Summit credit payment (See Note 4, page 35), net electric revenues decreased $23.7 million or 5.3%. Major factors contributing to the decrease were a $34.4 million decrease in rates and $9.2 million of Peach Bottom replacement power expenses, which were partially offset by a $26.4 million increase from higher sales. Electric rates in all the Company's jurisdictions have been reduced from early 1986 levels, mainly due to the effects of the Tax Reform Act of 1986 and lower rates of return authorized by regulatory commissions. (See Note 10 on page 40 for a discussion of rate matters.) Electric sales continued to benefit from the strength and diversity of the service territory's economy. Residential sales increased 9.5% largely due to new residential construction and warmer summer weather. A commercial sales increase of7.0% resulted from customer growth in banking, business services and retail trade. Industrial sales recorded a 5.2% decline primarily due to the closing of a major customer, Phoenix Steel, in January 1987. Excluding the closing of Phoenix Steel, industrial sales increased 3.9% as a result of a broad-based increase in customer usage.

Net electric revenues for 1986 decreased $9.8 million or 2.3% from 1985. The 1986 decrease was primarily due to the $28.1 million Delaware Summit credit payment and a $13.5 million decrease in rates, offset by a $31.5 million sales increase. The Delaware Summit credit payment did not affect 1986 earnings due to a corresponding reduction in operating expenses related to the payment.

Generation Fuel Mix (percent)

GAS REVENUES AND SALES JOO Gas revenues, net of fuel costs, decreased $0.4 million or 1.1%in1987. The decrease was due to a 3.4% sales decrease that resulted from the closing of Phoenix Steel. Excluding the effect of Phoenix Steel, gas sales increased 6.2%. The largest factor contributing to the increase was a rise in oil prices, which caused customers with dual-fuel capability to use gas for most of the year.

Also, the continued trend of residential and commercial customer growth increased sales in both of these sales classes.

In 1986, netgas revenues increased $2.7 million or 9.4% over 1985. $1.1 million of the increase was attributed to a 1985 rate increase that was effective for only ten months of 1985, compared to a full year in 1986. The remainder of the net increase was primarily attributed to increased residential and commercial sales, partially offset by lower sales to dual-fuel customers, who used more oil due to its relatively lower cost in 1986.

40 FUEL MIX In 1987, generation from coal, nuclear, and oil and gas sources was 67%, 11 %, and 22%,

respectively. The average fuel cost, which includes fuel, interchange and purchased power costs, increased to 1.98¢/kwh in 1987 from 1.84¢ in 1986 and 1.94¢ in 1985. Nuclear generation, which 20 has the lowest fuel cost of all energy sources available to the Company, declined 37% in 1987, principally due to the NRC ordered shutdown of Peach Bottom. To replace the decrease in nuclear generation, increased generation from higher cost energy sources and increased power purchases were necessary. A rise in 1987 oil prices also increased the average fuel cost. The increase in the average fuel cost was mitigated by a $4.4 million reduction in coal costs, mostly due to renegotiation of various contracts for the purchase and transportation of coal.

  • OilandGas

!ill Nuclear

  • Coal 21

Del111m1*a Poll'er C:- Ligbt Co111pmzv FINANCIAL REvlEW AND ANALYSIS RESULTS OF OPERATING EXPENSES OPERATIONS (continued) In 1986, the Summit credit payment resulted in a $14.3 million tax benefit and $13.5 million of additional amortization of the Summit credit. Excluding the effects of this transaction, operating expenses, other than fuel costs, decreased $12.9 million or 3.5% in 1987. This decrease resulted from lower income taxes due to the lower 1987 federal tax rate and lower pre-tax earnings.

The income tax decrease was partial~y offset by increases in operation, maintenance, and depreciation expenses. Increased costs incurred at the Company's jointly owned nuclear generating units and higher payroll costs were the primary factors contributing to the increase in operation and maintenance expenses. Depreciation continued to increase due to capital additions.

Excluding the effects of the 1986 Summit credit payment, 1986 operating expenses, other than fuel costs, increased 5.9% from 1985. This increase was due to higher annual overhaul expenses for the Company's generating units, increased insurance costs and higher payroll costs.

OTHER INCOME (Net ofIncome Taxes)

Other income, excluding allowance for funds used during construction, decreased $6.4 million in 1987. During 1987, the market value of the Company's interest rate sensitive investments decreased due to an overall rise in interest rates. This effect combined with the October 1987 stock market decline resulted in a $1.6 million write-down of securities to current market value and $1.1 million ofrealized securities' losses. A $2.0 million decrease in interest on tax refunds and a $0.8 million increase in initial expenses of subsidiary research and development projects also contributed to the reduction in 1987 other income. A $0.7 million interest and dividend income increase partially offset these decreases.

Other income, excluding allowance for funds used during construction, increased $6.9 million in 1986 principally due to increased leveraged leasing income, higher interest and dividend income, interest on tax refunds, and investment tax credits on subsidiary investments.

FINANCING COSTS Financing costs for 1987 remained relatively unchanged from 1986. In 1986, interest on long-term debt increased $7.2 million primarily due to the refinancing of $41.9 million of preferred stock with long-term debt in December 1985. During 1986, $87.1 million of bonds and preferred stock were refinanced with lower cost securities. The refinancings resulted in a net of tax savings of

$2.3 million in 1986.

IMPACT OF As a regulated utility, the Company's utility revenues provide for recovery of operating costs INFLATION and a return on rate base. The Company's rates of return authorized by regulatory commissions are affected by the impacts of inflation. The overall decline in interest rates during the past several years combined with lower rates of inflation have resulted in lower rates of return authorized by regulatory commissions. Inflation can also affect tl1e Company's financial performance if rate relief is not granted on a timely basis for increased operating costs. However, inflation's impacts on operating costs has moderated in recent years due to lower inflation rates.

The cost of replacing utility plant will be significantly higher than the historical cost reflected in the financial statements. Based on past practices of regulatory commissions, the Company anticipates it will recover the increased cost of facilities when replacement actually occurs.

22

Delmarva Power & Ligbt Company FINANCIAL REVIEW AND ANALYSIS INCOME TAXES In December 1987, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes, which is required to be implemented by 1989. This Statement establishes a new method of computing deferred taxes and other changes in accounting for income taxes. The Company has not yet determined the effects this new Statement may have on its results of operations and financial position, except for the impact on unprovided deferred taxes as discussed in Note 2 on page 35.

LIQUIDITY AND OVERVIEW CAPITAL RESOURCES The Company's liquidity is affected principally by its construction program and to a lesser degree, by other capital requirements such as maturing debt and sinking fund requirements. The capital resources available to meet these requirements are internally generated funds (cash from operations less common and preferred dividends) and external financing. The Company anticipates that internally generated funds will continue to be its primary capital resource.

Internally generated funds decreased $35.8 million in 1987 mainly due to electric rate reductions, a one-time $31.1million1986 refund of taxes and interest (related to taxation of the Summit credit), and the effects of the Tax Reform Act of 1986. Increased electric sales partially offset these decreases in internally generated funds. The Company's future levels of internally generated funds will depend significantly upon economic conditions and regulatory actions.

Ratio of Earnings to Fixed Interest Charges (SEC metbod)

FINANCING AND CAPITALIZATION 5.0 The Company's capital structure, which has maintained an appropriate balance between debt and equity, changed little from 1986. The Company's ratepayers continued to benefit from 1985 and 1986 refinancings which lowered the overall cost of capital. A variety of factors may have an impact on future capital costs. The Company's ratio of pre-tax earnings to fixed charges (computed according to SEC regulations) declined from 3.70 in 1986 to 3.16 in 1987, principally due to electric rate reductions. Despite this decline, the Company's ratio of pre-tax earnings to fixed charges continues to indicate a strong ability to make interest payments to bondholders.

A further decrease may occur in 1988 since pre-tax income will be adversely affected by electric rate reductions resulting from the lower 1988 federal tax rate. During 1987 various bond rating agencies lowered the Company's bond and preferred stock ratings. Moody's Investor Service and 3.0 Standard and Poors downgraded the Company's senior debt to Aa2 and A+ , respectively, and preferred stock to Aa3 and A, respectively. Although these ratings are lower than recent years, they are still strong and will enable the Company to raise capital in the future at a reasonable cost.

2.0 External financing requirements are estimated to be $56 million and $66 million in 1988 and 1989, respectively. The need for external financing in 1988 is partly due to the June 1988 maturity of $25 million in bonds carrying a 3'l's% interest rate. The financing requirements will be satisfied through a mix of debt and equity. An amendment to the shareholder's Dividend Reinvestment Plan, that provides for the issue of new shares as an alternative to buying existing shares on the I.O open market, has been approved by the Board of Directors as one of the possible methods of raising equity capital. A total of $30 million of tax exempt variable rate demand bonds are planned to be issued during 1988 and 1989. These bonds normally carry a very favorable interest rate in comparison to other types of debt.

0 83 84 85 86 87 23

De/111an;c1 Pon*er & Ligbt Company FINANCIAL REvlEW AND ANALYSIS FINANCING AND Other capital resources available to the Company include commercial paper and lines of credit.

CAPITALIZATION The Company can issue commercial paper, supported by adequate lines of credit, to meet (continued) fluctuations in working capital requirements and for interim financing of construction projects.

At December 31, 1987, the Company had $6 million of commercial paper outstanding. The Company has lines of credit with banks in the amount of $54.5 million. These lines are available for bank loans and to secure commercial paper borrowings as the need arises.

In October 1987, the Company issued, through the Delaware Economic Development Authority,

$8 million of Variable Rate Demand Exempt Facilities Revenue Bonds, which had an average interest rate of 5.1%in1987. The proceeds were used to finance additions to the Company's gas system. The Company's subsidiaries issued $11 million of 15 year 9.65% First Mortgage Notes in October 1987 to finance a new office building and, in December 1987, repaid $15 million of a $43 million bank loan.

CAPITAL AND CONSTRUCTION REQUIREMENTS For the period 1985-1987, the Company had total capital requirements of $470 million, including

$340 million for construction (excluding AFUDC). During the same period, $431 million was Construction generated internally (i.e., cash from operations less common and preferred dividends) which Expenditures and represents 92% of the capital requirements and 127% of the construction requirements. Capital Internally requirements for the period 1988-1990 are estimated to be $517 million, including $490 million Generated Funds for construction (excluding AFUDC). The Company presently anticipates that, for the period (millions of dollars) 1988-1990, internally generated funds will be $321 million which equals 62% of the total capital requirements and 66% of its construction requirements. Actual construction expenditures may 180 vary from the above estimates due to, among other factors, the rate of inflation, regulation and legislation, rates of load growth, licensing and construction delays, results of rate proceedings, and the cost and availability of capital.

The Company estimates that its annual energy and peak load growth for the next 10 years will 150 be at a rate of 2.25% and 2.0%, respectively. The Company's present generating capacity of 2,277 megawatts provides a reserve of 9% against the Company peak of 2,084 megawatts experienced in the summer of 1987. In 1986, the Company peak was 1,840 megawatts.

The Company's approach to supplying adequate amounts of electricity in the future is to match capacity expansion and load growth as closely as possible. The Company plans to delay its next base load unit until the mid-1990's due to the high cost of adding new capacity and possible future technological developments. The plan to achieve this delay includes various demand and supply side options. The accelerated load growth over the past several years has caused the Company to move ahead with the installation of two 100 megawatt combustion turbine generating units, costing an approximate total of $44 million. The first unit is scheduled to be operational by mid 1989, assuming timely permitting, followed a few months later by the second unit. Demand side options being implemented include voluntary residential load control devices and rate incentives for load management by industrial and commercial customers.

Additionally, the Company has various other options that could be employed if future load growth is significantly different than forecasted. The Company's strategy is designed to provide an adequate and reliable supply of electricity at the lowest reasonable cost.

  • Internally Generated Funds
  • Construction Expenditures (excluding AFUDC) 24

,j

Delmarua Pou*er & Ligbt Company REPORT OF Management is responsible for the information ~d representations contained in the Company's MANAGEMENT financial statements. Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon currently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.

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

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

The audit committee of the Board of Directors, composed of outside Directors only, meets with management, internal auditors and independent accountants to review accounting, auditing and financial reporting matters. The independent accountants are appointed by the Board on recommendation of the audit committee, subject to shareholder approval.

~~~k Nevius M. Curtis Paul S. Gerritsen Chairman, President and Vice President and Chief Executive Officer Chief Financial Officer REPORT OF TO THE BOARD OF DIRECTORS AND STOCKHOLDERS INDEPENDENT DELMARVA POWER & LIGHT COMPANY CERTIFIED PUBLIC WILMINGTON, DELAWARE ACCOUNTANTS We have examined the consolidated balance sheets and statements of capitalization of Delmarva Power & Light Company as of December 31, 1987 and 1986, and the related consolidated statements of income, changes in common stockholders' equity and changes in financial position, for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing_ standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the consolidated financial position of Delmarva Power & Light Company at December 31, 1987 and 1986 and the consolidated results of its operations and changes in its financial position for each of the three years in the period ended December 31, 1987 in conformity with generally accepted accounting principles applied on a consistent basis.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 5, 1988 25

Delmarva Poil'er & Light Company CONSOLIDATED STATEMENTS OF INCOME (Dollars in Thousands)

For tbe Years Ended December 31 1987 1986 1985 OPERATING REVENUES Electric $612,367 $602,240 $605,581 Gas 78,233 91,802 95,256 Steam 21,879 20,821 21,997 712,479 714,863 722,834 OPERATING EXPENSES Operation:

Fuel for electric generation 211,006 207,862 240,901 Net interchange and purchased power (10,162) (28,098) (63,962)

Purchased gas 45,208 57,012 69,847 Deferred energy costs (8,994) 7,767 (2,549)

Other operati~n 132,914 128,116 121,105 Maintenance 65,738 62,621 59,406 Depreciation 68,907 64,657 61,183 Amortization of Summit credit (907) (15,707) (7,202)

Taxes on income 53,450 65,208 77,836 Taxes other than income 30,352 30,687 30,754 587,512 580,125 587,319 OPERATING INCOME 1;24,967 134,738 135,515 I

OTHER INCOME Allowance for other funds used during construction 3,453 2,750 2,428 Other, net 6,889 13,267 6,382 10,342 16,017 8,810 INCOME BEFORE INTEREST CHARGES

  • 135,309 150,755 144,325 INTEREST CHARGES Long-term debt 54,989 54,478 47,236 Other 1,667 922 1,059 Allowance for borrowed funds used during construction (1,150) (768) (608) I 55,506 54,632 47,687 I

EARNINGS Net income 79,803 96,123 96,638 Dividends on preferred stock 6,814 7,405 12,599 Earnings applicable to common stock $ 72,989 $ 88,718 $ 84,039 COMMON STOCK Average shares outstanding (Thousands) 45,717 45,717 45,717 Earnings per average share $ 1.60 $ 1.94 $ 1.84 Dividends declared per share $ 1.42 1/21 $ 1.361131 $ 1.292/3 See accompanying Notes to Consolidated Financial Statements.

Delmarva Power & Lig/Jt Company CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITION (Dollars in Thousands)

For the Years Ended December 31 1987 1986 1985 CASH FROM Net Income $ 79,803 $ 96,123 $ 96,638 OPERATIONS Items not requiring (providing) cash:

Depreciation 68,907 64,657 61,183 Amortization of Summit credit (907) (15,707) (7,202)

Amortization of nuclear fuel 6,027 5,405 6,594 Allowance for funds used during construction (AFUDC) (4,603) (3,518) (3,036)

Investment tax credits, net (3,132) (956) 21,878 Deferred income taxes, net 33,616 54,535 47,462 Other 3,378 206 (2,307)

Refundable taxes and interest 31,111 (:Z-,981)

Net change in:

Receivables, inventory & payables 16,012 17,228 20,915 Other current assets & liabilities* (4,471) (21,154) (19,140)

Net cash flow from operating activities 194,630 227,930 220,004 INVESTING ACTMTIES Construction expenditures (excluding AFUDC) (142,239) (102,597) (94,923)

Investment in leveraged leases (8,067) (28,682) (45,006)

Investment in partnerships (16,091) (5,372)

Decrease (increase) in marketable securities 33,497 (51,249) (32,308)

Construction funds held by trustee (180) 9,186 6,392 Other (1,137) (3,314) (8,313)

Net cash used by investing activities (134,217) (182,028) (174,158)

FINANCING ACTMTIES Dividends: Common (64,618) (61,574) C58,525) I Preferred (6,814) (7,405) (12,599)

Redemptions: Term loan (33,000)

Long-term debt (15,205) (114,250) (10,100)

Preferred stock (800) (31,635) (41,573)

Premium on redemption of securities (6,218) (2,814)

Issuances: First mortgage bonds 126,000 Variable rate demand bonds 8,000 33,500 Other _long-term debt 11,000 18,000 80,000 Preferred stock 28,000 Net change in short-term debt 6,000 Net cash used by financing activities (62,437) ( 49,082) (45,111)

Net increase (decrease) in cash $ (2,024) $ (3,180) $ 735 I

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

See accompanying Notes to Consolidated Financial Statements.

27

_J

Delmcm:a Power & Ligbt Company CONSOLIDATED BALANCE SHEETS (Dollars in Thousands)

ASSETS As ofDecember 31 1987 1986 UTILITY PLANT- Electric $1,739,339 $1,689,767 AT ORIGINAL COST Gas 103,788 96,782 Steam 24,913 24,746 Common 103,011 97,624

-1,971,051 1,908,919 Less: Accumulated depreciation 647,728 596,747 Net utility plant in service 1,323,323 1,312,172 Plant held for future use 6,838 6,830 Construction work in progress 80,850 45,467 Nuclear fuel, at amortized cost 20,791 19,461 1,431,802 1,383,930 OTHER INVESTMENTS Investment in leveraged leases 70,071 60,716 Other 40,533 11,178 110,604 71,894 CURRENT ASSETS Cash 12,204 14,228 Marketable securities, at lower of cost or market 76,081 111,205 Accounts receivable:

Customers 44,492 46,844 Other 10,023 19,433 Inventories, at average cost:

Fuel (coal, oil and gas) 45,703 43,745 Materials and supplies 22,820 21,284 Prepayments 5,882 4,999 Deferred energy costs, net 2,471 (6,229)

Deferred income taxes, net 116 1,326 219,792 256,835 DEFERRED CHARGES Unamortized debt expense 6,307 6,233 AND OTHER ASSETS Deferred recoverable plant costs 9,120 8,145 Other 22,197 15,790 37,624 30,168 Total $1,799,822 $1,742,827 See accompanying Notes to Consolidated Financial Statements.

28

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

AND LIABILITIES Asa/December 31 1987 1986 CAPITALIZATION Common stock $ 102,864 $ 102,876 (see Statements Additional paid-in capital 234,890 235,187 of Capitalization) Retained earnings 257,221 249,386 Total common stockholders' equity 594,975 587,449 Preferred stock:

Without mandatory redemption 103,306 103,306 With mandatory redemption 2,477 3,277 Long-term debt 645,270 666,829 1,346,028 1360,861 CURRENT LIABILITIES Short-term debt 6,000 Long-term debt due and preferred stock redeemable within one year 26,268 950 Accounts payable 39,691 31,947 Taxes accrued 6,394 1,961 Interest accrued 11,051 10,937 Dividends declared 16,687 16,155 Other 10,625 10,060 116,716 72,010 DEFERRED CREDITS Deferred income taxes, net 263,706 231,360 AND OTHER Deferred investment tax credits 66,328 69,460 LIABILITIES Other 7,044 9,136 337,078 309,956 OTHER Commitments and Contingencies (Notes 7and11)

Total $1,799,822 $1,742,827 See accompanying Notes to Consolidated Financial Statements.

29

_J

Delmarva Power & Light Company CONSOLIDATED STATEMENTS OF CAPITALIZATION (Dollars in Thousands)

Asa/December 31 1987 1986 COMMON Common stock, par value $2.25 per share, STOCKHOLDERS' authorized 90,000,000 shares, outstanding EQUI1Y 45,717,450 shares $ 102,864 $ 102,876 Additional paid-in capital 234,890 235,187 Retained earnings 257,221 249,386 Total Common Stockholders' Equity 594,975 43% 587,449 43%

CUMULATIVE Without Mandatory Redemption:

PREFERRED STOCK Par value $1 per share, 10,000,000 shares authorized, none outstanding Par value $25 per share, 3,000,000 shares authorized, none outstanding Par value $100 per share, 1,800,000 shares authorized:

Series Shares Issued (1987 and 1986) 3.70%-4.56% 240,000 and 240,000 24,000 24,000 5.00%-7.84% 330,000 and 330,000 33,000 33,000 7.88%-8.96% 200,000 and 200 1000 20,000 20,000 Adjustable-6.06%C1J 280,000 and 280,000 28,000 28,000 105,000 105,000 Less: Cost of shares (17,200) held in treasury 1,694 1,694 Preferred Stock without Mandatory Redemption 103,306 8% 103,306 8%

With Mandatory Redemption:

9.00% Seriesc2i 32,766 and 40,766 shares 3,277 0% 4,077 0%

Amount to be redeemed within one year (800) (800)

Preferred Stock with Mandatory Redemption 2,477 3,277 LONG-TERM DEBT First Mortgage and Collateral Trust Bonds:

Maturity Interest Rates Jun. 1, 1988 37;8% 25,000 25,000 1994-1997 4s/s%-63/s% 50,000 50,000 1998-2002 7%-113/4% 158,100 158,100 2003-2005 6.6%-10%% 92,150 92,150 2008-2016 9%%-12% 207,900 207,900 533,150 533,150 Pollution Control Notes:

Series, 1973 5.7% effective rate, due 1988-1998 7,400 7,550 Series, 1976 7.3% effective rate, due 1992-2006 34,500 34,500 41,900 42,050 Variable Rate Demand Series, due 2014-2017-4.73%Cll 57,000 49,000 First Mortgage Notes, 9.65%<3J 10,945 -

Other Long-Term Debt, 9.89%, due 1989 28,000 43,000 Unamortized premium and discount, net (257) (221) 670,738 49% 666,979 49%

Long-term debt due within one year (25,468) (150)

Total Long-Term Debt 645,270 666,829 Total Capitalization $1,346,028 100% $1,360,861 100%

<1lAverage rate during 1987.

2

< JRedemption price at December 31, 1987 is $107.

<3lRepaid through monthly payments ofprincipal and interest over 15 years ending November 2002.

30 See accompanying Notes to Consolidated Financial Statements.

Delmarua Power & Ligbt Compm~J' CONSOLIDATED STATEMENTS OF CHANGES IN COMMON STOCKHOLDERS' EQUITY (Dollars in Thousands)

Additional For the Three Years Ended Common Par Paid-in Retained December 31, 1987 Shares* Value Capital Earnings Total BALANCE AS OF JANUARY 1, 1985 45,717,450 $102,876 $235,473 $201,301 $539,650 Net Income 96,638 96,638 Cash dividends declared:

Commonstock($1.29 213)* (59,287) I (59,287)

Preferred stock (12,599) (12,599)

Redemption of preferred stock 325 (2,916) (2,591)

BALANCE AS OF DECEMBER 31, 1985 Net Income 45.717.450 I 102,876 .1 235,798 223,137 561,811 96,123 96,123 Cash dividends declared: J Commonstock($1.36113)*_ (62,336) I (62,336)

Preferred stock (7,405) (7,405)

Issuance of preferred stock Redemption of (650) ~ (650) preferred stock 39 I c133) (94)

~

BALANCE AS OF DECEMBER 31, 1986 45,717,450 102,876 235,187 249,386 587,449 Net Income 79,803 79,803 Cash dividends declared:

Commonstock($1.42Y2)* (65,149) (65,149)

Preferred stock (6,814) I (6,814):

Three for two stock split:

Cash paid for fractional shares Other expenses Redemption of preferred stock (12)

(302)1 _J (12)1 (302)

_I 5 I (5)

~

BALANCE AS OF DECEMBER 31, 1987 _4_5,7_1_7,_45_o....... $102,864 I $234,890 I $594,975

  • Restated retroactively for April 29, 1987 tbree for two stock split.

See accompanying Notes to Consolidated Financial Statements.

31

Delman*a Power & Lig/Jt Compan1

  • NOTES To CONSOLIDATED FINANCIAL STATEMENTS I. SIGNIFICANT FINANCIAL STATEMENTS ACCOUNTING POLICIES The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Delmarva Energy Company, Delmarva Industries Inc., Delmarva Services Company, and Delmarva Capital Investments, Inc. and its subsidiaries. In conformity with generally accepted accounting principles, the accounting policies reflect the financial effects of rate decisions issued by regulatory commissions having jurisdiction over the Company's utility business.

Certain reclassifications, not affecting income, have been made to amounts reported in prior years to conform to the presentations used in 1987.

REVENUES Revenues are recorded at the time billings are rendered to customers on a monthly cycle basis.

At the end of each month, there is an amount of unbilled electric and gas service which has been rendered from the last meter reading to the month-end.

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

DEPRECIATION AND MAINTENANCE The annual provision for depreciation of utility property is computed on the straight-line basis using composite rates by classes of depreciable property. Provision for the costs of decommissioning of nuclear plant is made to the extent of the net cost of removal allowed for rate purposes (approximately 20% of original plant cost). The relationship of the annual provision for depreciation for financial accounting purposes to average depreciable property was 3.7%

for 1987, 3.5% for 1986 and 3.6% for 1985.

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

NUCLEAR FUEL The Company's share of nuclear fuel costs relating to jointly-owned nuclear generating stations is charged to fuel expense on a unit of production basis, which includes a factor for spent nuclear fuel disposal costs pursuant to the Nuclear Waste Policy Act of 1982. The Company is collecting future storage and disposal costs for spent fuel as authorized by the regulatory commissions in each jurisdiction and is paying such amounts quarterly to the United States Department of Energy.

32

Delmarva Power & Light Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS

1. SIGNIFICANT LEVERAGED LEASES ACCOUNTING POLICIES The Company's net investment in leveraged leases includes the aggregate of rentals receivable (continued) (net of principal and interest on nonrecourse indebtedness) and estimated residual values of the leased equipment less unearned and deferred income (including investment tax credits). Unearned and deferred income is recognized at a level rate of return during the periods in which the net investment is positive.

INCOME TAXES The Company and its wholly-owned subsidiaries file a consolidated federal income tax return.

Income taxes are allocated to the Company's utility business and subsidiaries based upon their respective taxable incomes, tax credits, and the effects of the alternative minimum tax, if any.

Deferred income taxes are provided on timing differences between the tax and financial accounting recognition of certain income and expenses. The principle timing difference arises from accelerated depreciation methods used for income tax purposes. Investment tax credits from regulated operations utilized to reduce federal income taxes are deferred and generally amortized over the useful lives of the related utility plant. Investment tax credits of the Company's non-regulated operations (excluding leveraged leases) are accounted for by the flow-through method.

ALLOWANCE FOR FUNDS USED DURING CONSTRUCTION Allowance for funds used during construction (AFUDC) is a non-cash item and is defined in the regulatory system of accounts as the "net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds so used." AFUDC is segregated into two components: (1) the interest on debt component ("allowance for borrowed funds used during construction"), which is net of taxes and classified as a credit to interest charges, and (2) the common stock equity and preferred dividend component ("allowance for other funds used during construction"), which is classified as an item of other income. AFUDC is considered a cost of utility plant with a concurrent credit to income. It is excluded from taxable income for tax purposes. The rates used in determining AFUDC, which includes semi-annual compounding, were 8.5% in 1987 and 9.2% in 1986 and 1985.

33

Def111rm:a Pou*er & Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS

2. INCOME TAXES (Dollars in Thousands) 1987 1986 1985 Operations:

Federal: Current $28,592 $29,278 $32,557 Deferred 18,635 26,779 28,638 State: Current 5,934 5,051 6,320 Deferred 3,543 4,596 4,978 Investment tax credit adjustments, net (3,254) (496) 5,343 Other income: Current (16,177) (27,223) (29,788)

Deferred 11,438 23,160 13,846 Investment tax credit adjustments, net 15,724 Total income tax expense $48,711 $61,145 $77,618 Investment tax credits utilized to reduce federal income taxes payable amounted to $1,835,000 in 1987, $5,450,000 in 1986 and $24,992,000 in 1985. The amounts for 1986 and 1985 include Employee Stock Ownership Plan credits of $464,000 and $535,000, respectively, which did not affect net income.

The following is a reconciliation of the difference between income tax expense and the amount computed by multiplying income before tax by the federal statutory rate:

(Dollars in Thousands) 1987 1986 1985 Amount Rate Amount Rate Amount Rate Statutory income tax expense $51,406 40% $72,343 46% $80,158 46%

Increase (decrease) in taxes resulting from:

Exclusion of AFUDC for income tax purposes (1,842) (1) (1,619) (1) (1,397) (1)

Depreciation not normalized 1,504 1 2,852 2 2,196 1 ITC amortization/flow-through (5,089) (4) (5,947) (4) (4,028) (2)

State income taxes, net of federal tax benefit 5,455 4 5,333 3 6,160 3 Amortization of credit arising from sale of contracts (354) (7,225) (5) (3,313) (2)

Other, net (2,369) (2) (4,592) (3) (2,158) (1)

Income tax expense $48,711 38% $61,145 38% $77,618 44%

In 1987, the Tax Reform Act of 1986 substantially modified the Alternative Minimum Tax (AMT).

The new AMT is based on 20% of alternative minimum taxable income as defined by the tax law. The AMT is paid only if it exceeds the regular corporate tax. Generally, the AMT is carried forward as a reduction of subsequent-year regular corporate tax in excess of the minimum tax.

In 1987, the Company incurred an AMT liability of $2.6 million which did not affect income.

The $2.6 million AMT in 1987 qualifies for carry forward treatment.

34

De/J1wn'a P011'er Ec Light Coli/pany NOTES To CONSOLIDATED FINANCIAL STATEMENTS

2. INCOME TAXES The components of deferred income taxes relate to the following tax effects of timing differences (continued) between book and tax income:

(Dollars in Thousands) 1987 1986 1985 Depreciation $30,013 $43,443 $33,394 Deferred energy costs 3,541 (2,082) 1,163 Capitalized overhead costs (1,296) 1,143 1,432 Deferred recoverable plant costs (254) 3,488 Pollution control amortization 2,717 3,076 3,629 ADR repair allowance 3,788 2,337 4,295 Unbilled revenues (2,331)

Alternative.minimum tax (2,600)

Other, net 38 I . 3,130 3,549 Total ~-~--~

$33,616 $54,535 $47,462 The Company has not provided deferred income taxes of approximately $88 million, based on current income tax rates, related to cumulative timing differences of $221 million arising before the adoption of full tax normalization for ratemaking purposes by regulatory authorities. The Company is collecting the unnormalized taxes in I.ts rate jurisdictions either on a levelized basis, over the life of the related plant facilities, or when actually paid to taxing authorities. Statement of Financial Accounting Standards No. 96, Accounting for Income Taxes, requires the Company to record a liability for the unrecorded deferred taxes beginning in 1989. However, since the Company expects to recover the taxes through rates, an asset for the same amount would also be recorded.

J. TAXES OTHER (Dollars in Thousands) 1987 1986 1985 THAN INCOME Delaware utility $10,212 $11,869 $12,168

  • property 7,481 6,787 6,784 Other gross receipts 5,777' 5,881 5,799 Payroll, franchise and other 6,882 6,150 6,003 '

Total $30,352 $30,687 ~0,7541

4. SUMMIT CREDIT The net proceeds received by the Company for the sale in 1975 of the contracts for a nuclear steam supply system (Summit) were initially deferred as a credit on the balance sheet. Since 1982, the Company has amortized the credit to income, offsetting the related reduction in customer revenue. In December 1986, the Company paid $28.1 million to Delaware retail electric customers primarily for the $13.5 million Delaware unamortized Summit credit balance and the $14.3 million income tax benefit of the payment. The effects of this payment are reflected in the 1986 income statement as a $28.1 million electric revenue reduction, $13.5 million additional Summit amortization and a $14.3 reduction of income taxes.

35

Delmarm Pou*er & Lig/Jt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS

5. PENSION PLAN The Company has a trusteed noncontributory pension plan covering all regular employees.

ANDPOST- The benefits are based on years of service and the employee's compensation. The Company's RETIREMENT funding policy is to contribute each year the net periodic pension cost for that year. However, the contribution for any year will not be less than the minimum required contribution nor greater BENEFITS than the maximum tax deductible contribution. There were no pension contributions in 1987 and 1986; the 1985 contribution was $3,284,000.

During 1987, the Company adopted Statement of Financial Accounting Standards No. 87, "Employers' Accounting for Pensions". Under the new method, the Company uses the projected unit credit method; previously, the entry age actuarial cost method had been used.

The following table reconciles the plan assets and liabilities to the funded status of the plan as of December 31, 1987. Pension plari assets consist primarily of equity and public bond securities.

1987 ACTIJARIAL PRESENT VALUE OF BENEFIT OBLIGATIONS (In Millions)

Accumulated benefit obligation Vested $136.5 Nonvested 21.1 Total 157.6 Projected benefit obligation 229.0 Plan assets at fair value 293.2 Excess of plan assets over projected benefit obligation 64.2 Unrecognized prior service cost 1.5 Unrecognized net (gain) (9.2)

Unrecognized net transition (asset) (56.4)

Prepaid pension cost $ 0.1 1987 COMPONENTS OF 1987 NET PENSION COST (In Millions)

Service cost-benefits earned during period $ 9.5 Interest cost on projected benefit obligation 16.2 Actual return on plan assets * (15.8)

Net amortization and deferral (10.0)

Net pension cost $. (0.1)

The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation and the expected long-term rate of return on plan assets were 7.75%

(7% at January 1, 1987) and 8%, respectively. The rate of increase in future compensation ranges from 5.5% to 7.1%, graded by age.

The January 1, 1986 actµarial present value of accumulated plan benefits, using a discount rate of 8%, was $l18.7 million ($102.8 million vested). The market value of assets available for plan benefits was $253.5 million.

The Company provides health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach normal retirement age while still working for the Company. The Compapy recognizes the cost of providing these benefits by expensing the insurance claims as they are paid. These costs totalled $2,144,000,

$2,009,000, and $2,094,000for1987, 1986and1985, respectively.

36

Delmarm Pou*er & Lig/Jt Compm~r NOTES To CONSOLIDATED FINANCIAL STATEMENTS

6. CAPITALIZATION COMMON STOCK On April 28, 1987, the stockholders approved (1) an increase in the number of authorized shares from 35,000,000 to 90,000,000, (2) a decrease in the par value per share from $3.3 75 to $2.25, and (3) a 3 for 2 stock split, effective April 29, 1987. As a result of the split, the number of shares issued and outstanding increased from 30,481,925 to 45,717,450. Cash payments were made to stockholders in lieu of issuing fractional shares.

All per common share disclosures and the number of common shares stated in this report have been adjusted to reflect the stock split.

RETAINED EARNINGS The current first mortgage bond indenture restricts the amount of consolidated retained earnings available for cash dividend payments on common stock to $35,000,000 plus accumulations

  • after June 30, 1978, of which the available amount at December 31, 1987 was approximately

$177,894,000.

PREFERRED STOCK The annual preferred dividend requirements on all outstanding preferred stock at December 31, 1987 are $7,004,000. If preferred dividends are in arrears, the Company may not declare common stock dividends or acquire its common stock On April 28, 1987, the stockholders authorized a new class ofl0,000,000 shares of preferred stock, $1.00 par value, which is junior to the existing classes of preferred stock with $25 and $100 par values per share. No shares of this new class of preferred stock have been issued.

WITHOUT MANDATORY REDEMPTION These series may be redeemed at the option of the Company at any time, in whole or in part at the various redemption prices fixed for each series (ranging from $103 to $106 at December 31, 1987).

WITH MANDATORY REDEMPTION The 9% series has a sinking fund requirement to redeem -8,000 shares annually at $100 per share.

At the option of the Company, art additional 8,000 shares may be redeemed on any sinking fund date, without premium. The Company redeemed 8,000 shares in December 1987 at $100 per share. Under certain conditions, the 9% series may also be redeemed at the option of the Company. Mandatory sinking fund redemptions are $800,000 per year during the next four years and $77,000 in 1992.

37

1Je/111a1n1 Power & Lig/Jt Compwzy NOTES To CONSOLIDATED FINANCIAL STATEMENTS

6. CAPITALIZATION LONG-TERM DEBT (continued)
1) Sinking fund requirements for the First Mortgage and Collateral Trust Bonds may be reduced by an amount not exceeding sixty percent ( 60%) of the bondable value of property additions.

For the years 1985-1987, property additions satisfied the sinking fund requirements. Substantially all utility plant of the Company now or hereafter owned is subject to the lien of the related Mortgage and Deed of Trust.

2) Pursuant to a bank loan agreement, the Company has a $33,000,000 revolving credit commitment through November 1, 1989, convertible into a term loan due November 1, 1992. The loan agreementrequires a commitment fee of 0.2% on any unused portion of the revolving credit commitment. Loans under the agreement may be prepaid at any ti.me without penalty and would bear interest at 100% of the prime rate.
3) On October 1, 1987, the Company issued, through the Delaware Economic Development Authority, $8 million ofVariable Rate Demand Exempt Facilities Revenue Bonds (the Bonds), due October 1, 2017. The proceeds were used to finance additions to the Company's gas system.

The Bonds are secured by $9 million of First Mortgage and Collateral Trust Bonds. The Bonds will bear interest, which is tax exempt to the Bond owner, at a variable or fixed rate as determined by the Company from time to time. The Bond owners may sell the Bonds to the Company each time the interest rate is res~t, and the remarketing agent can resell any Bonds purchased by the Company.

As of December 31, 1987, $57,000,000 ofVar~able Rate Demand Bonds were outstanding. The Company has sufficient long-term financing agreements available to redeem any bonds not remarketed.

In recognition of the long-term financing capability, these Variable Rate Demand Bonds have been classified as long-term debt.

4) On October 15, 1987, a subsidiary of the Company issued $11 million of 9.65% First Mortgage Notes to finance a new office building. The Notes will be repaid through fixed monthly payments of principal and interest over 15 years ending November 2002.
5) In December 1987, a subsidiary of the Company repaid $15.million of a $43 million bank loan, classified as other long-term debt on the Consolidated Statements of Capitalization.
6) Maturities oflong-term debt during the next five years are: 1988-$25.468,000; 1989-

$28,532,000; 1990-$570,000; 1991-$612,000; 1992-$1,959,000.

7) The annual interest requirements on all borrowings classified as long-term debt at December 31, 1987 are $54,504,000.

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

Delmarm Poil'er E- Light Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS

7. COMMITMENTS The Company estimates that approximately $156,816,000 excluding AFUDC, will be expended for construction purposes in 1988. The Company also has commitments under long-term fuel supply contracts.

The Company leases certain distribution facilities, transportation equipment and various other facilities and equipment under long-term lease agreements. Rentals charged to operating expenses aggregated $9,191,000in1987, $7,439,000in1986 and $6,634,000in1985. During 1987, the Company retroactively recorded its capital leases, as required by SFAS No. 71. As a result of recording the capital leases, total assets and total liabilities increased $4,689,000 and $6,504,000 as of December 31, 1987 and 1986, respectively. Net income was not affected.

Minimum commitments as of December 31, 1987 under all non-cancellable lease agreements are as follows:

1988 $ 2,885,000 1989 2,597,000 1990 1,605,000 1991 676,000 1992 552,000 Remainder 3.660.000 Total $11,975,000 Nuclear fuel requirements for Peach Bottom Generating Station are being provided by the operating company through a fuel purchase contract. The Company is responsible for payment of its share of fuel consumed and related interest expense. Nuclear fuel expense for Peach Bottom totalled $3,190,000in1987, $8,372,000 in 1986 and $4,520,000in1985.

The Company has an agreement providing for the availability of fuel oil storage and oil pipeline facilities through 1999. Under the agreement, the Company must make specified minimum payments monthly, which totalled $2,165,000in1987, $2,766,000in1986 and $1,682,000in1985.

  • The estimated amount of required payments is $1,701,000in1988, $1,489,000in1989, $1,145,000 in 1990, $1,916,000in1991, $1,828,000in1992 and $12,384,000between1993and1999.

In 1987, Columbia Gas System, Inc. constructed a natural gas pipeline, which connects to Delmarva's gas system, under an agreement that obligates Delmarva to purchase $6.7 million of sales or transportation services over a ten year period. If Delmarva's purchases are less than $6. 7 million over the ten year period, then Delmarva will make aid-in-construction payments to the extent of the shortfall.

Delmarva Capital Investments, Inc. (DCI), the Company's primary investment subsidiary, has various commitments to m'ake equity contributions and loan funds under certain conditions to partnerships in which DCI has invested. The maximum amounts that DCI could be required to provide as loans or equity commitments over the next five years are as follows: $8,593,000-1988;

$8,913,000-1989; $6,873,000-1990; $6,621,000-1991; $3,600,000-1992.

8. LINES OF CREDIT As of December 31, 1987, the Company had unused bank lines of credit of $54,500,000, with

$6 million supporting commercial paper borrowings. The Company is generally required to pay commitment fees for these lines. Such lines of credit are periodically reviewed by the Company, at which time they may be renewed or cancelled.

39

_J

- Delman*a Power & Ligbt Compcm_r NOTES To CONSOLIDATED FINANCIAL STATEMENTS

9. JOINTLY-OWNED Information with respect to the Company's share of jointly-owned plant, including nuclear fuel PLANT for the Salem plant, as of December 31, 1987, is as follows:

(Dollars in Thousands) Construction Ownership Plant in Accumulated Work in Share Service Depreciation Progress Nuclear:

Peach Bottom 7.51% $ 94,079 $ 33,372 $ 6,426 Salem 7.41% 208,351 76,234 10,488 Coal-Fired:

Keystone 3.70% 12,062 4,903 727 Conemaugh 3.72% 13,269 5,231 324 Merrill Creek Reservoir 11.91 % 24,635 Transmission Facilities Various 4,462 1,321 Total $332,223 $121,061 $42,600 The Company provides its own financing for its share of improvements to jointly-owned plant.

In addition, the Company is a joint guarantor of loans ($526,000 proportionate share) advanced for operation of the coal mines that supply the Keystone plant. The Company's share of operating and maintenance expenses of the jointly-owned plant is included in the corresponding expenses in the statements of income.

JO. RATE MATTERS The Company is subject to regulation with respect to its retail sales of electricity by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission, which have broad powers over rate matters, accounting and terms of service. The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the Company's accounting systems and policies and the transmission and sale at wholesale (resale) of electric energy.

I) DELAWARE ELECTRIC RETAIL On April 14, 1987, the Delaware Public Service Commission (DPSC) issued a final order regarding its investigation into the level of the Company's earnings. The order further reduced electric rates by $7.3 million effective April 15, 1987. The Company's rates had been reduced on a temporary basis on August 20, 1986, by $22.8 million. The order reflected a reduction in the interim authorized return on equity from 13.0% to 12.5%, lower tax rates due to the Tax Reform Act of 1986 and resolution of certain accounting issues. An additional reduction in rates of approximately

$4.2 million became effective on January 1, 1988, primarily to reflect the lower 1988 federal income tax rate.

A Power Plant Performance Program is in effect through 1988. The program measures performance at the Company's twelve largest power units and can result in a financial reward or penalty.

The potential reward or penalty for 1987and1988 performance is limited to $1.5 million per year, which would be reflected in 1989 and 1990 electric rates, respectively. 1988 electric rates reflect a $605,000 reward under this program for 1986 performance.

2) MARYLAND RETAIL In accordance with a 1986 settlement agreement, Maryland retail electric rates were reduced

_ $3.3 million, effective January 1, 1987, to reflect the 1987 effects of the Tax Reform Act of1986.

Maryland retail electric rates were also reduced by $3.8 million, effective January 1, 1988, to reflect the lower 1988 federal income tax rate.

40

1Jel111a11*a Pozmr C- Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS-JO. RATE MATTERS

  • 3) VIRGINIA RETAIL (continued) By order dated August 27, 1987, the Virginia State Corporation Commission (VSCC) approved a

$0.8 million rate decrease which became effective on an interim basis on May 1, 1987. The decrease reflects a lower return on equity (13.0%) and the 1987 effects of the Tax Reform Act of 1986. Effective January 1, 1988, the VSCC has ordered the Company to reserve the effects of the lower 1988 federal income tax rate pending qisposition of the regulatory treatment of this matter.

4) RESALE On September 15, 1987, the Federal Energy Regulatory Commission approved the $2.4 million annual rate reduction filed by the Company on July 21, 1987. The lower. rates reflect the effects of the Tax Reform Act of1986 and became effective as of April 15, 1987. ,

OnJuly 31, 1987, the Company filed for a $3.4 million rate increase based on a 13% return on equity, with a proposed effective date of October 1, 1987. Since December 1978, in the resale jurisdiction, the pre-tax proceeds from the sale of the Summit contracts (see Note 4) have been distributed to customers through lower rates. In the Company's]uly1987 resale filing, recovery of the income taxes paid on the Summit proceeds and related carrying charges on the income tax payments (a total of $5 million) was also requested via a surcharge over a two year period.

In September 1987, the FERC suspended implementation of the proposed rates and surcharge until March 1, 1988.

11. CONTINGENCIES 1) SHUTDOWN OF PEACH BOTTOM NUCLEAR GENERATING STATION On March 31, 1987, the Nuclear Regulatory Commission (NRC) ordered the shutdown of the Peach Bottom Nuclear Generating Station citing inattention by control room staff The Company has a 7.51 % ownership interest in the plant which is operated by Philadelphia Electric (PE).

The NRC order stated that PE must provide a detailed and comprehensive plan and s_chedule to assure that the plant will operate safely and comply with all requirements prior to resuming operation of the plant. In August 1987, PE submitted a plan for the restart of Peach Bottom in response to the NRC order. The NRC criticized the plan primarily due to the NRC's disagreement with the plan's emphasis on solutions to problems related to the plant and its personnel without adequate emphasis on corporate management responsibility. .

  • In October 1987, PE announced a major corporate reorganization of its entire nuclear operations and support services, intended to strengthen both corporate and nuclear plant site management.

In November 1987, PE submitted part one of a two part plan that will replace the plan submitted in August. Part one of the plan detailed the reorganization of nuclear operations announced in October. PE plans to submit the second part of its restart plan in the first quarter of 1988.

On February 2, 1988, PE officials made public a report from the Institute of Nuclear Power Operations (INPO) that was very critical of PE's operatfon of Peach Bottom over the last several years. The report was highly critical of PE's senior management with respect to its effectiveness in preventing and resolving Peach Bottom problems and the lack of adequate corporate accountability. Due to the seriousness of the new information, not previously made available to Delmarva Power as a minority owner, the Company decided not to pursue recovery of replacement power costs from customers. Accordingly, the Company expensed $9.2 million (11¢ per share) ofreplacement power costs in the fourth quarter of1987. Future replacement power costs resulting from the NRC mandated shutdown of Peach Bottom will be expensed as incurred. The Company shall continue to consider other alternatives for recovery of these costs.

The Company believes that the safe and expeditious startup of the units at Peach Bottom is important to both our customers and our stockholders. The NRC has reacted favorably to some of PE's startup plans and PE has stated that it is committing the resources necessary to correct the problems and their root causes. It is clearly PE's responsibility to implement a recovery plan to return Peach Bottom to service. PE expects the plant to resume operations later this year.

However, this depends upon permission from the NRC, which Delmarva Power cannot predict.

41

!Je/111wn1 l'ou*er f'. Ugbt Compn11y NOTES To CONSOLIDATED FINANCIAL STATEMENTS

11. CONTINGENCIES 2) PLANT HELD FOR FUTURE USE (continued) In 1982, the Company delayed the construction schedule for the coal-fired Nanticoke #1 generating unit. During 1986, the Company downsized the planned unit and reclassified costs associated with the previously planned larger unit as a deferred asset ($7.6 million balance at December 31, 1987).

Cost recovery has been approved in the Delaware and Virginia jurisdictions. The Company has applied for recovery of $1.3 million applicable to the resale jurisdiction and anticipates recovery of the $1.9 million Maryland jurisdiction portion. $6.2 million of costs associated with the smaller Nanticoke #1 unit remain classified as plant held for future use. Recovery of these costs is anticipated through the ratemaking process.

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

Aggregate (Millions ofDollars) Maximum Maximum Retrospective Type and Source of Coverage Coverage Assessment for a Single Incident 0' Public Liabilit:y< 1J Private Price Anderson AssessmentC2l $1,5C3)

Property Damage:'5J Peach Bottom<6l $620 Salem<7l $620 $2.9 I All units<sJ $775 Replacement Power:

Nuclear Electric Insurance Limited (NEIL)< 9l $3.3-$3.5

- - $ 2 . _ 1_

$1.9

_J*

1) Tbe Price-Anderson liability provisions of tbe Atomic Energy Act of1954 (in notes 2, 3 and 4 below) expired on August 1, 1987. Howeve1; the limitation of liability and contribution provisions continue in effect for presently licensed plants, wbicb includes Peacb Bottom and Salem. Onjuly30, 1987, tbe U.S. House ofRepresentatives approved a bill to amend tbe Price*Anderson Act. Tbe bill would raise the limit for pz 1blic liability claims that could arise from a nuclear incident from the current $715 million to approximate~)' $7 billion for each licensed nuclearfacility. Under tbe House bill, tbe maximum retrospective premium assessmentfor tbe Company would risefrom

$1.5 million to $18.9 million for one incident and $3.0 million to $37.8 million for more than one incident in a yeai: The Senate is expected to vote in the nearfuture on similar bills, wbicb would also establisb a liability limit of approximately $7 billion. .

2) Retrospective premium program under the Price-Anderson liability provisions of the Atomic Energy Act of1954 as amended. Subject to retrospective assessment with respect to loss from an incident at any licensed nuclear reactor in tbe United States.
3) Maximum assessment would be $3,000,000 in tbe event of more than one incident in any yeai:
4) Limit of liability under tbe Price-Anderson Act for each nuclear incident.
5) Tbe Company is a self insure1; to the extent of its ownership interest.for any prope11)1 loss in excess of tbe stated amounts.
6) For prope11)i damage to tbe Peacb Bottom nuclear plant facilities, tbe Company and its co-owners have private insurance up to $620 million.
7) Forprope11)1 damage to tbe Salem nuclearfacilities, tbe Company and its co-owners /Jave $500 million of insurance witb Nuclear Mutual Limited (NML), a utility-owned mutual insurance company, and $120 million witb private insurers. NML bas a maximum retrospective assessment of ten times anm zal premium.
8) All units are insured by Nuclear Electric Insurance Limited (NEIL II) for losses in excess of $500 million. Ma.-.:imum retrospective assessment is seven and a balf times tbe annual premiums.
9) Utility owned mutual insurance company provides coverage against extra expense incwred in obtaining replacement power during prolonged accidental outages of nuclear power units. Maximum weekzv indemnity for 52 weeks wbicb commences after tbe first 26 weeks of an outage. Also provides for an additional 52 weeks indemnity at one-balfmaximum level. Jl!laximum retrospective assessment is five times annual premiums.

1O) Tbe Company's sbare of tbe maximum relrospective assessment for a single incident based on the Compm~v*s ownersbip sbare of tbe nuclear power units.

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

42

Deh11a11*a Po1l'er E- Ligbt Compwzr NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

INFORMATION (Dollars in Thousands) 1987 1986 1985 Operating Revenues:

Electric $ 612,367 $ 602,240 $ 605,581 Gas 78,233 91,802 95,256 Steam 21,879 20,821 21,997 Total $ 712,479 $ 714,863 $ 722,834 Operating Income:

Electric $ 115,964 $ 126,007 $ 127,148 Gas 7,347 6,985 6,604 Steam 1,656 1,746 1,763 Total $ 124,967 $ 134,738 $ 135,515 Net Utility Plant:o&z)

Electric $1,355,168 $1,312,517 $1,292,487 Gas 67,469 Steam 74,759 1,875 3,944 - 65,271 4,142

$1,431,802 $1,383,930 $1,361,900 Other Identifiable Assets:

Electric 121,654 105,575 144,544 Gas 11,760 18,341 32,890 Steam 1,405 409 418 134,819 I 124,325 177,852

~

Assets Not Allocated 234,572 141,504 Total Assets $1,799,822 I $1,742,827 $1,681,256 Depreciation Expense:

Electric $ 63,978 $ 59,725 $ 56,577 I Gas 4,004 4,016 I 3,699 I Steam 925 916 II 907

j

$ 68,907 i $ 64,657 I $ 61,183 I Total I Construction Expenditures:m Electric $ 131,970 $ 94,337 I $ 86,073 Gas 9,944 7,751 8,382 Steam 325 509 468 Total $ 142,239 $ 102,597 $ 94,923 m1ncludes plant heldfor ji1ture use, construction work in progress and allocation of common utility property.

mstated net ofthe respective accumulatedprovisions for depreciation.

r3'Excludes allowance for jimds used during construction.

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

43

Delman.*a Power E- Ligb! Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS

. I

13. CONDENSED The following is condensed financial information of the Company's wholly-owned subsidiaries, FINANCIAL Delmarva Energy Company, Delmarva Industries Jnc. and Delmarva Capital Investments, Inc.

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

SUBSIDIARIES CONSOLIDATED CONDENSED SUBSIDIARY STATEMENTS OF INCOME (Dollars In Thousands) 1987 1986 1985 Revenues and investment income $1,620 $3,261 $6,022 Operating expenses 2,453 1,698 1,368 Operating income (833) 1,563 4,654 Interest expense 3,955 3,164 1,276 Income (loss) before income taxes ( 4,788) (1,601) 3,378 Income tax expense (benefit) (5,448) I (6,426) (133) '

Net income $660 $4,825 $3,511 I

~

Contribution to Delmarva Power & Light's earnings per share of common stock $ 0.01 I $ 0.11 CONSOLIDATED CONDENSED SUBSIDIARY BALANCE SHEETS (Dollars In Thousands) At December 31, Liabilities and At December 31, Assets 1987 1986 Stockholder's Equity 1987 1986 I

1 Current liabilities $ 258 $ 157 Current assets $ 68,722 ~71,350 Noncurrent liabilities 80,948 82,132 Noncurrent assets 92,705 70,229 Stockholder's equity 80,221 59,290 Total $161,427 $141,579 1 Total $161,427 $141,579 The 10¢ decrease in subsidiary earnings per share in 1987 was the result of two major factors.

An overall rise in interest rates during 1987 caused a decrease in the market value of interest rate sensitive investments (mainly preferred stocks). This effect combined with the October 1987 stock market decline resulted in a write-down of securities to current market value and losses on the sale of securities, which decreased earnings per share by 6.1¢. Expenses for research and .

development projects and administrative and general functions increased primarily because several subsidiary projects are currently in the start-up phase. These start-up cost increases lowered earnings per share by 3.2¢.

44

Delmarl'a Power & Ligbt Company NOTES To CONSOLIDATED FINANCIAL STATEMENTS

14. QUARTERLY The quarterly data presented below reflect all adjustments necessary in the opinion of the Company FINANCIAL for a fair presentation of the interim results. Quarterly data normally vary seasonally with INFORMATION temperature variations, differences between summer and winter rates, the timing of rate orders (Unaudited) and the scheduled downtime and maintenance of electric generating units.

Earnings Earnings Applicable Average per Quarter Operating Operating Net to Common Shares Average Ended Revenue Income Income Stock Outstanding Share (Dollars in Thousands) (In Thousands) 1987 March31 $185,935 $ 35,689 $25,058 $23,394 45,717 $0.51 June 30 160,936 27,277 16,763 15,099 45,717 0.33 Sept. 30 200,482 44,279 32,880 31,164 45,717 0.68 Dec. 31 165,126 17,722 5,102 3,332 45,717 0.08

$712,479 $124,967 $79,803 $72,989 45,717 $1.60 1986 March31 $208,703 $ 38,235 $27,345 $25,405 45,717 $0.56 June30 171,341 29,966 19,183 17,125 45,717 0.37 Sept. 30 201,082 45,766 35,212 33,505 45,717 0.73 Dec. 31 133,737 20,771 14,383 12,683 45,717 0.28

$714,863. $134,738 $96,123 $88,718 45,717 $1.94 Electric rate decreases in the Company's jurisdictions, primarily due to lower authorized rates of return, decreased 1987 net income as follows: first quarter-$4,857,000 (10.6¢ per share);

second quarter-$4,587,000 (10.0¢ per share); third quarter-$3,9l6,000 (8.6¢ per share); fourth quarter-$442,000 (1.0¢ per share); or a total of $13,802,000 (30.2¢ per share).

In the fourth quarter of1987, losses were realized on the sale of marketable securities, certain marketable securities were written down to their market value and 1987 replacement power costs attributable to the Nuclear Regulatory Commission ordered shutdown of Peach Bottom were expensed. The effect of these transactions decreased net income $7,813,000 (17¢ per share).

Electric rate decreases in the Company's jurisdictions, primarily due to lower authorized rates of return, reduced net income during 1986 as follows: first quarter-$528,000 (1.2¢ per share);

second quarter-$468,000 (1.0¢ per share); third quarter-$1,578,000 (3.5¢ per share); fourth quarter-$4,179,000 (9.1¢ per share); or a total of $6,753,000 (14.8¢ per share).

In the fourth quarter of1986, the Company recorded the Delaware Summit credit payment, interest on tax refunds, ta.'{ accrual adjustments, and the impact of the Tax Reform Act of 1986 on its

  • leveraged lease investments. The effect of these adjustments increased net income $1,119,000 (2.4¢ per share).

45

Defmmi'a Power & Lig/Jt Compan1

  • CONSOLIDATED STATISTICS 10 YEARS OF REvlEW 1987 1986 1985 1984 ELECTRIC REVENUES Residential $ 231,439 $ 217,393 $ 212,254 $ 205,910 (thousands): Commercial 176,355 169,157 168,957 156,507 Industrial 119,109 127,900 135,141 128,833 Other utilities, etc. 79,180 80,291 79,399 79,235 Miscellaneous revenues. 6,284 7,499 9,830 13,678 I Total electric revenues $ 612,367 $ 602,240 $ 605,581 $ 584,163 ELECTRIC SALES Residential 2,732,018 2,496,099 2,256,922 2,249,270 (J,000 kilowatt-hours): Commercial 2,536,399 2,370,775 2,165,685 2,073,457 Industrial 2,611,218 2,753,902 2,606,466 2,569,572 Other utilities, etc. 1,685,641 1,585,019 1,501,447 1,415,934 Total electric sales 9,565,276 9,205,795 8,530,520 8,308,233 ELECTRIC CUSTOMERS Residential 303,158 293,452 283,911 275,175 (end ofperiod): Commercial 36,783 35,089 33,189 31,548 Industrial 842 853 893 929 Other utilities, etc. 525 517 492 502 Total electric customers 341,308 329,911 318,485 308,154 GAS REVENUES Residential $ 39,614 $ 43,145 $ 39,224 $ 40,933 (thousands): Commercial 15,491 18,523 17,901 18,663 Industrial 10,941 16,995 19,762 22,940 Interruptible 11,136 11,464 17,419 18,098 Other utilities, etc. 160 142 130 160 Miscellaneous revenues 891 1,533 820 784 Total gas revenues $ 78,233 $ 91,802 $ 95,256 $ 101,578 GAS SALES Residential 6,364 6,201 5,622 6,213 (million cubic feet) Commercial 2,992 2,906 2,742 2,971 Industrial 2,693 3,338 3,579 4,245 Interruptible . 3,320 3,471 3,734 3,769 Other utilities, etc. 42 36 31 41 Total gas sales 15,411 15,952 15,708 17,239 GAS CUSTOMERS Residential 73,803 72,685 70,804 70,183 (end ofperiod): Commercial 5,027 4,693 4,417 4,233 Industrial 156 158 160 165 Interruptible 15 14 15 19 Other utilities, etc. 1 1 1 1 Total gas customers 79,002 77,551 75,397 74,601 STEAM SERVICE Electricity delivered 354,842 370,802 335,308 298,203 (1,000 kilowatt-hours)

Steam delivered (1,000 pounds) 6,134,946 6,627,130 6,794,105 6,922,416

Average Annual Compound%

1983 1982 1981 1980 1979 1978 1977 Rate of Growth

$ 193,021 $ 183,258 $ 164,919 $ 144,637 $ 115,381 $ 105,237 $ 97,691 9.01  %

140,809 137,434 123,099 112,166 91,798 82,796 74,641 8.98  %

126,703 127,441 129,601 116,401 98,023 83,972 76,801 4.49  %

68,991 73,469 73,602 63,698 53,782 40,840 38,974 7.35  %

12,728 13,168 12,898 7,025 4,682 5,261 3,461 6.15  %

$ 542,252 $ 534,770 $ 504,119 $ 443,927 $ 363,666 $ 318,106 $ 291,568 7.70 %

2,136,265 2,026,398 1,996,647 2,046,546 1,968,452 1,979,624 1,924,723 3.56  %

1,844,324 f,729,863 1,660,147 1,648,776 1,598,299 1,568,600 1,495,796 5.42  %

2,600,492 2,255,673 2,454,685 2,429,842 2,624,438 2,418,527 2,277,630 1.38  %

1,297,395 1,237,508 1,283,845 1,335,216 1,300,611 1,281,498 1,207,941 3.39  %

7,878,476 7,249,442 7,395,324 7,460,380 7,491,800 7,248,249 6,906,090 3.31 %

267,357 260,371 255,646 246,887 242,745 237,925 233,106 2.66 %

30,525 29,966 29,450 28,162 27,998 28,421 29,648 2.18 %

949 741 788 821 874 858 921 (0.89)%

434 434 434 440 478 480 561 (0.66)%

299,265 291,512 286,318 276,310 272,095 267,684 264,236 2.59 %

$ 36,694 $ 36,505 $ 34,123 $ 26,525 $ 25,719 $ 28,370 $ 21,829 6.14  %

16,527 15,792 14,344 10,342 8,954 10,154 7,133 8.06  %

23,232 20,112 22,259 12,404 9,884 10,191 6,950 4.64  %

17,026 11,733 11,711 9,293 4,440 716 169 52.01  %

'115 53 61 46 55 93 49 12.56  %

764 552 572 430 270 116 103 24.08  %

$ 94,358 $ 84,747 $ 83,070 $ 59,040 $ 49,322 $ 49,640 $ 36,233 8.00 %

5,640 6,062 6,193 6,321 6,423 6,941 6,751 (0.59)%

2,677 2,768 2,704 2,683 2,415 2,593 2,439 2.07 %

4,378 4,108 4,809 3,937 3,388 3,290 2,811 (0.43)%

3,723 2,656 2,802 2,738 1,720 319 81 44.97 %

31 10 12 14 16 29 17 9.47 %

16,449 15,604 16,520 15,693 13,962 13,172 12,099 2.45 %

69,608 69,092 68,608 67,784 66,631 66,364 66,231 1.09 %

4,075 4,057 3,967 3,846 3,712 3,773 3,738 3.01 %

160 166 167 155 131 163 163 (0.44)%

19 18 16 16 16 21 21 (3.31)%

1 1 1 1 1 1 1 0.00 %

73,863 73,334 72,759 71,802 70,491 70,322 70,154 1.19 %

309,943 322,804 343,063 328,420 262,159 270,006 289,049 2.07 %

6,965,904 7,778,929 7,673,420 7,570,944 6;378,705 6,016,095 4,888,366 2.30 %

47

De!marua Power & lig/Jt Co111pa11y OFFICERS Asofjanuary11, 1988 NEVIUS M. CURTIS DONALD P. CONNELLY Chairman of the Board, President Secretary and Chief Executive Officer RICHARD H. EVANS HOWARD E. COSGROVE Vice President, Corporate Communications Executive Vice President BARBARA S. GRAHAM H. RAY LANDON Treasurer Executive Vice President KENNETH KJONES ROGER D. CAMPBELL Vice President, Planning Senior Vice President and President, Delmarva RALPH E. KLESIUS Capital Investments, Inc. Vice President, Engineering HARLAND M. WAKEFIELD, JR. CHARLES MARCHYSHYN Senior Vice President Comptroller DONALD E. CAIN FRANK). PERRY, JR.

Vice President Vice President, Gas Division PAULS. GERRITSEN DUANE C. TAYLOR Vice President and Vice President, Information Systems Chief Financial Officer D. WAYNE YERKES WAYNE A. LYONS Division Vice President, Vice President Southern Division THOMAS S. SHAW, JR.

Vice President Several management changes became effective January 1, 1988. H.R. Landon, formerly senior vice president, became executive vice president; Donald E. Cain, formerly northern division vice president became vice president with responsibility for human resources, information systems, and administration services; and Ralph E. Klesius, formerly general manager, engineering, became vice president, engineering. Thomas S. Shaw Jr., vice president, joined the Company's senior management team, and Wayne A Lyons, vice president, assumed responsibility for division operations. On October 1, 1987, Paul S. Gerritsen, formerly vice president regulatory, practice and maFketing became vice president and chief financial officer.

  • In the Company's subsidiary businesses, Roger D. Campbell, formerly chief financial officer of the parent company, was named President of Delmarva Capital Investments, Inc. Campbell remains a senior vice president of the Company. Hudson P. Hoen, formerly a general manager with Delmarva Capital Investments, Inc., was named vice president.
  • Delmarm l'oll'er {- Lig/Jt Compani*

DIRECTORS OSCAR L. CAREY WILLIAM G. SIMERAL President and Director of Larmar Director, Executive Vice Corporation (general real estate and President and member of the home builders) Salisbury, Maryland Executive Committee ofE. I.

du Pont de Nemours & Company JOHNR. COQPER (a dtversified chemical, energy and Director of Environmental Affairs of specialty products company)

E. I. du Pont de Nemours & Company Wilmington, Delaware (a diversified chemical, energy and specialty products company) DAVIDD. WAKEFIELD Wilmington, Delaware Senior Vice President of Morgan Guaranty Trust Company of HOWARD E. COSGROVE New York, New York; Executive Vice President of the Director of Continental American Company Life Insurance Company, Wilmington, Delaware NEVIUS M. CURTIS Chairman of the Board, President HARLAND M. WAKEFIELD, JR.

and Chief Executive Officer of the Senior Vice President of the Company Company SALLY V. HAWKINS EXECUTIVE COMMITTEE Director, President and Chief Nevius M. Curtis, Chairperson; Oscar Executive Officer of Delaware L. Carey; William G. Simeral; David D.

Broadcasting Company and President Wakefield; Harland M. Wakefield.Jr.

and General Manager of Station WIIM (radio broadcasting) AUDIT COMMITTEE Wilmington, Delaware John R. Cooper, Chairperson; James T. McKinstry;James 0. Pippin, Jr.

DONALD W. MABE President and Vice Chairman of NOMINATING COMMITTEE Perdue Farms Incorporated SallyV. Hawkins, Chairperson; Nevius (integrated poultry company) M. Curtis;James 0. Pippin.Jr.

Salisbury, Maryland COMPENSATION COMMITTEE JAMES T. McKINSTRY William G. Simeral, Chairperson; Partner, Law Firm of Oscar L. Carey; David D. Wakefield Richards, Layton & Finger Wilmington, Delaware INVESTMENT COMMITTEE David D. Wakefield, Chairperson; JAMES 0. PIPPIN, JR. Nevius M. Curtis; Donald W. Mabe; Director, President and James 0. Pippin, Jr.

Chief Executive Officer of the Centreville National Bank of SPECIAL DIRECTOR'S COMMITTEE Marylan-d, Centreville, Maryland ON PEACH BOTTOM William G. Simeral, Chairperson; John R. Cooper;James T. McKinstry 49

De/111arm Poll'er & Lig/Jt Co111pany STOCKHOLDER INFORMATION QUARTERLY COMMON STOCK DIVIDENDS AND PRICE RANGES The Company's common stock is listed in the New York and Philadelphia Stock Exchanges and has unlisted trading privileges on the Cincinnati, Midwest and Pacific Stock Exchanges.

  • i I

The Company had 53,465 holders of common stocks as of December 31, 1987.

1987 1986 Dividend Price($) Dividend Price($)

Declared High Low Declared High Low First Quarter $.35 1/3 233/s 21 $.33213 201/2 16Vs Second Quarter .35 1/3 2l1/s 183/s .33 213 231;8 19llz Third Quarter .35 1/3 203/4 18 1/4 .33 213 253/s 201/4 Fourth Quarter .36 1/2 193/4 161/4 .35 113 23 201/2 SHAREHOLDER SERVICES TRANSFER AGENTS AND REGISTRARS Carol C. Conrad, Assistant Secretary Preferred Stock Delmarva Power & Light Company Wilmington Trust Company, 800 King Street, P.O. Box 231 Corporate Trust Division Wilmington, Delaware 19899 Rodney Square North *)

Telephone (302) 429-3355. Wilmington, Delaware 19890.

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

Corporate Trust Division Rodney Square North . '

Wilmington, Delaware 19890.

ANNUAL MEETING Manufacturers Hanover Trust Company The Annual Meeting will be held Stock Transfer Department on April 26 at 11 :00 a.m. in P.O. Box 24935 '

~.

the Clayton Hall, University of Church Street Station '

Delaware, Newark, Delaware. New York, New York 10249.

ADDITIONAL REPORTS REGULATORY COMMISSIONS To supplement information in this Federal Energy Regulatory Commission, :I Annual Report, a Financial and 825 North Capitol Street, N.E.,

Statistical Review (1977-1987) and Washington, D.C. 20426.

the Form 10-K are available upon request. Please write to Shareholder Delaware Public Service Commission, Services, Delmarva Power, 1560 S. du Pont Highway, 800 King Street, P.O. Box 231, Dover, Delaware 19901.

Wilmington, Delaware 19899. Maryland Public Service Commission, American Building, TRUSTEES 231 East Baltimore Street, First Mortgage and Collateral Trust Baltimore, Maryland21202.

Bonds-Chemical Bank, Virginia State Corporate Commission, New York, New York P.O. Box1197, Pollution Control Revenue Bonds- Richmond, Virginia 23209 Mellon Bank (DE) N.A.

Wilmington, Delaware Bank of Delaware, Wilmington, Delaware Wilmington Trust Company, Wilmington, Delaware Irving Trust Company New York, New York 50

Delmarva Power Bulk Rate 800 King Street U.S. Postage Paid P.O. Box 231 Pennit No. 68 Wilmington, Delaware 19899

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