ML18092B462

Delmarva Power,1986 Annual Rept.

ML18092B462
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Site:	Salem, Hope Creek, 05000000
Issue date:	12/31/1986
From:	Curtis N DELMARVA POWER & LIGHT CO.
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DEADLINE RETURN DATE . . . . "3/<=zo/ _of~~**

....... l RECORDS FACILITY BRANCH

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

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

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

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

the Earnin9s increased to

$2.91 per share and reached a record hi9h.

Delmarva fuwers prices for electricity and 0 natural 9as are amon9 the lowest in the re9ion.

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

the the

Percent Increase FINA CIAL HIGHLIGHTS 1986 1985 (Decrease)

Revenues $ 714.9 million $ 722.8 million (I. I)

Net Income $ 96.1 million $ 96.6 million (0.5)

Earnings Per Share $ 2.91 $ 2.76 5.4 Dividends Declared $ 2.045 $ 1.945 5.1 Common Stock Outstanding Average Shares 30,481,925 30,481,925 Common Stock Book Value $ 19.27 $ 18.43 4.6 Construction Expenditures $ 102.6 million $ 94.9 million 8.1 Internally Generated Funds':' $ 157.2 million $ 148.9 million 5.6 Electric Sales 9.21 billion kwh 8.53 billion kwh 8.0 Electric Customers (average) 325,832 314,013 3.8 Average Residential Usage 8,605 kwh 8,059 kwh 6.8 Gas Sales 15.95 million mcf 15.71 million mcf 1.5 Gas Customers (average) 76,614 75, 103 2.0 Average Residential Usage 86.3 mcf 79.7 mcf 8.3

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

the l: HAI RMA Nc 1' Curtis Stockholders and customers have enjoyed an outstandin9 year in a prosperous period at Delmarva Power.

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

• Dividends increased for the tenth consecutive \'Car.

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

• Generating plants performed above national averages.

• Customer approval ratings increased for the fourth consecutive year.

• Outside investments continued to increase earnings.

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

3

EARN! GS In last year's repo1t, this letter told of a The current level of financial performance new goal adopted by the company to develop a cannot be sustained during the next year or plan which would delay, by at least five years, two. Regulators, responding to decreased interest the in-service date of the next generating unit.

rates nationally, have reduced significantly the Such a delay could be accomplished, without allowable rates of return for most of our business. sacrificing service, through load management tech-The consequences of these rate reductions will niques and cogeneration. That plan has been be compounded by the new federal tax act which developed and implementation has begun. The will cut further into the company's strong cash work so far shows a delay is achievable until about flow and subsequently, into the ability to earn the tum of the century.

returns on that cash.

GROWTH As discussed on pages 15 and 16, these However, significant new events have decreases in authorized returns and cash flow can occurred . There have been two years of substantial be countered somewhat by anticipated increases growth in the demand for electricity during in sales on the economically-strong Delmarva peak load periods. This has been out of character Peninsula, modest growth in subsidiaries, and con- with the growth patterns of the previous decade.

tinued tight cost control. Nevertheless, while Since the Arab oil embargo of 1973, peak load the company is still financially healthy and we growth has occurred at an average rate of about expect to continue our policy of modest dividend 13 a year. In the summer of 1985, it grew 10.5%

increases annually, we also expect earnings to and in the summer of 1986, it grew an additional be down in 1987. 2.53. Delmarva Power planners have concluded that the summer peaks of 1985 and 1986 were Historically, Delmarva Power's earnings not aberrations. Peak demand, fueled by a strong growth has tended to be cyclical with periods of economy in the service territory and lower prosperity followed by dips and then rebounds. rates, is greater than previously anticipated and is Such a rebound from a low in 1987 should occur expected to continue to grow.

because, by most standards, the company is financially healthy. The construction budget is Thus, in addition to beginning the load relatively modest. Cash flow, although reduced, management program, we also responded by is still good. Growth prospects are strong. The accelerating the study of various options to supply talent of employees is excellent. more power under the general strategy of mini-mizing capital expenses and matching capacity FUTURE OPTIONS expansion to load growth as much as possible.

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

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

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

4

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

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

John R. Cooper Howard E. CosB'ove While this letter has discussed some of the key challenges that face the company, we should not forget that 1986 was an outstanding year.

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

I appreciate their efforts and hope you do also as you look at pictures of many of them at \\'Ork. Sal~v V. Hawkins Donald W falabe Sincerely, EV CURTIS lchruan I0. 198 7 James 0. Pippin, Jr. William G. Simeral Delman-a Poll'er's direcwrs represent a broad range of business and communi~r e.\pcrtisc. Their titles and affiliations arc listed on page 48.

David D. Wakefield Harland M. Wakefield, Jr.

the

FINANCIAL STRENGTH The fuel mix is balanced: reduction was $4 million. Virginia Earnings increased 5.43 to 613 coal, 223 oil, and 173 will address rates in 1987.

$2.91 per share. Quarterly divi- nucl ear through nucl ear plants Pursuant to a Delaware dends increased by 5.1 3 to 53 partially owned by Delmarva Public Service Commission order, cents for an indicated annual rate Power but run by other companies. the company made the final of $2. 12. The price of common In 1986, the company distribution to customers of stock increased from $27Y8 to $33 . completed the acquisition of the $28. 1 million remaining from the The company paid for all of Lincoln-Ellendale e lectric funds negotiated by the company its construction expenses with system with its 1,420 customers. in 1975 to allow a contractor its mm cash. The AFUDC ratio, In the gas business, the to cancel the proposed Summit a kev indicator for financial company signed a contract to Nuclear Power Plant.

analysis, remained low at 3. 7% connect to the Columbia Gas of net income. The company's System, Inc. in late 1987. The use Earnin9s increased to bond rating, in differing terms of two suppliers, Columbia and from the different agencies, Transco, Inc., will give the $2.91 per share and is AA. company flexibility in meeting Electric sales increased future demands of its natural reached a record hi9h.

8% O\'er 1985 le\'els because gas customers and an additional of the strong economy on the source of electrical generating Also in Delaware, standards Delmarva Peninsula. Industrial fuel at the Edge Moor Power Plant. for power plant performance sales increased 5. 73 with sit,mifl- were established . These standards cant gains in the chemical and RA TE MA TIERS provide rewards and penalties refining industries in northern As a result of declining for good and poor performance.

Dela\\'are and the poultry business capita l costs and exceeding The rate-reduction con-in southern Delaware and al"lo\\'ed rates of return, regulators sequences of the new federal tax Man*land. Commercial sales in- cut Delman*a Power's electric act have been detern1ined in creased 9.53 and residential sales rates. In Dela\\'are, the reduction Maryland but are sti ll pending in increased I0.63. The prospects was $22 .8 million on an interim the other jurisdict ions.

for continued sales growth in the basis with a final decision due diverse service territory arc near the end of the first quarter, discussed on page 15. 1987. In Maryland, the final reduction was $8.8 million, and FACILITI ES for wholesale customers regu-Generating resen'es are lated by the Federal Energy 243. The company's 1987 capital Regulatory Commission, the total budget of $137.8 million is relatively modest, indicating adequate capacity. The company sells po\\'er to the PJ M inter-connection and to other companies. This reduced costs Anne Wri9ht Chn"stiana to customers by more than

$7.5 million in 1986.

Charles Turner Ocean City Tim Smith Westover 7

T EAMWO RK SAFEll' Recognizing the inevitability Employees continue to As part of its Right-To-of increased competition, four Know program, the company years ago the company developed demonstrate creativity as identified, published, and placed a participative skills program in accessible areas a list of all designed to encourage innova- well as technical skill in chemicals used in the workplace tion from the employees working including those which may be the closest to a situation and accomplishin9 their jobs. hazardous. Training was given in to take increased advantage of the safe handling and disposal teamwork. That program is Another example of of these chemicals.

maturing. By the end of 1986, all employee creativity and skill Also, employees from employees had been placed on is the effort to retain a large indus- across the company came teams and all team leaders had trial customer which had decided together to develop standards been trained in techniques to to expand and move outside the and procedures for handling encourage participation. service territory. When employees asbestos found in the workplace An example of the results of in the marketing, regulatory and at customer locations.

this program is the success of the practice, and economic develop- On the overall safety pro-company's profitable Gas Mainte- ment departments heard of gram, the company led its cate-nance Plan. For the last three the proposed relocation, they gory in the Southeastern Electric years, the employees who repair put together an innovative rate Exchange in fewest fleet acci-gas heaters have taken the initiative package that would be fair to dents. It finished second in to increase the sales of this pro- current customers and favorable the occupational injury category.

gram. Through their efforts to to the industrial customer as However, lost-time accidents organize other employees in an alternative to moving. They increased to 13 and lost-work days marketing, corporate communi- worked with the Delaware state increased to 157. The company cations, and gas service, sales government which was also is concerned about these acci-of this program increased 1% in interested in keeping 35 current dents and will put increased 1984, 6.2% in 1985, and 12.9% operating jobs and 75 to 80 new emphasis on reducing them in 1986. jobs in the state plus the con- in 1987.

struction jobs for a $50 million project. The rate proposal is now pending before the Delaware Public Service Commission.

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

Walt Robbins James Dennis Wilmin9ton Boulevard Harrin9ton Tom my Stephens Mary Ella Sutton 8 £\:more Christiana

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

Delmarva Power's prices for electricity and regulators to reduce rates, natural g as are among the lowest in the region. Delmarva Po\\'er has also worked to reduce prices by refinancing Electric comparisons (in Throughout the service debt, consolidating offices, con-cents per k\\'h) are: Ne\\' York territory, the price of electricity trolling expenses, converting 12.28; Newark, NJ 9.40; Philadel- is dee! ining. In Delaware, for about two thirds of its generating phia 9.14; Boston 8.73; Baltimore example, the price of electricity capacity from oil to coal, and con-6.51; Delmarva Peninsula 6.46. for a residential customer using tinuing to keep the number or For natural gas (in cents ccf): 750 kilowatt hours of electricity employees belo"* the 1982 level.

New York 75.89; Philadelphia per month has decreased 11. 7% Together, all of these efforts 62 .77; Newark, NJ 62.72; since 1983. help customers and put the Boston 62.04; Baltimore 60.76; While the decline in inter- company in a better position to Wi lmington 56.62. est rates nationally has enabled face developing competition.

10

S ERVICE IM PR OVEM ENTS difficulty, for any rea~on, in In 1986, customer service paying their bills. Customer ser-representatives began programs vice representatives inform the to allow customers to phone in customer of programs available meter readings and to enable such as credit extensions, bud-meter readers to read (electroni- get billing, or hmds available cally) inside meters from the throughout the service territory outside. Planning was begun for to help. As a result of this a computerized, automated dis- approach, both writeofls and patch system to improve re- cutoffs are down - a win-win sponses in the fie ld. situation for both the customer For several years, the com- and the company. Par Ramsey pany has taken an individualized Christiana approach to customers having Eric Whalen Christiana II

E VlRO MENT The company worked with The new "Be A Star, In ovember, 1986, the University of Delaware to Volunteer" program provides 50 Delmarva Power crews removed build an artificial reef demonstra- employees, chosen through a the last distribution capacitor tion project in the Atlantic lottery, a $100 grant for a non-containing the toxic chemical PCB Ocean off Rehoboth Beach with profit community organization in the insulating fluid. As part fly ash - a waste product from where they have given at least of the company's commitment to the Indian River Power Plant. The 50 hours5.787037e-4 days <br />0.0139 hours <br />8.267196e-5 weeks <br />1.9025e-5 months <br /> of volunteer time.

operate with as Iittle intrusion company is also working with In other activities, the into the environment as possible, the Electric Power Research Good eighbor Energy Fund the company began removing Institute to use more of this ash raised more than $170,000 in such capacitors before federal as a base for an interstate highway customer and stockholder con-laws required utilities to do so entrance being built near the tributions to help people having and completed the task well Edge Moor plant. trouble paying their energy bills.

ahead of the federal deadline Employees again exceeded their of 1988. The company works in goal in contributions to the The company also em- United Way.

barked on a study- supported several ways to help by citizens groups, regulators, and FO R MATI ON ACTIVITI ES environmental officials - of improve the quality of In an effort to provide emerging technologies to correct customers with info1mation on an infrequent air pollution life on the Delmarva how to use energy wisely, the problem at the Indian River Power company offers a variety of pro-Plant. The study was developed Peninsula. grams including the monthly with the community as an customer newsletter, "Energy alternative to an expensive ($40 Employees at the Vienna News You Can Use", the quarterly million), tall smokestack which Power Plant, working on their newsletter for senior citizens, also would have solved the own time with facilities built by "Silver Bulletin", and the home problem. Initial analyses show the company, released striped building efficiency standards, that alternatives may not be bass flngerlings they reared into "Super E+." Face-to-face help cheaper but may result in a more the Nanticoke River for the comes from customer service effective environmental solution. second consecutive year. representatives, marketing depart-ment employees, and volunteer CoMMUNIIT ACTIVITI ES speakers.

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

Kate DiPietro Larry Maclaren Christiana Christiana BobSporay Newman Sonnier 12 Wilmin9ton Boulevard Salisbury

GROWTH as stores and restaurants. Single provide challenging job oppor-Electric sales increased 83 family housing starts in Delaware tunities to its employees, and in 1986 - the highest increase have more than doubled from ultimately, expects to develop experienced by any of the com- 1982 to 1986. In the service operating businesses.

panies in the PJM regional te1Titory, more than 903 of new interconnection. 1lealthy growth homes are heated with either Moderate increases in sales is expected to continue for electricity or natural gas.

the immediate future because People are also using more and investmen t earnings will it is coming from diverse sources electricity in their homes. In in the strong economy of the 1986, the average monthly use per help the company meet service area. residential customer increased Unemployment is near an approximately 73 from 672 the challenges ahead.

all-time lo"* in Delaware of kilowatt-hours per month to 717 about 43 , substantially below kilowatt-hours per month. Broadly, the company in-the national average of about 73 . vests in five areas: gas and oil The Financial Center Develop- SuBSJDIARI ES exploration, liquid cash invest-ment Act of 1981 continues Investments by both the ments, equipment leasing, tech-to bring new jobs and oflke- parent and subsidiaries contributed nology and energy projects, building construction to Dela"*are 27 cents to earnings of $2. 91 and real estate. The company as banks and insurance companies in 1986 compared to 20 cents has invested in two communica-locate credit card and financial per share on earnings of $2.76 per tions satellites, all or part of administration operations in share in 1985 and 12 cents per five airplanes, a solar project in Delaware to take advantage of share on earnings of $2.63 in California, a hydroelectric project fayorable legislation and tax 1984. Earnings from these busi- in Maine, and a wastewater treatment. These laws have nesses are expected to grow treatment project in Florida.

bolstered gro\\*th in the com- modesth- over the next few years. It is investigating opportunities mercial sector which has seen The philosophy of the sub- outside the service territorv a 223 increase in jobs in Dela"*a re sidiary efforts is to seek returns to generate steam from trash.

over the past five years com- which exceed those of the pared to a national average rate regulated business but do not of 133. Tourism and recreation detract from the core operation of continues to prosper along the the energy company. The company Maryland and Virginia coasts. confines its investments to Population is growing. areas of its expertise, looks to From 1978 until 1981, Dela,,*are

" *as losing around 5,000 people a year. Now, Delaware is gaining up to 4,000 new people a year moving into the area. Also, the Eastern Shore of Marvland i~ growing faster than the rest or Linda Stevens Christiana Maryland. This has helped growth in small retail businesses such Walter Evans Horrin9 ton Mary Sanford Ocean City 15

The company is also work- Equipment purchases for the D IVERSE S ERVICE T ER RITO RY ing to increase returns on its project are underway. Centrally located within the real estate holdings, especially the However, peak load growth major East Coast markets, the land around its computer center continues to exceed projections. Delmarva Peninsula has a unique under construction at Christiana, It has increased 13% over the blend of industrial, agricultural, Delaware. past two years. commercial, and recreational Thus, the study of options activities.

G EN ERATING OPTIONS for supplying electricity in This mixture makes the One of the biggest challenges the future has been accelerated demands for electricity and natural over the next few years will in the event peak load growth gas less affected by extreme be to make the best decisions continues to exceed expectations fluctuations in the national about supplying electricity during or some of the load control economy than in many other areas the next decade. Nevv power and cogeneration programs do of the nation.

plants are eno1mously expensive not progress as anticipated. Delmarva Power serves and can be devalued quickly Options include purchases from 325,832 electric customers by technological advances. other utilities, restarting, in throughout most of the 5,700-In 1986, the company environmentally acceptable ways, square-mile Delmarva Peninsula developed and began to imple- retired units at Edge Moor, or which includes Delaware, portions ment a project to delay 225 building a new, smaller-than- of nine Eastern Shore counties megawatts of peak growth by previously-planned plant using in Maryland, and two Eastern 1996. Th is would be enough to advanced technology. Shore counties in Virginia. The postpone the next major plant There is enough generating company also distributes natural until near the tum of the century. capacity available in Delmarva gas to 76,614 customers in a Key ingredients of this project Power's svstem and on the East 275-square-mile area in northern are residential load control Coast so that no major decision has Delaware. To serve this area, and cogeneration. During 1987, to be made for the next year or Delmarva Power maintains an members of the task force will two. The strategy is to study all electric system with 2,277 mega-be conducting market research to options, keeping the company watts of generation capacity, determine incentives necessary as flexible as it can be until 1,306 miles of transmission lines, for customers to participate. future demand and the potential and 9,285 miles of distribution Initial projects involving cus- of load control become clearer. lines, and a natural gas system tomers are scheduled to begin with 1,061 miles of gas main.

during the first quarter of 1988. The company employs 2,586 people.

Charlie Johnson Salisbury 16 Tom Ashby Lori Meredith Exmore Westover

PENNSYLVANIA NEW jEH SEY MARYLAND Indian R11'er

• Laurel Salisburl' LEGEND ,

/ .0 orate Headquarters

" Nonhem Division Gen~~ol Office VIRGINIA J Southern r yn General

• Cuswmpl Sen*ice Loca1i s

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

For the Years Ended December 31 1986 1985 1984 1983 1982 OPERATING Operating Revenues $ 714,863 $ 722,834 $ 702,593 $ 649,799 $ 636,666 Operating Income 134,738 135,515 133,209 129,138 116,573 Net Income 96,123 96,638 92,110 85,063 73,571 EARNINGS AND DIVIDENDS Earnings Per Share 2.91 2.76 2.63 2.45 2. 13 Dividends Declared on Common Stock 2.045 1.945 1.83 1.68 1.595 Average Shares Outstanding (000) 30,482 30,482 30,248 29,541 28,489 Total Assets 1,742,552 1,672,527 1,591,630 1,533,263 1,509,771 Construction Expenditures 11 1 102,597 94,923 79,488 76,056 110,646 Internal Generation121 of Funds 157,176 148,880 100,493 99,730 54,553 CAPITALIZATION Long Term Debt131 666,979 638,090 567,761 567,935 592,615 Preferred Stock without mandatory redemption 103,306 105,000 105,000 105,000 105,000 Preferred Stock with mandatory redemption 141 4,077 5,992 47,836 49,383 50,000 Common Equity 587,449 561,811 539,650 503,513 468,073 Total $1,361,811 $1,310,893 $1,260,247 $1,225,831 $1,215,688 CAPITALIZATION RATIOS Long Term Debt 493 493 45 3 463 493 Preferred Stock without mandatory redemption 83 83 83 93 93 Preferred Stock with mandatory redemption 03 03 43 43 43 Common Equity 433 433 433 41 3 383 Total 1003 1003 1003 1003 1003 ELECTRIC/ GAS SALES Electric Sales (kwh 000) 9,205,795 8,530,520 8,308,233 7,878,476 7,249,442 Gas Sal es (mcfOOO) 15,952 15,708 17,239 16,449 15,604 II !Excludes Allowance for Funds Used During Construction.

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

iliJncludes long-term debt due within one year.

t 41Jncludes mandatory redemption due within one year.

19

Delmarva Power &_Light Compan_v FINA CIAL REVIEW A D ANALYSIS RESULTS OF OPERATIONS EARNINGS Earnings per share of common stock increased to $2.91 in 1986 from $2.76 in 1985 and

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

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

Dividends Declared (cents)

ELECTRIC REVENUES AND SALES Electric revenues, net of fuel, decreased $9.8 million or 2.33 in 1986. The 1986 decrease 300 was primarily due to a $28.1 million Delaware Summit credit payment and a $13.5 million decrease from lower rates offset by a $31.5 million sales increase. (See Note 10 on page 40 for a discussion of rate matters.) The sales increase resulted from a continued strong economy in the service territory, colder winter weather, and new residential construction. A new system peak of 1,840 megawatts was reached in July 1986, a 2.5% increase over the previous peak in August 1985. The $28.1 million Delaware Summit credit payment consisted of the unamortized Summit credit and related tax benefits. The settlement payment did not reduce earnings since there was a corresponding credit to operating expenses.

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

GAS REVENUES AND SALES 1986 gas revenues, net of fuel costs, increased $2.7 million or 9.4% in 1986. The net revenue increase reflects a full year of revenues at higher rates, effective March 5, 1985, compared to 1985 which includes only ten months at the higher rates. Also contributing to the increase were higher residential space heating sales which were due to colder winter weather and residential and commercial customer growth. Offsetting these increases was a decrease in industrial sales, largely attributable to lower oil prices, which caused some customers 82 83 84 85 86 to switch from gas.

• Earnings

• Dividends 20

Delmarva Power &._ Li9ht Company FINANCIAL REVIEW AND ANALYSIS 1985 net gas revenues increased 2.63 due to increased rates partially offset by a 8.93 decrease in sales principally attributable to fuel switching, decreased industrial production levels and mild weather in the first quarter of 1985.

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

Generation Fuel Mix FUEL Mix (percent)

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

Nuclear generation increased 233 due to increased production by the Peach Bottom units which experienced extended outages during 1985. Oil generation increased 93 primarily due to a 393 decline in the company's average cost of oil. These factors lowered the effective 100 customer fuel cost, which includes fuel, interchange and purchased power costs, to l .84ct/ kwh in 1986 from 1.94ct/ kwh in 1985 and 1.9M/ kwh in 1984.

I 80 - ....__

- ~

OPERATING EXPENSES Operating expenses, net of fuel costs, decreased 2.23 in 1986 due to $13.5 million accelerated amortization of the Summit credit in the Delaware jurisdiction and the $14.3 million tax 60 effect of the Delaware Summit credit payment. Excluding the impact of the Delaware Summit credit payment, operating expenses, net of fuel costs, increased 5.93. This increase was due to higher payroll, increased insurance costs and higher annual overhaul expenses for the company's generating units.

40 1985 operating expenses, net of fuel costs, increased 4.93 principally due to higher payroll and associated benefits, the higher cost of jointly-owned nuclear facilities, costs related to Hurricane Gloria, and increased steam service expenses, which are billed and reflected in steam revenues.

20 0

83 84 85 86 87

• Oil

• Nuclear

• Coal 21

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

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

FINA CING COSTS Interest on long-term debt increased $7.2 million in 1986 primarily due to a December 1985 refinancing of $41.9 million of preferred stock with long-term debt. An increase in loans used to finance leveraged lease investments also contributed to the interest expense increase. During 1986, $87.l million of bonds and preferred stock were refinanced with lower cost securities. The 1985 and 1986 refinancings resulted in a net of tax savings of $2 .3 million in 1986, which reflects a $5.2 million decrease in preferred dividends. In 1985, interest on long-term debt increased $1.4 million mainly due to borrowings related to leveraged leases.

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

22

Delmarva Power &.. Li9ht Company FINANCIAL REVIEW AND A ALYSIS LIQUIDITY AND LIQUIDITY 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 company's cash flow was decreased by 1986 rate reductions and will decrease to a greater degree in 1987, when the rate reductions will be in effect for a full year. The Tax Reform Act of 1986 will also reduce the company's internal generation of cash due to loss of the investment tax credit and less favorable depreciation rules.

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

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

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

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

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

The company's ratio of earnings to fixed charges of 3.67, as of December 31, 1986, decreased 4.0

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

3.0 2.0 1.0 0

82 83 84 85 86 23

Delmana Pou er &. Li9ht Company FINA CIAL REVIEW AND ANALYSIS CAPITAL AND CONSTRUCTION REQUIREMENTS For the period 1984-1986, the company had total capital requirements of $424 million, including $277 million for construction (excluding AFUDC). During the same period, $407 million was generated internally (cash from operations less common and preferred dividend requirements) which represents 963 of the capital requirements and 1473 of the construction requirements. Capital requirements for the period 1987-1989 are estimated to be $478 million, including $396 million for construction (excluding AFUDC). The company presently anticipates that, for the period 1987-1989, internally generated funds will be $311 million which equals 653 of the total capital requirements and 793 of its construction requirements.

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

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

Construction Expenditures and Internally The company developed a plan to delay the in-service date of its next generation unit Generated Funds until the late 1990's because of the high cost of adding new capacity and possible future (millions of dollars) technological developments. In order to respond to the unexpectedly high peak growth experienced over the past two years by the company, the development of the plan's supply side and demand side options has been intensified. The company's strategy is to match capacity expansion and load growth as closely as possible. This strategy will enable the company 150 to maintain its relatively low pricing within the Northeast and meet developing competition in the utility industry.

120 90 60 30 0

85 86 87 88 89

• Internally Generated Funds

• Construction Expenditures (excluding AFU DC) 24

Delmarva Power &. Light Company REPORT OF MANAGEMENT Management is responsible for the information and representations contained in the company's financial statements. Our financial statements have been prepared in conformity with generally accepted accounting principles, based upon cunently available facts and circumstances and management's best estimates and judgments of the expected effects of events and transactions.

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

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

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

~fl~

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

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

~~

Philadelphia, Pennsylvania February 6, 1987 25

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

For the Years Ended December 31 1986 1985 1984 OPERATING REVENUES Electric $ 602,240 $ 605,581 $ 584,163 Gas 91,802 95,256 101,578 Steam 20,821 21,997 16,852 714,863 722,834 702,593 OPERATING EXPENSES Operation:

Fuel for electric generation 207,862 240,901 278,474 Net interchange and purchased power (28,098) (63,962) (108,011)

Purchased gas 57,012 69,847 74,082 Deferred energy costs 7,767 (2,549) (2,345)

Other operation 128,116 121, 105 108,001 Maintenance 62,621 59,406 56,752 Depreciation 64,657 61,183 58,464 Amortization of Summit credit (15,707) (7,202) (4,762)

Taxes on income 65,208 77,836 77,577 Taxes other than income 30,687 30,754 31,152 580,125 587,319 569,384 OPERATING INCOME 134,738 135,515 133,209 OTHER INCOME Allowance for other funds used during construction 2,750 2,428 2,780 Other, net 13,267 6,382 3,243 16,017 8,810 6,023 INCOME BEFORE INTEREST CHARGES 150,755 144,325 139,232 INTEREST CHARGES Long-term debt 54,478 47,236 45,815 Short-term debt and other 922 1,059 2,090 Allowance for borrowed funds used during construction (768) (608) (783) 54,632 47,687 47,122 EARNINGS Net Income 96,123 96,638 92, 110 Dividends on preferred stock 7,405 12,599 12,662 Earnings applicable to common stock $ 88,718 $ 84,039 $ 79,448 COMMON STOCK Average shares outstanding (thousands) 30,482 30,482 30,248 Earnings per average share $ 2.91 $ 2.76 $ 2.63 Dividends declared Eer share $ 2.045 $ 1.945 $ 1.83 See accompanying Notes to Consolidated Financial Statements.

26

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

For the Years Ended December 31 1986 1985 1984 CASH FROM OPERATIONS Net Income $ 96,123 $ 96,638 $ 92,110 Items not requiring (providing) cash:

Depreciation 64,657 61, 183 58,464 Amortization of Summit credit (15,707) (7,202) (4,762)

Amortization of nuclear fuel 5,405 6,594 2,071 Allowance for funds used during construction (3,518) (3,036) (3,563)

Investment tax credit adjustments, net (956) 21,878 2,253 Deferred income taxes, net 54,535 47,462 31,935 Dther (1,569) (2,307)

Refundable taxes and interest 31,111 (2,981) (2,188)

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

Changes in other current assets

& liabilities':' (21,154) (19,140) 15,003 Net cash flow from operating activities 226,155 220,004 167,294 INVESTING AcnvITIES Construction expenditures (excluding AFUDC) (102,597) (94,923) (79,488)

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

Investment in marketable securities (51,249) (32,308) (19,754)

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

Other non-current changes, net (6,911) (8,313) (4, 722)

Net cash used by investing activities (180,253) (174,158) (108,897)

FINANCING ACTIVITIES Dividends: Common (61,574) (58,525) (54, 139)

Preferred (7,405) (12,599) (12,662)

Redemptions: Term loan (33,000) (5,500)

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

Preferred stock (31,635) (41,573) (1,418)

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

Issuances: First mortgage bonds 126,000 Variable rate demand series bonds 33,500 15,500 Other long-term debt 18,000 80,000 Preferred stock 28,000 Common stock 11,921 Net cash used by financing activities (49,082) (45,111) (56,398)

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

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

See accompanying Notes to Consolidated Financial Statements.

27

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

ASSETS As of December 3 I 1986 1985 UTILI1Y PLANT- Electric $1,685,954 $1,624,881 AT ORIGINAL COST Gas 96,782 90,956 Steam 24,746 24,389 Common 85,261 80,541 1,892,743 1,820,767 Less: Accumulated depreciation 587,075 535,873 Net utility plant in service 1,305,668 1,284,894 Plant held for future use 6,830 15,297 Construction work in progress 45,467 33,184 Nuclear fuel, at amortized cost 19,461 19,796 1,377,426 1,353,171 0rHER INVESTMENTS Investment in leveraged leases 60,716 30,465 Construction funds held by trustee 9,186 Other 11,178 4,340 71,894 43,991 CURRENT ASSETS Cash 14,228 17,408 Marketable securities, at cost 111,205 59,956 Accounts receivable:

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

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

Refundable taxes and interest 31,111 263,064 261,672 DEFERRED CHARGES AND Unamortized debt expense 6,233 5,368 0rHER ASSETS Deferred recoverable plant costs 8,145 Other 15,790 8,325 30,168 13,693 Total $1,742,552 $1,672,527 See accompanying Notes to Consolidated Financial Statements.

28

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

CAPITALIZATION As of December 31 1986 1985 AND LIABILITIES CAPITALIZATION Common stock $ 102,876 $ 102,876 (see Statements Additional paid-in capital 235,187 235,798 of Capitalization) Retained earnings 249,386 223,137 Total common stockholders' equity 587,449 561,811 Preferred stock:

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

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

Total $1,742,552 $1,672,527 See accompanying Notes to Consolidated Financial Statements.

29

Dclmal1'a Power &_Light Company CONSOLIDATED STATEMENTS OF CAPITALIZATION (Dollars in Thousands)

As of December 31 1986 1985 COMMON STOCKHOLDERS' Common stock, par value $3.375 per share EQUITY authorized 35 ,000,000 shares, outstanding 30,481,925 shares $ 102,876 $ 102,876 Additional paid-in capital 235,187 235,798 Retained earnings 249,386 223,137 Total Common Stockholders' Equity 587,449 433 561,811 43%

CUMULATIVE PREFERRED Par value $25 per share, 3,000,000 shares authorized, none outstanding STOCK Par value $100 per share, 1,800,000 shares authorized Without Mandatory Redemption:

Series Shares Issued (1986 and 1985) 3.70%-4.56% 240,000 and 240,000 24,000 24,000 5.00%-7.84% 330,000 and 330,000 33,000 33,000 7.88%-8.96% 200,000 and 480,000 20,000 48,000 Adjustable-5.58%Pl 280,000 and 0 28,000 105,000 105,000 Less: Reacquired preferred shares held in treasury (at cost) 1,694 Preferred Stock without Mandatory Redemption 103,306 83 105,000 8%

With Mandatory Redemption:

9.00% Series! 2 l 40,766 and 59,916 shares 4,077 03 5,992 0%

Less: Amount to be redeemed within one year 800 800 Preferred Stock with Mandatory Redemption 3,277 5,192 LONG-TERM DEBT First Mortgage and Collateral Trust Bonds:

Maturity Interest Rates Jun. 1, 1988 3Ys% 25,000 25,000 1994-1997 4%%-6%% 50,000 50,000 1998-2002 7%-11-M% 158,100 158,100 2003-2005 6.6%-10\4% 92,150 121,250 2008-2016 9\4%-12% 207,900 111,900 533,150 466,250 Pollution Control Notes:

Series, 1973 5.7% effective rate, due 1987-1998 7,550 7,700 Series, 1976 7.3% effective rate, due 1992-2006 34,500 34,500 42,050 42,200 Variable Rate Demand Series, due 2014-2015-4.51%! 1

) 49,000 49,000 Other Long-Term Debt- 7.76%(1 1 43,000 80,000 Unamortized premium and discount, net (221) 640 666,979 493 638,090 49%

Long-term debt due within one year (150) ( 150)

Total Long-Term Debt 666,829 637,940 Total Capitalization $1,360,861 1003 $1,309,943 100%

illAverage rate during 1986.

! 2 1Redemption price at December 31, 1986 is$ 107.

See accompanying Notes to Consolidated Financial Statements.

30

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

Additional For the Three Years Ended Common Par Paid-in Retained December 31, 1986 Shares Value Capital Earnings Total BALANCE AS OF 29,841,182 $100,714 $225,585 $177,214 $503,513 jANUARY 1, 1984 Net income 92,110 92, 110 Cash dividends declared:

Common stock ($1.83) (55,361) (55,361)

Preferred stock (12,662) ( 12,662)

Issuance of common stock:

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

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

Common stock ($1.945) (59,287) (59,287)

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

Net loss on retirement of preferred stock 325 (2,916) (2,591)

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

Common stock ($2.045) (62,336) (62,336)

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

Issuance of preferred stock (650) (650)

Redemption of preferred stock 39 (133) (94)

BALANCE AS OF DECEMBER 31, 1986 30,481,925 $102,876 $235,187 $249,386 $587,449 See accompanying Notes to Consolidated Financial Statements.

31

Delmarva Power &_ Li9ht Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

REVENUES Revenues are recorded at the time billings are rendered to customers on a monthly cycle basis. At the end of each month, there is an amount of unbilled electric and gas service which has been rendered from the last meter reading to the month-end.

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

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

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

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

32

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

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

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

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

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

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

33

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

2. INCOME TAXES (Dollars in Thousands) 1986 1985 1984 Operations:

Federal: Current $29,278 $32,557 $36,131 Deferred 26,779 28,638 27,380 State: Current 5,051 6,320 6,560 Deferred 4,596 4,978 4,555 Investment tax credit adjustments, net (496) 5,343 2,951 Other income: Current (27,223) (29,788) 1,528 Deferred 23,160 13,846 Investment tax credit adjustments, net (1,720) 12,608 Total $59,425 $74,502 $79,105 Investment tax credits utilized to reduce federal income taxes payable amounted to $5,450,000 in 1986, $24,992,000 in 1985 and $6,890,000 in 1984. The amounts for 1986, 1985 and 1984 include Employee Stock Ownership Plan credits of $464,000, $535,000 and $707,000, respectively.

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

(Dollars in Thousands) 1986 1985 1984 Amount Rate Amount Rate Amount Rate Statutory income tax expense $71,553 46% $78,725 46% $78,758 46%

Increase (Decrease) in taxes '

resulting from:

Exclusion of AFUDC for income tax purposes (1,619) (1) (1,397) (1) (1,639) (1)

Depreciation not normalized 2,852 2 2,196 1 1, 163 1 ITC amortization/flow-through (7,667) (5) (7,144) (4) (4,018) (2)

State income taxes, net of federal tax benefit 5,333 3 6,160 4 6,067 3 Amortization of credit arising from sale of contracts (7,225) (5) (3,313) (2) (2,190) (1)

Other, net (3,802) (2) (725) 964 Income tax expense $59,425 38% $74,502 44% $79,105 46%

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

(Dollars in Thousands) 1986 1985 1984 Depreciation $43,443 $33,394 $18,887 Deferred energy costs (2,082) 1, 163 954 Capitalized overhead costs 1,143 1,432 1,508 Deferred recoverable plant costs 3,488 Pollution control amortization 3,076 3,629 3,687 ADR repair allowance 2,337 4,295 4,863 Other, net 3,130 3,549 2,036 Total $54,535 $47,462 $31,935 34

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

2. INCOME TAXES The company has not provided deferred income taxes of approximately $83 million, based (continued) on anticipated future income tax rates, related to cumulative timing differences of $208 million arising before the adoption of full tax normalization for ratemaking purposes by regulatory authorities. The company is collecting the unnormalized taxes in its rate jurisdictions either on a levelized basis, over the life of the related plant facilities, or when actually paid to taxing authorities.

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

3. TAXES OTHER THAN (Dollars in Thousands)

INCOME 1986 1985 1984 Delaware utility $11,869 $12,168 $13,732 Property 6,787 6,784 6,652 Other gross receipts 5,881 5,799 4,995 Payroll, franchise and other 6,150 6,003 5,773 Total $30,687 $30,754 $31,152

4. PENSION PLAN AND The company has a trusteed noncontributory pension plan covering all regular employees.

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

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

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

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

The company provides certain health care and life insurance benefits for retired employees.

Substantially all of the company's employees may become eligible for these benefits if they reach normal retirement age while still working for the company. The company recognizes the cost of providing those benefits by expensing the insurance claims as they are paid. These costs totalled $2,009,000, $2,094,000 and $1,640,000 for 1986, 1985 and 1984, respectively.

35

Delmarva Power &._Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

5. CAPITALIZATION RETAINED EARNINGS The current first mortgage bond indenture restricts the amount of consolidated retained earnings available for cash dividend payments on common stock to $35,000,000 plus accumulations after June 30, 1978, which available amount at December 31, 1986 was approximately $170,059,000.

PREFERRED STOCK The annual preferred dividend requirements on all outstanding preferred stock at December 31, 1986 are $6,656,000. If preferred dividends are in arrears the company may not declare common stock dividends or acquire its common stock.

WITHOUT MANDATORY REDEMPTION These series may be redeemed at the option of the company at any time, in whole or in part at the various redemption prices fixed for each series (ranging from $103 to $106 at December 31, 1986).

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

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

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

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

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

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

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

36

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

5. 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 (603) of the bondable value of property additions. For the years 1984-1986, property additions satisfied the sinking fund requirements.

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

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

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

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

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

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

$59.1 million of First Mortgage Bonds (11.753 Series, due July 1, 2010-$30 million and 113 Series, due July 1, 2005-$29.l million) called on July 1, 1986. The call premium plus related unamortized discount and expenses totaling $5 .5 million have been deferred in anticipation of recovery in rates. Recovery in the Maryland jurisdiction has been approved.

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

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

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

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

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

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

37

Delmarva Power &_Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

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

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

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

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

1987 $ 3,059,000 1988 2,310,000 1989 2,080,000 1990 537,000 1991 260,000 Remainder 3,857,000 Total $12,103,000 The total minimum rental commitments are applicable to the following types of property:

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

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

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

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

38

Delmarva PolVer &_Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

8. SHORT-TERM DEBT As of December 31, 1986, the company had unused bank lines of credit of $44,500,000 and AND LINES OF CREDIT 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.

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

(Dollars in Thousands)

Construction Ownership Plant in Accumulated Work in Share Service Depreciation Progress

• Nuclear:

Peach Bottom 7.51% $ 91,307 $ 29,818 $ 3,602 Salem 7.41% 198,839 63,716 9,074 Coal-Fired:

Keystone 3.70% 11,880 4,491 299 Conemaugh 3.72% 11,692 4,982 758 Men-ill Creek Reservoir 11.91% 10,534 Transmission Facilities Various 4,462 1,252 Total $318,180 $104,259 $24,267 The company provides its own financing for its share of improvements to jointly-owned plant. In addition, the company is a joint guarantor of loans ($662,000 proportionate share) advanced for operation of the coal mines that supply the Keystone plant. The company's share of operating and maintenance expenses of the jointly-owned plant is included in the corresponding expenses in the statements of income.

39

Delmarva Power &. Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

10. RATE MATTERS The company is subject to regulation with respect to its retail sales of electricity by the Delaware and Maryland Public Service Commissions and the Virginia State Corporation Commission, which have broad powers over rate matters, accounting and terms of service.

The Federal Energy Regulatory Commission (FERC) exercises jurisdiction with respect to the company's accounting systems and policies and the transmission and sale at wholesale (resale) of electric energy.

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

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

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

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

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

40

Delmarva Power &_ Li9ht Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Millions of Dollars)

Maximum Maximum Retrospective Type and Source of Coverage Coverage Assessment for a Single Incident Public Liability:Pl Private $160 None Price Anderson Assessment( 2 l 535 $1.5(3)

$695( 4 )

5 Property Damage:( l Peach Bottom( 6 l $585 Salem(7l $585 $3.0 All units(Bl $575 $1.6 Replacement Power:

Nuclear Electric Insurance Limited (NEIL)l9' $3.0-$3.3 $1.6 (llThe Price-Anderson Act is scheduled to expire in August 1987 and Congress is currently considering several proposals. The company is unable to predict Congress' ultimate action and what effect such action may have on the company's liability.

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

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

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

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

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

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

(BlAll units are insured by Nuclear Electric Insurance Limited (NEIL II) for losses in excess of $500 million.

Maximum retrospective assessment is seven and a half times the annual premiums.

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

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

41

Delmarva Power &_Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

(Dollars in Thousands) 1986 1985 1984 Operating Revenues:

Electric $ 602,240 $ 605,581 $ 584,163 Gas 91,802 95,256 101,578 Steam 20,821 21,997 16,852 Total $ 714,863 $ 722,834 $ 702,593 Operating Income:

Electric $ 126,007 $ 127,148 $ 125,200 Gas 6,985 6,604 6,616 Steam 1,746 1,763 1,393 Total $ 134,738 $ 135,515 $ 133,209 Net Utility Plant:l'l12 l Electric $1,306,215 $1,284,062 $1,257,728 Gas 67,267 64,967 59,097 Steam 3,944 4,142 4,349 1,377,426 1,353,171 1,321,174 Other Identifiable Assets:

Electric 112,423 144,544 157,437 Gas 17,722 32,890 42,685 Steam 409 418 440 130,554 177,852 200,562 Assets Not Allocated 234,572 141,504 69,894 Total Assets $1,742,552 $1,672,527 $1,591,630 Depreciation Expense:

Electric $ 59,725 $ 56,577 $ 54,255 Gas 4,016 3,699 3,310 Steam 916 907 899 Total $ 64,657 $ 61,183 $ 58,464 Construction Expenditures:l 3 l Electric $ 94,337 $ 86,073 $ 69,233 Gas 7,751 '8,382 10,109 Steam 509 468 146 Total $ 102,597 $ 94,923 $ 79,488 ll l!ncludes plant held for future use, construction work in progress and allocation of common utility property.

12lStated net of the respective accumulated provisions for depreciation.

13>Excludes allowance for funds used during construction.

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

42

Delmarva Power &. Light Company NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Earnings Earnings Applicable Average per Quarter Operating Operating Net to Common Shares Average Ended Revenue Income Income Stock Outstanding Share (Dollars in Thousands) (In Thousands) 1986 March 31 $208,703 $ 38,235 $27,345 $25,405 30,482 $0.83 June 30 171,341 29,966 19, 183 17,125 30,482 0.57 September 30 201,082 45,766 35,212 33,505 30,482 1.09 December 31 133,737 20,771 14,383 12,683 30,482 0.42

$714,863 $134,738 $96,123 $88,718 30,482 $2.91 1985 March 31 $198,788 $ 36,946 $27,114 $23,964 30,482 $0.79 June 30 161,093 29,416 20,582 17,433 30,482 0.57 September 30 196,352 43,496 34,235 31,085 30,482 1.02 December 31 166,601 25,657 14,707 11,557 30,482 0.38

$722,834 $135,515 $96,638 $84,039 30,482 $2.76 In the second quarter of 1985, adjustments were recorded for the additional Delaware electric retail revenue refund for 1984 and additional amortization of the credit arising from the sale of contracts, which resulted from an out-of-court tax settlement. The effect of these adjustments reduced second quarter net income by approximately $1,100,000 (4¢ per share).

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

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

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

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

43

Delmarva Po1Ver &._Light Campany CONSOLIDATED STATISTICS 10 Years of Review 1986 1985 1984 1983 ELECTRIC REVENUES (thousands): Residential $ 217,393 $ 212,254 $ 205,910 $ 193,021 Commercial 169,157 168,957 156,507 140,809 Industrial 127,900 135,141 128,833 126,703 Other utilities, etc. 80,291 79,399 79,235 68,991 Miscellaneous revenues 7,499 9,830 13,678 12,728 Total electric revenues $ 602,240 $ 605,581 $ 584,163 $ 542,252 ELECTRIC SALES

( 1,000 kilowatt-hours): Residential 2,496,099 2,256,922 2,249,270 2,136,265 Commercial 2,370,775 2,165,685 2,073,457 1,844,324 Industrial 2,753,902 2,606,466 2,569,572 2,600,492 Other utilities, etc. 1,585,019 1,501,447 1,415,934 1,297,395 Total electric sales 9,205,795 8,530,520 8,308,233 7,878,476 ELECTRIC CUSTOMERS (end of period): Residential 293,452 283,911 275,175 267,357 Commercial 35,089 33,189 31,548 30,525 Industrial 853 893 929 949 Other utilities, etc. 517 492 502 434 Total electric customers 329,911 318,485 308,154 299,265 GAS REVENUES (thousands): Residential $ 43,145 $ 39,224 $ 40,933 $ 36,694 Commercial 18,523 17,901 18,663 16,527 Industrial 16,995 19,762 22,940 23,232 Interruptible 11,464 17,419 18,098 17,026 Other utilities, etc. 142 130 160 115 Miscellaneous revenues 1,533 820 784 764 Total gas revenues $ 91,802 $ 95,256 $ 101,578 $ 94,358 GAS SALES (million cubic feet): Residential 6,201 5,622 6,213 5,640 Commercial 2,906 2,742 2,971 2,677 Industrial 3,338 3,579 4,245 4,378 Interruptible 3,471 3,734 3,769 3,723 Other utilities, etc. 36 31 41 31 Total gas sales 15,952 15,708 17,239 16,449 GAS CUSTOMERS (end of period): Residential 72,685 70,804 70,183 69,608 Commercial 4,693 4,417 4,233 4,075 Industrial 158 160 165 160 Interruptible 14 15 19 19 Other utilities, etc. 1 1 1 Total gas customers 77,551 75,397 74,601 73,863 STEAM SERVICE Electricity delivered 370,802 335,308 298,203 309,043

( 1,000 kilowatt-hours)

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

( 1,000 pounds) 44

Average Annual Compound%

1982 1981 1980 1979 1978 1977 1976 Rate of Growth

$183,258 $164,919 $144,637 $115,381 $105,237 $ 97,691 $ 80,416 10.46 137,434 123,099 112,166 91,798 82,196 74,641 60, 111 10.90 127,441 129,601 116,401 98,023 83,972 76,801 64,458 7.09 73,469 73,602 63,698 53,782 40,840 38,974 34,896 8.69 13,168 12,898 7,025 4,682 5,261 3,461 2,398 12.08

$534,770 $504,119 $443,927 $363,666 $318,106 $291,568 $242,279 9.53 2,026,398 1,996,647 2,046,546 1,968,452 1,979,624 1,924,723 1,787,663 3.39 1,729,863' 1,660,147 . 1,648,776 1,598,299 1,568,600 1,495,796 1,412,259 5.32 2,255,673 2,454,685 2,429,842 2,624,438 2,418,527 2,277,630 2,260,661 1.99 1,237,508 1,283,845 1,335,216 1,300,611 1,281,498 1,207,941 1,199,155 2.83 7,249,442 7,395,324 7,460,380 7,491,800 7,248,249 6,906,090 6,659,738 3.29 260,371 255,646 246,887 242,745 237,925 233,106 230,579 2.44 29,966 29,450 28,162 27,998 28,421 29,648 28,345 2.16 741 788 821 874 858 921 1,002 ( 1.60) 434 434 440 478 480 561 550 (0.62) 291,512 286,318 276,310 272,095 267,684 264,236 260,476 2.39

$ 36,505 $ 34,123 $ 26,525 $ 25,719 $ 28,370 $ 21,829 $ 18,826 8.65 15,792 14,344 10,342 8,954 10, 154 7,133 6,062 11.82 20, 112 22,259 12,404 9,884 10,191 6,950 5,984 11.00 11,733 11,711 9,293 4,440 716 169 1,301 24.31 53 61 46 55 93 49 44 12.43 552 572 430 270 116 103 31 47.71

$ 84,747 $ 83,070 $ 59,040 $ 49,322 $ 49,640 $ 36,233 $ 32,248 11.03 6,062 6,193 6,321 6,423 6,941 6,751 6,956 (1.14) 2,768 2,704 2,683 2,415 2,593 2,439 2,586 1.17 4,108 4,809 3,937 3,388 3,290 2,811 3,264 0.22 2,656 2,802 2,738 1,720 319 81 953 13.80 10 12 14 16 29 17 20 5.76 15,604 16,520 15,693 13,962 13,172 12,099 13,779 1.48 69,092 68,608 67,784 66,631 66,364 66,231 67,754 0.71 4,057 3,967 3,846 3,712 3,773 3,738 4,154 1.23 166 167 155 131 163 163 198 (2.23) 18 16 16 16 21 21 21 (3.97) 1 1 1 1 1 1 1 73,334 72,759 71,802 70,491 70,322 70,154 72,128 0.73 322,804 343,063 328,420 262,159 270,006 289,049 318,389 1.54 7,778,929 7,673,420 7,570,944 6,378,705 6,016,095 4,888,366 5,301,421 2.26 45

Delmarva Power &._Light Company STOCKHOLDER INFORMATION SHAREHOLDER SERVICES COMMON STOCK -

Carol C. Conrad, Assistant Secretary Wilmington Trust Company, Delmarva Power & Light Company Corporate Trust Division 800 King Street* P.O. Box 231 Rodney Square North Wilmington, Delaware 19899 Wilmington, Delaware 19890.

Telephone (302) 429-3355. Manufacturers Hanover Trust Company STOCK SYMBOL Stock Transfer Department Common Stock, DEW - listed on P.O. Box 24935 the New York and Philadelphia Church Street Station Stock Exchanges. New York, New York 10249.

ANNUAL MEETING REGULATORY COMMISSIONS The Annual Meeting will be held Federal Energy Regulatory Commission, on April 28 at 11:00 a.m., in 825 North Capitol Street, N.E.,

the Clayton Hall, University of Washington, D.C. 20426.

Delaware, Newark, Delaware. Delaware Public Service Commission, ADDITIONAL REPORTS 1560 S. du Pont Highway, To supplement information in this Dover, Delaware 19901.

Annual Report, a Financial and Maryland Public Service Commission, Statistical Review (1975-1985) and American Building, the Form 10-K are available upon 231 East Baltimore Street, request. Please write to Shareholder Baltimore, Maryland 21202.

Services, Delmarva Power, Virginia State Corporate Commission, 800 King Street, P.O. Box 231, P.O. Box 1197, Wilmington, Delaware 19899. Richmond, Virginia 23209.

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

Mellon Bank (DE) N.A.

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

TRANSFER AGENTS AND REGISTRARS Preferred Stock-Wilmington Trust Company, Corporate Trust Division Rodney Square North Wilmington, Delaware 19890.

46

Delmarva Power &._Light Company STOCKHOLDER INFORMATION QUARTERLY COMMON COMMON STOCK 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.

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

1986 1985 Dividend Price Dividend Price Declared High Low Declared High Low First Quarter $.505 30% 25% $.48 23Ys 21 Second Quarter .505 34% 291/4 .48 26llz 22Ys Third Quarter .505 381/s 30% .48 26% 22}4 Fourth Quarter .53 341/2 30% .505 28!4 22%

(

47

Delman-a Po1Ver &._Light Compan,v OFFICERS AND DIRECTORS OFFICERS NEVIUS M. CURTIS RICHARD H. EVANS Chairman of the Board, President Vice President, Corporate Communications and Chief Executive Officer PAUL S. GERRITSEN HOWARD E. COSGROVE Vice President, Regulatory Practices Executive Vice President BARBARA S. GRAHAM ROGER D. CAMPBELL Treasurer Senior Vice President and Chief KENNETH K. JONES Financial Officer Vice President, Planning H. RAY LANDON CHARLES MARCHYSHYN Senior Vice President Comptroller HARLAND M. WAKEFIELD, jR.

FRANK j. PERRY, JR.

Senior Vice President Vice President, Gas Division WAYNE A. LYONS Vice President THOMAS s. SHAW, JR.

Vice President, Production DONALD E. CAIN DUANE C. TAYLOR Division Vice President, Northern Vice President, Information Systems Division D. WAYNE YERKES DONALD P. CONNELLY Division Vice President, Southern Secretary Division DIRECTORS CHARLOTTE LEE CANNON WILLIAM G. SIMERAL Director of H. P. Cannon & Son, Inc. Director, Executive Vice (warehousing) Bridgeville, Delaware President and member of the OSCAR L. CAREY Executive Committee of E. I.

President and Director of Larmar du Pont de Nemours & Company (a Corporation (general real estate and diversified chemical, energy and home builders) Salisbury, Maryland specialty products company)

Wilmington, Delaware JOHN R. COOPER Director of Environmental Affairs of DAVID D. WAKEFIELD E. I. du Pont de Nemours & Company Senior Vice President of Morgan (a diversified chemical, energy and Guaranty Trust Company of New specialty products company) York, New York, New York; Wilmington, Delaware Director of Continental American Life Insurance Company, HOWARD E. COSGROVE Wilmington, Delaware Executive Vice President of the Company HARLAND M. WAKEFIELD, jR.

Senior Vice President of the NEVIUS M. CURTIS Company Chairman of the Board, President and Chief Executive Officer of the EXECUTIVE COMMITTEE Company Nevius M. Curtis, Chairperson; Oscar L. Carey; William G. Simeral; David D.

SALLY v. HAWKINS Wakefield; Harland M. Wakefield, Jr.

Director, President and Chief Executive Officer of Delaware AUDIT COMMITTEE Broadcasting Company and President Oscar L. Carey, Chairperson; John R.

and General Manager of Station Cooper; James 0. Pippin, Jr.

WILM (radio broadcasting) NOMINATING COMMITTEE Wilmington, Delaware Sally V. Hawkins, Chairperson; Nevius DONALD W. MABE M. Curtis; James 0. Pippin, Jr.

President and Vice Chairman of COMPENSATION COMMITTEE Perdue Farms Incorporated William G. Simeral, Chairperson; (integrated poultry company) Oscar L. Carey; Nevius M. Curtis; Salisbury, Maryland David D. Wakefield jAMES 0. PIPPIN, jR. INVESTMENT COMMITTEE Director, President and David D. Wakefield, Chairperson; Chief Executive Officer of the Nevius M. Curtis; James 0. Pippin, Jr.

Centreville National Bank of Maryland, Centreville, Maryland 48