ML18017A270

PP&L Annual Rept 1993.

ML18017A270
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Site:	Susquehanna
Issue date:	12/31/1993
From:	Hecht W PENNSYLVANIA POWER & LIGHT CO.
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Pennsylvania Power & Light Company, headquartered in Allentown, Pa.,

provides electric service to approximately 1.2 million homes and businesses throughout a 10,000-square-mile area in 29 counties of Central Eastern Pennsylvania. Principal cities in the PPRL service area are Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport. The area is at the heart of the nation's largest industrial and commercial market area. More than 70 million consumers live within a 500-mile radius.

NORTI IEAST DIVISION SUSQUEHANNA DIVISION cranton likes-Barr

~ Wiltlamsport Iaalcto Bgth hcm IIARRISBURG DIVISION Allc town

) Iarrisbury Lancaster DIVISION LANCASTER Vll N PPRL's 1994 annual meeting will be held April 27 at the F. M. Kirby Center for the Performing Arts, Public Square, Wilkes-Barre, Pa. See page 46 for details.

Financial/Operating Highlights Chairman's Letter Our Changing Industry Competition & Deregulation ..

Our Response to the Changing Rules Meeting Competition Head-On .

Our Continuous Performance Improvement Process How PP&L IPi'll Change . 6 Year In Review 8 Financial Review. 12 Independent Auditors'eport 20 Management's Report on Responsibility for Financial Statements .. 20 Financial Statements . 21 Notes to Financial Statements .28 Selected Financial and Operating Data .............42 Shareowner and Investor Information .46 Officers . . ...........48 Directors Inside Back Cover Printed on Recycled Paper and is Recyclable

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r 1993-1992 1993 1992 %Change 1991 Operating Data (in thousands)

Total Energy Sales, Kilowatt-hours ......... 42,333,831 42,242,334 0.2 43,772,159 System Energy Sales, Kilowatt-hours(a) ..... 31,050,172 29,755,211 29,036,169 Contractual Sales to Other Utilities, Kilowatt-hours . 7,142,189 7,326,845 (2.5) 7,182,642 PJM Interchange Power Sales, Kilowatt-hours .. 4,141,470 5,160,278 (19.7) 7,553,348 Electricity Generated, Kilowatt-hours....... 39,245,835 39,186,425 0.2 41,551,242 Net System Capacity, Kilowatts(b)(c) ....... 7,802 7,802 0.0 7,797 Winter Peak Demand, Kilowatts (d)......... 6,403 6,130 5,974 I'inancial Data(in thousands)

Operating Revenues . $ 2,727,002 $ 2,744,122 (0.6) $ 2,740,715 Operating Income $ 562,808 $ 573,431 (1 9) $ 582,331 Net Income . $ 348,126 $ 346,724 0.4 $ 348,414 Common Dividends Declared............. $ 250,611 $ 242,655 3.3 $ 234,626 Common Equity(b) . $ 2,425,835 $ 2,366,939 2.5 '2,298,010 Capital Provided by Investors (b)........... $ 5,797,040 $ 5,702,658 1.7 $ 5,623,378 Construction Expenditures. $ 430,672 $ 387,220 11.2 $ 336,741 Construction Work in Progress(b)

......... $ 238,600 $ 211,534 12.8 $ 183,242 Property, Plantand Equipment Net(b)..... $ 7,145,581 $ 7,019,504 1.8 $ 6,929,578 Total Assets(b) . $ 9,454,113 $ 8,191,768 15.4 $ 7,934,595 Per Common Share Earnings $ 2.07 $ 2.02 2.5 $ 2.01 Dividends Declared . $ 1.65 $ 1.60 3.1 $ 1.55 Marker Price(b) .. $ 27 $ 27 t/g (0.9) $ 26>/s Bookvalue(b) . $ 15.95 $ 15.58 2.4 $ 15.15 Other Information Return on Average Common Equity ........ 13 06% 13.11% (0 4) 13.42%

Times Interest Earned Before Income Taxes... 3.33 3.18 47 3.06 Number of Customers Electric(b) ........ 1,203,139 1,186,682 1.4 1,173,680 Common Shares Outstanding(b) .......... 152,132,089 151,885,335 0.2 151,655,268 Number of Common Shareowners (b)....... 130,677 129,394 1.0 127,272 Number of Employees Electric(b) ........ 7,765 7,981 (2 7) 8,144

( a ) Excludes cont tactual sales to other utilities and PJM interchange p ower sales.

(b) At year-end.

( c ) Total generating capacity plus firm capacity purchases less firm ca paclty sales.

(d) Winter peaks were reached early in the subsequent year.

WHERE THE PP8rL INCOME DOLLAR WENT IN 1993 29e Fuel and power purchases 17e Other operation 0BCQ+6:UKKQ)~t 7e Maintenance ea9Cad9xzmaCNCRS 10e Dcprcciatlon 164'axes 94'nterest 10e Dividends 2e Earnings rcinvested

ou-get the future for which new era of partnership and employee you plan. participation at PP&L. Our success in At PP&L, we believe that the future will come from the ideas adage but we also believe that plans and the enthusiasm of every PP&L don't amount to much unless you do employee. CPIP will be the catalyst a good job in executing them. I'm that will bring more of those ideas pleased to report to you that we are and that enthusiasm to the surface.

implementing plans that will enable For more details on CPIP, see the arti-us to take full advantage of the cle on page 6.

changes that are shaping a new elec- These changes come none too tric utility industry. Provisions of the soon because, in many ways, the fu-National Energy Policy Act of 1992 ture already is here.

have altered the very nature of the New competition has arrived in our electric business in the United States. "wholesale" business. Each year, about Opportunities abound for companies $ 44 million in revenues have come from that are prepared to move. our sales to small utilities municipals, During the past year, we have cooperatives and investor-owned that begun work on initiatives that will don't operate their own generating facili-help us shape a successful future for ties. The 1992 energy act specifically says PP&L customers, for PP&L investors William F. Heeht that this group is no longer bound to and for PP&L employees. their traditional utility supplier and is Also, we are implementing a now free to "shop around" for electricity.

Continuous Performance Improve- there are growth opportunities for This led to significant opportunity for us.

ment Process. We are continuing our PP&L in the worldwide power We reacted in two ways: First, w aggressive cost-reduction effort. And, market. We are establishing a sub- began to explore the additional "mar-we are responding to the new com- sidiary to take advantage of emerg- kets" those customers located in petition in our industry with a re- ing opportunities in the United other utilities'ervice areas. Second, newed commitment to high quality States and in other countries op- we took action to renegotiate the service and reasonable prices. portunities in the electric power sales agreements that we had with A series of initiatives, many of business that are outside the scope municipal and small utilities located which stem from the new rules in of the traditional utility structure. in Central Eastern Pennsylvania.

our business, will lead to new sources To take advantage of such op- The results were good. We are of revenue for the company and portunities, in February our board of talking with several potential buyers will allow us to compete effectively directors gave approval to form a about sales agreements and we were as some of our markets are deregu- holding company. During this year, able to retain as customers those lated. Several of our initiatives in- we will be seeking regulatory ap- small utilities that we have been sell-volve cost-reduction measures that provals for the holding company ar- ing to for years. These new agree-are necessary to solidify our position rangement. If appropriate approvals are ments are subject to Federal Energy as a low cost supplier of electricity. granted, the process will culminate Regulatory Commission approval.

Some of these initiatives involve ex- in our asking you for approval of the The wholesale market was not the panding operations in our traditional holding company at next year's annual only place in which we can report business to gain new revenues. And, meeting. success in 1993. Sales to our service still other initiatives involve PP&L The holding company structure is area customers were up by 4.4 per-reaching out beyond the confines of a visible demonstration of the dra- cent for the year. It is especially signifi-our present service area. These initia- matic changes that we see coming to cant that industrial sales also in-tives are detailed on page 5 of this PP&L. A similar dramatic change is creased by 4 percent. Even when report. under way in the way we work.with accounting for an unusually hot sum-While we remain sharply fo- each other in the company. That' mer, which tends to increase residen-cused on providing high quality the reasoning behind our Continuous tial and commercial sales, the stron~

service at reasonable prices to the Performance Improvement Process. sales performance indicates an en-people of Central Eastern Pennsyl- CPIP, which was developed by a couraging underlying growth in our vania, we also are convinced that union-management team, heralds a service area economy.

Earnings for 1993 were $ 2.07 per In other environmental news, the ty we have available for sale.

share, an increase of 5 cents per company signed an agreement with ~ We have been a leader in attract-share over the previous year. A full federal and state agencies as well as ing business and industry to Cen-discussion of earnings can be found private sporting groups to restore shad tral Eastern Pennsylvania, despite on page 12. to the Susquehanna River. Under the intense competition. Over the The news also was good for our agreement, we will install fish lifts at past five years, we have been in-customers in 1993. Our rates contin- our Holtwood hydro plant by the volved in attracting a net in-ue to hold steady. At the end of spring of 1997. Also, PP&L's Comfort crease of more than 30,000 jobs 1993, PP&L rates were roughly the Home program was recognized as a to Central Eastern Pennsylvania.

same as they were in 1986, an im- "model of excellence" by a group of ~ In the face of a strong challenge pressive record when you consider environmental organizations. from other fuels, electricity con-that the Consumer Price Index has The news was not so good in tinues to be the heating source increased by more than 20 percent the safety area during 1993. Tragical- of choice for new home builders over that same period. ly, a Distribution Department employ- in Central Eastern Pennsylvania.

1993 also was a good year for ee from our Susquehanna Division About 69 percent of the homes financing. Taking advantage of favor- died of complications resulting from built in our service area in the able interest rates, we sold $ 1.15 bil- injuries he suffered when he came in past five years are all-electric.

lion in securities and redeemed $ 1.09 contact with a 7,200-volt under- We have been successful in the billion of high-cost securities, in each ground line. Francisco Garcia, 48, competitive markets in which we case more than in any year in our was a PP&L employee for 15 years. have been involved. And, while the history. This reduced our costs by This was the first job-related fatality new challenges are unlike those we lowering our interest charges and of a PP&L employee since 1988. have seen in the past, we feel confi--

'vidends on preferred stock. Also We also failed to reach our safety dent we will be able to meet the com-he financial front, at year's end goals in 1993 as lost-time accidents, petitive challenges in the future as well.

i e expressed a fond farewell to a no-lost-time accidents and motor ve- Our experiences give us a com-man who was involved in the com- hicle accidents all exceeded targets. petitive advantage. We have put pany's financial operations for nearly Reacting to the clearly subpar safety together a cohesive strategy for the four decades. Charles E. Russoli, ex- performance during the year, we ap- future. We are empowering PP&L ecutive vice president and chief fi- pointed a union-management team people to meet the challenge.

nancial officer, retired. Charlie also to examine the problem and make We are trimming down to face the retired from his position on the com- recommendations for improvement. competition.

pany's board of directors. After talking to hundreds of employ- These are the reasons that we The 12 months of 1993 also were ees throughout the company, the look with confidence to the opportu-productive ones for our power team made dozens of recommenda- nities created by the new rules in our plants. Our fossil plants exceeded tions for improvements, on which business.

their goal as they were available to we are now acting. These are the reasons that PP&L produce electricity 82 percent of the Our performance in 1993, our will be one of the winners in the time during the year. Our initiatives for the more competitive new electric power business.

Susquehanna nuclear plant fell just future and the promise of our CPIP On behalf of all of us at PP&L,.I short of its goal for the year. effort give us great confidence in the thank you for your continued support.

Our marketing and economic de- future a future that we are now velopment program had another suc- working to shape. PP&L is a solid cessful year, exceeding its goals by investment today and will continue Respectfully submitted, accounting for 556 million kwh in to be in the new competitive future.

increased annual sales. A look at our history tells you We continued our environmental why we are optimistic:

efforts in 1993, publishing our first- ~ We have been a leader in the ever environmental annual report. competitive bulk power sales report, which is available upon market. In the last five years, we William F. Hecht est, provides details of the com- have sold more than 71 billion March I, 1994 pany's environmental efforts and of kwh to other utility companies, the impact of its operations. about 32 percent of the electrici-

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ince the passage of the Energy Act empowers all utilities, While this competition affects

<~National Energy Policy Act including those that do not now only about 3 percent of our total of 1992, there has been a generate their full requirements, the sales today, we think that will great deal of discussion about opportunity to shop around for a change.

changes in the utility business. At wholesale supplier, rather than being Although the National Energy PAL, we are convinced that the limited to purchasing their needs Act requires open access to the new rules in our industry present from their traditional supplier. transmission system for these tremendous opportunity. wholesale energy sales, it does not The 1992 act changes the provide such opportunity for retail nature of the electric utility busi- What does this ntean? industrial and commercial customers.

ness a business in which PAL It means we have enhanced It does not, however, prohibit states has been a major player. Because opportunities to market PP8cL from doing so. Already, several of changes in the regulations, to electric service beyond the bound- states have legislation being con-remain a force in sidered that the electric power would do industry, we are exactly that.

expanding our Since the passage of the National Competitio in the retail operations be-yond the borders Energy Policy Act of 1992, market, starting of Central Eastern there has been a great deal of discussion with the indus-trial and com-Pennsylvania.

The new about changes in the utility business. mercial sector, regulations provide PP8cL At PAL, we are convinced will dramatical-ly alter our with new market- that the new rules in our industry industry.

ing opportunities. While we For instance, we present tremendous opportunity. don't know are negotiating to when this retail sell electricit to competition small utilities in a'reas beyond aries of our traditional operating will occur, we are convinced it will those we have traditionally served. territory. It also means that another come. That's why we are taking Also, we will be seeking utility company, or a non-utility actions that will enable us to be opportunities in power plant generator, could attempt to sell successful in a more competitive construction and operation outside electricity to utilities that are now environment.

our service territory and outside receiving service from us. To take advantage of the new the United States (see article on We are reacting aggressively to opportunities in a restructured next page). this change in our marketplace. In utility industry, we are reducing The changes in our industry addition to negotiating with poten- our employment levels, we are usher in a new era of competition, tial customers outside of Central aggressively reducing our costs the likes of which we have not seen before. Exactly how does this competition come about?

Eastern Pennsylvania, we have successfully renegotiated long-term agreements with a number of small and we are vigorously implementing productivity gains. Initiatives that we have put in place in 1993

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The answer is very simple: utilities that we have served for involve an increase in these activi-Among other things, the 1992 years. ties as well as other actions.

QSS 8$ 8(SQK 88il - $S ncreased competition in the In all cases, employee teams in software that PP8cL people had

~udtky industry will make PPtkL the spirit of the company's Continu- developed for our use. In addition, a healthier corn p an . ous Performance Improvement we are marketing to other utilities a We are well positioned, with Process are helping to establish videotape that describes the benefits reasonable costs, excellent employ- stretch goals and to implement of a ground source heat pump.

ees, abundant capacity and a history improvements. (See following In our revenue enhancement of being innovative in the competi- article.) effort, the key is to identify areas in tive energy business. But, we are not By taking these aggressive cost- which we can provide new services, standing still. PP8rL is working to reduction measures, and by estab- or better services, at a lower cost take advantage of the opportunities lishing new plateaus in customer than is being provided by others.

that the new rules present. service, the company will be in an As part of this initiative we have Our initiatives are in three basic excellent position to take advantage named a business growth manager areas: resource management in the of the opportunities offered by the for the company a person who traditional business; revenue en- new regulatory rules. will be responsible for assessing hancement in the traditional business; ideas that might bring new revenues expanded business growth Revenue Enbancement into the traditional business.

ortunities. in tbe Traditional Business Resource Management We are also developing ways to Expanded Grotvtb in tbe Traditional Business raise revenues from new sources in Opportunities the traditional business.

We are developing ways to be This involves a concerted effort PP&L always has been a leader more productive in all our opera- to develop new products and in the electric power business. We tions. services for customers. For example, have every intention of remaining so.

At our power plants, we have the company is piloting the rental of Prior to the National Energy Act established cost targets based on the a whole-house surge protection of 1992, the electric power business future prices that will be set by the device to customers in the Allentown and the electric utility business were marketplace (see previous article on area. Along with this device, for a essentially the same thing. But the competition). Employee teams at fee, comes insurance against damage changing rules of our business have each of our plants are undertaking to electronic appliances from chang- separated the two. The generation activities to meet those targets. es in voltage. This is just one exam- portion of the electric power busi-Power plants are not the only ple of new "products" that we will ness is being opened up to all area in which we are developing offer to customers. companies, not just utilities.

productivity improvements. We are And, this effort is not confined to That means that any company establishing stretch goals, based on our residential market. There are now can build and operate a power the best practices in the industry, for opportunities in the industrial and plant, selling the electricity to utility our transmission and distribution commercial market. For instance, we companies. A utility that does not operations. are now offering energy-manage- aggressively enter the marketplace As a third part of the resource ment services to our larger business will no longer be in the electric agement initiative, the compa- customers. power business. Its opportunities for service organizations are im- Other utilities are another mar- growth will be very limited.

proving operational processes and ket. We recently sold to several other We are not satisfied with the lowering costs. utilities substation control computer prospect of limited growth.

We believe that we bring some In addition to the worldwide hen you strip away all special abilities to the worldwide power effort, we are investing in ~the jargon, the Contin-power market, so we have decided allied businesses enterprises that > ~uous Performance Im-to step outside the boundaries of we understand but are outside our provement Process is Central Eastern Pennsylvania. This traditional scope. Any such allied just common sense.

will allow us to take full advantage businesses also would be operated It's common sense that the of the new opportunities in the outside the normal utility environ- people who are closest to the electric power business. ment. work those who are doing it-Therefore, our initiatives involve We do plan, however, to stay would have the best ideas regard-expanding beyond our traditional within areas akin to the energy ing how to improve. It's common boundaries. business. We will not consider, for sense that a team with diverse strengths will outperform any one individual.

It is that belief that has driven the development of CPIP.

The process was developed by joint union-management A utility that does not aggressively enter the marketplace will no longer a

team, which talked to hundreds of employees before making

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recommendations. In a year-be in the electric power business. long study, the team consid-ered a wide variety of options Its opportunities for growth and talked with hundreds of peo-will be very limited. ple from other businesses and in-dustries about implementing quality programs.

That team, in setting up the structure for the process, devel-oped a guiding premise:

We have completed a business example, getting into the food plan for PAL's entry in the world- service industry or building theme XVe will achieve excellence wide power market. The plan parks, or any other business about and ongoing success for calls for some small investment which we know little. Our expertise customers, employees and initially, which enables us to get is in energy and allied businesses. shareowners through con-experience in the market and devel- We will continue to concentrate our tinuous improvement by:

op the skills necessary to be a major efforts here.

player. The initiatives that we have

1. Serving our customers.

While the worldwide power kicked off over the past year put in With the changes taking initiative could include projects in place the key elements that will place in the utility industry, the United States, our study shows permit PAL to prosper in the future, customer satisfaction will be that, at this time, broader opportuni-ties exist outside North America.

as we have for the past seven decades.

crucial to the continued suc-~

cess of PP8i:L. To ensure our long-term financial health,

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"serving our customers" must

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become an obsession and the tion of the corporate vision and operational decisions as possi-focus of everything we do. business direction'is crucial to the ble.

success of CPIP and the company.

2. Striving to meet customer, em- 8. Creating a high level of team-ployee and shareowner ex- 5. Leaders role-modeling the work throughout the organi-pectations by being a cost- behavior they expect from zation.

competitive producer. others. In the competitive environment, The fundamental and underlying We look to our leaders to "live" our greatest opportunity for suc-purpose of CPIP is to enable the our shared values, both in the be- cess clearly lies in the collective company to progress from its havior they demonstrate and in efforts of all employees. The po-current level of performance to a the behavior they recognize and tential of all people working to-higher future level. The interests support. gether is far greater than the most significant individual efforts.

The team selected a butterfly as a symbol for the change that We will achieve excellence PAL must undergo to successfully implement this process. CPIP, like a and ongoing success for customers, butterfly, is about metamorphosis about totally changing the face of employees and shareowners PP8tL.

through continuous improvement. We are making progress. A joint union-management team is over-seeing the process. Continuous Improvement Managers have been appointed in each. of the major de-of PP8cL's primary stakeholders- 6. Creating a climate of trust. partments to provide support for the employees, customers and Trust is not an issue that needs to effort. Every employee in the com-shareowners are served by our be addressed only between man- pany is receiving CPIP orientation in ability to be a cost-competitive the first quarter of 1994.

agers and non-managers. It is producer. something that needs to be a pri- At the heart of the process will be ority for all employees in all employee teams looking for a

3. Measuring and assessing per- relationships. Each individual better way to serve customers and to formance constantly. needs to evaluate his or her own improve productivity. During 1994, When things are not measured, we expect that teams will be estab-actions in regard to improving they usually don't improve. Mea- the level of trust in the organiza- lished throughout the organization.

surement and assessment will tion.

provide valuable information in CPIP is crucial to the com-establishing ongoing improve- 7. Empowering people to think pany's future.

ment plans. and act. While our strategic initiatives The concept of empowerment, in provide us with the direction for the Ensuring that all employees its simplest terms, means that future, CPIP provides us with a nderstand and support stra- people who are closest to the method to get there. CPIP provides tegic and operational plans. work have the authority and the the framework to change the very A clear, consistent communica- responsibility to make as many culture of PAL.

January February the Blizzard of '93 buries the service territory in a blanket of

~ President and Chief Operating ~ A cold snap leads to a new win-deep snow, but advance prepa-Officer William R Hecht ter peak record for electricity ration and long hours by PP8cL assumes the additional titles of use. In a one-hour period, cus-employees minimize service in-chairman and chief executive tomers use 6,130,000 kilowatt-terruptions.

officer Jan. 1, succeeding hours of electricity.

John T. Kauffman, who retired ~ A plan to reclaim open pit mines Distribution employee Francisco Dec. 31, 1992. Garcia dies from injuries sus-with power plant ash, providing economic and environmental tained when he accidentally

~ Frank A. Long, senior vice touched a 7,200-volt under-president-System Power & Engi- benefits for PP&L and the com-munities it serves, is outlined to ground power line in February.

neering, becomes executive vice It is the first job-related fatality at president and assumes the duties the public.

PP&L since May 1988.

and title of chief operating officer ~ The quarterly common stock from Hecht, effective Jan. 1. dividend is increased by 3.1 per- Harold W. Keiser, senior vice cent, from 40 cents a share to president-Nuclear since 1988,

~ Robert G. Byram, vice president- resigns to accept a position at 41.25 cents a share. PP&L has Nuclear Operations, is named another utility. Robert G. Byram, increased the common stock senior vice president-System senior vice president-System dividend every year since 1979.

Power & Engineering and Power & Engineering, is named becomes a member of the March senior vice president-Nuclear.

Corporate Management ~ Helen J. Wolfer retires as assis-Committee, effective Jan. 1. tant secretary and assistant trea-ril surer, effective March I, after PP8cL offers $ 275 million of first

~ PP&L offers $ 300 million of first 45 years with PP&L. mortgage bonds to redeem mortgage bonds to the public, $ 250 million of first mortgage and, using funds supplied by the ~ A fierce winter storm knocks out bonds with higher interest rates.

company, redeems $ 305 million electric service to 153,000 cus-of first mortgage bonds having a tomers. Most service is restored Raymond F. Suhocki, vice presi-higher interest rate. within 24 hours2.777778e-4 days <br />0.00667 hours <br />3.968254e-5 weeks <br />9.132e-6 months <br />. A week later, dent-Susquehanna Division, is j !s i .if I

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'T An employee belps dig out from tbe Blizzard A rail car fiillof low-sulfiir coal from outside Swollen by beavy rain and melting snoiv tbe of '93. Advance plannbig and bard worl. Pennsylvania is dumped at PAL's Bninner Susqaebarsna River spilled over its basil,s in Srougbout tbe company mbsbrstzed service interruptions to cssstomers.

Island power plant, as part of a test bans to belp Se company identify options to meet new clean.air requirements.

late Istarcb and early April, causing at Se company's Holtwood bydroelectric power plant.

floodb~

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amed vice president-System six training programs for and more than 100 other firms, Power, effective April 1. Susquehanna nuclear power opens to the public

~ Robert M. Geneczko, manager- plant operators.

~ Top business leaders, nationally System Planning, is named vice June president-Susquehanna Division, recognized experts and mem-succeeding Suhocki. bers of PP8tL management gath- ~ Harold G. Stanley and George T.

er at PAL's first Key Executives Jones are named vice president-

~ Customers get a $ 6 million de- Forum to discuss Pennsylvania's Nuclear Operations and vice crease in their electricity rates business future. president-Nuclear Engineering, because of adjustments to ac- respectively, effective June 1.

count for changing energy costs

~ PAL extends through 1998 an The restructuring of the Nuclear and state taxes the second employee and information ex-Department sharpens the focus rate decrease in 2 years. change agreement with Japan's Chugoku Electric Power Co. on day-to-day operations at the

~ PP8tL marketing personnel con- Susquehanna nuclear plant.

~ PP8cL offers $ 100 million of se-tinue their excellent showing in ries preferred stock, using the ~ Chairman Bill Hecht joins offi-the annual Pennsylvania Electric proceeds to retire four series of cials of federal and state agen-Association marketing competi- preferred stock with higher divi- cies and private sporting groups tion by winning half of the avail- dend rates. in signing an agreement to re-able awards. Later in the year, store the American shad to the

~ A new state-of-the-art control similar performance was exhib- Susquehanna River. PP&L's room simulator, used to train the ited in the national Edison Electric Holtwood hydroelectric dam will Institute marketing competition. people who operate the compa-ny's Susquehanna nuclear plant, is get two fish lifts by spring 1997.

Additionally, PAL's ground dedicated and placed in service. ~ The Susquehanna nuclear plant source heat pump program won op residential program honors.

~ The Idea Home at Bent Creek in earns the highest possible rating Lancaster County, a showcase of in a performance evaluation by May residential electric and thermal the Institute for Nuclear Power

~ A national independent review technology built by PAL in Operations, an independent in-board renews accreditation for partnership with a local builder dustry organization.

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Kobt Tada, president ofJapan's Cbugobu Procurement analyst 1tarl Tbomas (left) Pennsylvania Gov. Robert Casey (rigbt) and Electric Power Co. (left), and PAL Cbairman is one of tbe PAL volunteers wbo tutor iltaryland Gov. 1Villiam Donald Scbaefer Hecbt (rigbt), with interpreter, sign five- cbildren at an Allentown elementary scbool as release a sbad into tbe Susquebanna River, extension of an employee- and informa- part of PAL 2000, tbe company's business- symbolizing tbe return of Se migratory fisb to n.excbange agreement bettveen tbe education partnership effort. In Sis photo, be Se river as tbe result of PAL and other utilities Iwo companies. discusses Se program at tbe Lebigb Valley commiting to build fisb lifts at bydroelectric Dusbtess-Education Sbowcase. dams.

~ PP&L offers $ 125 million of first operations to better serve ries preferred stock. The pro-mortgage bonds. Proceeds are customers of its 11 member ceeds are used to retire three se-used to redeem $ 125 million of utilities. ries of preference stock with first mortgage bonds with a higher dividend rates.

~ Heavy air conditioner use during higher interest rate. a summer heat wave leads to a ~ Joining other utilities nation-

~ The Susquehanna nuclear plant new record for customer sum- wide, PP&L pledges to cooper-is named to the Nuclear Regula- mer electricity demand ate with the U.S. Department of tory Commission's list of the na- 5,409,000 kilowatt'-hours during Energy in helping formulate a tion's top safety performers be- a one-hour period. national policy on greenhouse cause of its "sustained high level ~ Turbine damage discovered after gas emissions.

of safety performance." It is the an automatic shutdown of Unit 1 September third straight appearance for at the Susquehanna nuclear Susquehanna on the NRC's bian-

~ The company's Comfort Home plant sidelines the generating nual good performer list. program is recognized as a "mod-unit for seven weeks.

el of environmental excellence"

~ The Pennsylvania Public Utility August by a group of 30 American envi-Commission rates PP&L's con- ronmental organizations.

~ Clair W. Noll, vice president-In-sumer complaint performance formation Services, retires after ~ PP&L begins exploring options the best among the state's major 33 years with PP&L. Michael D. to expand interim storage of electric utilities for the eighth Hill, manager-System Operation, spent uranium fuel from the straight year.

is named vice president-Informa- Susquehanna nuclear power tion Services to replace Noll, ef- plant while awaiting federal gov-July fective Aug. 1. ernment action on a permanent

~ The Pennsylvania-New Jersey- ~ Edward F. Reis, vice president- storage facility.

Maryland Interconnection, the Corporate Planning, retires, ef- PP&L offers $ 85 million of series regional power pool to which fective Aug. I, after 37 years preferred stock, using the pro-PP&L belongs, becomes an inde-with PP&L ceeds to retire two series of pre-pendent association. The pool coordinates bulk power ~ PP&L offers $ 115 million of se- ferred stock with higher divi-kWOI10 ABACA K>I,

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Tbe company's new Nortbeast Division Herb K'oodesbick, special assistant to tbe Ray Subocl,i, vice president-System Potver, beadquarters and ltledta Operations Center president for tbe Susquehanna nuclear power outlines PP&L's strategy for tbe future to a for tbe Susquebanna nuclear plant was a plant, mabes a point durbtg one of tbe plant's group of employees from System Operating~

unique fast.traclz project managed by PAL etnergency drills at tbe company's new iltedia Tbe strategy was explained by top executit~

and completed on lime and under budget. Operations Center. Nuclear safety engbteer to 7,700 employees in several bundred snralt.

Ricb flenry acted as a resource person for group meetings Ibrougbout tbe company.

tr~oodesbtck.

10

dend rates. $ 1.15 billion, making the year processing facility to a Pitts-PP8'cL's biggest ever for selling burg-based company, complet-

~ The company's new Northeast Division headquarters and Media new stocks and bonds to re- ing the phase-out of subsidiary deem higher-cost issues. mining operations.

Operations Center for the Susquehanna nuclear plant ~ A series of fuel-handling prob- December opens near Wilkes-Barre. lems during refueling of Unit 1 ~ Nance K. Dicciani, vice presi-October at the Susquehanna nuclear dent and business director of the power plant leads to a Nuclear Petroleum Chemicals Division of

~ Quality land management prac- Regulatory Commission inspec- Rohm and Haas Company, is tices and environmental educa- tion and a series of corrective elected to PP8tL's board of direc-tion earn PP8cL national recogni- actions by PP8cL. The unit's re- tors, effective Feb. I, 1994.

tion as the 1993 recipient of an turn to service is delayed further Edison Electric Institute land

~ A partnership agreement with by a decision to replace metal the Ministry of Energy and Elec-management award. supports for reactor pumps after trification of Ukraine is signed,

~ PP8cL and General Motors an- similar components developed calling for study tours and ex-nounce an electric vehicle test cracks at a nuclear plant in change visits.

drive program in Harrisburg. 'ississippi.

~ Charles E. Russoli, executive About 80 PP8cL customers will ~ Richard S. Barton, president of vice president and chief financial be selected to test-drive GM's U.S. Customer Operations for officer, retires as an employee electric "Impact" for two- and Xerox Corp., and a corporate and a director, ending a 38-year four-week periods in 1994. vice president of Xerox, is career at PP8'cL. Ronald E. Hill,

~ PP8cL offers $ 150 million of first elected a director of PP8'cL, effec- vice president and comptroller, mortgage bonds, using the pro- tive Jan. 1, 1994. is named senior vice president-eeds to redeem $ 125 million of Financial, effective Jan. I, 1994, first mortgage bonds having a November to replace Russoli as head of the higher interest rate, and to retire ~ Pennsylvania Mines Corp., Financial Department. Hill also short-term debt. IVith this trans- a PP8cL subsidiary, transfers joins the Corporate Management action, securities sales reach ownership of a coal- Committee.

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Doug Rebrer, manager-Safety and ifeallb During 1993, PAL produced ils firsl compre- Frank Lorrg, PAL's executfve vice president Services, reminds meter installer Lesler Dielricb bensive enviromnental report for sbareowners, and cbief operating officer pejt), and Vfadfrnfr be Lancaster Service Center about tbe customers, employees and tbe public. Tbe Paffmov of tbe Ukraine ftffnfstryof Energy and ortance of safe driving. Tbe company report, titled "Energy br iiarrnony Witb tbe Electrificatfon, sign an agreement under wbfcb oosted its safety au areness efforts during 1993 Environment," explains borv tbe company PAL rvill help Ul.raine a former Sovfet after a disturbing increase in employee provides reliable and economfcal electric Republic meet ils energy challenges.

accidents. service ublle protecting tbe environment.

REVIEW OF THE COMPANY'S FINANCIAL CONDITION AND RESULTS OF OPERATIONS Results of Operations debt and preferred stock with lower cost securities to reduce interest expense and dividends on preferred stock.

Earnings Earniny per share of common stock were $ 2.07 in 1993, $ 2.02 in Electric Energy Sales 1992 and $ 2.01 in 1991. Increasing economic activity in central System, or service area, sales were 31.1 billion kwh in 1993, an in-eastern Pennsylvania and the effects of hotter. than. normal weather crease of about 1.3 billion kwh, or 4.4%, over 1992. The effects of during the summer were the main reasons for the earniny improve- hotter weather during the summer, which resulted in higher air condi ~

ment. If weather had been normal, earniny would have been 2 cents tioner use, and the increased economic activity in central eastern per share lower in 1993. Weather conditions affect sales and earnings Pennsylvania were the primary reasons for the increases in system as heating and cooling demands change. To make valid comparisons sales. Sales in all major customer categories were higher in 1993 than of financial performance, the Company adjusts the figures to reflect in 1992. hlilder.than. normal weather depressed system sales in 1992 "normal" conditions as determined by historical weather data. primarily due to reduced use of electricity for heating by residential Earniny also benefited from continuing efforts to control operating and commercial customers. System sales were down an estimated 334 and maintenance costs and by the continuing refinancing of higher million kwh in 1992 due to milder-than-normal weather. The Com-cost securities to take advantage of favorable market conditions. pany estimates that if normal weather had been experienced in both In the fourth quarter of 1993, the Company recorded charges years, system sales for 1993 would have increased by 855 million against income that, in the aggregate, adversely affected net income kwh, or 2.8%, over 1992.

by about $ 18 million or 12 cents per share of common stock. The Actual sales to residential and commercial customers in 1993 in-charges related to: (i) credits to be included in the Company's Energy creased 439 million kwh, or 4.1%, and 334 million kwh, or 3.7%,

Cost Rate (ECR) due to entering a settlement agreement with corn. respectively, over 1992. The Company estimates that under normal plainants against the Company's ECR; (ii) the write-off of certain weather conditions for both years, sales to residential and commercial deferred retiree benefit costs; and (iii) the recognition of certain customers in 1993 would have increased 167 million kwh, or 1.5%,

employee benefit costs in connection with the adoption of a new ac- and 189 million kwh, or 2.1%, respectively, over 1992.

counting standard. These matters are discussed in more detail in the Industrial sales, which are not affected by weather conditions, in.

remainder of this review. creased 354 million kwh in 1993, or 4.0%, over 1992. The continued Earniny for 1992 and 1991 were affected by extremely mild growth trend in this category is an encouraging sign of increased in-weather. Earnings per share would have been 7 cents higher in 1992 dustrial activity.

and 6 cents higher in 1991 had there been normal weather in the System sales in 1994 are currently forecasted to be approximately Company's service territory. 31.7 billion kwh, an increase of 665 million kwh, or 2.1%, over 1993 Earnings per share over the last five years have essentially been flat, actual system sales, and a 771 million kwh, or 2.5%, increase over generally reflecting a slowdown in the rate of growth of energy sales, 1993 weather. normalized sales.

higher Susquehanna depreciation and increased competition. To Additional energy sales from marketing and economic development achieve continued earnings growth and to respond to this increased efforts is a key corporate initiative. These additional sales generally competition, the Company has begun strategic initiatives as explained will be realized over at least a two.year period, and possibly longer if under "Increasing Competition" on page 19. In addition, the Com. a major commercial or industrial customer is involved. The level of pany will continue its aggressive marketing and economic develop. additional sales estimated from these programs in 1993 was 556 ment programs aimed at increasing energy sales, will continue to em- million kwh. The Company's 1994 marketing and economic develop-phasize effective cost reduction and will also continue to take advan- ment goal is to achieve annual net sales growth of 650 million kwh.

tage of favorable financial market conditions to refinance long. term Competition from other fuel sources for certain energy applications EARNINGS PER SHARE COhfhfON STOCK BOOK VALUE WEATHER NORhfALIZED VS. ACTUAL VS. hfARKET PRICE Dollars r share Dollars r share 25 20 1.50 l5 l0 0.50 00.0 f6 90 9i 92 93 89 90 9l 92 93

~ Acruat earninSS per share ~ Book balue per share

~ Wearher normalized earninas per share ~ Marker price per share 12

has increased in recent years. The Company's 'electric heat market ments, net of foregone PJM interchange savings which are included in hare in new residential construction has dropped from 69% in 1991 the Company's ECR, totaled $ 35.0 million in 1993, $ 35.0 million in o 65% in 1993. The Company's goal for 1994 is a 68% electric heat 1992 and $ 35.4 million in 1991. The Company currently expects market share in new residential construction. about $ 35 million of revenues from these transactions during 1994.

c Certain large customers have considered self-generation of electrici- Increased competition involving capacity credit transactions has ty over the past several years. However, the Company has lost no reduced the price received for such sales.

significant load to customer-owned generation. The Company is continuing to look for opportunities to derive ad.

Total electric energy sales, which include contractual sales to other ditional revenues due to its strong generating capacity position. The utilities and interchange power sales, were 42.3 billion kwh in 1993, amount of revenues from these types of transactions depends on an increase of 0.1 billion kwh, or 0.2%, compared to 1992. many factors, and it is difficult to predict the amount of revenues the Contractual sales to other major utilities include: (i) energy sold to Company will ultimately realize from these transactions.

Atlantic City Electric Company (Atlantic), Baltimore Gas & Electric The Company, the Pennsylvania Office of Consumer Advocate Company (BG&E) and Jersey Central Power & Light Company OCP&L) (OCA) and certain industrial customers have reached a settlement pursuant to long-term contracts under which these utilities purchase a agreement resolving all complaints pending against the ECR. The specified percentage of the capacity and related energy from agreement provides, among other things, for crediting the 1994-95 Company-owned generating units; and (ii) energy sold on a short term ECR with a portion of the receipts from capacity credit sales. See basis to other electric utilities. Contractual sales to other utilities were "Rate Matters" below for additional information.

about 7.1 billion kwh in 1993, or 2.5% lower than 1992.

Interchange power sales to Pennsylvania. New Jersey Itlaryiand Inter-connection Association (PJM) utilities were about 4.1 billion kwh in Rate Matters 1993, or 19.7% lower than 1992. The decrease was primarily due to The OCA and certain industrial customers filed complaints against increased system sales and an increase in the availability of nuclear the Company's ECR for the last four years. The complainants argued, generating capacity of other PJM utilities, which reduced the opera. among other things, that the Company should not be able to recover tion of certain of the Company's generating units. the cost of energy purchased from non utility generating companies on a current basis, and that revenues from the sale of capacity. related and transmission entitlement transactions should be credited against Capactty-Related and Transmlsslon the ECR.

Entitlement Transactions As a result of discussions which began in late 1993, the Company The Company's strong generating capacity position has enabled it and the complainants to the Company's ECR reached a settlement o enter into a number of capacity-related transactions with other agreement having major provisions that credits the 1994-95 ECR with lectric utilities. These transactions include: (i) the sale of capacity a portion of the receipts from capacity credit sales from April 1990 credits but no energy to other utilities in the PJM to enable them to through December 31, 1993; credits a portion of the receipts from satisfy their PJM contractual capacity obligations; (ii) agreements with future capacity credit sales to the ECR; excludes from recovery both PJM and non PJM utilities for the reservation of output during through the ECR a portion of the Pennsylvania Public Utility Commis-certain periods from the Company's Martins Creek units, with the op- sion (PUC)-jurisdictional amount of deferred retired miners'ealth tion to purchase energy from those units; and (iii) arrangements care benefits costs; and settles all pending complaints against the whereby other PJM utilities can purchase the Company's entitlements Company's 1990-91 through 1993-94 ECRs.

to use the PJM transmission system to import energy from utilities This agreement is subject to PUC approval. As a result of this agree-outside the PJM. ment, in the fourth quarter of 1993, the Company recorded a charge Revenues from the sale of capacity credits, the reservation of output to expense of $ 17.1 million, which after income taxes, reduced net in-from the tbiartins Creek units and the sale of transmission entitle- come by approximately S9.7 million or 6.4 cents per share of SOURCES OF ENERGY DISPOSITION OF ENERGY 30 Biltio of kwh Billions of kwh 30 40 40 30 30 20 20-

>, brae Cii 10 I I IO 0

09 90 9l

~

~

Hydro and purchased power 92 93

~ 09 90 9l 92 Compsny use, line losses and other 93 Oil fired generation and other C3 Irucfear generation

~ interchange power sales C3 Contractual sales to other utilities W Coal.fired generation W S>stem sales to customers.

13

common stock. The Company estimates that about $ 8 million of 1994 Tariffs subject to PUC jurisdiction accounted for approximately 82%

capacity credit sales will be credited to the ECR. of the Company's revenues from energy sales in 1993. The remaining The Company has negotiated new five-year, lower. priced sales con- 18% of such revenues resulted from sales regulated by the FERC and tracts with certain small utilities it currently serves. The contracts are include the Company's PJhi interchange power sales.

subject to Federal Energy Regulatory Commission (FERC) approval and Billings to customers under PUC jurisdiction include: (i) base rate will reduce rates to these small utilities by about $ 3.6 million in 1994 charges; (ii) the ECR which is a supplemental charge or credit for fuel and 1995 and by about an additional $ 4.1 million for the years 1996 and other energy costs over or under the levels included in base through 1998. rates; (iii) a state tax adjustment surcharge (STAS) which adjusts retail In connection with the new contlacts, in the fourth quarter of customers'ills for the effects of changes in state tax rates; and (iv) a ~

1993, the Company wrote off $ 6.6 million of deferred retired miners'ealth special base rate credit adjustment (SBRCA) that flows through to care benefits costs and $ 2.3 million of postretirement benefits customers the effects of certain nonrecurring items.

other than pensions applicable to FERC-jurisdictional services. The The last base rate increase for PUC-jurisdictional customers went in.

charge to expense amounted to $ 8.9 million, which after income to effect in April 1985. The Company is unable to predict the timing taxes, reduced net income by $ 5.1 million or about 3.4 cents per of its next PUC-jurisdictional base rate filing, but intends to delay that share of common stock. filing for as long as possible.

Billings to utilities are subject to FERC jurisdiction. In the case of certain small utilities, billings include base rate charges and a sup.

plemental charge or credit for fuel costs over or under the levels in-Operating Revenues cluded in base rates. See "Rate Matters" on page 13 for additional in.

Total operating revenues decreased $ 17.1 million, or 0.6%, in 1993 formation concerning rates for these customers.

from 1992. Details of changes in operating revenues from the prior The FERC also regulates contractual sales to other major utilities, year are shown in the schedule below. Pjhi interchange power sales and capacity-related and transmission en.

titlement transactions. Sales to Atlantic, BG&E and JCP&L are made at a price covering the Company's cost of service, including a return on investment. Energy sales relating to the reservation of output from the Changes in Operating Revenues thiartins Creek units are generally made at a price equal to the cost of 1993 1992 1991 fuel plus an amount to reflect foregone interchange savings. PJM inter-(8fillions of Dollars) change power sales are made at a price equal to the midpoint be-tween the sellers'ctual costs and costs that the buyers would have Recovery of fuel and energy costs... $ (20.0) $ 44.0 $ 79.9 incurred to produce the energy. Capacity-related and transmission en-ECR credits to be applied in 1994 ... (12.7) titlement transactions are made at prices negotiated by the Company Change in customer usage ......... 58.9 20.6 38.2 and the purchaser, subject to a price cap accepted by the FERC.

Roll.in of state taxes into base rates .. 26.4 State tax adjustment surcharge ...... (32 0) 22.2 22.0 Special base rate credit adjustment... (5 4) (22.6) (16.7)

Wholesale rate increase............ 2.4 Capacity. related and transmission Fuel expense entitlement transactions.......... (0.4) 3.1 Fuel expense for 1993 decreased by $ 38.5 million from 1992. The Contractual sales to other decrease was primarily due to lower unit fuel costs for coal-fired major utilities.................. (16.4) 7.7 9.1 generation, partially offset by higher oil-fired generation and the PJM interchange power sales........ (14.8) (68.8) (37.0) write.off of $ 11.0 million of the deferred cost of retired miners'ealth Other . care benefits. For 1993, the cost of coal delivered to the Company's generating stations declined to $ 36.23 per ton from $ 41.44 per ton Total $ (17.1) $ 3.4 $ 102.8 for 1992.

SOURCES OF CAPITAL USES OF CAPITAL I

hlilgons of dolhrs >2 ~ hiiliions of douars l,800 l,800 I,S00 l,600 l,400 l,400 200 I I I I l,200 l,000 1,000 9l

~

89 90 9l 92 93 Other (prindpally capital tease obligations) ~

~

89 Other 90 Security retirements 92 93 C3 Outside rtnandng (sales of debt and equity securities) C3 Construction, nuclear fuel and other

~ internal sources (principally from operations plus equity AFVDC less dividends) teased property 14

Potver Purchases subject to an annual increasing amount of depreciation was $ 116 In 1993, power purchases were $ 278.8 million, an increase of $ 3.3 million in 1993 and will increase annually to $ 192 million in 1998 and million over 1992. The increase was the result of additional purchases then decline to $ 102 million in 1999.

from other electric utilities and the PJM, partially offset by a lower vel of purchases from non.utility generating companies. Taxes Effective January I, 1993, the Company adopted SFAS 109, "Ac-counting for Income Taxes." Under the provisions of SFAS 109, the Other Operation, ilfatntenance and Depreciation Company, in January 1993, recorded an increase of approximately $ 1.1 The reduction in revenues resulting from flowing the benefits of a billion in its deferred tax liability for tax benefits previously flowed settlement of certain claims arising from construction of the Sus- through to customers and for other temporary differences. The in.

quehanna station through to customers in the SBRCA is offset by a creased ux liability was offset by a corresponding asset representing credit to other operation expense on the Consolidated Sutement of the future revenue expected through the ratemaking process to pay Income (see Financial Note 3). The credit was $ 14.3 million in 1993 for the taxes based on the established regulatory practice and and $ 8.5 million in 1992. legislative history in Pennsylvania permitting recovery of actual taxes During 1993, the Company recorded an estimated minimum liability payable.

of $ 4.4 million for the cost of environmental remediation at several In August 1991, Pennsylvania enacted legislation that increased the sites. At December 31, 1993, the estimated minimum liability recorded Company's state taxes by approximately $ 38 million on an annual for such remediation totaled $ 5.2 million. The Company's share of ac- basis. The Company recovered substantially all of the increased state tual remediation costs may be greater than the minimum amounts ac- taxes through application of a surcharge on billings to retail customers crued, but the Company at this time cannot reasonably estimate its and through billings for the contractual sale of capacity and related expected cost. energy to other utilities. Except for recovery of a prior undercollec-During 1993, the Company wrote off $ 9.1 million of obsolete and tion, the tax surcharge was rolled into the Company's base rates effec-excess materials and supplies at its fossil fueled steam generating sta- tive April I, 1993.

tions. Of this amount, $ 2.2 million was charged to other operation In August 1993, the Omnibus Budget Reconciliation Act of 1993 expense and $ 6.9 million was charged to maintenance expense. was enacted, which contains a provision that increased the Company's In December 1993, the Company adopted Statement of Financial federal income tax rate from 34/o to 35/o retroactive to January I, Accounting Standards (SFAS) 112, "Employers'ccounting for 1993. This higher tax rate increased the Company's federal income tax Postemployment Benefits," as discussed in Financial Note 13. The expense for 1993 by about $ 5.9 million. Additionally, the Company adoption of SFAS 112 resulted in a $ 5.5 million charge to other opera. recorded an increase in deferred income tax liabilities and taxes tion expense. recoverable through future rates of $ 79.5 million due to the increase Excluding the credits associated with the SBRCA, the accruals for in the federal tax rate.

the environmental remediation costs, the recognition of obsolete and xcess materials and supplies and the expense associated with the Ftnanctng Costs doption of SFAS 112 discussed above, other operation expense re- The Company has continued to take advanuge of opportunities to mained essentially unchanged in 1993 compared to 1992. reduce its financing costs by the retirement of long. term debt and The Company intends to reduce the number of full.time employees preferred and preference stock with the proceeds from the sales of by approximately 6.8/0 from 8,043 at year.end 1991 to about 7,500 securities at a lower cost. Interest on long. term debt and dividends on by the mid-1990s. This is one of the actions being uken to contain preferred and preference stock have decreased by $ 25 million from costs and keep the price of the Company's electric service corn. 5285 million in 1990 to $ 260 million in 1993. Additionally, interest on petitive. This reduction is expected to come primarily from normal at- short. term debt has decreased by 513 million for the same period.

trition and close examination of the need to fill vacancies. As of year-end 1993, the number of full time employees was 7,677.

The amortization of'the deferred income effect of adopting the in- Financial Condition ventory method of accounting for power plant spare parts is credited to maintenance expense on the Consolidated Statement of Income Financing and Ltqutdtty (see Financial Note 3). Excluding this amortization, which amounted For the years 1991-1993, the Company issued 51.39 billion of long.

to 524.3 million in 1993 and 523.5 million in 1992, and the write off term debt, $ 300 million of preferred stock and about 521 million of of obsolete and excess materials and supplies as discussed above, common stock, and also incurred $ 218 million of obliytions under maintenance expense decreased by 514.1 million, or 6.3/o, in 1993 capiul leases (primarily nuclear fuel). In 1993, the Company sold compared to 1992. The reduction in maintenance expense resulted 5850 million principal amount of first mortyge bonds and 5300 primarily from lower costs associated with maintaining the Company's million of preferred stock, increased its short. term debt by $ 43 mil-generating stations. lion and issued 57 million of common stock to the Employee Higher depreciation expense in 1993 reflects the annual increase Stock Ownership Plan. During the year, the Company retired $ 809 associated with the method of depreciating the Susquehanna station million of long term debt and $ 343 million of preferred and and the depreciation of new property, plant and equipment placed in preference stock.

service. As approved by the PUC and the FERC, depreciation expense After the payment of dividends, internally generated funds during for the Susquehanna station will increase annually through the year the years 1994 1996 are currently expected to provide approximately 1998. In 1993, the amount of depreciation expense applicable to the 86%%d of the Company's construction expenditures.

Susquehanna station exceeded the amount that would have been Sales of securities will be undertaken during the 1994.1996 period recorded using the straight. line method, resulting in an amortization as needed to meet the Company's capital requirements, to meet a total f previously deferred depreciation. Beginning in 1999, depreciation of $ 166 million of long-term debt maturities and preferred stock sink-vill change to the straight-line method at a level substantially less ing fund requirements and to provide funds for the early retirement than the amount expected to be recorded in 1998. The amount of of high cost securities if such retirements are determined to be ap-depreciation applicable to that portion of the Susquehanna station propriate in the light of market conditions and other factors. The 15

Company expects to issue $ 55 million of common stock in 1994 of AFUDC recorded will depend on the timing and level of construc-through its Dividend Reinvestment Plan. In addition, depending on tion work in progress as well as the rate treatment afforded the capital market conditions and other factors, the Company plans to issue up expenditures required to comply with the clean air legislation. Under to an additional $ 150 million of preferred stock through the end of current Pennsylvania law, construction work in progress for non-1994, of which about $ 80 million is expected to be used to refinance revenue producing assets, such as capital expenditures for pollution higher cost preferred stock at a lower cost and the balance is to pro- control equipment, can be claimed in rate base.

vide financing for the Company's capital requirements. The Company also plans to issue up to an additional $ 750 million principal amount Fbiancial Fndleators of first mortgage bonds through the end of 1994, which is expected The Company earned a 13.06/o return on average common equity to be used to refinance higher cost first mortgage bonds at a lower during 1993, down slightly from the 13.11/o earned in 1992. The ratio cost. Of this amount, $ 300 million is expected to be redeemed of the Company's pretax income to interest charges increased slightly through the provisions of the maintenance and replacement fund from 3.2 times in 1992 to 3.3 times in 1993. The Company increased under the Company's Mortgage. In addition, 'the Company expects to common stock dividends from an annual per share rate of $ 1.60 in arrange for the refinancing of $ 169 million of higher cost tax-exempt securities issued to provide pollution control and solid waste disposal facilities at the Company's generating stations.

The Company's ability to issue securities during the 1994-1996

'f 1992 to $ 1.65 in 1993. The book value per share of common stock increased 2.4/0 from $ 15.58 at the end of 1992 to $ 15.95 at the end 1993. The ratio of the market price to book value of common stock was 169/0 at the end of 1993 compared with 175/0 at the end period is not expected to be limited by earnings or other issuance of 1992.

tests. To enhance financing flexibility, a $ 140 million revolving credit arrangement is maintained with a group of banks and is used prin- Termbtation of Coal-ijfbting Operations cipally as a back.up for the Company's commercial paper and $ 60 The Company has ceased its subsidiary coal. mining operations due million in credit arrangements are maintained with a group of banks principally to the depletion of coal reserves and the high cost of to provide back-up for the Company's commercial paper and short-mined coal as compared to the price of coal purchased on the open term borrowings of certain subsidiaries. The Company also maintains market. One of the three operating mines closed at the end of June a $ 5 million bank line of credit. No borrowings were outstanding at 1991. A second operating mine closed at the end of March 1992, and December 31, 1993 under these arrangements.

a third mine was sold in September 1992. A coal processing and loading facility was sold in November 1993, completing the planned Capital Expenditure Requirements phase-out of coal. mining operations.

The schedule below shows the Company's actual capital expen. The Energy Policy Act of 1992 (Energy Act) imposed a new liability ditures for electric utility operations for the years 1991-1993 and cur- on the Company or its coal. mining subsidiaries for the health care of rent projections for the years 1994-1996. Construction expenditures retired coal miners previously employed by those subsidiaries. The during the years 1991.1993 totaled about $ 1.2 billion and are expected estimated liability amounts to approximately $ 68 million on a net pre~

to be about $ 1.3 billion during the years 1994-1996. sent value basis. At the time coal. mining operations ceased, subsidia~

mining companies had accrued $ 32 million for anticipated payments to the miners'ealth care trust funds to provide for health care Allowance for Funds Used Durbig Construction benefits of retired miners. Under the Energy Act, the Company or its The allowance for funds used during construction (AFUDC), a non. subsidiaries will be directly liable for these benefits and the $ 32 cash credit to income, accounted for about 5/0 of earnings in 1993. million will not have to be paid to the trust funds. The Company in-In 1994, AFUDC is expected to increase as the Company accelerates tends to use the amount accrued by its subsidiary mining companies capital expenditures to comply with clean air legislation. The amount to partially offset the new liability, 1991 Actual 1992 Capital Expenditure Requirements (a) 1993 1994 Projected (1fillions of Dollars) 1995 1996 Construction expenditures Generating facilities...... $ 124 $ 136 $ 142 $ 94 $ 107 $ 74 Transmission and distribution facilities ... 165 186 173 183 183 192 Environmental 11 13 65 135 55 105 Other 37 52 51 59 53 51 337 387 431 471 398 422 Nuclear fuel owned and leased 41 42 64 44 58 82 Other leased property. 17 20 20 27 22 23 Total. $ 395 $ 449 $ 515 $ 542 $ 478 $ 527 (a) Capital expenditure plans are revised from time to time to reflect changes in conditions.

Actual expenditures may vary from those projected because of changes in plans, cost fluc-tuations, environmental regulations and other factors. Construction expenditures include AFUDC which is expected to be less than S25 million in each of the years 1994-1996.

In December 1992, the Company recorded an additional liability of lower sulfur fuel, emission allowance purchases, sales or trades, and approximately $ 36 million representing the balance of the liability im- the amount and timing of FGD will be determined based on FGD in-posed by the Energy Act for health care benefits for retired coal stallation costs, fuel cost and availability, and emission allowance miners. The charge to expense was deferred. The net PUC- prices.

urisdictional amount of this liability is $ 30 million, and in 1993 the The Company currently estimates that the cost of compliance with UC permitted the Company to begin recovery of these costs ap- the Phase II sulfur dioxide standards will require additional capital ex-plicable to retail customers through the ECR over ten years. The OCA penditures in the later half of the 1990s of $ 400 million to $ 500 and certain industrial customers liled complaints against the Com. million (in estimated,1994 dollars) and additional operating expenses pany's 1993.94 ECR opposing, among other things, the Company's which will result in an increase in customer rates (based on 1993 recovery of these costs. revenue levels) of about 3/0 above the increase expected to result In the fourth quarter of 1993, the Company charged to expense from Phase I compliance with the sulfur dioxide standards of the

$ 11.0 million of the deferred cost of retired miners'ealth care legislation and installation of low nitrogen oxide'urners.

benefits representing all of the FERC-jurisdictional portion of the The ambient ozone attainment provisions also require modeling of deferral and part of the PUC-jurisdictional portion of the deferred nitrogen oxide and volatile organic compound emissions in the costs. The write-off was related to the ECR agreement and the Northeast Ozone Transport Region to determine what further reduc-agreements to reduce rates to certain small utilities discussed on page tions are needed beyond the RACT requirements to achieve ambient 13 under the caption "Rate Matters." The Company expects to recover ozone attainment. If the results indicate further reductions are needed the remaining PUC jurisdictional amount of deferred retired in power plant nitrogen oxide emissions, the Company may be re-miners'ealth care benefits costs of $ 24.1 million through the ECR. quired to install additional nitrogen oxide reduction equipment, such as selective catalytic reduction, on some or all of the fossil units around 2000. The Company's preliminary estimates indicate that the Clean Afr Legislation anti Other Environnrental Matters cost of compliance could require additional capital expenditures of up The Federal Clean Air Act Amendments of 1990 deal, in part, with to $ 600 million (in estimated 1994 dollars) and additional operating acid rain, attainment of federal ambient ozone standards and toxic air expenses which will result in a further increase in customer rates of emissions. The acid rain provisions, which are contained in Title IV of as much as 4/0 (based on 1993 revenue levels).

the legislation, specify Phase I sulfur dioxide emission limits on about In addition to acid rain and ambient ozone attainment provisions, 55/0 of the Company's coal. fired generating capacity by January I, the legislation requires the Environmental Protection Agency (EPA) to 1995, and more stringent Phase II sulfur dioxide emission limits for conduct a study of hazardous air emissions from power plants.

all of the Company's fossil-fueled generating units by January I, 2000. Adverse findings from this study could cause the EPA to mandate ad-The Company expects to meet the 1995 Phase I sulfur dioxide stan- ditional ultra high efficiency particulate removal baghouses or dards by the use of lower sulfur coal, additional processing of coal specialized flue gas scrubbing to remove certain vaporous trace metals through cleaning plants, and the installation of scrubbers at the Con. and certain gaseous emissions. If it is determined that the installation maugh station, in which the Company has an 11.39/o ownership in. of such additional equipment is required, the Coinpany's preliminary crest. The Company may also choose to limit the generation of cer- estimates indicate that the cost of compliance could require additional tain units and to bank or trade emission allowances among its capital expenditures of up to $ 400 million (in estimated 1994 dollars) generating units or with other utilities to the extent permitted by the and additional operating expenses which will result in a further in-legislation. crease in customer rates of as much as 2%%d (based on 1993 revenue The acid rain provisions also require installation of low nitrogen ox- levels).

ide burners on each unit by the same date that sulfur dioxide limits Under current Pennsylvania law, construction work in progress for apply to that unit. In addition, the ambient ozone attainment provi- non revenue producing assets, such as capital expenditures for pollu-sions contained in Title I of the legislation specify other nitrogen ox- tion control equipment, can be claimed in rate base.

ide emission reductions. In this regard, the legislation defines a In February 1993, the PUC adopted a policy statement regarding the Northeast Ozone Transport Region that includes all of Pennsylvania in trading and usage of, and the ratemaking treatment for, emission addition to all states in the Northeast from northern Virginia to Maine. allowances by Pennsylvania electric utilities. The policy statement All major stationary sources within the region must install reasonably determines, among other things, that the PUC will not require ap.

available control technology (RACT) for nitrogen oxide emissions by proval of specific transactions and the cost of allowances will be May 1995. recognized as energy-related power production expenses and The Company expects to meet this RACT requirement by installing recoverable through the ECR.

low nitrogen oxide burners on the Phase I units as required by the The Pennsylvania Air Pollution Control Act, as amended, im-acid rain title and by advancing the installation of low nitrogen oxide plements the 1990 federal clean air legislation. The state legislation burners on certain Phase II units, where technically feasible, that essentially requires that new state air emission standards be no more would have been required in 2000 by the acid rain title. stringent than federal standards. This legislation has no effect on the The Company currently estimates that the cost of compliance with Company's plans for compliance with the Federal Clean Air Act the Phase I sulfur dioxide standards and installation of the low Amendments of 1990.

nitrogen oxide burners will require capital expenditures of about $ 200 Until action has been taken by the appropriate regulatory bodies, million (in estimated 1994 dollars) and additional operating expenses the Company will not be able to determine the exact method of com-which will result in an increase in customer rates of about 1.5/o pliance with the acid rain, ambient ozone and hazardous air emission (based on 1993 revenue levels). provisions of the legislation, or the cost thereof and its impact on To meet the Phase II acid rain sulfur dioxide emission standards, customer rates.

the Company expects to install flue gas desulfurization (FGD) on up The Pennsylvania Department of Environmental Resources (DER) 60/. of its coal. fired generating capacity, to continue to purchase regulations governing the handling and disposal of industrial (or ower sulfur coal for its remaining generating capacity and to bank or residual) solid waste require the Company to submit detailed informa.

trade emission allowances among its generating units or with other tion on waste generation, minimization and disposal practices. They utilities to the extent permitted by the legislation. The exact mix of also require the Company to upgrade and repermit existing ash basins 17

at all of its coal. fired generating stations by applying updated stan. about $ 137 million, of which about $ 68 million is included in the dards for waste disposal. Ash basins that cannot be repermitted are re- Company's estimate of 1994-1996 construction expenditures shown on quired to close by July 1997. Any groundwater contamination caused page 16. Actions taken to correct groundwater degradation, to comply by the basins must also be addressed. Any new ash basin must meet with the DER's regulations and to address waste water control are also the rigid site and design standards set forth in the regulations. In addi- expected to result in increased operating costs'in amounts which are, tion, the siting of future facilities at Company facilities could be not now determinable but could be material.

affected. The issue of potential polychlorinated biphenyl (PCB) contamina.

The fly ash basin at the Martins Creek station and the dry fly ash tion at certain of the Company's substations and pole sites is currently disposal area at the Montour station are expected to comply with the being pursued by the DER. In this regard, the DER sent the Company DER regulations. However, the fly ash basins at other fossil fueled a proposed Consent Order under which the Company would assess generating stations, bottom ash basins at all fossil. fueled generating and, if necessary, remediate sites where PCB contamination may exist.

stations and the coal refuse basin at the Brunner Island station do not The Company is continuing to negotiate with the DER. The costs of meet the new requirements and must be retired by July 1997. The addressing these PCB issues are not now determinable but could be Company, in addressing the requirements of these regulations, plans material.

to install dry fly ash handling systems'at the Brunner Island, Sunbury At December 31, 1993, the Company had accrued $ 5.2 million, and Holtwood stations. The Company, with siting assistance from a representing the minimum amount the Company at this time can public advisory group, plans to use the dry fly ash from the Sunbury reasonably estimate it will have to spend to remediate sites in.

and Holtwood stations to reclaim strip mines in the anthracite coal volving the removal of hazardous or toxic substances. The Company region. The Company is exploring opportunities to beneficially use is involved in several other sites where it may be required, along with coal ash from Brunner Island in various roadway construction pro- other parties, to contribute to such remediation. Some of these sites jects in the vicinity of the plant that may delay or preclude the need have been listed by the EPA under the federal Comprehensive for a new disposal facility. Environmental Response Compensation and Liability Act of 1980, as Groundwater degradation related to fuel oil leakage from amended (Superfund), and others may be candidates for listing at a underground facilities and to seepage from coal refuse disposal areas future date. Future clean-up or remediation work at sites currently and coal storage piles has been identified at several generating sta- under review, or at sites currently unknown, may result in material tions. Many requirements of the DER regulations address these additional operating costs which the Company cannot estimate at groundwater degradation issues. The Company has reviewed its this time.

remedial action plans with the DER. Remedial work has begun at one Concerns have been expressed by some members of the scientific generating station, and remedial work may be required at others. community and others regarding the potential health effects of elec-The DER has adopted, and recently revised, regulations to imple- tric and magnetic fields (EMF). These fields are emitted by all devices ment the toxic control provisions of the Federal Water Quality Act of carrying electricity, including electric transmission and distribution 1987 and to advance Pennsylvania's toxic control progtam. These lines and substation equipment. Federal, state and local officials are regulations authorize the DER to use both biomonitoring and a water focusing increased attention on this issue. The Company is actively quality based chemical-specific approach in National Pollutant participating in the current research effort to determine whether or Discharge Elimination System (NPDES) permits to control toxics. In not EMF causes any human health problems and is taking steps to the third quarter of 1993, the Company received a new NPDES permit reduce EMF, where practical, in the design of new transmission and for the Montour and Holtwood stations. The Montour permit contains distribution facilities. The Company is unable to predict what effect very stringent limits for certain toxic metals and increased monitoring the EMF issue might have on Company operations and facilities.

requirements. More toxic reduction studies will be conducted at Mon- In complying with statutes, regulations and actions by regulatory tour before the permit limits become effective. Additional water treat- bodies involving environmental matters, including the areas of water ment facilities may be needed at Montour, depending on the results of and air quality, hazardous and solid waste handling and disposal and the studies. At Holtwood, toxics are required to be monitored at the toxic substances, the Company may be required to modify, replace or fly ash basin until its closure in 1997. No limits have been set at this cease operating certain of its facilities. The Company may also incur point. The Company will therefore comply with an implementation material capital expenditures and operating expenses in amounts schedule for such closure and for construction of a new dry ash which are not now determinable.

handling system at Holtwood.

Uranium Enrichment Decontamination and The Company currently estimates that about $ 238 million of capital Decommissioning Fnnd expenditures could be required to comply with the residual waste regulations, correct groundwater degradation at fossil. fueled The Energy Act established the Uranium Enrichment Decontamina.

generating stations and address waste water control at Company tion and Decommissioning Fund (Fund) and provides for an assess.

facilities. Such expenditures during the years 1994.1996 could total ment on domestic utilities with nuclear power operations, including

the Company. Assessments are based on the amount of uranium a former or inactive employees after employment but before retire-utility had processed for enrichment prior to enactment of the Ene'rgy ment. In connection with the adoption of SFAS 112, the Company Act and are expected to be paid to the Fund by such utilities over a recorded a charge to operating expense of $ 5.5 million, which after 15.year period. Amounts paid to the Fund are to be used for the income taxes, reduced net income by $ 3.1 million or about 2.1 cents ltimate decontamination and decommissioning of the Department of per share of common stock.

'nergy's uranium enrichment facilities. The Energy Act states that the assessment shall be deemed a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in all jurisdictions in the same manner as the utility's other fuel costs.

As of December 31, 1993, the Company's recorded liability for its Acconntfng Statement Adopted After December 31, 1993 total assessment amounted to about $ 34.5 million, The liability is sub- Effective January I, 1994, the Company adopted SFAS 115, "Ac-ject to adjustment for inflation. The corresponding charge to expense counting for Certain Investments in Debt and Equity Securities." SFAS was deferred because the Company includes its annual payments to 115 addresses the accounting and reporting for investments in equity the Fund of approximately $ 2.6 million, subject to adjustment for in- securities that have readily determinable fair values and for all in.

flation, in the ECR which is in the Company's PUC tariffs and in the vestments in debt securities. The adoption of SFAS 115 did not have a fuel adjustment clause which is in the Company's FERC tariffs. As a material effect on the Company's net income.

result, the Company does not expect the assessment to have an adverse effect on net income.

Increasfng Competftfon Postretfrement Benefits Other Than Pensions The Energy Act will,have a significant impact on the Company and and Postemployment Benefits the electric utility industry, primarily through amendments to the Effective January I, 1993, the Company adopted SFAS 106, Public Utility Holding Company Act of 1935 that creates a new class "Employers'ccounting for Postretirement Benefits Other Than Pen- of independent power producers, and amendments to the Federal sions." SFAS 106 establishes new rules for accounting for the costs of Power Act that opens access to electric transmission systems for postretirement benefits other than pensions. The statement requires wholesale transactions. These changes increase competition in the accrual, during the years that the employees render the necessary ser- wholesale energy supply market.

vice, of the expected cost of providing those benefits. Caps have been In response to the increased competition, the Company has under-established on the amount the Company will pay for retiree health taken initiatives to strengthen its position in the wholesale market, care costs for all employees who retire on or after April I, 1993. The The Company entered into new five-year supply agreements at re-Company's transition obligation on January I, 1993 amounted to duced prices with its existing wholesale customers. These agreements 173.8 million and is being amortized over a 20.year period. The in- are subject to FERC approval. The Company is actively participating rease in the cost of retiree benefits attributable to PUC-jurisdictional in negotiations and proceedings involving the sale of electricity to customers due to the adoption of SFAS 106 is being deferred in accor- wholesale customers currently served by other electric utilities. These dance with a PUC order. Recovery of the PUC-juristictional deferred wholesale customers are generally small utilities that do not have their costs will be requested in the Company's next base rate proceeding. own generating capability and purchase electricity from others.

Current accounting rules permit deferral of the costs for about five While there is currently no comparable competition in the retail years. At December 31, 1993, the deferred costs totaled $ 14.9 million. electric market, the Company anticipates that it will face similar com-In the fourth quarter of 1993, the Company charged to expense $ 2.3 petitive pressures in the industrial and large commercial sectors of million of the cost of postretirement benefits other than pensions at- that market in the future.

tributable to FERC-jurisdictional service, which, net of applicable in- The Company's strategic initiatives also include an assessment of come taxes, reduced earnings by 0.9 cents per share of common entering power-related businesses outside of the Company's service stock. See "Rate Matters" on page 13 and Financial Note 13 for addi ~ territory, both domestically and in foreign countries. Any expansion tional information. by the Company into these areas would be methodical and deliberate.

The Company provides health and life insurance benefits to dis- To take advantage of these new business opportunities, in February abled employees and income benefits to eligible spouses of deceased 1994 the Company's Board of Directors approved a plan to (i) make employees. In December 1993, the Company adopted SFAS.112, an initial investment of $ 50 million in these new businesses; and (ii)

"Employers'ccounting for Postemployment Benefits," which requires pursue the formation of a holding company structure to facilitate such the Company to accrue, during the years that the employees render investment, subject to the receipt of appropriate regulatory approvals the necessary service, the expected cost of providing benefits to and, ultimately, shareowner approval at the 1995 annual meeting.

~

' ~ ~ I ~ ~

~ 0 To the Shareowners and Board of Directors of Pennsylvania Power R Light Company:

We have audited the accompanying consolidated balance sheets and statements of preferred and preference stock and long. term debt of Pennsylvania Power &: Light Company and its subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareowners'ommon equity, and cash flows for each of the three years in the period ended December 31, 1993. These financial statements are the responsibility of'the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Pennsylvania Power 8r Light Company and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles.

As discussed in Notes 5 and 13 to the consolidated financial statements, in 1993 the Company changed its method of accounting for postretire-ment benefit costs, income taxes and postemployment benefits to conform with Statements of Financial Accounting Standards Numbers 106, 109 and 112, respectively.

Parsippany, New Jersey February 3, 1994

~ ~ 0 I ~

~ ~ ~

The management of Pennsylvania Power K Light Company is auditors'nd Deloitte K Touche's recommendations concerning its responsible for the preparation, integrity and objectivity of the con- system of internal control and has taken actions which are believed to solidated financial statements and all other sections of this annual be cost-effective in the circumstances to respond appropriately to report. The financial statements were prepared in accordance with these recommendations. Management believes that the Company's generally accepted accounting principles and the Uniform System of system of internal control is adequate to accomplish the objectives Accounts prescribed by the Federal Energy Regulatory Commission. In discussed in this report.

preparing the financial statements, management makes informed The Board of Directors, acting through its Audit Committee, estimates and judgments of the expected effects of events and transac- oversees management's responsibilities in the preparation of the flinan-tions based upon currently available facts and circumstances. Manage- cial statements. In performing this function, the Audit Committee, ment believes that the financial statements are free of material which is composed of five independent directors, meets periodically misstatement and present fairly the financial position, results of open- with management, the internal auditors and the independent certified tions and cash flows of the Company. public accountants to review the work of each. Deloitte 8'ouche The Company's consolidated financial statements have been audited and the internal auditors have free access to the Audit Committee and by Deloitte K Touche, independent certified public accountants, to the Board of Directors, without management present, to discuss in-whose report with respect to the financial statements appears above. ternal accounting control, auditing and financial reporting matters.

Deloitte 5 Touche's appointment as auditors was previously ratiTied by Management also recognizes its responsibility for fostering a strong the shareowners. Management has made available to Deloitte 8~ ethical climate so that the Company's affairs are conducted according Touche all the Company's financial records and related data, as well as to the highest standards of personal and corporate conduct. This the minutes of shareowners'nd directors'eetings. Management responsibility is characterized and reflected in the Company's Stan.

believes that all representations made to Deloitte & Touche during its dards of Integrity, which is publicized throughout the Company. The audit were valid and appropriate. Standards of Integrity addresses: the necessity of ensuring open com-The Company maintains a system of internal control designed to munication within the Company; potential conflicts of interest; proper provide reasonable, but not absolute, assurance as to the integrity and procurement activities; compliance with all applicable law, including reliability of the financial statements, the protection of assets from those relating to financial disclosure; and the confidentiality of pro-unauthorized use or disposition and the prevention and detection of prietary information. The Company maintains a systematic program to fraudulent financial reporting. The concept of reasonable assurance assess compliance with these policies.

recognizes that the cost of a system of internal control should not ex-ceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control.

Fundamental to the control system is the selection and training of 6Vau~

William F. Hecht r=,k~

qualified personnel, an organizational structure that provides ap- Cbairntan, President and Cbief Executive Officer propriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for com-pliance. In addition, the Company maintains an internal auditing pro-gram to evaluate the Company's system of internal control for ade- R. E. Hill quacy, application and compliance. Management considers the internal Senior Vice President-Financial 20

Consolidated Statement of Income Pennsylvania Power 8r Light Company and Subsidiaries 1993 1992 1991 P'J>onsands ofDollars)

Operating Revenues (Notes 1, 2, 3 and 4) .. $ 2,727,002 $ 2,744,122 $ 2,740,715 Operating Expenses Operation Fuel .. 506,900 545,361 586,325 Power purchases 278,800 275,499 256,320 Other 460,482 452,999 461,921 Maintenance........... 193,242 201,254 206,861 Depreciation (Notes 1 and 10) . 271,390 258,357 246,212 Amortized (deferred) depreciation (Notes 1 and 10) .. 14,249 3,563 (7,047)

Income taxes (Note 5) .. 235,164 228,340 217,366 Taxes, other than income (Note 5) ., 203,967 205,318 190,426 2,164,194 2,170,691 2,158,384 Operating Income 562,808 573,431 582,331 Other Income and (Deductions)

Allowance for equity funds used during construction(Note 1) .. 7,981 6,771 2,961 Income tax credits (expense) (Note 5) .. 1,280 (322) 903 Other net 8,700 12,337 7,616 17,961 18,786 11,480 580,769 592,217 593,811 Interest Charges Long-term debt 225,800 240,260 232,092 Short-term debt and other 14,443 13,402 22,254 Allowance for borrowed funds used during construction and interest capitalized(Note 1) . (7,600) (8,169) '8,949) 232,643 245,493 245,397 Net Income 348,126 346,724 348,414 Dividends on Preferred and Preference Stock 33,885 40,495 44,687 Earnings Applicable to Common Stock $ 314,241 $ 306,229 $ 303,727 Earnings Per Share of Common Stock(a) 2.07 $ 2.02 $ 2.01 Average Number of Shares Outstanding(thousands) 151,904 151,676 151,382 Dividends Declared Per Share of Common Stock .. 1.65 $ 1.60 $ 1.55 (a) Based on average numberofshares outstanding.

See accontpanying Notes to Financial Statements.

21

Consolidated Balance Sheet at December 31 Pennsylvania Power & Light Company and Subsidiaries Assets 1993 1992 (Thousands ofDollars)

Property, Plant and Equipment Electric utilityplant in service at original cost $ 8,912,473 $ 8,591,544 Accumulated depreciation (Notes 1 and 10) . (2,686,967) (2,495,972)

Deferred depreciation(Notes 1 and 10) . 282,115 296,285 6,507,621 6,391,857 Construction work in progress at cost 238,600 211,534 Nuclear fuel owned and leased net of amortization(Note 9) . 174,979 174,368 Other leased property net of amortization (Note 9)........ 75,630 76,974 Electric utilityplant net . 6,996,830 6,854,733 Other property net of depreciation, amortization and depletion(1993, $ 49,166; 1992, $ 64,286)........... 148,751 164,771 7,145,581 7,019,504 Investments Associated company at equity 17,069 17,088 Nuclear plant decommissioning trust fund (Notes 1 and 6) .. 76,913 65,159 Financial investments (Notes 1 and 7) . 140,569 121,500 Other at cost or less (Note 7) . 31,249 33,657 265,800 237,404 Current Assets Cash and cash equivalents (Note 1) 8,271 15,110 Accounts receivable(less reserve: 1993, $ 29,429; 1992, $ 27,660)

Customers .. 183,364 184,149 Interchange power sales . 7,261 Other . 17,502 14,128 Unbilled revenues 120,589 109,906 Fuel (coal and oil) at average cost 95,702 142,374 Materials and supplies at average cost . 125,676 139,360 Common stock held for dividend reinvestment plan at cost(Note 8) . 15,937 14,383 Deferred income taxes (Note 5) 12,688 6,776 Other . 37,083 52,153 616,812 685,600 Deferred Debits Utilityplant carrying charges net ofamortization (Notes 1 and 10) 24,097 24,965 Reacquired debt costs (Notes 1 and 10) 101,836 78,917 Assessment for decommissioning uranium enrichment facilities (Notes 3 and 10) . 33,710 38,925 Retired miners'ealth care benefits (Notes 3 and 10) ......... 24,096 36,'600 Taxes recoverable through future rates (Notes 5 and 10) ...... 1,166,118 Fostretirement benefits other than pensions (Notes 10 and 13) . 14,855 Other . 61,208 69,853 1,425,920 249,260

$ 9,454,113 $ 8,191,768 See accompanying Notes to Financial Statentents.

22

t Liabilities Capitalization Common equity Common stock Capital stock expense 1993 (TI>ottsands 1,370,783 (10,906) 1992 ofDollars)

$ 1,364,148 (11,969)

Earnings reinvested 1,065,958 1,014,760 2,425,835 2,366,939 Preferred and preference stock With sinking fund requirements . 335,000 325,600 Without sinking fund requirements 171,375 223,612 Long-term debt 2,618,031 2,620,720 5,550,241 5,536,871 Current Liabilities Commercial paper (Note 12) . 117,000 67,000 Bank loans(Note 12) .. 85,260 92,348 Long-term debt due within one year .. 44,539 6,439 Capital lease obligations due within one year (Note 9) . 78,740 86,899 Accounts payable 156,992 147,001 Taxes accrued 62,721 63,067 Interest accrued .. 60,373 59,429 Dividends payable 70,410 70,556 Accrued mine closing costs 7,842 20,296 Other 88,791 91,105 772,668 704,140 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits (Note 5) 242,317 255,823 Deferred income taxes (Note 5) .. 2,269,648 1,079,744 Capital lease obligations(Note 9) . 170,285 164,159 Unamortized cost of power plant spare parts(Note 3)......... 51,147 75,457 Accrued nuclear plant decommissioning costs (Notes 1.and 6) .. 78,947 67,435 Accrued mine closing costs 55,876 61,841 Contract settlementproceeds to be credited to customers (Note 3) 43,894 55,794 Accrued pension costs(Note 13) . 92,024 73,902 Accrued assessment for decommissioning uranium enrichment facilities (Note 3) .. 31,871 39,600 Accrued retired miners'ealth care benefits (Note 3)......... 38,751 36,'600 Accrued postretirement benefits other than pensions and postemployment benefits (Note 13) ..... 9,862 Other .. 46,582 40,402 3,131,204 1,950,757 Commitments and Contingent Liabilities (Note 15)

$ 9,454,113 $ 8,191,768 Seeaccompanytng Notes to Financla!Statemettts.

23

Consolidated Statement of Cash Flows Pennsylvania Power 8c Light Company and Subsidiaries 1993 1992 1991 (TI>ousands ofDollars)

Cash Flows From Operating Activities Net income $ 348,126 $ 346,724 $ 348,414 Adjustments to reconcile net income to net cash provided by operating activities Depreciation .. 289,055 270,048 261,180 Amortization of property under capital leases............ 79,437 81,916 96,565 Amortization of contract settlement proceeds and deferred cost of power plant spare parts . (38,602) (31,973) (17,818)

Deferred income taxes and investment tax credits ......'. 12,229 18,309 52,118 Equity component of AFUDC . (7,981) (6,771) (2,961)

Change in current assets and current liabilities Accounts receivable . 4,672 16,010 (14,380)

Unbilled and refundable electric revenues ............ (10,291) (37,865) (45,725)

Fuel inventories. 46,672 16,997 25,887 Materials and supplies 4,541 9,071 1,200 Accounts payable . 9,991 41,790 (11,835)

Accrued interest and taxes 598 4,525 17,858 Other. 1,630 (11,876) 8,012 Other operating activities net 29,656 52,985 49,432 Net cash provided by operating activities ........... 769,733 769,890 767,947 Cash Flows From Investing Activities Property, plant and equipment expenditures . (487,836) (422,209) (374,397)

Proceeds from sales of nuclear fuel to trust Financial investments ..

Other investingactivities net ..

63,431 (705) 6,825 42,778 (17,796) 4,509 48,914 (50,876) 4,191

~

Net cash used in investing activities . (418,285) (392,718) (372,168)

Cash Flows From Financing Activities Issuance of long-term debt 850,000 390,000 150,000 Issuance of common stock 6,635 6,151 8,401 Issuance of preferred stock .. 300,000 Retirement of long-term debt . (809,000) (346,400) (37,460)

Retirement of preferred and preference stock (342,837) (46,753) (19,100)

Payments on capital lease obligations .. (83,868) (85,733) (100,227)

Dividends paid .. (284,642) (282,209) (277,323)

Net increase (decrease) in short-term debt 42,912 12,178 (118,770)

Costs associated with issuance and retirement ofsecurities (37,448) (16,682) (2,136)

Other financing activities net . (39) (126) (160)

Net cash used in financing activities . (358,287) (369,574) (396,775)

Net Increase (Decrease) in Cash and Cash Equivalents .. (6,839) 7,598 (996)

Cash and Cash Equivalents at Beginning of Period 15,110 7,512 8,508 Cash and Cash Equivalents at End of Period . $ 8,271 $ 15,110 $ 7 5'12 Supplemental Disclosures of Cash Flow Information Cash paid during the year for Interest(net of amount capitalized) . $ 205,090 $ 249,303 $ 229,066 Income taxes . $ 221,049 $ 197,594 $ 154,136 See accompauyfttg Notes to Flttattcfaf Statements.

24

Consolidated Statement of Long-Term Debt at December 31 Pennsylvania Power & Light Company and Subsidiaries Outstanding 1993 1992 hf aturity(b)

Company thousands of Dollars)

First Mortgage Bonds (a) 4'is% $ 30,000 $ 30,000 March 1, 1994 5$/s% 30,000 30,000 June 1, 1996 6>/% 30,000 30,000 November 1, 1997 9/4% 125,000 March 1, 1998 5 t/2% 150,000 April 1, 1998 9$/s% 125,000 June 1, 1998 6% to 9% 720,000 495,000 1999-2003 6/a% to 9$/4% .. 375,000 555,000 2004-2008 9% to 9/,% 250,000 '2014-2018 6$/4% to 10% 1,025,000 675',000 2019-2023 First Mortgage Pollution Control Bonds (a) 5$/s% SeriesA . 15,500 15,500 (c) 10$/s% Series E. 37,750 37,750 March 1, 2014 10$/,% Series F . 115,500 115,500 September 1, 2014 9$/s% Series G . 55,000 55,000 July 1, 2015 6 4~0% Series H .. 90,000 90,000 November 1, 2021 2,673,750 2,628,750 Miscellaneous promissory notes. 77 116 1994-1995 2,673,827 2,628,866 Unamortized(discount) and premium net .. (24,857) (19,307) 2,648,970 2,609,559 Less amount due within one year 30,939 39 2,618,031 2,609,520 Subsidiaries

~ ~ ~

Notes(d) .. 13,600 17,600 Less amount due within one year 13,600 6,400 1998@re 11,200 Total long-term debt $ 2,618,031 $ 2,620,720

( a ) Substantially all owned electric utilityplant is subject to the lien of thc Company's first mortgage.

( b) Aggregate long. term debt maturities through (thousands of dollars): 1994, $ 44,539; 1995, $ 938; 1996, $ 30,900; 1997, $ 30 900; 1998, $ 150,900. hlaximum sinking fund rcqulremcnts aggregate $ 25.8 million through 1998 and may be met with property additions or retirement of bonds.

( c ) Bonds mature annually on hlay I as follows (thousands of dollars): 1994.2002, $ 900; 2003, $ 7,400.

(d) Fixed rates ranging from 9% to 12%. During 1993, a subsidiary company retired $ 4.0 millionof maturing notes. In January 1994, a subsidiary company repaid $ 13.6 million of its notes.

See accompanying Notes to Financial Statements.

25

Consolidated Statement of Shareowners'ommon Equity Pennsylvania Power & Light Company and Subsidiaries Common Stock Outstanding Capital Stock Earnings Shares (a) Amount Expense Reinvested Total (Thousands ofDollars)

Balance atDecember 31, 1990 .... 151,297,940 $ 1,351,046 $ (12,449) $ 883,162 $ 2,221,759 Net income 348,414 348,414 Cash dividends declared Preferred stock Preference stock..............

(35,047) (35,047)

(9,640) (9,640)

Commonstock($ 1.55) ......... (234,626) (234,626)

Stock redemption costs........... (157) (157)

Employee stock ownership plan (b),. 357,328 7,045 7,045 Other .. 262 262 Balance at December 31, 1991 .... 151,655,268 $ 1,358,091 $ (12,187) $ 952,106 $ 2,298,010 Net income.................... 346,724 346,724 Cash dividends declared Preferredstock ............... (30,855)

Preferencestock.............. (9,640)

Commonstock($ 1.60) ......... (242,655)

Stock redemption costs........... (920)

Employee stock ownership plan(b) . 230,067 6,057 6,057 Other . 218 218 Balance at December 31, 1992 .... 151,885,335 $ 1,364,148 S(11~969~$ 1 014760 82 366 939 Netincome .. 348 T2 348, f2 Cash dividends declared Preferredstock Preferencestock

.............. (29,065) (29,065)

(4,820) (4,820)

Common stock($ 1.65) ......... (250,611) (250,611)

Stock redemption costs........... (12,432) (12,432)

Employee stock ownership plan.... 246,754 6,635 6,635 Other . 1,063 1,063 Balance at December 31, 1993 .... 152,132,089 $ 1,370,783 $ (10,906) $ 1,065,958 $ 2,425,835 (a) No par value, 170,000,000 shares authorized. Each share entitles the holders to one vote on any question presented towny shareowners'eeting.

(b) Includes employee subscriptions.

Consolidated Statement of Preferred and Preference Stock at December 31 Pennsylvania Power &Light Company and Subsidiaries Shares Outstanding Outstanding Shares 1993 1992 1993 Authorized (Tbotrsands ofDollars)

Preferred Stock $ 100 par, cumulative (a) 4th% $ 53,019 $ 53,019 530,189 629,936 Series 453,356 381,193 4,533,556 10,000,000

$ 506,375 $ 434,212 Preference Stock no par, cumulative (a) .. $ 115,000 5,000,000

( a ) Each sharc of preferred and preference stock entitles the holders to one vote on any question presented to any shareowners'eeting.

(b) The involuntary liquidation price of the preferred stock is $ 100 per share. The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4 V2 % Preferred Stock for which such price is $ 100 per share (plus in each case any unpaid dividends),

( c) The aggregate amount ofsinking fund redemption requirements through 1998 are(thousands of dollars): 1994, $ 30,000; 1995, $ 30,000; 1996, $ 30,000; 1997, $ 30,000; 1998, none.

(d) This series of preferred stock Is not redeemab! e prior to 2003.

( e ) Shares to be redeemed annually on October I as follows: 2003-2007, 57,500; 2008, 862,500.

( f ) Shares to be redeemed annually on July I as follows: 2003.2007, 50,000; 2008, 750,000.

( g) On certain sinking fund redemption dates, additional shares may be redeemed up to the number ofshares required to bc redeemed annually.

(h) InJanuary 1994, the Company redeemed through sinking fund provisions at $ 100 per share 200 000 shares of 7 00% Series Preferred Stock.

See accompanying Notes to Financial Statentents.

26

Details of Preferred and Preference Stock (b)

Optional Sinking Fund Redemption Provisions (c)

Shares Price Per Shares to be Outstanding Outstanding Share Redeemed Redemption l993 l992 l993 l993 Annually Period (TI>ottsands ofDollars)

With Sinking Fund Requirements Series Preferred 6.125% . $ 115,000 1,150,000 (d) (e) 2003-2008 6.33% .. 100,000 1,000,000 (d) (f) 2003-2008 6.875% (g) . 40,000 S 50,000 400,000 $ 101.72 100,000 1994-1997 7.00% (g) (h) 80,000 100,000 800,000 101.75 200,000 1994-1997 7.375% . 50,000 7.40% .. 17,600 7.82% .. 50,000 7.927% . 3,000 8.00% .. 25,000 8.75% .. 30,000

$ 335,000 $ 325,600 Without Sinking Fund Requirements 4~/z% Preferred............. $ 53,019 S 53,019 530,189 $ 110.00 Series Preferred 3.35% .. 4,178 4,178 41,783 103.'50 440% .. 22>878 22,878 228,773 102.00 4 60% 6,300 6,300 63,000 103.00 6 85,000 850,000 (d) 75'.60%

.. 22 237 Preference

$ 8.00 35,000

$ 8.40 40,000

$ 8.70 40,000

$ 171,375 $ 223,612 Increases (Decreases) in Preferred and Preference Stock (Thousands ofDollars) l993 1992 l99l Shares Amount Shares Amount Shares Amount Series Preferred Stock 6.125% . 1,150,000 $ 115,000 6.33% .. 1,000,000 100,000 6 75% 850,000 85,000 6.875% . (100,000) (10,000) 7.00% .. (200,000) (20,000) 7.375% . (500,000) (50,000) 7 (176,000) (17,600) (16,000) $ (1,600) (16,000) S(1,600) 40'.82%

.. (500,000) (50,000) 7.927% . (30,000) (3,000) (30,000) (3,000) (30,000) (3,000) 8.00% .. (250,000) (25,'000) (25,000) (2,500) (25,000) (2,500) 8.60% (222,370) (22,237) 8.75% .. (300,000) (30,000) (60,000) (6,000) (60,000) (6,000) 9.00% .. (77,630) (7,763) 9.24% .. (258,900) (25,890) (60,000) (6,000)

Preference Stock

$ 8.00 (350,000) (35,000)

$ 8.40 (400,000) (40,000)

$ 8.70 (400,000) 40,000)

Decreases in Preferred and Preference St oc ks represent: (i) the redemp tiono fstock pursuant tosin king fund rcquircments, or (ii) shares rcdeemcd pursuant to optional red emption provisions.

See accompanying Notes to Financial Statements.

27

1. Summary of Significant Accounting Policies Accountfng Records The U.S. Department of Energy (DOE) is responsible for the perma-Accounting records for utility operations are maintained in accor- nent storage and disposal of spent nuclear fuel removed from nuclear dance with the Uniform System of Accounts prescribed by the Federal reactors. The Company currently pays DOE a fee for future disposal Energy Regulatory Commission (FERC) and adopted by the Penn- services and recovers such costs in customer rates.

sylvania Public Utility Commission (PUC).

Financial Investments Prfncfples of Consolfdatlon Marketable equity securities are carried at the lower of their ag-All wholly owned subsidiaries (principally involved in holding coal gregate cost or market value, determined at the balance sheet date.

reserves, oil pipeline operations and passive financial investments) Noncurrent marketable debt securities are carried at amortized cost.

have been consolidated in the accompanying financial statements and Current marketable debt securities are carried at the lower of amor-all significant intercompany transactions have been eliminated. Income tized cost or market value. Gains and losses on the sale of marketable and expenses of subsidiaries not related to utility operations have securities are recognized upon realization utilizing the specific cost been classified under other income and deductions on the Con. identification method. Investments in financial limited partnerships are solidated Statement of Income. accounted for using the equity method of accounting and venture The investment in Safe Harbor Water Power Corporation (Safe Har- capital investments are recorded at cost. (See Note 7) bor), of which the Company owns one-third of the outstanding Premfum on Reacqufred Long-Term Debt capital stock representing one. half of the voting securities, is recorded As provided in the Uniform System of Accounts, the premium paid using the equity method of accounting. The Company's principal and expenses incurred to redeem long. term debt are deferred and transaction with Safe Harbor is the purchase of electricity amounting amortized over the life of the new debt issue or the remaining life of to (millions of dollars): 1993, $ 9.9; 1992, $ 9.4 and 1991, $ 9.3. Under the retired debt when the redemption is not financed by a new issue.

equity accounting, the operations of Safe Harbor resulted in addi ~

tional income to the Company of (millions of dollars): 1993, $ 2.1; Allowance for Funds Used Durfng Constructfon 1992, $ 2.1 and 1991, $ 2.2.

As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of con.

UtflltyPlant and Deprecfation struction cost. The components of allowance for funds used during Additions to utility plant and replacement of units of property are construction (AFUDC) shown on the Consolidated Statement of In-capitalized at cost. The cost of units of property retired or replaced is come under other income and deductions and interest charges are removed from utility plant accounts and charged to accumulated non.cash items equal to the cost of funds capitalized during the depreciation. Expenditures for maintenance and repairs of property period.

and the cost of replacing items determined to be less than units of AFUDC serves to offset on the Consolidated Statement of Income property are charged to operating expense. the interest charges on debt and dividends on preferred and For financial statement purposes, depreciation is being provided preference stock incurred to finance construction. In addition, a over the estimated useful lives of property and is computed using a return on common equity used to finance construction is imputed.

straight-line method for all property except for property placed in ser-vice prior to January I, 1989 at the nuclear-fueled Susquehanna steam Capftal Leases electric station. Current PUC and FERC rate orders provide for an in- Leased property capitalized on the Consolidated Balance Sheet is creasing amount of annual depreciation for property placed in service recorded at the present value of future lease payments and is amor-prior to January I, 1989 at the Susquehanna station through 1998, at tized so that the total of interest on the lease obligation and amor-which time depreciation will change to the straight-line method. Pro- tization of the leased property equals the rental expense allowed for visions for depreciation, as a percent of average depreciable property, ratemaking purposes. (See Note 9.)

approximated 3.3% in 1993, 3.2% in 1992 and 3.1% in 1991.

Revenues UtflftyPlant Carrying Charges Electric revenues are recorded based on the amounts of electricity Carrying charge accruals on certain facilities for the Susquehanna delivered to customers through the end of each accounting period.

and Martins Creek stations are recorded as deferred debits in accor- This includes amounts customers will be billed for electricity dance with a FERC order. These amounts are being amortized to ex- delivered from the time meters were last read to the end of the pense over the remaining lives of the stations. respective period.

The Company's PUC tariffs contain an Energy Cost Rate (ECR)

Nuclear Decomniissfonfng and Fuel Dfsposal under which customers are billed an estimated amount for fuel and An annual provision for the Company's share of the future decom. other energy costs. Any difference between the actual and estimated missioning of the Susquehanna station, equal to the amount allowed amount for such costs is collected from or refunded to customers in a for ratemaking purposes, is charged to operating expense; Such subsequent period. Revenues applicable to ECR billings are recorded amounts are invested in a trust fund which can be used only for at the level of actual energy costs and the difference is recorded as future decommissioning costs. (See Note 6.) payable to or receivable from customers.

28

The Company's PUC tariffs include a Special Base Rate Credit Ad. income tax purposes and the minimum contribution required under ustment (SBRCA) that currently credits retail customers'ills for three the Employee Retirement Income Security Act of 1974. (See Note 13.)

nonrecurring items related to: (i) the use of an inventory method of In January 1993, the Company adopted SFAS 106, "Employers'c.

accounting for certain power plant spare parts; (ii) the sale of capacity counting for Postretirement Benefits Other Than Pensions." SFAS 106 and related energy from the Company's wholly owned coal-fired sta- requires the Company to accrue, during the years that the employees tions to Atlantic City Electric Company (Atlantic); and (iii) the pro- render the necessary service, the expected cost of providing retiree ceeds from a settlement of outstanding contract claims arising from health care and life insurance benefits. (See Note 13.)

construction of the Susquehanna station. (See Note 3.) In accordance with a PUC order, the Company is deferring the ac-In April 1993, the Company rolled into base rates the level of in- crued cost of the PUC-jurisdictional portion of retiree health and life creased state taxes recovered since August 1991 through a State Tax insurance benefits in excess of actual claims paid pending recovery of Adjustment Surcharge (STAS) and revised the STAS to collect an under- the increased costs in retail rates.

collection of state taxes during the period April 1992 through hlarch In December 1993, the Company adopted SFAS 112, "Employers'ccounting 1993. (See Note 3.) for Postemployment Benefits." SFAS 112 requires the ac.

crual of the expected cost of providing benefits to former or inactive Income Taxes employees after employment but before retirement. (See Note 13.)

The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are allocated to operating ex- Accounting Statement Adopted After December 31, 1993 penses and other income and deductions on the Consolidated State- Effective January I, 1994, the Company adopted SFAS 115, "Account-ment of Income. ing for Certain Investments in Debt and Equity Securities." SFAS 115 In January 1993, the Company adopted Statement of Financial Ac- addresses the accounting and reporting for investments in equity counting Standards (SFAS) 109, "Accounting for Income Taxes." SFAS securities that have readily determinable fair values and for all in-109 requires a change from the deferred method to the asset and vestments in debt securities. The adoption of SFAS 115 did not have a liability method of accounting for income taxes. (See Note 5.) material effect on the Company's net income.

The provision for deferred income taxes included on the Con. Unusual Items Recognized in tbe Fourth Quarter solidated Statement of Income represents the amount of deferred tax In the fourth quarter of 1993, the Company recorded charges expense reflected in rates established by the PUC and FERC. The dif-against income that, in the aggregate, adversely affected net income ference in the provision for deferred income taxes determined under

'FAS 109 and the amount recorded based on ratemaking procedures by about $ 18 million or 12 cents per share of common stock. The charges related to: (i) credits to be included in the Company's ECR adopted by the PUC and FERC is deferred and included in taxes due to entering a settlement agreement with complainants against the recoverable through future rates on the Consolidated Balance Sheet.

Company's ECR; (ii) the write-off of certain deferred retiree benefits (See Note 5.)

costs; and (iii) the recognition of certain employee benefit costs in Investment tax credits were deferred when utilized and are amor-connection with the adoption of a new accounting standard. (See tized over the average lives of the related property. The investment Notes 3 and 13.)

tax credit was repealed effective December 31, 1985.

Cash Equivalents Pension Plan and Other Postretirenient and Postemployment The Company considers all highly liquid debt instruments pur-Benefits chased with original maturities of thiee months or less to be cash The Company has a noncontributory pension plan covering equivalents.

substantially all employees, and subsidiary mining companies have a noncontributory pension plan for substantially all non.bargaining, full. Reclassification time employees. Funding is based upon actuarially determined com- Certain amounts from prior years'inancial statements have been putations that take into account the amount deductible for reclassified to conform to the current year presentation.

2. Sources of Revenues The Company is an operating electric utility serving about 1.2 customers, 27% from commercial customers, 20% from industrial million customers in a 10,000 square. mile territory of central eastern customers, 4% from interchange power sales to members of the Pennsylvania with a population of approximately 2.6 million persons. Pennsylvania-New Jersey-hlaryland Interconnection Association (PJhi),

Substantially all of the Company's'operating revenues are derived 12% from contractual sales to other major utilities and 3% from from the sale of electric energy subject to PUC and FERC regulation. others. The Company's largest industrial customer provided about ustomers are generally billed for electric service on a monthly basis 1.4% of revenues from energy sales during 1993. Twenty-nine in.

after electricity is delivered. dustrial customers, whose billings exceeded $ 3 million each, provided During 1993, about 98% of total operating revenues'was derived about 7.5% of such revenues. Industrial customers are broadly from electric energy sales with 34% coming from residential distributed among industrial classifications.

29

'3. Rate Matters Energy Cost Rate Issues As a result of discussions which began in late 1993, the Company Several complaints have been filed with the PUC against the Com- and the complainants reached a settlement agreement which provides pany's ECR by the Pennsylvania Office of Consumer Advocate (OCA) for crediting the 1994-95 ECR with a portion of the receipts from in.

and certain industrial customers. These complaints relate to the Com- stalled capacity credit sales from April 1990 through December 31, pany's ECRs beginning with the 1990.91 ECR through the 1993-94 1993; credits a portion of the receipts from future installed capacity ECR, which became effective in April 1993. credit sales to the ECR and excludes from recovery through the ECR a The complaints by industrial customers generally oppose the Com. portion of the PUC-jurisdictional amount of deferred retired miners'ealth pany's recovery on a current basis through the ECR of the cost of care benefits costs.

output purchased from non.utility generating companies or question This agreement is subject to PUC approval. As a result of this agree.

the manner in which the cost of such purchases is recovered through ment, in the fourth quarter of 1993 the Company recorded a charge the ECR. The OCA and industrial customers complaints also request a to expense of $ 17.1 million, which after income taxes, reduced net in.

PUC investigation into whether the revenues received from the Com- come by approximately $ 9.7 million or 6.4 cents per share of com-pany's sales of installed capacity credits, reservation of output and mon stock.

transmission entitlements (capacity. related transactions) should be Postretirement Benefits Otber Than Pensions credited to customers through the ECR. These transactions are In March 1993, the PUC approved the Company's petition to defer discussed in Note 4.

the increase in retiree benefits costs arising from adoption of SFAS With respect to the 1993.94 ECR, certain of the complaints also op-106, "Employers'ccounting for Postretirement Benefits Other Than pose the Company's request to recover through the ECR the liability Pensions." The increased costs applicable to PUC-jurisdictional imposed on the Company or its coal-mining subsidiaries by the customers will be deferred from January I, 1993 until such costs are Energy Policy Act of 1992 (Energy Act) for the cost of health care for included in customer rates in the Company's next retail base rate pro-retired coal miners previously employed by those subsidiaries.

ceeding. Accounting rules permit deferral of the costs for about The Energy Act imposed a new liability on the Company or its five years.

coal. mining subsidiaries for the health care of retired coal miners In June 1993, the OCA appealed the PUC's decision permiulng previously employed by those subsidiaries. The estimated liability deferral and future recovery of the increased retiree benefits costs to amounts to approximately $ 68 million on a net present value basis. At the Commonwealth Court of Pennsylvania. The filing of the appeal the time coal. mining operations ceased, subsidiary mining companies does not operate as a stay of the PUC's order and the Company is had accrued $ 32 million for anticipated payments to the miners'ealth continuing to defer such costs in accordance with the PUC's order.

care trust funds to provide for health care benefits for retired Thc Company cannot predict the ultimate outcome of this matter miners. Under the Energy Act, the Company or its coal mining sub.

before the Commonwealth Court.

sidiaries will be directly liable for these benefits and the $ 32 million The Company also began to defer the increased costs applicable to will not have to be paid to the trust funds. The Company intends to FERC-jurisdictional service pursuant to a FERC policy statement, but use the amount accrued by its subsidiary mining companies to partial-subsequently charged the increased costs of $ 2.3 million to expense ly offset the liability. due to a settlement agreement reached with municipalities and other In December 1992, the Company recorded an additional liability of small utilities served under FERC tariffs. As a result of this agreement, approximately $ 36 million representing the balance of the liability im.

the Company will be unable to file for recovery of the increased costs posed by the Energy Act for health care benefits for retired coal within the time period specified in the FERC policy statement. See miners. The charge to expense was deferred. The net PUC-

"FERC Wholesale Rates" for more information.

jurisdictional amount of this liability was $ 30 million. The balance of the deferral pertains to FERC.jurisdictional service. Uranium Enrichment Decontaniination and In addition, certain complaints challenge the Company's request for Decommissioning Fund ECR recovery in the 1993 94 ECR of the additional costs associated The Energy Act'also provides for an assessment on utilities with with the 12-month extension of the Company's agreement to purchase nuclear power operations, including the Company, to establish a coal from the operator of a mine formerly owned by the Company. Uranium Enrichment Decontamination and Decommissioning Fund The additional costs in question total approximately $ 3 million. (Fund). Assessments are based on the amount of uranium a utility had With regard to the Company's 1991-92 ECR, the PUC ordered hear- processed for enrichment prior to enactment of the Energy Act and ings regarding ECR treatment of capacity-related sales made possible are expected to be paid to the Fund by such utilities over a 15 year by the purchase of output from non utility generating companies. The period. Amounts paid to the Fund are to be used for the ultimate PUC also ordered hearings on the Company's 1993 94 ECR. The decontamination and decommissioning of the DOE's uranium enrich.

Administrative Law Judge assigned to the case excluded from the ment facilities. The Energy Act states that the assessment shall be scope of the hearings issues regarding the Company's recovery of the deemed a necessary and reasonable current cost of fuel and shall be cost of output purchased from non.utility generating companies fully recoverable in rates in all jurisdictions in the same manner as the and also indicated that the scope of the other cases would be limited utility's other fuel costs.

to the Company's capacity. related transactions and various coal related As of December 31, 1993, the Company's recorde'd liability for its issues. total assessmcnt amounted to about $ 34.5 million. The liability is 30

subject to adjustment for inflation. The corresponding charge to ex- The SBRCA reduced revenues from retail customers by about $ 44.5 ense was deferred because the Company includes its annual million in 1993, $ 39.1 million in 1992 and $ 16.7 million in 1991. The payments to the Fund of approximately $ 2.6 million, subject to ad. reductions in revenues due to the SBRCA do not adversely affect the justment for inflation, in the ECR which is in the Company's PUC Company's net income.

tariffs and in the fuel adjustment clause which is in the Company's FERC tariffs. As a result, the Company does not expect the assessment Recovery of State Tax Increase to have an adverse effect on net income. In August 1991, Pennsylvania enacted legislation that increased the Company's state taxes by approximately $ 38 million on an annual Special Base Rate Credit Arljustntent basis. Certain of these tax increases were effective as of January I, The SBRCA has been in effect since April I, 1991 and currently 1991. The Company's retail rates include a provision for a STAS which reduces retail customers'ills for the effects of three nonrecurring provides for recovery of costs associated with new or increased state items. The first item is the annual amortization of a credit to income taxes, and the Company recovered the increased taxes applicable to associated with the Company's using an inventory method of account-retail customers through application of the STAS. In April 1993, the ing for spare parts beginning January I, 1991. The amortization of the Company rolled into base rates the level of increased state taxes cost of spare parts on hand at January I, 1991 is being included in the previously recovered in the STAS and the STAS was revised to collect SBRCA over a five-year period.

an undercollection of state taxes during the period April 1992 through The second relates to costs that are being recovered from Atlantic March 1993. The portion of the increased taxes applicable to the pursuant to the sale of 125,000 kilowatts of capacity (summer rating)

Company's contractual sales of capacity and related energy to other and related energy from the Company's wholly owned coal. fired sta-utilities is recovered as a cost of providing such service.

tions beginning October I, 1991. The costs recovered from Atlantic are currently reflected in retail base rate tariffs. Accordingly, the Com-FERC Wholesale Rates pany included a credit in the SBRCA for the costs, except energy

'costs, recovered from the sale of coal fired capacity and related The Company has negotiated new five-year, lower. priced sales con-energy to Atlantic. The change in energy costs associated with the tracts with certain small utilities it currently serves. The contracts are sale is reflected in the ECR. subject to FERC approval and will reduce rates to these small utilities The third is the proceeds from the settlement of outstanding con- by about $ 3.6 million in 1994 and 1995 and by about an additional tract claims arising from construction of the nuclear. fueled Sus- $ 4.1 million for the years 1996 through 1998. In connection with the quehanna steam generating station. In accordance with approval of agreement, in 1993, the Company wrote off the deferred portions of he settlement by the PUC, the Company began on April I, 1992 to retired miners'ealth care benefits costs and postretirement benefits return the settlement proceeds to retail customers through the SBRCA other than pensions applicable to FERC-jurisdictional services. The at the rate of $ 11 million per year for five years. In addition, the pro. charge to expense amounted to $ 8.9 million and, after income taxes, ceeds from the settlement applicable to wholesale and bulk power reduced net income by $ 5.1 million or about 3.4 cents per share of customers are being credited to those customers. common stock.

4. Sales to Other Major Electric Utilities The Company provided Atlantic with 126,000 kilowatts of the Com- on the Company's investment in generating capacity. Revenues from pany's share of capacity and related energy from the Susquehanna sta. these sales totaled $ 282.2 million in 1993, $ 293.8 million in 1992 and tion from 1983 through September 30, 1991. Another agreement pro- $ 284.2 million in 1991.

vides Atlantic with 125,000 kilowatts of capacity (summer rating) and In addition to these bulk power contractual sales, the Company has related energy from the Company's wholly owned coal fired stations entered into several agreements with other electric utilities in the PJM from October I, 1991 through September 2000. for the sale of capacity credits from the Company's system capacity.

On October I, 1991, immediately following the expiration of the These capacity credits are used by the other utilities to meet their in-agreement with Atlantic, the Company began providing Baltimore Gas stalled capacity obligation in the PJM. The price received for these 8: Electric (BG8:E) with 126,000 kilowatts of the Company's share of sales is based on a percentage of the rate the utilities would have paid capacity and related energy from the Susquehanna station. Sales to to purchase installed capacity under the PJM agreement. The length of BG&E will continue through May 2001. these agreements and the amount of capacity credits sold vary. The The Company provides Jersey Central Power and Light Company longest agreement currently in effect is scheduled to terminate (iCP&L) with 945,000 kilowatts of capacity and related energy from in 1996.

all the Company's generating units. Sales to JCP&L began in 1985 and The Company has entered into arrangements with several utilities will continue at the 945,000 kilowatt level through 1995, with the both inside and outside the PJM for the reservation of output from amount then declining uniformly each year until the end of the agree- either the oil.fired or coal. fired units at the Company's Martins Creek ent in 1999. station during certain periods of time. Specific deliveries of energy are These agreements provide that sales are to be made at a price equal requested by the purchasing utility as needed during the reservation to the Company's cost of providing service, which includes a return period. One utility has agreed to purchase a maximum of

10 megawatt hours per hour of the output the Company purchases periods of time. The Company includes, as a credit to the ECR, the from non.utility generating companies for the period June 1990 foregone interchange saviny that are not realized when the sale of through May 1995. The Company includes as a credit to the ECR the transmissiori entitlements reduces the amount of energy the Company~

revenue received for deliveries of energy from Martins Creek, the imports and sells to other utilities.

revenue received for deliveries of output from non.utility generating Revenues from the sale of capacity credits, the reservation of output companies and the foregone PJM interchange saviny that are not from the Martins Creek units and the sale of transmission entitlements realized when interchange sales are reduced because of reservation (net of foregone interchange saviny included in the ECR) totaled agreements. $ 35.0 million in 1993, $ 35.0 million in 1992 and $ 35.4 million in Arrangements also have been entered into whereby PJM utilities can 1991. For information relating to proceediny pending before the PUC purchase a portion of the Company's entitlement to use the PJM and a settlement agreement between the Company and complainants transmission system to import energy from utilities outside the PJhi. to the ECR with respect to capacity-related transactions, see Note 3.

These transactions are made through negotiated prices for various

,5. Taxes In January 1993, the Company adopted SFAS 109, "Accounting for The tax effects of significant temporary differences comprising the Income Taxes." SFAS 109 requires a change from the deferred method Company's net deferred income tax liability at December 31, 1993 to the asset and liability method of accounting for income taxes. were as fo!Iows (thousands of dollars):

Under the asset and liability method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary dif- Deferred tax assets ferences by applying enacted statutory tax rates applicable to future Deferred investment tax credits .. $ 103,084 Accrued pension costs . 38,821 years to differences between the financial statement carrying amount Other . 108,441 and the tax bases of existing assets and liabilities.

Valuation allowance (8,694)

In adopting SFAS 109, the Company recorded in January 1993 an in-crease of approximately $ 1.1 billion in its deferred tax liability for tax 241,652 benefits previously flowed through to customers and for other tem- Deferred tax liabilities porary differences. The increased tax liability was offset by a cor- Electric utility plant net... 1,892,366 responding asset representing the future revenue expected through Other property-net 26,629 the ratemaking process to pay for the taxes based on the established Taxes recoverable through regulatory practices and legislative history in Pennsylvania permitting future rates 500,959 recovery of actual taxes payable. The adoption of SFAS 109 did not Reacquired debt costs . 43,580 have a material effect on the Company's net income. Other . 35,120 In August 1993, federal legislation was enacted that increased the corporate federal income tax rate to 35% from 34% retroactive to 2,498,654 January I, 1993. For 1993, the Company recorded additional income Net deferred tax liability $ 2,257,002 tax expense of $ 5.9 million and an increase in deferred income tax liabilities and taxes recoverable through future rates of $ 79.5 million The valuation allowance related to deferred tax assets at December to reflect the new tax rate. 31, 1993 amounted to $ 8,694,000, a decrease of $ 2,882,000 from the The provision for deferred income taxes included on the Con- $ 11,576,000 established upon the adoption of SFAS 109 at January I, solidated Statement of Income represents the amount of deferred tax 1993.

expense reflected in rates established by the PUC and FERC. The dif- In August 1991, Pennsylvania enacted legislation that increased the ference in the provision for deferred income taxes for 1993 de- Company's state income and other taxes retroactive to January I, 1991.

termined under SFAS 109 and the amount recorded based on ratemak- See Note 3 for information concerning the recovery of these in-ing procedures adopted by the PUC and FERC is deferred and in- creased taxes.

cluded in taxes recoverable through future rates on the Consolidated During 1991, the Company utilized the remaining $ 16 million of Balance Sheet. previously unused tax credits to reduce its federal income tax liability.

32

Details of the components of income tax expense and a reconciliation of federal income taxes derived from statutory tax rates applied to

'ncome from continuing operations for accounting purposes are as follows (thousands of dollars):

1993 1992 1991 Income Tax Expense Included in operating expenses Provision-Federal $ 158,106 $ 144,546 $ 114,904 Federal-tax rate change 4,689 State . G3,508 Q,QS 49,534 226,3o3 209,194 164,43S Deferred Federal . 21,280 3o,654 51,547 Federal-tax rate change 1,211 State (124) 2,521 225 22,367 33,175 51,772 Investment tax credit, net Federal (13,506) (14,029) 1,156 235,164 228,340 217,366 Included in other income and deductions Provision (credit)-Federal. (4,976) 676 (126)

Federal-tax rate change; (158)

State . 486 483 33 (4,648) 1,159 (93)

Deferred-Federal . 3,907 (441) (640)

Federal tax rate change. 14o State (679) (396) (170) 3,368 (837) (810)

(1)280) 322 (903)

Total income tax expense Federal . 170,693 i6i,4o6 166,S41 State 63,191 67,256 49,622

$ 233,884 $ 228,662 $ 216,463 Detail of deferred taxes in operating expenses Tax depreciation $ 33,195 $ 38,026 $ 72,113 Reacquired debt costs. 9,927 5,4o5 (1,938)

Other (20,755) (10,256) (18,403)

$ 22,367 $ 33,175 $ 51,772 Reconciliation of Income Tax Expense.

Indicated federal income tax on pretax income at statutory tax rate (1993, 35%; 1992 1991, 34%) .. $ 203,704 $ 195,631 $ 192,058 Increase (decrease) due to:

State income taxes . 41,829 44,575 34,319 Depreciation differences not normalized. 8)470 6,'so5 9,080 Amortization of investment tax credit (13,50G) (14,029) (15,048)

AFUDC (Note I) (2)794) (2,302) (1,007)

Other (3,819) (2,018) (2,939) 30,180 33,031 24,405 Total income tax expense $ 233)884 $ 228,662 $ 2i6,463 Effective income tax rate .. 40 2% 39.7% 38.3%

Taxes, other than income, consist of the following (thousands of dollars):

tTaxes, Other Than Income State gross receipts .

State utility realty ..

State capital stock Social security and other

$ 98,280 45,292 35,943 24,452

$ 2031967

$ 94,926 4S,511 37,279 24,6o2

$ 205,318

$ 91,504 43,432 32,579 22,911

$ 190,426 33

6. Nuclear Decommissioning Costs The Company's most recent site specific decommissioning study, deposited in an external trust fund for investment and can be used based on immediate dismantlement and decommissioning each unit only for future decommissioning costs. The market value of securities following final shutdown, indicates that its share of the total estimated held and accrued income in the trust fund at December 31, 1993 ag.

cost of decommissioning the Susquehanna station is approximately gregated approximately $ 82.9 million.

$ 725 million in 1993 dollars. The operating licenses for Units 1 and 2 The most recent estimated cost of decommissioning Susquehanna is expire in 2022 and 2024, respectively. substantially higher than the estimate used to determine the amount Under current rates, the Company collects about $ 6.9 million an- currently collected in retail rates. As a result, the Company would ex-nually from customers for the cost of decommissioning the Sus- pect to request recovery of a higher level of decommissioning ex.

quehanna station. The amounts collected, less applicable taxes, are pense in its next retail base rate proceeding.

7. I'inancial Instruments The carrying amount and the estimated fair value of the Company's financial instruments are as follows (thousands of dollars):

December 31, 1993 December 31, 1992 Carrying Fair Carrying Fair Amount Value Amount Value Assets Nuclear plant decommissioning trust fund (a)............... $ 76,913 $ 82,860 $ 65,159 $ 69,104 Financial investments (b). 140,569 i45,482 121,500 124,203 Other investments (a) . 31,249 31>182 33,657 33,638 Cash and cash equivalents (c). 8,271 8,271 15,110 15,110 Marketable debt securities and other assets included in other current assets (a) . 6,266 6,274 16,842 16,862 Liabilities Preferred stock with sinking fund requirements (d) ......,... , 335)000 336>388 325,600 334,090 Long. term debt (d) 2,662,570 2,843,635 2,627,159 2,758,176 Commercial paper and bank loans (c) . 202,260 202,260 159,348 159,348 Taxes and interest accrued, dividends payable and other liabilities included in other current liabilities (c) . 219,505 219,505 222,338 222,338 Accrued nuclear assessment noncurrent (c)................ 31,871 31,871 39,600 39,600 (a) The fair nlue generally is based on esublished market prices. For a minor ponion, the fair nlue approximates the carrying amount.

(b) The fair n!ue is based on esublished market prices. For venture capiul investmems included in financial investments, fair nlue is determined in good faith by management of the venture capital entity.

(c) The fair value approximates the carrying amount.

(d) The fair value is based on quoted market prices for the security or similar securities where anihble and estimates based on current rates offered to the Company where quoted market prices are not anihble.

Financial investments consist of the following (thousands of dollars):

December 31 1993 1992 Marketable equity securities $ 10)85 $ 11,320 Marketable debt securities 61,294 78,942 Financial limited partnerships. 65,378 39,256 Venture capital investments 6,207 6,393 143,733 135,911 Less marketable debt securities included in other current assets (at the lower of amortized cost or market value) .. 3,164 14,41 i Total . $ 140,569 $ 121,500 34

Marketable equity securities at December 31, 1993 and 1992 are and $ 11,546,000 at December 31, 1992. The market value of tated at the lower of aggregate cost or market. The market value of marketable debt securities was $ 65,562,000 at December 31, 1993 and arketable equity securities was $ 12,995,000 at December 31, 1993 S80,588,000 at December 31, 1992.

8. Stock Held For Dividend Reinvestment Plan At December 31, 1993, the Company temporarily held 585,506 These shares were distributed to participants in the Dividend Reinvest-shares of common stock which were acquired in the open market. ment Plan in January 1994.

9. Leases 3'he Company and a subsidiary have entered into capital leases consisting of the following (thousands of dollars):

December 31 1993 1992 Nuclear fuel, net of accumulated amortization (1993, $ 191,812; 1992, $ 191,002) . $ 173,395 $ 171,901 Vehicles, oil storage tanks and other property, net of accumulated amortization (1993, $ 83,224; 1992, $ 93,730) 75,630 79,157 Net property under capital leases $ 249,025 $ 251,058 Capital lease obligations incurred for the acquisition of nuclear fuel million, including $ 10.9 million in imputed interest. During the five nd other property were (millions of dollars): 1993, $ 84.0; 1992, years ending 1998, such payments would decrease from $ 22.3 million

$ 64.8 and 1991, $ 69.5. per year to $ 6.5 million per year.

Nuclear fuel lease payments, which are charged to expense as the Interest on capital lease ob! igations was recorded as operating ex-fuel is used for the generation of electricity, were (millions of dollars): penses on the Consolidated Statement of Income in the following 1993, $ 67.6; 1992, $ 70.4 and 1991, $ 95.5. Future nuclear fuel lease amounts (millions of dollars): 1993, $ 9.1; 1992, $ 10.5 and 1991, $ 20.5.

payments will be based on the quantity of electricity produced by the Generally, capital leases contain renewal options and obligate the Susquehanna station. The maximum amount of unamortized nuclear Company and a subsidiary to pay maintenance, insurance and other fuel leasable under current arrangements is S200 million. related costs. Various operating leases have also been entered into Future minimum lease payments under capital leases in effect at which are not material with respect to the Company's financial December 31, 1993 (excluding nuclear fuel) would aggregate $ 86.6 position.

10. Regulatory Assets The Company has deferred certain costs in accordance with the recover such costs in electric rates charged to customers. Regulatory rate actions of the PUC and FERC and is recovering or expects to assets consist of the following (thousands of dollars):

December 31 1993 1992 Deferred depreciation $ 282,115 $ 296,285 Deferred operating and carrying costs Susquehanna 39)215 39,215 Utility plant carrying charges net of amortization. 24)097 24,965 Deferred refueling outage costs Susquehanna 16,027 17,446 Reacquired debt costs 101,836 78,917 Taxes recoverable through future rates 1,166,118 Postretirement benefits other than pensions 14,855 Retired miners'ealth care benefits 24)096 36,600 Assessment for decommissioning uranium enrichment facilities... 33,710 38,925 S 1,702) 069 $ 532,353 35

Deferred depreciation is the difference between the straight-line accordance with a FERC order. Such charges are being amortized over depreciation of property placed in service at the Susquehanna station the remaining depreciable life of the related property and are include prior to January I, 1989 and the amount of depreciation on such in PUC electric service rates.

property provided for financial reporting purposes and included in Deferred refueling outage costs-Susquehanna represent incremental rates, and is the result of a rate phase-in plan meeting the criteria of maintenance costs incurred during refueling and inspection outages SFAS 92, "Regulated Enterprise-Accounting for Phase-in Plans." The which are deferred and subsequently amortized over the period of annual difference is shown as amortized (deferred) depreciation on time that begins upon the cessation of the outage and ends with the the Consolidated Statement of Income. start of the next scheduled refueling and inspection outage. Such Deferred operating and carrying costs Susquehanna consist of cer- costs are included in electric service rates.

tain operating and capital costs, net of energy savings, associated with Reacquired debt costs represent premiums and expenses incurred in Units I and 2 at the Susquehanna station. The costsi deferred in the redemption of long. term debt. In accordance with FERC regula.

accordance with orders from the PUC, were incurred from the date tions, reacquired debt costs are amortized over either the life of the the units were placed in commercial operation until the effective refunding issue or the remaining life of the redeemed issue, as ap-dates of the rate increases reflecting operation of the units. The propriate. Reacquired debt costs are included in electric service rates.

deferred costs include related deferred income taxes. Recovery of For a discussion of taxes recoverable through future rates, post-these costs will be subject to PUC approval. No return is being retirement benefits other than pensions, retired miners'ealth 'care accrued on the deferred costs. benefits and assessment for decommissioning uranium enrichment Utility plant carrying charges are carrying charge accruals that were facilities, see Notes 5, 13 and 3, respectively.

reclassified from electric utility plant in service to a deferred debit in

11. Termination of Coal-Mining Operations The Company has ceased its subsidiary coal. mining operations. One customers.

of the three operating mines closed at the end of June 1991. A second All the coal produced at the now closed Greenwich mines was operating mine closed at the end of March 1992, and a third mine delivered to the Company's Montour generating station. The PUC was sold in September 1992. A coal processing and loading facility adopted a standard based on the cost of coal purchased by other was sold in November 1993, completing the planned phase.out of Pennsylvania electric utilities against which the cost of all coal coal mining operations. The Company replaced the coal produced by delivered to Montour was measured. The standard covered the three-its subsidiaries with coal acquired through new contracts with non. year period from April I, 1990 through March 31, 1993. At the end of affiliated suppliers and open market purchases. A subsidiary continues this period, the cost of coal delivered to Montour was less than the to sell purchased coal to the Company. standard.

The Company purchased, coal from certain subsidiaries at prices The Energy Act imposed a new liability on the Company or its equal to the cost incurred by those subsidiaries for mining, processing coal. mining subsidiaries for the cost of health care for retired coal and purchasing coal, These purchases totaled approximately $ 20 miners previously employed by those subsidiaries. See Note 3 for in-million in 1993, $ 109 million in 1992 and $ 188 million in 1991. The formation concerning this liability.

cost of coal purchased was included in energy costs collected from

12. Credit Arrangements The Company issues commercial paper and, from time to time, bor- terest rates based upon Eurodollar deposit rates or the prime rate.

rows from banks to provide short-term funds required for general cor- These credit arrangements mature on May I, 1994 with provisions to porate purposes. In addition, certain subsidiaries also borrow from extend every six months. These arrangements produce a total of $ 200 banks to obtain short. term funds. Bank borrowiny generally bear in. million of lines of credit to provide back.up for the Company's com-terest at rates negotiated at the time of the borrowing. mercial paper and the short-term borrowings of certain subsidiaries.

A $ 140 million revolving credit arrangement is maintained with a No borrowiny werc outstanding at December 31, 1993 under these group of banks in return for the payment of commitment fees. The credit arrangements.

line of credit is maintained principally as a back up for the Company's The Company also maintains a $ 5 million line of credit with a bank commercial paper. Any loans made under this credit arrangement in return for the maintenance of a compensating balance. No borrow-would mature on June 30, 1996 and, at the option of the Company, ings were outstanding at December 31, 1993 under this line of credit.

interest rates would be based upon certificate of deposit rates, The Company leases its nuclear fuel from a trust funded by sales of Eurodollar deposit rates or the prime rate. The Company has addi ~ commercial paper. The maximum financing capacity of the trust tional credit arrangements with another group of banks in return for under existing credit arrangements is $ 200 million.

the payment of commitment fees. The banks have committed to lend Commitment fees incurred were (millions of dollars): 1993, $ 0.3; the Company up to $ 60 million under these credit arrangements at in. 1992, $ 0.4 and 1991, $ 0.4.

36

13. Pension Plan and Other Postretirement and Postemployment Benefits Pensfon Plan tain management employees and directors that are not funded. Benefit The Company has a funded noncontributory defined benefit pen. payments pursuant to these supplemental plans are made directly by sion plan (Plan) covering substantially all employees. Benefits are the Company. At December 31, 1993, the projected benefit obligation based upon a participant's earnings and length of participation in the of these supplemental plans was approximately $ 12.9 million.

Plan, subject to meeting certain minimum requirements. The components of the Company's net periodic pension cost for The Company also has two supplemental retirement plans for cer- the three plans were (thousands of dollars):

1993 1992 1991 Service cost. benefits earned during the period .. $ 31>381 $ 29,967 $ 28,188 Interest cost 48,266 44,203 40,'605 Actual return on plan assets ................. (92,085) (95,969) (182,956)

Net amortization and deferral ................ 29,696 40,251 134,268 Net periodic pension cost $ 17,258 $ 18,452 $ 20,105 The net periodic pension cost charged to operating expenses was 1991. The balance was charged to construction and other accounts.

$ 10.1 million in 1993, $ 11.6 million in 1992 and $ 12.6 million in The funded status of the Company's Plan was (thousands of dollars):

December 31 1993 1992 Fair value of plan assets . $ 943>889 $ 877,887 Actuarial present value of benefit obligations:

Vested benefits. 490>567 407,164 Nonvested benefits 1>543 1,119 Accumulated benefit obligation 492,110 408,283 Effect of projected future compensation.... 191>302 201,594 Projected benefit obligation . 683,412 609,877 Plan assets in excess of projected benefit obligation 260,477 268,010 Unrecognized transition assets (being amortized over 23 years) (72>316) (76,836)

Unrecognized prior service cost . 34,240 36,731 Unrecognized net gain . (305,577) (295,543)

Accrued expense $ (83,176) $ (67,638)

The weighted avenge discount rate used in determining the ac- contracts with insurance companies. Substantially all union employees of tuarial present value of projected benefit obligations was 70% and these subsidiaries were covered by a pension plan administered by the 7.5%, respectively, on December 31, 1993 and December 31, 1992. Trustees of the United Mine Workers of America (UMWA) Health and The rate of increase in future compensation used in determining the Retirement Funds. The pension cost for non.bargaining employees actuarial present value of projected benefit obligations was 5.7% and together with retirement contributions to the UMWA Health and Retire-6.2%, respectively, on December 31, 1993 and December 31, 1992. ment Funds for 1991, 1992 and 1993 aggregated $ 5.4 million, $ 2.0 The assumed long term ntes of return on assets used in determining million and $ 0.0 million, respectively.

pension cost in 1993 and 1992 was 8.0%. Plan assets consist primarily Subsidiary mining companies are liable under federal and state laws to of common stocks, government and corporate bonds and temporary pay black lung benefits to claimants and dependents, with respect to ap.

ash investments. proved claims, and are members of a trust which was established to Subsidiary mining companies have a noncontributory defined facilitate payment of such liabilities. The actuarially determined expense benefit pension plan covering substantially all non bargaining, full. for black lung benefits was $ 0.5 million in 1991 and $ 0.2 million in time employees which is fully funded primarily by group annuity 1992. There was no expense for black lung benefits in 1993.

37

Postretirement Benefits Other Tban Pensions 1992, the Company recognized the cost of these benefits for retired Substantially all employees of the Company and its subsidiaries will employees when payments were made.

become eligible for certain health care and life insurance benefits Effective January I, 1993, the Company adopted SFAS 106, upon retirement. The Company sponsors four defined benefit health "Employers'ccounting for Postretirement Benefits Other Than Pen-and welfare plans that cover substantially all management and bargain- sions," which requires the Company to accrue, during the years that ing unit employees upon retirement. One plan provides for retiree the employees render the necessary service, the expected cost of pro.

health care benefits to certain management employees, another plan viding retiree health care and life insurance benefits. The transition provides retiree health care benefits to bargaining unit employees, a obligation at January I, 1993, which is being amortized over a 20-year third plan provides retiree life insurance benefits to certain manage. period, amounted to $ 173.8 million. In accordance with a PUC order, ment employees up to a specified amount and a fourth plan provides the Company is deferring the PUC-jurisdictional accrued cost of retiree life insurance benefits to bargaining unit employees. retiree health and life insurance benefits in excess of'actual claims Life insurance benefits for certain management employees beyond a paid pending recovery of the increased cost in reuil rates. See Note 3 specified amount are not included in the plan for retiree life insurance for additional information.

benefits to management employees but are combined with the In December 1993, the Company established a separate Voluntary disclosures below for the health care and life insurance plans. The Employee Benefit Association trust (VEBA) for each of the four health cost of retiree health care and life insurance benefits for officers of and welfare benefit plans for retirees and adopted a funding policy the Company are not material and are not combined with the that ukes into account the maximum amount allowed as a deduction disclosures below for health care and life insurance plans. for federal income tax purposes.

Dollar limits have been established for the amount the Company The following table sets forth the plans'ombined funded status will contribute annually toward the cost of retiree health care for reconciled with the amount shown on the Company's Consolidated employees retiring on or after April I, 1993. Through December 31, Balance Sheet at December 31, 1993 (thousands of dollars):

Accumulated postretirement benefit obligation:

Retirees . $ 95,046 Fully eligible active plan participants 32,742 Other active plan participants 75,185 202,973 Plan assets at fair value, primarily temporary cash investments 14,848 Accumulated postretirement benefit obligation in excess of plan assets... 188,125 Unrecognized net loss (20,573)

Unrecognized transition obligation . (i65,i40)

Accrued postretirement benefit cost .............................. $ 2,412 The plan that provides retiree health care benefits to ceruin that plan is (thousands of dollars) $ 70,630.

management employees is currently unfunded; the amount included The net periodic postretirement benefit cost for 1993 included the in the accumulated postretirement benefit obligation auributable to following components (thousands of dollars):

Service cost benefits attributed to service during the period S 3,699 Interest cost on accumulated postretirement benefit obligation 13,008 Net amortization and deferral 8,691 Net periodic postretirement benefit cost . $ 25,398 Through December 31, 1993, the Company deferred $ 14.9 million components of net periodic postretirement benefit cost for the year of retiree benefits costs. See Note 3 for additional information con- then ended by'about $ 1.1 million.

cerning the recovery of the deferred costs. The benefit cost charged In determining the accumulated postretirement benefit obligation, to operating expenses was $ 6.9 million in 1993. The balance was the weighted average discount rate used was 7%. The three trusts charged to construction and other accounts, The cost of retiree health holding plan assets are tax-exempt. The unfunded trust will be subject and life insurance benefits recognized as expense by the Company to federal income taxes at a 35% ux rate. The expected long. term rate and its subsidiaries was approximately (millions of dollars): 1992, S5,5 ~

of return on plan assets for the tax.exempt trusts was 6.5%.

and 1991, $ 7.2. Subsidiary coal mining companies had accrued $ 32 million for an For measurement purposes, a 10% annual rate of increase in the estimated payment they expected to make to the UMWA health trust per capita cost of covered health care benefits was assumed for 1994; funds for future retiree health care. However, the Energy Act imposed the rate was assumed to decrease gradually to 6% by 2006 and re- a new liability, estimated to about $ 68 million on a net present value main at that level thereafter. Increasing the assumed health care cost basis, on the Company or its subsidiary'coal mining companies for trend rates by 1% in each year would increase the accumulated the cost of health care of retired miners previously employed by postretirement benefit obligation as of December 31, 1993 by about those subsidiaries. See Note 3 for information concerning this liability.

$ 11.2 million and the aggregate of the service and interest cost

Postemptoyment Benef(ts Emptoyee Stock Ownership Plan The Company provides health and life insurance benefits to dis. The Company has an Employee Stock Ownership Plan (ESOP) for led employees and income benefits to eligible spouses of deceased all full-time employees having more than one year of service. Con.

employees. In December 1993, the Company adopted SFAS 112, tributions to the ESOP had been funded with investment and payroll-

"Employers'ccounting for Postemployment Benefits," which requires based tax credits previously available to the Company under federal the Company to accrue, during the years that the employees render law to acquire shares of the Company's common stock. Contributions the necessary service, the expected cost of providing benefits to funded with these tax credits were completed in 1991. Since 1990, all former or inactive employees after employment but before retirement. dividends on shares credited to participants'ccounts have been paid In connection with the adoption of SFAS 112, the Company recorded in cash. The Company deducts the amount of those dividends for in-an obligation for postemployment benefits of $ 7.5 million and a come tax purposes and contributes to the ESOP shares having a cost charge to operating expense of S5.5 million. The balance of the equal to the tax savings resulting from that deduction and postemployment benefit obligation was charged to construction and contribution.

other accounts. The one-time charge to operating expense, which after income:taxes, reduced net income by $ 3.1 million or about 2.1 cents per share of common stock.

14. Jointly Owned Facilities At December 31, 1993, the Company or a subsidiary owned undivided interests in the following facilities (millions of dollars):

Merrill Generating Stations Creek Susquehanna Keystone Conemaugh Reservoir Ownership interest . 90.00% 12.34% 11.39% 8.37%

Electric utility plant in service... 53,984 S55 S57 Other property 522 Accumulated depreciation....... 592 27 24 5 Construction work in progress... 64 2 26 Each participant in these facilities provides its own financing. The the Consolidated Statement of Income. The Merrill Creek Reservoir Company receives a portion of the total output of the generating sta- provides water during periods of low river flow to replace water from tions equal to its percentage ownership. The Company's share of fuel the Delaware River used by the Company and other utilities in the and other operating costs associated with the stations is reflected on production of electricity.

15. Commitments and Contingent Liabilities The Company's construction expenditures are estimated to ag- the insurers'osses exceed their reserves. The maximum amount the gregate 5471 million in 1994, 5398 million in 1995 and $ 422 million Company could be assessed under these programs at December 31, in 1996, including AFUDC. For discussion pertaining to construction 1993 was about 520.1 million.

expenditures, see Review of the Company's Financial Condition and Nuclear Regulatory Commission regulations, as amended, require Results of Operations under the caption "Financial Condition Capital that in the event of an accident, where the estimated cost of stabiliza-Expenditure Requirements" on page 16. tion and decontamination exceeds 5100 million, proceeds of property The Company is a member of certain insurance programs which damage insurance be segregated and used, first, to place and maintain provide coverage for property damage to members'uclear generating the reactor in a safe and stable condition and, second, to complete re-stations. Facilities at the Susquehanna station are insured against prop- quired decontamination operations before any insurance proceeds erty damage losses up to $ 2.7 billion under these programs. The would be made available to the Company or the trustee under the Company is also a member of an insurance program which provides Mortgage. The Company's on-site property damage insurance policies

'nsurance coverage for the cost of replacement power during pro- for the Susquehanna station conform to these regulations.

longed outages of nuclear units caused by certain specified condi. The Company's public liability for claims resulting from a nuclear tions. Under the property and replacement power insurance programs, incident at the Susquehanna station is limited to about $ 9.4 billion the Company could be assessed retrospective premiums in the event under provisions of The Price Anderson Admendments Act of 1988 39

(the Act). The Company is protected against this liability by a corn. oxide burners on each unit by the same date that sulfur dioxide limits bination of commercial insurance and an industry assessment pro- apply to that unit. In addition, the ambient ozone attainment provi.

gram. A utility's liability under the assessment program will be in- sions contained in Title I of the legislation specify other nitrogen ox-dexed not less than once during each five-year period for inflation ide emission reductions. In this regard, the legislation defines a and will be subject to an additional surcharge of 5/o in the event the total amount of public claims and costs exceeds the basic assessment.

Northeast Ozone Transport Region that includes all of Pennsylvania addition to all states in the Northeast from northern Virginia to Maine.

in~

In the event of a nuclear incident at any of the reactors covered by All major stationary sources within the region must install reasonably the Act, the Company could be assessed up to $ 151 million per inci~ available control technology (RACT) for nitrogen oxide emissions by dent, payable at a rate of $ 20 million per year, plus the additional 5/o May 1995.

surcharge, if applicable. The Company expects to meet this RACT requirement by installing In August 1991, a group of 21 fuel oil dealers in the Company's ser- low nitrogen oxide burners on the Phase I units as required by the vice area filed a complaint against the Company in United States acid rain title and by advancing the installation of low nitrogen oxide District Court for the Eastern District of Pennsylvania (Court) alleging burners on certain Phase II units, where technically feasible, that that the Company's promotion of electric heat pumps and off-peak would have been required in 2000 by the acid rain title.

thermal storage systems had violated and continues to violate the The Company currently estimates that the cost of compliance with federal antitrust laws. The complaint also alleged that the Company's the Phase I sulfur dioxide standards and installation of the low use of a cash grant program to developers and contractors for the in- nitrogen oxide burners will require capital expenditures of about $ 200 stallation of high efficiency heat pumps violated and continues to million (in estimated 1994 dollars) and additional operating expenses violate the Racketeer Influenced and Corrupt Organizations Act (RICO). which will result in an increase in customer rates of about I.5/o The complaint requested judgment against the Company for a sum (based on 1993 revenue levels).

in excess of $ 10 million for the alleged antitrust violations, treble the To meet the Phase II acid rain sulfur dioxide emission standards, damages alleged to have been sustained by the plaintiffs. Separately, the Company expects to install flue gas desulfurization (FGD) on up the complaint requested judgment for a sum in excess of $ 10 million to 60/o of its coal fired generating capacity, to continue to purchase for the alleged RICO violations, treble the damages alleged to have lower sulfur coal for its remaining generating capacity and to bank or been sustained by the plaintiffs. Finally, the complaint requested a trade emission allowances among its generating units or with other permanent injunction against all activities found to be illegal, in. utilities to the extent permitted by the legislation. The exact mix of eluding the cash grant program. lower sulfur fuel, emission allowance purchases, sales or trades, and In April 1992, a fuel oil dealer in the Company's service area filed a the amount and timing of FGD will be determined based on FGD in-class action complaint against the Company in the Court alleging, as stallation costs, fuel cost and availability, and emission allowance prices.

did the August 1991 complaint, that the Company's promotion of The Company currently estimates that the cost of compliance with electric heat pumps and off peak thermal storage systems had violated the Phase II sulfur dioxide standards will require additional capital ex-and continues to violate the federal antitrust laws. The complaint did not allege any violation of RICO, but did allege that the Company engaged in a civil conspiracy and unfair competition in violation of penditures in the later half of the 1990s of $ 400 million to $ 500 million (in estimated 1994 dollars) and additional operating expenses which will result in an increase in customer rates (based on 1993

~

Pennsylvania law. revenue levels) of about 3/o above the increase expected to result The plaintiff sought to represent as a class all fuel oil dealers in the from Phase I compliance with the sulfur dioxide standards of the Company's service area. The complaint requested a permanent injunc- legislation and installation of low nitrogen oxide burners.

tion against all activities found to be illegal and treble the damages The ambient ozone attainment provisions also require modeling of alleged to have been sustained by the class. No specific damage nitrogen oxide and volatile organic compound emissions in the amount was set forth in the complaint. This second antitrust corn. Northeast Ozone Transport Region to determine what further reduc-plaint was consolidated with the August 1991 complaint for pre.trial tions are needed beyond the RACT requirements to achieve ambient purposes. ozone attainment. If the results indicate further reductions are needed In September 1992, the Court granted the Company's motion for in power plant nitrogen oxide emissions, the Company may be re-summary judgment and dismissed both suits filed against the Com- quired to install additional nitrogen oxide reduction equipment, such pany. The plaintiffs have appealed the decision to the United States as selective catalytic reduction, on some or all of the fossil units Court of Appeals for the Third Circuit. The Company cannot predict around 2000. The Company's preliminary estimates indicate that the the ultimate outcome of, these proceedings. cost of compliance could require additional capital expenditures of up The Federal Clean Air Act Amendments of 1990 deal, in part, with to $ 600 million (in estimated 1994 dollars) and additional operating acid rain, attainment of federal ambient ozone standards and toxic air expenses which will result in a further increase in customer rates of emissions. The acid rain provisions, which are contained in Title IV of as much as 4/o (based on 1993 revenue levels).

the legislation, specify Phase I sulfur dioxide emission limits on about In addition to acid rain and ambient ozone attainment provisions, 55/o of the Company's coal. fired generating capacity by January I, the legislation requires the Environmental Protection Agency (EPA) to 1995, and more stringent Phase II sulfur dioxide emission limits for conduct a study of hazardous air emissions from power plants.

all of the Company's fossil fueled generating units by January I, 2000. Adverse findings from this study could cause the EPA to mandate ad-The Company expects to meet the 1995 Phase I sulfur dioxide stan. ditional ultra high efficiency particulate removal baghouses or dards by the use of lower sulfur coal, additional processing of coal specialized flue gas scrubbing to remove certain vaporous trace metals through cleaning plants, and the installation of scrubbers at the Con- and certain gaseous emissions. If it is determined that the installation emaugh station, in which the Company has an II.39/o ownership in- of such additional equipment is required, the Company's preliminary terest. The Company may also choose to limit the generation of cer- estimates indicate that the cost of compliance could require additional tain units and to bank or trade emission allowances among its capital expenditures of up to $ 400 million (in estimated 1994 dollars) generating units or with other utilities to the extent permitted by and additional operating expenses which will result in a further in-the legislation. crease in customer rates of as much as 2/o (based on 1993 revenue The acid rain provisions also require installation of low nitrogen levels).

4O

Under current Pennsylvania law, construction work in progress for very stringent limits for certain toxic metals and increased monitoring non.revenue producing assets, such as capital expenditures for pollu- requirements. More toxic reduction studies will be conducted at Mon.

tion control equipment, can be claimed in rate base. tour before the permit limits become effective. Additional water treat-In February 1993, the PUC adopted a policy statement regarding the ment facilities may be needed at Montour, depending on the results of ding and usage of, and the ratemaking treatment for, emission the studies. At Holtwood, toxics are required to be monitored at the allowances by Pennsylvania electric utilities. The policy statement fly ash basin until its closure in 1997. No limits have been set at this determines, among other things, that the PUC will not require ap- point. The Company will therefore comply with an implementation proval of specific transactions and the cost of allowances will be schedule for such closure and for construction of a new dry ash recognized as energy-related power production expenses and handling system at Holtwood.

recoverable through the ECR. The Company currently estimates that about $ 238 million of capital The Pennsylvania Air Pollution Control Act, as amended, im. expenditures could be required to comply with the residual waste plements the 1990 federal clean air legislation. The state legislation regulations, correct groundwater degradation at fossil-fueled essentially requires that new state air emission standards be no more generating stations and address waste water control at Company stringent than federal standards. This legislation has no effect on the facilities. Such expenditures during the years 1994-1996 could total Company's plans for compliance with the Federal Clean Air Act about $ 137 million, of which about $ 68 million is'included in the Amendments of 1990. Company's estimate of 1994-1996 construction expenditures shown on Until action has been taken by the appropriate regulatory bodies, page 16. Actions taken to correct groundwater degradation, to comply the Company will not be able to determine the exact method of corn. with the DER's regulations and to address waste water control are also pliance with the acid rain, ambient ozone and hazardous air emission expected to result in increased operating costs in amounts which are provisions of the legislation, or the cost thereof and,its impact on not now determinable but could be material.

customer rates. The issue of potential polychlorinated biphenyl (PCB) contamina-The Pennsylvania Department of Environmental Resources (DER) tion at certain of the Company's substations and pole sites is currently regulations governing the handling and disposal of industrial (or being pursued by the DER. In this regard, the DER sent the Company residual) solid waste require the Company to submit detailed informa. a proposed Consent Order under which the Company would assess tion on waste generation, minimization and disposal practices. They and, if necessary, remediate sites where PCB contamination may exist.

also require the Company to upgrade and repermit,existing ash basins The Company is continuing to negotiate with the DER. The costs of at all of its coal. fired generating stations by applying updated stan. addressing these PCB issues are not now determinable but could be dards for waste disposal. Ash basins that cannot be repermitted are re- material.

quired to close by July 1997. Any groundwater contamination caused At December 31, 1993, the Company had accrued $ 5.2 million, by the basins must also be addressed. Any new ash basin must meet representing the minimum amount the Company at this time can the rigid site and design standards set forth in the regulations. In addi- reasonably estimate it will have to spend to remediate sites involving

'on, the siting of future facilities at Company facilities could be the removal of hazardous or toxic substances. The Company is involved affected. in several other sites where it may be required, along with other par-The fly ash basin at the Martins Creek station and the dry fly ash ties, to contribute to such remediation. Some of these sites have been disposal area at the Montour station are expected to comply with the listed by the EPA under the federal Comprehensive Environmental DER regulations. However, the fly ash basins at other fossil-fueled Response Compensation and Liability Act of 1980, as amended (Super-generating stations, bottom ash basins at all fossil. fueled generating fund), and others may be candidates for listing at a future date. Future stations and the coal refuse basin at the Brunner Island station do not clean-up or remediation work at sites currently under review, or at meet the new requirements and must be retired by July 1997. The sites currently unknown, may result in material additional operating Company, in addressing the requirements of these regulations, plans costs which the Company cannot estimate at this time.

to install dry fly ash handling systems at the Brunner Island, Sunbury Concerns have been expressed by some members of the scientific and Holtwood stations. The Company, with siting assistance from a community and others regarding the potential health effects of elec-public advisory group, plans to use the dry fly ash from the Sunbury tric and magnetic fields (EMF). These fields are emitted by all devices and Holtwood stations to reclaim strip mines in the anthracite coal carrying electricity, including electric transmission and distribution region. The Company is exploring opportunities to beneficially use lines and substation equipment. Federal, state and local officials are coal ash from Brunner Island in various roadway construction pro- focusing increased attention on this issue. The Company is actively jects in the vicinity of the plant that may delay or preclude the need participating in the current research effort to determine whether or for a new disposal facility. not EMF causes any human health problems and is taking steps to Groundwater degradation related to fuel oil leakage from reduce EMF, where practical, in the design of new transmission and underground facilities and to seepage from coal refuse disposal areas distribution facilities. The Company is unable to predict what effect and coal storage piles has been identified at several generating sta- the EMF issue might have on Company operations and facilities.

tions. Many requirements of the DER regulations address these In complying with statutes, regulations and actions by regulatory groundwater degradation issues. The Company has reviewed its bodies involving environmental matters, including the areas of water remedial action plans with the DER. Remedial work has begun at one and air quality, hazardous and solid waste handling and disposal and generating station, and remedial work may be required at others. toxic substances, the Company may be required to modify, replace or The DER has adopted, and recently revised, regulations to imple- cease operating certain of its facilities. The Company may also incur ment the toxic control provisions of the, Federal Water Quality Act of material capital expenditures and operating expenses in amounts 1987 and to advance Pennsylvania's toxic control program. These which are not now determinable.

regulations authorize the DER to use both biomonitoring and a water At December 31, 1993, the Company had guaranteed $ 13.3 million uality based chemical-specific approach in National Pollutant of obligations of Safe Harbor. The Company does not expect to fund Elimination System (NPDES) permits to control toxics. In'ischarge the guarantee and has concluded that it is impractical to determine the third quarter of 1993, the Company received a new NPDES permit the fair value of the guarantee.

for- the Montour and Holtwood stations. The Montour permit contains

1993 1992 1991 1990 CONSOLIDATED OPERATIONS Income Items thousands Operating revenues $ 2,727,002 $ 2,744,122 $ 2,740,715 $ 2,637,922 Operating income 562,808 573,431 582,331 590,366 Netincome . 348,126 346,724 348,414 343,906 Earnings applicable to common stock............ 314,241 306,229 303,727 297,781 Balance Sheet Items thousands (a)

Electric utilityplant inservice net.............: $ 6,507,621 $ 6,391,857 $ 6,296,496 $ 6,240,608 Construction work in progress 238,600 211,534 183,242 143,084 Other property, plant and equipment net........ 399,360 416,113 449,s4o 510,529 Total assets. 9,454,113 8,191,768 7,934,595 7,735,442 Long-term debt 2,662,570 2,627,159 2,582,233 2,470 596 Preferred and preference stock With sinking fund requirements............... 335,000 325,600 364,590 383,690 Without sinking fund requirements............ 171,375 223,612 231,375 231,375 Common equity 2,425,835 2,366,939 2,298,010 2,221,759 Short-term debt 202,260 159,348 147,170 265,940 Total capital provided by investors .............. 5,797,040 5,702,658 5,623,378 5,573,360 Capital lease obligations . 249i025 251,058 271,976 302,754 Financial Ratios Return on average common equity  %........... 13.06 13.11 i3.42 13.65 Embedded cost rates (a)

Long-term debt % 8.63 9.36 9.72 9.69 Preferred and preference stock  %............ 6.3o 7.36 7.51 7.54 Times interest earned before income taxes

........ 3 33 3.18 3.o6 2.s6 Ratio of earnings to fixed charges total enterprise basis (b) . 3.31 3.15 3.o4 2.81 Depreciation as % of average depreciable property .. 3.3 32 3.1 2.9 Common Stock Data Number ofshares outstanding thousands Year-end .

Average Number ofshareowners(a) ..

Earningspershare .

152,132 151,904 130,677 S 2.07 151,885 15i,676 129,394

$ 2.02 i5i,655 151,382 127,272

$ 2.01 151,298 150,924 130,719

$ 1.97

~

Dividends declared per share s 1.65 $ i.6o '1.55

$ . 1.49 Book value per share (a) . $ 15.95 $ 15.58 $ 15.15 $ 14.68 Market price per share (a) $ 27 $ 27i/g $ 26>/8 $ 217/

Dividendpayoutrate % . 80 79 77 76 Dividend yield % (c) 5.64 6.07 '.69 7.15 Price earnings ratio (c) 14.14 13.05 11.55 10.56 ELECTRIC OPERATIONS Revenue Data By class of service thousands Residential $ 905,650 $ 876,531 842,771 $ 800,587 Commercial . 735,192 713,4o6 687,632 647,949 Industrial . 524,160 523,367 506,038 503,806 Other energy sales . 91,205 s5,456 83,630 78,489 System sales . 2,256,207 2,198,760 2,120,071 2,030,831 Contractual sales to other utilities... 313,578 330,017 322,298 313,207 PJM interchange power sales 96,848 111,602 180,434 217,430 Total from energy sales billed 2,666,633 2,640,379 2,622,803 2,56i,46s Unbilled revenues net . >>455) 36,567 47,o22 5,043 Other operating revenues . 1,561 64,67o 6s,'s6s 69,725 Total electric operating revenues . $ 2,725,739 $ 2,741,616 $ 2,738,693 $ 2,636,236 Average price per kwh billed cents Residential 8.20 8.27 8.12 7.92 Commercial . 7.84 7.89 "

7.76 7.59 Industrial . 5.76 5.98 5.98 5.78 (a)

Total for ultimate customers

. Total forsystem sales .

At year-end.

737 7.27 7.48 7.39 7.39 7.30 7.17 7'.08

~

42

1983-1993 1989 1988 1987 1986 1985 1984 1983  % Change

$ 2,632,915 $ 2,495,640 $ 2,457,153 $ 2,480,006 $ 2,566,288 $ 2,212,482 $ 1,991,773 36.9

'6i8',850 605,051 590,637 597,529 536,115 418,689 300,563 87.3 353,436 332,042 302)461 300,108 290,613 318,903 296,011 i7.6 305,018 279,865 248,035 231,051 199,327 226,758 210,173 49.5

$ 6,198,693 $ 6,056,723 $ 5,970,000 $ 5,815,838 $ 5,776,687 $ 3,856,738 $ 3,842,826 69.3 115,799 177,333 141,960 224,426 i6i,684 2,020,780 1,730,223 (86.2) 552,150 607,528 655,254 691,820 699,448 733,002 670,239 (40.4) 7,598,968 7,524,648 7,457,346 7,413,105 7,255,918 7,231,058 6,744,180 40.2 2,650,276 2,626,784 2,587,500 2,849,972 2,664,564 2,674,036 2,477,700 7.5 409,990 438,290 495,590 475,239 691,010 738,027 714,830 (53 1) 231,375 231,375 231,375 231,375 231,375 231,375 231,375 (25.9) 2,139,338 2,049,831 1,969,971 1,915,649 1,905,700 1,896,987 1,767,949 37.2 95,429 201,652 298,321 243,588 247,260 278,652 351,194 (42.4) 5,526,408 5,547,932 5,582,757 5,715,823 5,739,909 5,819,077 5,543,048 4 342,912 372,806 415,206 411,886 405,456 411,225 379,725 (34.4) i4.62 i3.86 12.78 12.11 10.42 12.30 12.29 6.3 9.80 10.15 10.31 10.53 11.23 11.11 10.98, (21.4) 7.62 7.66 7.77 8.33 10.02 9.94 9.66 (34.8) 2.78 2.65 2.62 2.69 2.28 2.24 2.20 51.4 2.69 2.57 2.53 2.58 2.19 2.06 2.05 6i.5 2.7 2.6 2.5 23 23 2.7 2.9 13.8 150,845 150,497 149,945 149,026 149,026 149,026 140,670 8.1 150,628 i50,i4i 149,289 149,026 149,026 145.534 137,284 i0.6 132,197 137,450 141,843 147,6i i 151,025 162,903 169,142 (22.7)

$ 2.02 $ i.86 $ 1.66 $ 1.55 $ 1.34 S i.56 $ 1.53 353

$ i.43. $ 1.38 $ 1.34 $ 1.29 $ 1.28 $ 1.24 $ 1.20 37.5

$ 14.18 $ 13.62 $ 13.13 $ 12.85 $ 12.79 $ 12.73 $ 12.56 27.0

$ 21i/ $ 18/s 16y $ 18/4 $ 14~s/ 12s/e S los i60.2 71 74 81 83 80 79 1.3 7.33 7.70 737 7.30 9.81 11.00 10.48 (46.2) 9.63 9.61 10.95 11.39 9.76 7.24 7.48 89.0

$ 776,673 S 768,051 S 737,066 $ 714,753 S 634,669 . S 591,922 $ 529,911 70.9 612,762 592,023 572,623 557,216 492,686 441,65i 386,617 90.2 488,691 495,968 492,491 473,488 438,427 411,533 367,950 42.5 80,144 75,507 74,228 74,047 64,223 59,526 47,275 92.9 1,958,270 1,931,549 i,876,408 1,819,504 1,630,005 1,504,632 1,331,753 69.4 316,508 277,971 282,799 299,663 255,875 52,724 39,012 703.8 255,245 268,526 359,449 282,259 556,926 623,328 720,462 (86.6) 2,530,023 2,478,046 2,518,656 2,401,426 2,442,806 2,180,684 2,091,227 27.5 39,628 (18,187) '84',888) 52,344 78,545 (9,725) (119,539) 97.9 6i,588 34,073 21,900 25,033 38,i63 33,657 i8,604 349 5

$ 2,631,239 $ 2,493,932 $ 2,455,668 $ 2,478,803 $ 2,559,514 $ 2,204,616 $ 1,985,382 373 7.72 7.79 8.05 8.15 7.60 7.00 6.5i 26.0 7.40 7.46 7.68 7.78 732 6.77 6.32 24.i 5.60 5.64 5.84 593 5.55 5.07 4.83 19.3 6.97 7.02 723 7.34 6.85 6.30 5.91 24.7 6.89 6.91 7.12 7.25 6.77 6.23 5.83 24.7 (b) Computed using earnings and fixed charges of the Company and all of its affiliated companies. Fixed charges consist of interest on short- and long. term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals.

( c) Based on avetage of month-end market prices.

43

Selected Financial and Operating Data 1993 1992 1991 1990 ELECTRIC OPERATIONS (Continued)

Sales Data Customers (a) . 1,203,139 1,186,682 1,173,680 1,161,232 Average annual residential kwh use 10,503 10,207 10,101 9,947 Electric energy sales billed millions of kwh Residential . 11,043 i0,604 10,385 10,103 Commercial 9,373 9,039 8,86i 8,538 Industrial 9,100 8,746 8,456 8,7i6 Other 1,534 i,366 1,334 1,315 System sales .. 31,050 29,755 29)036 28)672 Contractual sales to other utilities......... 7,142 7 327 7,183 7,028 PJM interchange power sales 4,142 5,160 7,553 8,971 Total electric energy sales billed........ 42,334 42,242 43,772 44,671 Sources of energy sold millions of kwh Generated Coal-fired steam stations 24,960 25,153 24,805 26,409 Nuclear steam station(b) 12,181 121216 14,271 13,254 Oil-fired steam station .. ~,452 1)057 1,939 i,442 Combustion turbines and diesels (oil).... 16 10 15 33 Hydroelectricstations . , 637 750 521 804 39,246 39,186 41,551 41 942 Power purchases 5,586 5,34? 4,542 4,634 Company use, line losses and other . (2,498) (2,291) (2,321) (1,905)

Total electric energy sales billed .. 42,334 42,242 43,772 44,67i Generation Data Net system capacity thousands of kw (a) (c)..... 7,802 7,802 7,797 7)912 Winter peak demand thousands of kw (d)...... 6,403 6,130 5,974 5,66i Generation by fuel source  %

Coal Oil ..

Nuclear(b)

Hydroelectric 63.6 31.0 3.8 1.6 64.2 31.2 2.7 1.9 59.7 34.3 4.7 1.3 63.0 3.5 1.9

~

Steam station availability  %

Coat-fired 82.6 81.7 78.1 82.5 Nuclear(b) . 73.8 73 7 86.3 80.2 Oil-fired . 81.9 94.8 86.7 82.8 Steam station capacity factor  %

Coal-fired 68.5 68.8 68.2 72.7 Nuclear(b) . 73.0 73.0 85.8 80.1 Oil-fired 10.'1 73 13.5 10.0 Fuel Cost Data Cost per kwh generated cents Coal-fired steam stations . 1.53 1.74 1.75 i.66 Nuclear steam station (b) . 0.54 0.54 0.57 0.59 Oil-firedsteamstation . 3.89 3.73 3.58 4.i8 Combustion turbines and diesels (oil)......... 7.03 7.50 7.52 7.68 Average 1.31 1.42 1.43 1.4i Cost of fossil fuel received at steam stations Coal per ton. $ 36.23 $ 4i.44 $ 42.87 $ 40.64 Residual oil per barrel $ 18.70 $ i6.56 $ i8.76 $ 21.52 Capitalization Ratios  % (a)

Long-term debt . 46.5 46.7 46.3 44 5 Short-term debt 2.0 1.2 1.3 3.8 Preferred and preference stock 8.9 9.8 10.8 1 1.2 Common equity. 42.6 42.3 41.6 40.5 Times Interest Earned Before Income Taxes... '.37 3.21 3.11 2.93 Employees(a) . 7,765 7,981 8,i44 8,149 (a) At year-end.

(b) The Company's first nuclear unit was placed in commercial operation on June 8, 1983 and the second unit on February 12, 1985.

44

1983-1993 1989 1988 1987 1986 1985 1984 1983  % Change 1,143,593 1,122,633 1,097,522 1,073 151 1,055,550 1,039,385 1,026,149 17.2 10,064 10,059 9,565 9 344 9,034 9,282 9,051 16.0 10,061 9,856 9,157 8,771 8,354 8,454 8,138 357 8,285 7,932 7,457 7,159 6,728 6,527 6,119 532 8,723 8,799 8,438 7,986 7,907 8,117 7,623 194 1,333 1,360 1,285 1,170 1,082 1,043 968 58.5 28,402 27,947 26,337 25,086 24,071 24,141 22,848 35.9 6,956 6,268 6,201 5,602 4,850 1,002 845 745.2 9,234 10,855 12,682 11,018 15,433 14,732 15,769 (73.7) 44,592 45,070 45,220 41,706 44,354 39,875 39,462 73 27,104 26,607 26,465, 25,151 26,237 26,695 26,885 (7 2) 11,916 12,867 13,285 10,151 11,534 6,295 4,509 170.1 3,817 4,186 4,095 5,453 4,316 4,121 5,581 (74.0) 107 57 28 17 18 '32 45 (64.4) 714 573 689 739 612 747 700 (9.0) 43,658 44,290 44,562 41,511 42,717 37,890 37,720 4.0 3,586 3,027 2,707 2,032 3,716 3,765 3,880 44.0 (2,652) (2,247) (2,049) (1,837) (2,079) (1,780) (2,138) (16.8) 44,592 45,070 45,220 41,706 44,354 39,875 39,462 7.3 7,864 7,479 7,499 7,519 7,513 7,484 7,494 4.1 6,000 5,566 5,591 5,154 4,981 5,519 4,869 31.5 62.1 60.1 594 60.6 61.4 70.4 71.3 (10.8) 27.3 29.0 29.8 24.4 27.0 16.6 11.9 160.5 9.0 9.6 9.3 13.2 10.2 11.0 14.9 (74.5) 1.6 1.3 1.5 1.8 1.4 2.0 1.9 (15.8) 81.1 81.3 83.3 78.8 78.6 75.2 78.8 4.8 72.1 77.7 80.4 61.7 70.7 66.7 67.7 9.0 76.3 90.1 84.7 84.7 87.2 68.0 75.8 8.0 74.6 73.1 72.9 69.3 72.3 73.3 74.0 (7.4) 72.0 77.7 80.5 61.3 70.5 65.7 67.5 8.1 26.6 29.1 28.5 38.0 30.0 28.6 38.8 (74.0) 1.61 1.64 1.63 1.67 1.78 1.75 1.68 (8.9) 0.58 0.56 0.56 0.58 0.61 0.54 0.66 (18.2) 303 2.76 3.23 2.96 5.02 5.31 5.23 (25.6) 5.95 5.89 6.51 7.81 9.31 9.82 10.21 (31.1) 1.46 1.44 1.46 1.57 1.81 1.98 2.15 (39.1)

$ 39.04 $ 39 52 $ 39 30 $ 40.17 $ 42.00 $ 42.75 $ 39.37 (8.0)

$ 17.71 $ 15.95 $ 18.51 $ 16.83 $ 28.42 $ 31.32 $ 29.79 (37.2) 3 47 9 46.9 50.4 47.1 46.7 45.1 3.1 0.2 1.7 3.1 2.1 1.7 1.9 3.6 (44.4) 1 1.9 12.4 13.5 12.8 16.7 17.4 17.9 (50.3) 39.6 38.0 '6.5 34.7 34.5 34.0 33.4 27.5 t

2.88 2.73 2.71 2.80 2.37 235 2.29 47.2 8,108 8,306 8,301 8,339 8,433 8,386 8,160 (4.8)

(c) Total generating capacity plus fir capacity purchases less fir capacity sales.

Except for 1989, the winter peaks shown were reached early in the subsequent year.

(d) 45

The followinginformation is pro- Direct Deposit of Dividends: Publications: Several publica-vided as a service to shareowners Shareowners may choose to have tions are prepared each year and and other investors. For any their dividend checks deposited sent to all investors of re'cord and questions you may have or ad- directly into their checking or sav- to others who request their names ditional information you may ings account. Quarterly dividend be placed on our mailing lists.

require about PP8cL or your in- payments are electronically These publications are:

vestments in the company, credited on the dividend date, or Annual Report published and please feel free to call the toll- the first business day thereafter. mailed to all shareowners of record free number listed below, or in mid-March.

write to: Dividend Reinvestment Plan: Shareowners'Newsletter an George I. Kline, Manager Shareowners may choose to have easy-to-read newsletter containing Investor Services Department dividends on their common or current items of interest to share-Pennsylvania Power &Light Co. preferred stocks reinvested in owners published and mailed at Two North Ninth Street PP8:L common stock instead of the beginning of each quarter. Ad-Allentown, Pa. 18101-1179 receiving the dividend by check. ditionally, a special year-end edi-

. Toll-Free Phone Number: For tion containing unaudited results information regarding your in- Certificate Safekeeping: of the year's operations is mailed in vestor account, or other inquiries, Shareowners participating in the early February.

call toll-free: 800-345-3085. Dividend Reinvestment Plan may choose to have their common Quarterly Review published in Annual Meeting: The annual May, August and November to pro-stock certificates forwarded to the vide quarterly financial informa-meeting ofshareowners is held company for safekeeping. These each year on the fourth Wednes- tion to investors.

shares willbe registered in the day ofApril. The 1994 annual name of the company as agent for meeting willbe held at 1:30 p.m. plan participants andwill be Periodic Mailings: Letters from on Wednesday, April27, 1994, at credited to the the company regarding new in-the F.M. Kirby Center for the Performing Arts, Public Square, Wilkes-Barrc, Pa. A reservation participants'ccounts.

Lost Dividend or Interest vestor programs, special items of interest, or other pertinent infor-mation are mailed on a non-

~

card for meeting attendance is Checks: Dividend or interest scheduled basis as necessary.

included with shareowners'roxy checks lost by investors, or those material. that maybelostin themail, willbe Duplicate Mailings: Annual Proxy Material: A proxy state- replaced ifthe check has not been reports and other investor publi-rnent, a proxy and a reservation located by the 10th business day cations are mailed to each in-card for the company's annual following the payment date. vestor account. Ifyou have more meeting are mailed in a package than one account, or ifthere is that includes this report. This. Transfer of Stock or Bonds: more than one investor in your material was mailed beginning Stock or bonds may be transferred household, you may call or write March 15, 1994, to all shareowners. from one name to another or to a to request that only one publica-of record as of March 10, 1994. new account in the name of tion be delivered to your address.

another person. Please call or write Please provide account numbers Dividends: For 1994, the dates regarding transfer instructions. for all duplicate mailings.

the declaration of dividends is con-sidered by the board or its execu- Bondholder Information:

tive committee are: Feb. 23, Form 10-K and PPRL Profile:

Much of the information and many The company's annual report, May 25, Aug. 24 and Nov. 23, of the procedures detailed here for filed with the Securities and for payment on April 1,July 1 shareowners also apply to bond- Exchange Commission on and Oct. 1, 1994, and Jan. 1, holders. Questions related to Form 10-K, is available about 1995, respectively. Dividend bondholder accounts should be mid-March. The PPKL Profile, a checks are mailed ahead of those directed to Investor Services. 10-year statistical review contain-dates with the intention they arrive as close as possible to the payment ing in-depth information about Lost Stock or Bond Certifi- the company, is available in May.

dates.

Record Dates: The 1994 record dates for dividends are March 10, cates: Please call or write to In-vestor Services for an explanation of the procedure to replace lost Investors may obtain a copy of these publications, at no cost, by calling or writing to Investor

~

June 10, Sept. 9 and Dec.9. stock or bond certificates. Services.

46

isted Securitiesr Fiscal Agents:

i ew York Stock Exchange Pbfladelpbfa Stock Exchange Stock Transfer Agents and Common Stock (Code: PPL) Common Stock Regfstrars 4>/,% Preferred Stock 4t/,% Preferred Stock First Chicago Trust Co. ofNew York 3.35% Series Preferred Stock P.O. Box2506 (Code: PPLPRB) 4.40% Series Preferred Stock Suite 4659 4.40% Series Preferred Stock Jersey City, NJ 07303-2506 (Code: PPLPRA) 4.60% Series Preferred Stock Pennsylvania Power &Light Co.

Investor Services Department Dfvfdend Dfsbursfng Office and Dfvfdend Refnvestment Plan Agent Pennsylvania Power &Light Co.

Investor Services Department Mortgage Bond Trustee Morgan Guaranty Trust Co. ofNerv York Corporate Trust Operations 55 L'xchange Place Basement 'A" New York, New York 10260-0023 Bond Interest Payfng Agent Pennsylvania Power 6 Light Co.

Investor Services Department Quarterly Financial, Common Stock Price and Dividend Data (Unaudited)

For the Quarters Ended(a)

March 31 June 30 Sept. 30 Dec. 31 (T/thousands ofDollars, Except Per Share Amounts) 1993 Operating revenues . $ 727,386 $ 620,439 $ 683,466 $ 695,711 Operating income .. 171,476 123,849 134,129 133,354 Net income 115,749 69,867 81,775 80,735 Earnings applicable to common stock . 106,206 60,231 74,826 72,978 Earnings per common share (b) . 0.70 0.40 0.49 0.48 Dividends declared per common share(c) . 0.4125 0.4125 0.4125 0.4125 Price per common share High . 30/z 30$/4 31 30/4 Low ........... 26t/4 28>/s 291/ 261/s 1992 Operating revenues . $ 756,834 $ 645,093 $ 655,912 $ 686,283 Operating income .. 170,505 128,162 128,061 146,703 Net income 113,025 69,790 72,900 91,009 Earnings applicable to common stock . 102,603 59,686 62,825 81,115 Earnings per common share(b) . 0.68 0.39 0.41 0.53 Dividends declared per common share (c) . 0.40 0.40 0.40 0.40 Price per commonshare High . 26t/, 261/. 28t/4 277/s Low . 237/s 24t/, 25$/4 257/s t

( a ) The Company's elearic utilitybusiness is seasonal in nature with peak sales periods genenlly occurring in the winter months. Accordingly, com-parisons among quarters ofa year may not be indicative ofovenll trends and changes in opentions.

(b) The sum of the quarterly amounts may not equal annual earnings per share due to changes in the number of cqmmon shares outstanding during the year or rounding.

( c ) The Company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in 1993 and 1992 were

$ 1.6375 and $ 1.5875, respeaively. The most recent regular quarterly dividend paid by the Company was 41.25 cents per share(equivalent to $ 1.65 per annum) paid January 1, 1994. Future dividends willbe dependent upon future earnings, financial requirements and other factors.

47

WILLIAMF. HECHT 50 (29), Chairman, President and Chief Executive Officer FRANCIS A. LONG 53 (30), Executive Vice President and Chief Operating Officer ROBERT G. BYRAM 48 (17), Senior Vice President-Nuclear GENNARO D. CALIENDO 53 (25), Senior Vice President, General Counsel and Secretary RONALD E. HILL 51 (29), Senior Vice President-Financial JOSEPH C. KRUM 56 (34), Senior Vice President-Division Operations LINDA CURRY BARTHOLOMEW 45 (23), Vice President-Public Affairs JOHN R. BIGGAR 49 (24), Vice President-Finance.

STEVEN H. CANTONE 50 (14), Vice President-Northeast Division JOHN M. CHAPPELEAR 55 (15), Vice President-Investments and Pensions ROBERT M. GENECZKO 41 (19), Vice President-Susquehanna Division ROBERT S. GOMBOS 50 (28), Vice President-Human Resource 6 Development MICHAEL D. HILL 51 (28), Vice President-Information Services GEORGE T. JONES 46 (2), Vice President-Nuclear Engineering JOHN P. KIERZKOWSKI 54 (22), Vice President and Treasurer GRAYSON E. McNAIR 53 (31), Vice President-Lehigh Division JOHN R. MENICHINI 46 (25), Vice President-Harrisburg Division JOHN H. SAEGER 55 (33), Vice President-Lancaster Division ROBERT J. SHOVLIN 53 (31), Vice President-Power Production & Engineering JEAN A. SMOLICK 59 (41), Assistant Secretary HAROLD G. STANLEY 53 (14), Vice President-Nuclear Operations RAYMOND F. SUHOCKI 48 (20), Vice President-System Power Numbers indicate age and years of service ( ) as of March t, 1994.

CORPORATE hIANAGEMENT COhIhIITTEE: BOARD COMMITTEES William F. Hccht, chairman; Francis A. Long, Robert G. Byram, Executive Committee: William F. Hecht, G. D. Caliendo, Ronald E. Hill and Joseph C. Krum. chairman; Jeffrey J, Burdge, John T. Kauffman, Norman Robertson, and David L. Tressler.

Audit Committee: David L. Tressler, chairman; Nance K. Dicciani, William J. Flood, Daniel G.

Gambet, and Ruth Leventhal.

Corporate Responsibility Committee:

Daniel G. Gambet, chairman; Richard S. Barton, Stuart Heydt, Clifford L. Jones, Robert Y. Kaufman, and Ruth Leventhal.

hlanagement Development and Compensation Committee: Edward Donley, chairman; Richard S. Barton, E. Allen Deaver, Elmer D. Gates, and Norman Robertson.

Nominating Committee: Jeffrey J. Burdge, chairman; Edward Donley, William J. Flood, Stuart Heydt, and Clifford L. Jones.

Nuclear Oversight Committee:

Elmer D. Gates, chairman; E. Allen Deaver, Nance K Dicciani, John T. Kauffman, and Robert Y. Kaufman.

4s

D Pictured are outside Directors as of March l, 1994 ting@~

Barton Burdge Deaver Dicciani Donley Flood Gambet Gates Heydt Jones Kauffman Kaufman Leventhal Robertson Trcssler RICHARD S. BARTON 44 ('), Rochester, N.Y., President, U.S. Customer Operations and a Corporate Vice President, Xerox Corporation. Manufacturer and marketer of document processing products and systems JEFFREY J. BURDGE 71 (11), Camp Hill, Former Chairman of the Board, Harsco Corporation.

Manufacturer of processed and fabricated metals E. ALLEN DEAVER 58 (3), Lancaster, Executive Vice President, Armstrong World Industries Inc.

Manufacturer of interior furnishings and specialty products ANCE K. DICCIANI 46 (*), Philadelphia, Vice President and Business Director, Petroleum Chemicals Division, Rohm and Haas Company. Manufacturer of specialty chemicals and plastics DWARD DONLEY 72 (11), Allentown, Former Chairman, Air Products and Chemicals Inc Manufacturer of industrial and commercial gases and chemicals WILLIAMJ. FLOOD 58 (4), Hazleton, Secretary-Treasurer, Highway Equipment 6 Supply Co. Supplier of.

heavy equipment for highway construction and industry REV. DANIEL G. GAMBET, O.S.F.S. 64 (7), Center Valley, President, Allentown College of St. Francis de Sales ELMER D. GATES 64 (4), Bethlehem, Vice Chairman, Fuller Company. Manufacturer of plants, machinery and equipment for industry WILLIAMF. HECHT 50 (3), Allentown, PP&L Chairman, President and Chief Executive Officer STUART HEYDT 54 (3), Danville President and Chief Executive Officer, Geisinger Health System CLIFFORD L. JONES 66 (5), Mechanicsburg, Former President, Pennsylvania Chamber of Business and Industry JOHN T. KAUFFMAN 67 (15), Allentown, Former PP&L Chairman and Chief Executive Officer ROBERT Y. KAUFMAN 69 (1), Potomac Md., Chairman and President, Yogi, Inc Consulting firm RUTH LEVENTHAL 53 (5), Middletown, Provost and Dean, Penn State Harrisburg (Tbe Capital College)

FRANCIS A. LONG 53 (1), Allentown, PP&L Executive Vice President and Chief Operating Officer NORMAN ROBERTSON 66 (24), Pittsburgh, Former Senior Vice President and Chief Economist, Mellon Bank, N.A.

DAVID L. TRESSLER 57 (12), Scranton, Executive Director of the Joseph M. McDade Center for Public Initiatives at the University of Scranton Numbers indicate age and years of service ( ) on PP&L board as of'arch i, 1994. 'Less than one year as a director.

ggg Pennsylvania Power tt Light Company Two North Ninth Street ~ Allentown, PA 18101 ~ 610/774-5151 PAL is part of a nationwide partnership with General Motors to put people in the driver's seat of electric vehicles. The test-drive partnership was announced by PAL and GM officials and acting Pennsylvania Governor Mari. Singel in Harrisburg in October. PAL was chosen as one of 12 test sites in the nationwide prografn because of the cotnpany's long-standing support of electric vehicle initiatives.

fee f

s tvs e Working Tozvards a Brighter Tomorrozoo UTHO IN U.t

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]

For the fiscal year ended December 31, 1993 OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from to Commission file number 1-905 PENNSYLVANIA POWER & LIGHT COMPANY, (Exact name of Registrant as specified in its charter)

PENNSYLVANIA, 23-0959590 (State or other jurisdiction of (I.R.S, Employer Identification incorporation or organization) No.)

TWO NORTH NINTH STREET, ALLENTOWN PENNSYLVANIA 18101-1179 (Address of principal executive offices) (Zip Code)

Registrant's telephone number, including area code: 610-774-5151 Securities registered pursuant to Section 12(b) of the Act:

Name of each exchange on which registered Preferred Stock 4-1/24 New York & Philadelphia Stock Exchanges 3.354 Series Philadelphia Stock Exchange 4.40% Series New York &.Philadelphia Stock Exchanges 4.604 Series Philadelphia Stock Exchange Common Stock New York & Philadelphia Stock Exchanges r

Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Requlation S-K is not contained herein, and will not be contained, to the .best of Registrant's knowledge, in definitive proxy or reference in Part III information statements incorporated by of this Form 10-K or any amendment to this Form 10-K.

[ X ]

Indicate by check mark whether the Registrant (1) has offiled all reports required Securities Exchange to be filed by Section 13 or 15(d)

Act of 1934 durinq the preceding 12 months the or for such shor'ter period that the Registrant was required to ile such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No Estimated agqregate market value of the voting stock (common an5 preferred) held by non-affiliates a5 the end of January 1994 $4 g 33 1 J 308 J 348 Common stock, no par, number of shares outstanding at january 31, 1994 152J132g089 Documents incorporated by reference:

Registrant has incorporated herein by and reference certain sections of its 1994 Notice of Annual Meeting Proxy Statement which will be filed with the Securities and Exchange Such Commission not later than 120 days after December 31, 1993. Part Proxy III Statement will provide the information required by of this Report.

(THIS PAGE LEFT BLANK INTENTIONALLY.)

PENNSYLVANIA POWER & LIGHT COMPANY FORM 10-K ANNUAL REPORT TO THE SECURITIES AND EXCHANGE COMMISSION FOR THE YEAR ENDED DECEMBER 31 1993 TABLE OF CONTENTS Item Pacae PART I 1 Bustiness 2 Propert.les ~ ~ ~ ~ ~ ~ ...... ~ ~ ~ ~ ~ ~ ~ . ~ ~ ~ .~ ~ ~ ~ ~ ~ ~ ~ ~ ~ . ~ ~ ~ ~ ~ ~ ~ ~ 18

3. Legal Proceedings 18

4. Submission of Matters to a Vote of Security Holders 20 Executive Officers of the Registrant.................. 21 PART II

5. Market for the Registrant's Common Equity and Related Stockholder Matters 24

6. Selected Fxnancxal Data 24

7. Management's Discussion and Analysis of Financial Condition and Results of Operations 24

8. Financial Statements and Supplementary Data 25

9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 25 PART III

10. Directors and Executive Officers of the Registrant.... 94

11. Executive Compensation 94

12. Security Ownership of Certain Beneficial Owners and Management 94

13. Certain Relationships and Related Transactions 94 PART IV

14. Exhibits, Financial Statement Schedules, and R eports on Form 8-K 95 S signatures 97 Exh

~

~

~izbzt b

~

Index 98 Computation of Ratio of Earnings to Fixed Charges..... 113

PART I ITEM 1. BUSINESS THE COMP2QPI Pennsylvania Power & Light Company (Company) is an operating electric utility, incorporated Pennsylvania in 1920.

under the laws of the Commonwealth of The Company's general offices are located at Two North Ninth Street, Allentown, Pennsylvania 18101. The Company's telephone number is (610) 774-5151.

The Company is subject to regulation as a public utility by the Pennsylvania Public Utility Commission (PUC) and is subject in certain of its activities to the jurisdiction of the Federal Energy Regulatory Commission (FERC) under Parts I, II and III of the Federal Power Act. The Company is a holding company under the Public Utility Holding Company Act of 1935 (PUHCA) but has been exempted by the Securities and Exchange Commission from the provisions of that Act applicable to it as a holding company.

The Company is subject to the jurisdiction of the Nuclear Regulatory Commission (NRC) in connection with the operation of the two nuclear-fueled generating units at the Company's Susquehanna station. The Company owns a 904 undivided interest in each of the Susquehanna units and Allegheny Electric Cooperative, Inc. owns a 10%

undivided interest in each of those units.

The Company is also subject to the jurisdiction of certain federal, regional, state and local regulatory agencies with respect to air and water quality, land use and other environmental matters.

The operations of the Company are subject to the Occupational Safety and Health Act of 1970 and the coal cleaning and loading operations of a Company subsidiary are, subject to the Federal Mine Safety and Health Act of 1977.

The Company operates its generation and transmission facilities as part of the Pennsylvania-New Jersey-Maryland Interconnection Association (PJM). The PJM, one of the world's largest power pools, includes 11 companies serving about 21 million people in a 50,000 square mile territory covering all or part of Pennsylvania, New Jersey, Maryland, Delaware, Virginia and Washington, D.C.

The Company serves approximately 1.2 million customers in a 10,000 square mile territory in 29 counties of central eastern Pennsylvania (see Map on page 17), with a population of approximately 2.6 million persons. This service area has 126 communities with populations over 5,000, the largest of which are the cities of Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and Williamsport.

During 1993, about 98% of total operating revenues was derived from electric energy sales, with 34% coming from residential customers, 274 from commercial customers, 204 from industrial

customers, 44 from interchange power sales to members of the PJMf 12% from contractual sales to other major utilities and 3% from others. The Company's largest industrial customer provided about 1.4% of revenues from energy sales during 1993. Twenty-nine industrial customers, whose billings exceeded $ 3 million each, provided about 7.5% of such revenues. Industrial customers are broadly distributed among industrial classifications.

Wholly owned subsidiary companies of the Company principally are engaged in holding coal reserves, oil pipeline operations, and passive financial investments. See "Termination of Coal-Mining Operations" on page 34 and Note ll to Financial Statements for information concerning the Company's termination of its subsidiary coal-mining operations, and "Increasing Competition" on page 40 for information concerning the Company's plans to create a new corporate structure to pursue new business opportunities.

FINANCIAL CONDITION Earnings per share of common stock were $ 2.07 in 1993, $ 2.02 in 1992 and $ 2.01 in 1991. Increasing economic activity in central eastern Pennsylvania and the effects of hotter-than-normal weather during the summer were the main reasons for the earnings improvement.

If weather had been normal, earnings would have been 2 cents per share lower in 1993.

Earnings also benefited from continuing efforts to control operating and -maintenance costs and by the continuing refinancing of higher cost securities to take advantage of favorable market conditions.

In the fourth quarter of 1993, the Company recorded charges against income that, in the aggregate, adversely affected net income by about $ 18 million or 12 cents per share of common stock. The charges related to: (i) credits to be included in the Company's Energy Cost Rate (ECR) due to entering a settlement agreement with complainants against the Company's ECR; (ii) the write-off of certain deferred retiree benefit costs; and (iii) the recognition of certain employee benefit costs in connection with the adoption of a new accounting standard.

The Company earned a 13.064 return on average common equity during 1993, down slightly from the 13.114 return in 1992. The ratio of the Company's pretax income to interest charges increased slightly from 3.2- times in 1992 to 3.3 times in 1993. The Company increased common stock dividends from an annual per share rate of $ 1.60 in 1992 to $ 1.65 in 1993. The ratio of the market price to book value of common stock was 169% at, the end of 1993 compared to 1754 at the end of 1992.

The allowance for funds used during construction (AFUDC), a non-cash credit to income, accounted for only about 5% of earnings in 1993. In 1994, AFUDC is expected to increase as the Company accelerates capital expenditures to comply with the federal clean air legislation. The amount of AFUDC recorded will depend on the timing and level of construction work in progress as well as the rate treatment afforded the capital expenditures required to comply with

the clean air legislation. Under .current Pennsylvania law, construction work in progress for non-revenue producing assets, such as capital expenditures for pollution control equipment, can be claimed in rate base.

to The Company's strong generating capacity position has 'enabled enter into a number of capacity-related transactions, as discussed it under "Capacity-Related and, Transmission Entitlement Transactions" on page 28 and in Note .4 to Financial Statements.

Revenues from the sale of capacity credits, the reservation of output from the Martins Creek units and the sale of transmission entitlements, net of foregone interchange savings which are included in the Company's ECR, totaled $ 35.0 million in 1993, $ 35.0 million in 1992 and $ 35.4 million in 1991. The Company currently expects about $ 35 million of revenues from these transactions during 1994.

Increased competition in capacity credit transactions has reduced the price received for such sales.

'he Company is continuing to look, for opportunities to derive additional revenues due to its strong generating capacity. position.

The amount of revenues from these types of transactions. depends on many factors, and it is difficult to predict the amount of revenues the Company will ultimately realize from these transactions. See "Rate Matters" on page 28 and Note 3 to Financial Statements for information concerning a settlement agreement between the Company and opposing parties in the ongoing ECR proceedings which would credit to the ECR a portion of the Company's receipts from capacity credit sales for past and future ECR periods.

Economic activity in the Company's .service territory continued to increase in 1993. Energy sales to service area customers, when adjusted for normal weather, increased by 855 million kilowatt-hours, or 2.84, over 1992. By comparison, weather-normalized energy sales in 1992 increased by only 2.64 over 1991 levels.

In 1993, residential sales and commercial sales, when adjusted for normal weather, increased by 1.54 and 2.14, respectively, over 1992. Industrial sales, which are not affected by the'eather, were up 4.0<.

System sales in 1994 are currently forecasted to be approximately 31.7 billion kwh, an increase of 655 million kwh, or 2.1%, over 1993 actual system sales, and a 771 million kwh, or 2.5%,

increase over 1993 weather-normalized sales.

Additional energy sales from marketing and economic development efforts continue to be a key corporate initiative. The level of additional sales estimated from these programs in 1993 was 556 million kwh. The Company's 1994 marketing and economic development goal is to achieve annual net sales growth of 650 million kwh. The financial effect of these additional sales may take at least two years to be realized, and possibly longer industrial customer is involved.

if a major commercial or

'Competition from other fuel sources for certain energy applications has increased in recent years. The Company's electric heat market share in new residential construction has dropped from 69< in 1991 to 65% in 1993. The Company's goal for 1994 is a 684 electric heat market share in new residential construction.

Certain large customers have considered self-generation of electricity over the past several years. generation. However, the Company no significant load to customer-owned has'ost The Energy Policy Act of 1992 (Energy Act) will have a significant impact on the Company and the electric utility industry, class of primarily through amendments to the PUHCA that creates a new independent power producers, and amendments to the Federal Power Act that opens access to electric transmission systems for wholesale transactions. These changes are expected to increase competition in the wholesale energy supply market.

In response to the increased competition, the Company has undertaken initiatives to strengthen its position in the wholesale market. The Company. entered into new five-year supply agreements at reduced prices with its existing wholesale customers. These agreements are subject to FERC approval. The Company is actively participating in negotiations and proceedings involving the sale of electricity to wholesale customers currently served bysmall other electric utilities. These wholesale customers are generally utilities that do not have their own generating capability ,and purchase electricity from others.

While there is currently no comparable competition in the retail electric market, the Company anticipates that it will face similar sectors

. competitive pressures in the industrial and large commercial of that market in the future.

The Company's strategic initiatives also include an assessment of entering power-related businesses outside of the Company's service territory, both domestically and in foreignmethodical countries. Any expansion by the Company into these areas would be and deliberate.

To take advantage of these new business opportunities, in February 1994 the Company's Board of Directors approved a plan to (i) make an initial investment of $ 50 million in these new businesses; and (ii) pursue the formation of a holding company structure to facilitate such investment, subject to the receipt of appropriate regulatory approvals and, ultimately, shareowner approval at the 1995 annual meeting.

For a discussion of the assessment on the Company pursuant to the Energy Act for the Uranium Enrichment Decontamination and Decommissioning Fund, see the discussion under that caption on page

39. For a discussion of the effects of the Energy Act provisions relating to health care for retired coal miners, see "Termination of Coal-Mining Operations" on page 34.

CAPITAL EXPENDITURE REQUIREMENTS~ FINANCING AND RATE MATTERS See "Capital Expenditure Requirements" on page 33 for information concerning the Company's estimated capital expenditure

requirements for the years 1994-1996. See "Clean Air Legislation and Other Environmental Matters" on page 35 and Note 15 to Financial Statements for information concerning the Company's estimate of the cost to comply with the federal clean air legislation enacted in 1990, to address groundwater degradation and waste water control at Company facilities and to comply with solid waste disposal regulations adopted by the Pennsylvania Department of Environmental Resources (DER) .

After the payment of dividends, internally generated funds during the years 1994-1996 are currently expected to provide approximately 864 of the Company's construction expenditures. Sales of securities will be undertaken during the 1994-1996 period as needed to meet the Company's capital requirements, to meet a total of

$ 166 million of long-term debt maturities and preferred stock sinking fund requirements and to provide funds for the early retirement of high-cost securities if such retirements are determined to be appropriate in the light of market conditions and other factors.

The Company's ability to issue securities during the next three years is not expected to be limited by earnings or other issuance tests.

See Note 3 to Financial Statements for information concerning rate matters affecting the Company. The last base rate increase for PUC-jurisdictional customers went into effect in April 1985. The Company is unable to predict the timing of its next PUC-jurisdictional base rate filing, but intends to delay that filing for as long as possible.

POWER SUPPLY The Company's system capacity (winter rating) at December 31, 1993 was as follows:

Net Kilowatt Plant ~ca acit Nuclear-fueIed steam station Susquehanna 1, 905, 000 (a)

Coal-fired steam stations Montour 1,525, 000 Brunner Island 1,469, 000 Sunbury 389, 000 Martins Creek 300, 000 Keystone 210, 000 (b)

Conemaugh 194, 000 (c)

Holtwood 73,000 Total coal-fired Oil-fired steam station Martins Creek 1, 640, 000 Combustion turbines and diesels 508,000 Hydroelectric 146,000 Total generating capacity gUUU Firm purchases Hydroelectric 139,000 (d)

Qualifying facilities 504,000 (e)

Total firm purchases Total system capacity a ompany s un xva.ded interest.

(b) Company's 12.34% undivided interest.

(c) Company's 11.39% undivided interest.

(d) From Safe Harbor Water Power Corporation.

(e) From non-utility generating companies.

The system capacity shown in the preceding tabulation does not reflect: (i) sales of capacity and energy to Atlantic City Electric Company (Atlantic) through September 2000; (ii) sales of capacity and energy to Baltimore Gas and Electric Company (BG&E) through 2001; (iii) sales of capacity and energy to Jersey Central Power Company (JCP&L) through 1999; or (iv) sales of capacity credits to

& Light GPU Service Corporation for PJM installed capacity accounting purposes only, which capacity credit sales aggregated 567,000 kilowatts at December 31, 1993. Giving effect to the sales to Atlantic (129,000 kilowatts winter rating), BG&E (126,000 kilowatts) and JCP&L (945,000 kilowatts), the, Company's net system capacity at December 31, 1993 was 7,802,000 kilowatts.

The capacity of generating units is based upon a number of factors, including the operating experience and physical condition of the units, and may be revised from time to time to reflect changed circumstances.

4 During 1993, the Company produced about 39.2 billion kwh in plants owned by it.

agreements The Company purchased 5.0 billion kwh under received 0.6 billion kwh as power pool purchase and interchange. During the year, the Company delivered about 4.2 billion kwh as pool interchange and about 1.1 billion kwh under purchase agreements.

During 1993,'3.6% of the energy generated by the Company's plants came from coal-fired stations, 31.04 from nuclear operations at the Suscpxehanna station, 3.84 from the Martins Creek oil-fired steam station and 1.64 from hydroelectric stations.

The maximum one-hour demand recorded on the Company's system is 6,403,000 kilowatts, which occurred on January 18, 1994. The maximum recorded one-hour summer demand is 5,409,000 kilowatts, which occurred on July 8, 1993. The peak demands do, not include energy sold to Atlantic, BG&E or JCP&L.

The Company purchases energy from other utilities when it is economically desirable to do so. The Company occasionally purchases energy from systems located to the west of the Company's service area on a weekly basis at advantageous prices. The amount of energy purchased depends on a number of factors including cost and the import capability of the transmission network. When it economical to do so, the Company has sold portions of its entitlement has been to use the bulk power transmission system to import energy from utilities outside the pJM, rather than utilize its entitlement for purchases from such western systems.

The Company also has entered into separate agreements with several utilities in New York and New England to provide energy on an as available, as needed basis. Transactions under these agreements are expected to continue to allow the Company to make more efficient use of its generating capacity and provide benefits to customers of both the Company and the purchasing utilities. The Company also has entered into an agreement with Orange & Rockland Utilities for the reservation of output during certain periods from the Company's

Martins Creek units with the option to . purchase energy from those units.

See "Capacity-Related and Transmission Entitlement Transactions" on page 28 and Note 4 to Financial Statements for additional information concerning the sale of capacity and energy to Atlantic, BG&E and JCP&L, the sale of capacity credits (but not energy) to other electric utilities in the PJM and the sale of transmission entitlements and the reservation of output the Martins Creek units. 'ee "Rate Matters" Statements for information on page concerning 28 and from complaints Note 3 filed to Financial with the PUC regarding the Company's recovery on a current basis through the ECR of the cost of energy purchased from non-utility generating companies and the treatment of revenues from the Company's capacity-related transactions.

In addition to the 504,000 kilowatts of non-utility generation shown in the preceding tabulation, the Company is purchasing about 3,000 kilowatts of output from various other non-utility generating companies. The payments made for energy purchased from non-utility generating companies, all of whose facilities are located in the Company's service area, are recovered from customers through the ECR applicable to PUC-jurisdictional customers and base rate charges applicable to FERC-jurisdictional customers.

tt t The PJM companies had approximately 55 million kilowatts of installed generating capacity at December 31, 1993, and transmission line connections with neighboring power pools have the capability of transferring an additional 4 to 5 million kilowatts between the PJM and neighboring power pools. Through December 31, 1993, the maximum one-hour demand recorded on the PJM was approximately 46.4 million kilowatts, which occurred on July 8, 1993. The Company is also a party to the Mid-Atlantic Area Coordination Agreement, which provides for the coordinated planning of generation and transmission facilities by the companies included in the PJM.

The Company currently plans to convert the two oil-fired generating units at the Martins Creek station to burn both oil and natural gas, subject to appropriate regulatory approvals. A Company subsidiary filed an application with the PUC for authority to also transport natural gas through the pipeline to the existing pipeline customers, which include the Company and another utility. Two parties have protested the subsidiary s application, asserting that they have the sole authority to provide such gas service to the Company and the other utility, respectively. The matter is presently being litigated at the PUC and the Company cannot predict the outcome.

FUEL SUPPLY Coal During 1993, the Company's generating stations burned about 9.1 million tons of bituminous coal and about 900,000 tons of anthracite and petroleum coke.

During 1993, 744 of the coal delivered to the Company's generating 'stations was purchased under contracts and 264 was obtained through open market purchases.

The amount of bituminous coal carried in inventory at the Company's generating stations varies from time to time depending on market conditions and plant operations. As of December 31, 1993, the Company's bituminous coal supply was sufficient for about 31 days of operations.

During 1993, contracts with non-affiliated coal producers provided the Company with about 5.4 million tons of bituminous coal.

Contracts currently in effect with non-affiliated coal producers are expected to provide the Company with about 5.8 million tons of bituminous coal in 1994.

As more fully described in Note 11 to Financial Statements, the Company has ceased its subsidiary coal-mining operations. The Company replaced the coal produced by its subsidiaries with coal acquired through new contracts with non-affiliated suppliers and open market purchases. In this regard, the Company has entered into coal supply agreements that will provide year through 1999.

it with about 3 million tons per A wholly owned subsidiary of the Company also holds certain undeveloped coal reserves which the Company currently does not plan to develop. At December 31, 1993, the investment by the subsidiary in those coal reserves was about $ 84 million.

The coal burned in the Company's generating stations contains both organic and pyritic sulfur. Mechanical cleaning processes are utilized to reduce the pyritic sulfur content of the coal., The reduction of the pyritic sulfur content by either mechanical cleaning or blending has lowered the total sulfur content of the coal burned to levels which permit compliance with current sulfur dioxide emission regulations established by the DER. . For information concerning the Company's plans to achieve compliance with the federal clean air legislation enacted in 1990, see "Clean Air Legislation and Other Environmental Matters" on page 35 and Note 15 to Financial Statements.

The Company owns a 12.344 undivided interest in the Keystone station and an 11.39% undivided interest in the Conemaugh station, both of which are generating stations located in western Pennsylvania. The owners of the Keystone station have a long-term contract with a coal supplier to provide at least two-thirds of that station's requirements through 1999 and declining amounts thereafter until the contract expires at the end of 2004. The balance of the Keystone station requirements are purchased in the open market. The coal supply requirements for, the Conemaugh station are being met from several sources through a blend of long-term and short-term contracts and spot market purchases.

At December 31, 1993, the Company's inventory of anthracite was about 5.7 million tons. The Company's requirements for petroleum coke and any additional anthracite that may be required over the

remainder of the expected useful lives of the Company's anthracite-fired generating stations are expected to be obtained by contract and market purchases.

Nuclear The nuclear fuel cycle consists of the mining of uranium ore and its milling to produce uranium concentrates; the conversion of uranium concentrates to uranium hexafluoride; the enrichment of uranium hexafluoride; the fabrication of fuel assemblies; the utilization of the fuel assemblies in the reactor; the temporary storage of spent fuel; and the permanent disposal of spent fuel.

The Company has entered into uranium supply agreements that, together with options to extend, satisfy 100% of the uranium concentrate requirements for the Susquehanna units through 1997, approximately 704 of the requirements for the period 1998-1999, and approximately 354 of the requirements for the period 2000-2001.

Deliveries under these agreements are expected to provide sufficient quantities of uranium concentrates to permit Unit 1 to operate into the third quarter of 1999 and Unit 2 to operate into the third quarter of 1998.

The Company has entered into agreements that satisfy 100~ of its conversion requirements through 1997 and approximately 254 of the conversion requirements for the period 1998-1999.

The Company has also entered into agreements for other segments of the nuclear fuel cycle. Based upon the current operating plans for each of the Susquehanna units, the following tabulation shows the years through which contracts, including options to extend, could provide the indicated segments of the nuclear fuel cycle:

Enrichment 2014 Fabrication 2004 The Company has elected to cancel all or a portion of deliveries under its existing enrichment contract during the period 1999 through 2002, and plans to competitively bid those requirements on the open market. Additional arrangements will be necessary to satisfy the remaining fuel requirements of the Susquehanna units over their anticipated useful lives.

The Company estimates that there will be sufficient storage capability in the spent fuel pools at Susquehanna to accommodate the fuel that is expected to be discharged through the year 1996.

Federal law requires the federal government to provide for the permanent disposal of commercial spent nuclear fuel. Pursuant to the requirements of that law, the United States Department of Energy (DOE) has initiated an analysis of a site in Nevada for a permanent nuclear waste repository. The most recent estimated in-service date for the repository is beyond 2010. However, the location of the site for the repository in Nevada has been opposed by the state of Nevada.

The DOE is also pursuing implementation of a Monitored Retrievable Storage (MRS) facility which is intended to permit the receipt of spent nuclear fuel for interim storage by the year 1998, or shortly

thereafter.

for the MRS, Even if the DOE is successful it is unlikely that any spent in implementing its plans fuel will be shipped from Susquehanna until well after the year 2000 because of the limited capacity of the MRS and the large volume of other utilities'pent fuel that is scheduled to be shipped before the Company's spent fuel.

Therefore, expansion of Susquehanna's spent fuel storage capability will be necessary. Studies for this expansion are underway and the Company plans to have expanded storage capacity in place to meet post-1996 requirements.

Federal law also provides that the costs of spent nuclear fuel disposal will be the responsibility of the generators of such wastes.

The Company includes in customer rates the fees charged by the DOE to fund the permanent disposal of spent nuclear fuel.

For a discussion of the assessment on the 'Company pursuant to the Energy Act for the Uranium Enrichment Decontamination and Decommissioning Fund, see the discussion under that caption on page 39.

Oil The Company has agreements with two suppliers under which it can units.

purchase its expected oil requirements for the Martins Creek

However, oil in if the there are price advantages to be realized from purchasing spot market, these contracts permit the Company to acquire up to one-half of its expected oil requirements for the Martins Creek units in that manner. One oil purchase agreement expired in mid-1993 and was replaced with a similar new two-year agreement which will expire in mid-1995. The other agreement expires in mid-1994.

During 1993, approximately 904 of the oil requirements for the Martins Creek units were purchased under the Company's oil contracts and the balance was purchased on the spot market.

See "POWER SUPPLY" on page 5 for information concerning the planned conversion of the two oil-fired generating units at the Martins Creek station to burn both oil and natural gas.

ENVIRONMENTAL MATTERS The Company is subject to certain ,present and developing federal, regional, state and local laws and regulations with respect to air and water quality, land use and other environmental matters.

See "Capital Expenditure Requirements" on page 33 for information concerning the environmental expenditures during the years 1991-1993 and the Company's estimate of those expenditures during the years 1994-1996. The Company believes that it is presently in substantial compliance with applicable environmental laws and regulations.

See "Clean Air Legislation and Other Environmental Matters" on page 35 and Note 15 to Financial Statements for information concerning federal clean air legislation enacted in 1990, groundwater degradation and waste water control at Company facilities, DER's solid waste disposal regulations,.the Company s negotiations with the DER concerning polychlorinated biphenyl contamination at certain of 10

the Company's substation and pole sites, and the issue of electric and magnetic fields. Other environmental laws, regulations and developments that may have a substantial impact on the Company are discussed below.

Air The Federal Clean Air Act includes, among other things, provisions that: (a) require the prevention of significant deterioration of existing air quality in regions where air quality is better than applicable ambient standards; (b) restrict the construction of and revise the performance standards for new coal-fired and oil-fired generating stations; and (c) authorize the United States Environmental Protection Agency (EPA) to impose substantial noncompliance penalties of up to $ 25,000 per day of violation for each facility found to be in violation of the requirements of an applicable state implementation plan. The DER administers the EPA's air quality regulations through the Pennsylvania State Implementation Plan and has concurrent authority to impose penalties for noncompliance.

As a result of computer dispersion modeling of the effects of the Company's Martins Creek station (located in Pennsylvania) on ambient air quality in New Jersey, the EPA redesignated Warren County, New Jersey to non-attainment status for sulfur dioxide, effective February 1, 1988. However, the EPA withheld further regulatory action until the Company, the EPA, the DER and the New Jersey Department of Enviromental Protection (NJDEP) could agree upon and apply a computer model that will more accurately predict the actual ambient air quality of the area. The Company negotiated with the EPA, the DER and the NJDEP on a study to allow the use of a more accurate model. This study began in May 1992 and is expected to be concluded in 1994. In addition, the regulatory agencies have required the Company to expand the study area beyond the designated sulfur dioxide non-attainment area to include any predicted "areas of concern" in the vicinity of the plant. The Company is developing a study to address this expanded area. If it is determined that the Martins Creek operations are causing ambient air violations, the Company may be required to make changes to reduce sulfur dioxide emissions. However, it is currently expected that the reductions planned to meet the requirements of the Clean Air Act acid rain provisions should be adequate to meet any reduction that may be required as a result of these studies. See "Clean Air Legislation and Other Environmental Matters" on page 35 and Note 15.

Water To implement the requirements established by the Federal Water Pollution Control Act of 1972, as amended by the. Clean Water Act of 1977 and the Water Quality Act of 1987, the EPA has adopted regulations including effluent standards for steam electric stations.

The DER administers the EPA's effluent standards through state laws and regulations relating, among other things, to effluent discharges and water quality. The standards adopted by the EPA pursuant to the Clean Water Act may have a significant impact on the Company's 11

existing facilities depending on the DER!s interpretation and future amendments to its regulations.

The EPA and the DER limitations, standards and guidelines for the discharge of pollutants from point sources into surface waters are enforced through the issuance of National Pollutant Discharge Elimination System (NPDES) permits. The Company has NPDES permits necessary for the operation of its facilities.

Pursuant to the Surface Mining and Reclamation Act .of 1977 (Reclamation Act), the United States Office of Surface Mining (OSM) has adopted effluent guidelines which are applicable to Company subsidiaries as a result of their past coal mining and continued coal processing activities. The EPA and the OSM limitations, guidelines and standards are also enforced through the issuance of NPDES permits. In accordance with the provisions of the Clean Water Act and the Reclamation Act, the EPA and the OSM have authorized the DER to implement the NPDES program for Pennsylvania sources. Compliance with applicable water quality standards is assured by DER review of NPDES permit conditions. The Company s subsidiaries have received NPDES permits for their mines and related facilities.

Solid and Hazardous Waste The 1976 Resource Conservation and Recovery Act (RCRA) regulates the generation, transportation, treatment, storage and disposal of hazardous wastes. RCRA also imposes joint and several liability on generators of solid or hazardous waste for clean-up costs. A revision of RCRA in late 1984 lowered the threshold for the amount of on-site hazardous waste generation requiring regulation and incorporated underground tanks used for the storage of petroleum and petroleum products as regulated units. Based upon the results of a survey of its solid waste practices, the Company at several times between 1980 and 1985 filed notices with the EPA indicating that hazardous waste is occasionally generated at all of its steam electric generating stations and service centers. Because of the small quantities of hazardous waste generated at the Company's facilities and concurrent regulation by the DER, RCRA is not expected to have a significant impact on the Company.

In January 1993, DER revised its comprehensive regulations governing the handling and disposal of hazardous waste. These revisions are not expected to have a significant impact on the Company.

The provisions of the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (Superfund),

authorize the EPA to require past and present owners of contaminated sites and generators of any hazardous substance found at a site to clean up the site or pay the EPA or the state for the costs of clean-up. The generators and past owners can be liable even generator contributed only a minute portion of the hazardous if the substances at the site. Present owners can be liable even contributed no hazardous substances to the site.

if they 12

In 1981 the Company was notified by the EPA that the Company could be liable for the cost of removing coal,tar deposits discovered at a former gas plant site owned by the Company along Brodhead Creek in Monroe County, Pennsylvania, and on adjacent property owned by a company unrelated to the Company. The EPA used Superfund monies to construct a slurry wall which was paid for by the adjacent property owner. The Company removed approximately 8,000 gallons of, coal tar, from its property. To determ'ine whether additional work needed to be done, a Remedial Investigation and a Risk Assessment were conducted by the Company and the adjacent property owner and submitted to the EPA and the DER. Although the Risk Assessment showed acceptable risk levels, the EPA and the DER required a Feasibility Study to identify whether additional remedial action 'was required.

Based on the results of that Feasibility Study and other investigations, the Company and the adjacent property owner signed a consent decree with the EPA in November 1991. Under the terms of that consent decree, the Company and the adjacent property owner will remove two subsurface coal tar accumulations, monitor the site for up to 30 years and pay all past unreimbursed and all future EPA oversight costs. The Company's share of the costs associated with the consent decree is estimated to be about Q2 million.

In May 1992, the Company and the adjacent property owner signed a consent order from the EPA directing that an additional Remedial Investigation and Feasibility Study be performed to address groundwater contamination at -the site. This investigation is now underway and could result in the EPA requiring additional site remediation, the cost of which cannot now be determined but which could be material.

The EPA has proposed to place the site of a former Company gas plant in Columbia, Pennsylvania on the national Superfund list. The Company and another potentially responsible party (PRP) had previously conducted a detailed investigation of the site and removed a substantial amount of coal tar from a pedestrian tunnel at the rear of the property. However, coal tar remains in two brick pits on the site.. There is also coal tar contamination of the soil and groundwater at the site and of river sediment adjacent to the site.

The Company is negotiating with EPA and DER on additional investigations and remediation required at the site. The costs of the initial investigation and remediation are estimated at $ 1 million. Further remediation may be required, the costs of which are not now determinable but could be material.

The Company at one time also owned and operated several other gas plants in its service area. None of these sites is presently on the Superfund list. However, a few of them may be possible candidates for listing at a future date. The Company expects to continue to investigate and, if necessary, remediate these sites.

The cost of this work is not now determinable but could 'be material.

See "LEGAL PROCEEDINGS" on page 18 for information concerning an EPA order and a complaint filed by the EPA in .federal district court against the Company and 35 unrelated parties for remediation of a Superfund site in Berks County, Pennsylvania, the settlement of a 13

complaint proceeding involving a scrap metal recycling site in Roane County, West Virginia, a complaint filed by the Company and 16 unrelated parties in federal district court against other parties for contribution under Superfund relating to the Novak landfill site in Lehigh County, Pennsylvania, an EPA complaint in federal district court against the Company and 10 unrelated parties to recover all past and future EPA costs of investigating and remediating the Heleva landfill site in Lehigh County, Pennsylvania, costs and action by the EPA and remediation at for reimbursement of the EPA's past response the site of a former metal salvaging operation in Montour County, Pennsylvania.

The Company has also been identified by the EPA as a PRP at several other Superfund sites. At most of these sites, the Company believes that it has no involvement or that its clean-up liability would be minimal. At the remaining sites, the Company could incur remediat'ion costs which are not now determinable but could be material.

The Pennsylvania Superfund. law gives the DER broad authority to identify hazardous or contaminated sites in Pennsylvania and to order owners or responsible parties to clean up. the sites. Xf responsible parties cannot or will not perform the clean-up, the DER can hire contractors to clean up the sites and then require reimbursement from the responsible parties after the clean-up is completed. The Company has been contacted by the DER to determine the Company's involvement in two contaminated sites under the Pennsylvania Superfund law. The Company expects that its involvement at these sites will be determined to be minimal.

Low-Level Radioactive Waste Under federal law, each state is responsible for the disposal of low-level radioactive waste, generated in that state. States may join in regional compacts to jointly fulfill, their responsibilities.

Access to disposal sites may be denied, the volume of waste may be limited and/or surcharges on low-level radioactive waste being disposed may be increased of regional waste disposal if federal milestones regarding development sites are not met. Low-level radioactive wastes resulting from the operation of the Susquehanna station are currently. being shipped to the site in South Carolina for disposal.

However, South Carolina currently plans to stop accepting low-level radioactive wastes from outside that state in mid-1994. The states of Pennsylvania, Maryland, Delaware and West Virginia are members of the Appalachian States Low-Level Radioactive Waste Compact. Efforts to develop a regional disposal facility in Pennsylvania are currently underway. However, the Company cannot predict the future availability of low-level waste disposal facilities or the cost of such disposal. Any additional storage capacity required for the disposal of low-level radioactive waste from the Susquehanna station will have to be provided by the Company.

General Zn addition to the matters described above, the Company and its subsidiaries have been cited from time to time for temporary 14

violations of the'ER and EPA regulations with respect to air and water quality and solid waste disposal in connection with the operation of their facilities and may be cited for such violations in the future. As a result, the Company and its subsidiaries may be subject to certain penalties which are not expected to be material in amount.

The Company is unable to predict the, ultimate effect of evolving environmental laws and regulations upon its existing and proposed facilities and operations. In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid waste handling and disposal and toxic substances, the Company may be required to modify, replace or cease operating certain of its facilities. The Company may also incur material capital expenditures and operating expenses in amounts which are not now determinable.

FRANCHISES AND LICENSES The Company has authority to provide electric public utility service throughout its entire service area as a result of grants by the Commonwealth of Pennsylvania in corporate charters to the-Company and companies to which it has succeeded and as a result of certification thereof by the PUC. The Company has been granted the right to enter the streets and highways by the Commonwealth subject to certain conditions. In general, such conditions have been met by ordinance, resolution, permit, acquiescence. or other action by an appropriate local political subdivision or agency of the Commonwealth.

The Company operates Susquehanna Unit 1 and Unit 2 pursuant to NRC operating licenses which expire in 2022 and 2024, respectively.

The Company operates two hydroelectric projects pursuant to licenses which were renewed by the FERC in 1980: Wallenpaupack (44,000 kilowatts capacity) and Holtwood (102,000 kilowatts capacity). The Wallenpaupack license expires in 2004 and the Holtwood license expires in 2014.

The Company also owns one-third of the capital stock of Safe Harbor Water Power Corporation which holds a project license which extends until 2030 for the operation of its hydroelectric plant. The total capability of the Safe Harbor plant is 417,500 kilowatts and the Company is entitled by contract to one-third of the total capacity (139,000 kilowatts).,

EMPLOYEE RELATIONS Approximately 4,800 of the Company's 7,677 full-time employees are represented by the International Brotherhood of Electrical Workers under three-year agreements which expire in mid-1994.

15

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ITEM 2 PROPERTIES The Map on page 17 shows the location of the Company's service area and generating stations.

H Reference is made to Schedule V Property, Plant and Equipment for information concerning the Company's investment in property, plant and equipment. Substantially all electric is subject to the lien of the Company's first utility plantAdditional mortgage. information concerning capital leases is set forth in Note 9 to Financial Statements.

For additional information concerning the properties of the Company see Item, 1, "BUSINESS Power Supply" and "BUSINESS Fuel Supply".,

ITEM 3. LEGAL PROCEEDINGS Reference is made to Note 3 to Financial Statements for information concerning rate matters.

Reference is made to Note 15 to Financial Statements for information concerning two complaints filed against the Company by fuel oil dealers alleging that the Company's promotion of electric heat pumps and off-peak storage systems had violated and continues to violate the federal antitrust laws.

II Reference is made to Item 1, "BUSINESS-Power Supply" for information concerning litigation at the Pennsylvania Public Utility Commission (PUC) resulting from the application of Interstate Energy Company, a wholly owned Company subsidiary, to transport natural gas through its existing oil pipeline.

In April 1991, the U.S. Department of Labor (DOL) through its Mine Safety and Health Administration issued citations to one of the Company's coal-mining subsidiaries for alleged coal-dust sample tampering at one of the subsidiary's mines. The DOL at the same time issued similar citations to more than 500 other coal-mine operators. ,Based on a review of its dust sampling procedures, the subsidiary is contesting all of the citations.

It is believed at this time, based on the information available, that the DOL allegations are without merit. Citations were also issued against the independent operator of another subsidiary mine, who is also contesting the citations issued with respect to that mine. The Company cannot predict the eventual outcome of this matter. If violations are found, it is currently estimated that potential administrative penalties could range from approximately $ 90,000 to approximately $ 4.6 million.

In August 1991, the Company and 35 other unrelated parties received an Environmental Protection Agency (EPA) order under Section 106 of the federal Comprehensive Environmental, Response 18

Compensation and Liability Act of 1980, as amended (Superfund),

requiring that certain remedial actions be taken at a former oil recovery site in Berks County, Pennsylvania, which has been included on the federal Superfund list. The Company had been identified by the EPA as a potentially responsible party, along with over 100 other parties. The EPA order required remediation by the 36 named parties of four specific areas of the site.

Remedial action under this order has essentially been completed at a cost of approximately $ 2 million, of which the Company's share was approximately $ 50,000.

The EPA at the same time filed a complaint under Section 107 of Superfund in the United States District Court for the Eastern District of Pennsylvania (District Court) against the Company and the same 35 unrelated parties. The complaint asks the District Court to hold the parties jointly and severally liable for all past and future EPA costs of remediating some of the remaining areas of the site. The EPA claims it has spent approximately $ 12 million to date. The Company and a group of the other named parties have sued in District Court approximately 460 other parties that have contributed waste to the site, demanding that these companies contribute to the clean-up costs.

In July 1993, the Company and 33 of the 35 unrelated parties received an EPA order under Section 106 of Superfund recpxiring remediation of the remaining areas of the site identified by EPA.

Although the Company initially believed its contribution was very small because most of its oil sent to the site had been recycled, recent allegations by a waste oil hauler indicate that the Company may have sent substantially more oil to the site during earlier years when waste from treatment of the oil was disposed of on-site. Current estimates of remediating the remainder of the site range from $ 50 million to $ 200 million. These costs would be shared among the responsible parties. The Company may incur material costs for this matter in amounts which are not now determinable.

In October 1993, the Pennsylvania Department of Environmental Resources (DER) moved to intervene in the EPA suit, seeking to hold 16 of the originally named parties, including the Company, liable for all past and future DER costs of remediating the site and for any natural resource damages at the site.

According to the complaint, the DER has spent at least $ 800,000 to date. The Company may incur material costs for. this DER action in amounts which are not now determinable.

In December 1991, the Company and 16 unrelated parties filed complaints against 64 other parties in District Court seeking reimbursement under Superfund for costs the plaintiffs have incurred and will incur to investigate and remediate the Novak landfill site in Lehigh County, Pennsylvania. The complaints allege that the 64 defendants generated or transported. substances disposed of at the Superfund site. A Remedial Investigation and Draft Feasibility Study for the site has been completed at a cost of approximately $ 3 million, of which the Company's share was 19

approximately $ 300,000. EPA's selected remedy is currently estimated to cost approximately $ 16 million. The Company may incur material costs for this matter in amounts which are not now determinable.

In February 1993, three parties filed complaints against the Company and 40 other unrelated parties in the United States District Court for the Southern District of West Virginia, seeking reimbursement under Superfund for costs the plaintiffs have incurred and will incur to investigate and remediate a scrap metal recycling site in Roane County, West Virginia. In December 1993, this action was settled. The Company's contribution to the settlement was $ 122,000.

In March 1993, the EPA filed a complaint under Section 107 of Superfund in District Court against the Company and 10 unrelated parties to recover all past and future EPA costs of investigating and remediating the Heleva landfill site in Lehigh County, Pennsylvania. The EPA alleges

$ 10 million to date at this site.

it has spent approximately The Company has filed an answer to the complaint denying liability based on the absence of evidence that the Company sent any hazardous substances to the site. The Company may incur material costs for this matter in amounts which are not now determinable.

In April 1993, the Company received an order under Section 106 of Superfund requiring that actions be taken at the site of a former metal salvaging operation in Montour County, Pennsylvania.

The EPA has taken similar action. with two other potentially responsible parties at the site. The cost of compliance with the order is currently estimated to be approximately $ 37 million.

The EPA currently estimates that additional remediation work not covered by the order will cost an additional $ 36 million. In addition, the EPA has already incurred clean-up costs of approximately $ 5 million to date. The EPA has indicated that will seek to recover these additional costs at a later date. The it Company's records indicate that scrap metal, wire and transformers were sold to the salvage operator between 1969 and 1971. Current information indicates that the Company's contribution to the site, if any, is de minimis.

1TEM 4 ~ SUBMISSION OP MATTERS TO A VOTE OR SECURITY HOLDERS There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter of 1993.

20

EXECUTIVE OFFICERS OF THE REGISTRANT Officers are elected annually by the Board of Directors to serve at the pleasure of the Board. There are no family relationships among any of the executive officers, or any arrangement or understanding between any executive officer and any other person pursuant to which the officer was selected.

There have been no events under .any bankruptcy act, no.

criminal proceedings and no judgments or injunctions material to the evaluation of the ability and integrity of any executive officer during the past five years.

Listed below are the executive officers of the Company:

Effective Date of Election to Name AcCe Position Present Position William F. Hecht 50 Chairman, President and Chief Executive Officer January 1, 1993 Francis A. Long 53 Executive Vice President and Chief Operating Officer January 1, 1993 Robert G. Byram 48 Senior Vice President-Nuclear March 26, 1993 Gennaro D. Caliendo 53 Senior Vice, President, General Counsel and Secretary June 1, 1989 Ronald E. Hill 51 Senior Vice President-Financial January 1, 1994 Joseph C. Krum 56 Senior Vice President-Division Operations November 12, 1990 Linda Curry 45 Vice President Bartholomew Public Affairs June 1, 1989 John R. Biggar 49 Vice President-Finance March 1, 1984 John M. Chappelear 55 Vice President-Investments and Pensions June 1, 1986

Effective Date of Election to Name AcCe Position Present Position I

Robert S. Gombos 50 Vice President-Human Resource and Development September 1, 1989 Michael D. Hill 51 Vice President-Infor-mation Services August 1, 1993 George T. Zones 46 Vice President-Nuclear Engineering June 1, 1993 Zohn P. Kierzkowski 54 Vice President and Treasurer March 1, 1984 Robert Z. Shovlin 53 Vice President-Power Production and Engineering January 1, 1992 Harold G. Stanley 53 Vice President-Nuclear Operations June 1, 1993 Raymond F. Suhocki 48 Vice President-System Power April 1, 1993 Each of the above officers, with the exception of Mr. Jones, has been employed by the Company for more than five years as of December 31, 1993. Mr. Jones joined the Company in September 1991 and was previously employed by Entergy Operations, Inc. The positions he held at Entergy Operations, Inc. between January 1989 and September 1991 were General Manager Engineering Design, General Manager-Engineering and Director of Engineering-Arkansas Nuclear One.

Prior to election to the positions shown above, the following executive officers held other positions with the Company since January 1, 1989: Mr. Hecht was Vice President-Marketing and Customer Services, Vice President-Power Production

& Engineering, Senior Vice President-System Power and Engineering, Executive Vice President-Operations and President and Chief Operating Officer; Mr. Long was Manager-System Planning, Vice President-Power Supply and Senior Vice President System Power & Engineering; Mr. Byram was Superintendent of the Susquehanna Steam Electric Station (SSES), Vice President-Nuclear Operations and Senior Vice President System Power &

Engineering; Mr. Caliendo was Vice President and General Counsel; Mr. R. E. Hill was Vice President and Comptroller; Mr.

Krum was Director-Marketing and Economic Development and Vice President-Lancaster . Division; Ms. Bartholomew was Senior Director and Economist-Public Affairs; Mr. Gombos was Vice President-Human Resource and Development and Vice President-22

Construction; Mr. M. D. Hill was Project Manager-Power Management System, Manager-Bulk Power Engineering and Manager-System Operation; Mr. Jones was Manager-Nuclear Plant Engineering and, Manager-Nuclear Engineering; Mr. Shovlin was Manager-Fossil Fuel Supply and Director-Power Production and Engineering; Mr. Stanley was Assistant Superintendent-Outages and Superintendent of the SSES and Mr. Suhocki was Area Operating Manager, Manager-Marketing & Economic Development and Vice President-Suscpxehanna Division.

23

PART II ITEM 5 ~ MARKET FOR THE REGISTRANT S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Additional information for this item is set forth in the section entitled "Shareowner and Investor Information" on pages 83 through 86 of this report, and the number of common shareowners is set forth in the section entitled "Selected Financial and Operating Data" on pages 79 and 80.

ITEM 6 SELECTED FINANCIAL DATA t

Information for this item is set forth in the section entitled "Selected Financial and Operating Data" on pages 79 through 82 of this report.

ITEM 7 ~ MANAGEMENT~S DISCUSSION AND ANALYSIS OP FINANCIAL CONDITION AND RESULTS OR OPERATIONS e Information for this item is set forth in the section entitled "Review of the Company's Financial Condition and Results of Operations" on pages 26 through 41 of this report.

24

ZTEM 8 ~ FINANCIAL STATEMENTS AND SUPPLEMENTARY-DATA below.'acae Financial statements the pages indicated and supplementary data are set forth on Independent Auditors'eport 43 Management's Report on Responsibility for Financial Statements Financial Statements:

Consolidated Statement of Income for the Three Years Ended December 31, 1993 45 Consolidated Statement of Cash Flows for the Three Years Ended December 31, 1993- 46 Consolidated Balance Sheet at December 31, 1993 and 1992 Consolidated Statement of Shareowners'ommon Equity for the Three Years Ended December 31, 1993 49 Consolidated Statement of Preferred and Preference Stock at December 31, 1993 and 1992 49 Consolidated Statement of Long-Term Debt at December 31, 1993 and 1992 51 Notes to Financial Statements 52 Quarterly Financial, Common Stock Price and Dividend Data 86 Supplemental Financial Statement Schedules:

V Property, Plant and Equipment for the Three Years Ended December 31, 1993 87 VI Accumulated Provision for Depreciation, Depletion and Amortization of Property, Plant and Equipment for the Three Years Ended December 31, 1993 89 VIII Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1993 92 IX Short-Term Borrowings for the Three Years Ended December 31, 1993 93 ZTEM 9 ~ CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.

25

REVIEW OP THE COMPANY< S PINANCIAL CONDITION AND RESULTS OR OPERATIONS suits of Operations Earnings Earnings per share of common stock were $ 2.07 in 1993, $ 2.02 in 1992 and $ 2.01 in 1991. Increasing economic activity in central eastern Pennsylvania and the effects of hotter-than-normal weather during the summer were the main reasons for the earnings improvement. If weather had been normal, earnings would have been 2 cents per share lower in 1993.

Weather conditions affect sales and earnings as heating and cooling demands change. To make valid comparisons of financial performance, the Company adjusts the figures to reflect "normal" conditions as determined by historical weather data.

Earnings also benefited from continuing efforts to control operating and maintenance costs and by the continuing refinancing of higher cost securities to take advantage of favorable market conditions.

In the fourth quarter of 1993, the Company recorded charges against income that, in the aggregate, adversely affected net income by about $ 18 million or 12 cents per share of common stock. The charges related to:

(i) credits to be included in the Company's Energy Cost Rate (ECR) due to entering a settlement agreement with complainants against the Company's ECR; (ii) the write-off of certain deferred retiree benefit costs; and iii) the recognition of certain employee benefit costs in connection with e adoption of a new accounting standard. These matters are discussed in ore detail 'in the remainder of this review.,

Earnings for 1992 and 1991 were affected by extremely mild weather.

Earnings per share would have been 7 cents higher in 1992 and 6 cents higher in 1991 had there been normal weather in the Company's service territory.

Earnings per share over the last five years have essentially been flat, generally reflecting a slowdown in the rate of growth of energy sales, higher Susquehanna depreciation and increased competition. To achieve continued earnings growth and to respond to this increased competition, the Company has begun strategic initiatives as explained under "Increasing Competition" on page 40. In addition, the Company will continue its aggressive marketing and economic development programs aimed at increasing energy sales, will continue to emphasize effective cost reduction and will also continue to take advantage of favorable financial market conditions to refinance long-term debt and preferred stock with lower cost securities to reduce interest expense and dividends on preferred stock.

Electric Energy Sales System, or service area, sales were 31.1 billion kwh in 1993, an increase of about 1.3 billion kwh, or 4.44, over 1992. The effects of tter weather during the summer, which resulted in higher air conditioner se, and the increased economic activity in central eastern Pennsylvania were the primary reasons for the increases in system sales. Sales in all 26

major customer categories were higher in 1993 than in 1992. Milder-than-normal weather depressed system sales in 1992 primarily due to reduced use of electricity for heating by residential and commercial customers. Syste sales were down an estimated 334 million kwh in 1992 due to milder-than-normal weather. The Company estimates that if normal weather had been experienced in both years, system sales for 1993 would have increased by 855,million kwh, or 2.84, over 1992.

Actual sales to residential and commercial customers in 1993 increased 439 million kwh, or 4.1%, and 334 million kwh, or 3.7>, respectively, over 1992. The Company estimates that under normal weather conditions for both years, sales to residential and commercial customers in 1993 would have increased 167 million kwh, or 1.54, and 189 million kwh, or 2.14,

.respectively, over 1992.

Industrial sales, which are not affected by weather conditions, increased 354 million kwh in 1993, or 4.04, over 1992. The continued growth trend in this category is an encouraging sign of increased industrial activity.

System sales in 1994 are currently forecasted to be approximately 31.7 billion kwh, an increase of 665 million kwh, or 2.1%, over 1993 actual system, sales, and a 771 million kwh, or 2.5~, increase over 1993 weather-normalized sales.

Additional energy sales from marketing and economic development efforts is a key corporate initiative. These additional sales generally will be realized over .at least a two-year period, and possibly longer major commercial or industrial customer is involved.

if a~

The level of~

additional sales estimated from these programs in 1993 was 556 million kwh.

The Company's 1994 marketing and economic development goal is to achieve annual net sales growth of 650 million kwh.

Competition from other fuel sources for certain energy applications has increased in recent years. The Company's electric heat market share in new residential construction has dropped from 69: in 1991 to 65% in 1993.

The Company's goal for 1994 is a 684 electric heat market share in new residential construction.

Certain large customers have considered self-generation of electricity over the past several years. However, the Company has lost no significant load to customer-owned generation.

Total electric energy sales, which include contractual sales to other utilities and interchange power sales, were 42.3 billion kwh in 1993, an increase of 0.1 billion kwh, or 0.24, compared to 1992.

Contractual sales to other major utilities include: (i) energy sold to Atlantic City Electric Company (Atlantic), Baltimore Gas & Electric Company (BG&E) and Jersey Central Power & Light Company (JCP&L) pursuant to long-term contracts under which these utilities purchase a specified percentage of the capacity and related energy from Company-owned generating units; and (ii) energy sold on a short-term basis to other electric utilities. Contractual sales to other utilities were about 7.1 billion kwh in 1993, or 2.5% lower than 1992.

27

Interchange power sales to Pennsylvania-New Jersey-Maryland terconnection Association (PJM) utilities were about 4.1 billion kwh in

~ ~

93, or 19.74 lower than 1992. The decrease was primarily due to increased system sales and an increase in the availability of nuclear generating capacity of other PJM utilities which reduced the operation of

~ ~

certain of the-Company's generating units.

Capacity-Related and Transmission Entitlement Transactions The Company's strong generating capacity position has enabled transactions with other it electric to enter into a number of capacity-related utilities. These transactions include: (i) .the sale of capacity credits but no energy to other utilities in the PJM to enable them to satisfy their PJM contractual capacity obligations (ii) agreements with both PJM and non-PJM utilities for the reservation of output during certain periods from the Company's Martins Creek units, with the option to purchase energy from those units; and (iii) arrangements whereby other PJM utilities can purchase the Company's entitlements to use the PJM transmission system to import energy from utilities outside the PJM.

Revenues from the sale of capacity credits, the reservation of output from the Martins Creek units and the sale of transmission entitlements, net of foregone PJM interchange savings which 'are included in the Company's ECR, totaled $ 35.0 million in 1993, 935.0 million in'1992 and $ 35.4 million in 1991. The Company currently expects about $ 35 million of revenues from these transactions during 1994. Increased competition involving capacity edit transactions has reduced the price received for such sales.

'he'ompany is continuing to look for opportunities to derive additional revenues due to its strong generating capacity position. The amount of revenues from these types of transactions depends on many factors, and it is difficult to predict the amount of revenues the Company will ultimately realize from these transactions.

The Company, the Pennsylvania Office of Consumer Advocate (OCA) and certain industrial customers have reached a settlement agreement resolving all complaints pending against the ECR. The agreement provides, among other things, for crediting the 1994-95 ECR with a portion of the receipts from capacity credit sales. See "Rate Matters" below for additional information.

Rate Matters The OCA and certain industrial customers filed complaints against the Company's ECR for the last four years. The complainants argued, among other things, that the Company should not be able to recover the cost of energy purchased from non-utility generating companies on a current basis, and that revenues from the sale of capacity-related and transmission entitlement transactions should be credited against the ECR.

As a result of discussions which began in late 1993, the Company and e complainants to the Company's ECR reached a settlement agreement having jor provisions that credits the 1994-95 ECR with a portion of the receipts from capacity credit sales from April 1990 through December 31, 1993; credits a portion of the receipts from future capacity credit sales 28

to the ECR; excludes from recovery through the ECR a portion of the Pennsylvania Public Utility Commission (PUC) -jurisdictional, amount of~

deferred retired miners'ealth care benefits costs; and settles all+

pending complaints against the Company's 1990-91 through 1993-94 ECRs.

This agreement is subject to PUC approval. As 'a result of this agreement, in the fourth quarter of 1993, the Company recorded a charge to expense of $ 17.1 million, which after income taxes, reduced net income by approximately $ 9.7 million or 6.4 cents per share of common stock. The Company estimates that about" $ 8 million of 1994 capacity credit sales will be credited to the ECR.

The Company has negotiated new five-year, lower-priced sales contracts with certain small utilities it currently serves. The contracts are subject to Federal Energy Regulatory Commission (FERC) approval and will reduce rates to these small utilities by about $ 3.6 million in 1994 and 1995 and by about an additional $ 4.1 million for the years 1996 through 1998.

In connection with the new contracts, in the fourth quarter of 1993, the Company wrote off $ 6.6 million of deferred retired miners'ealth care benefits costs and $ 2.3 million of postretirement benefits other than pensions applicable to FERC-jurisdictional services. The charge to expense amounted to $ 8.9 million, which after income taxes, reduced net income by

$ 5.1 million or about 3.4 cents per share of common stock.

Operating Revenues Total operating revenues decreased $ 17.1 million, or 0.64, in 1993 from 1992. Details of changes in operating revenues from the prior year are shown in the schedule below.

t Changes in Operating Revenues 1993 1992 1991 (Millions of Dollars)

Recovery of fuel and energy costs $ (20. 0) $ 44.0 $ 79.9 ECR credits to be applied in 1994 (12.7)

Change in customer usage 58.9 20.6 38.2 Roll-in of state taxes into base rates 26.4 State tax adjustment surcharge (32.0) 22.2 22.0 Special base rate credit adjustment (5.4) (22.6) (16.7)

Wholesale rate increase 1.7 2.4 Capacity-related and transmission entitlement transactions (0.4) 3 '

Contractual sales to other major utilities (16.4) 7.7 F 1 PJM interchange power sales (14.8) (68.8) (37. 0)

Other ~1. 1) ~>- G) 1.8 Total ~17. 1) 3.4 29

Tariffs subject to

~ ~

PUC jurisdiction-accounted for approximately 824 of e Company's revenues from energy sales in 1993. The remaining 184 of ch revenues resulted from sales regulated by the FERC and include the Company's PJM interchange power sales.

~

Billings to customers under PUC jurisdiction include: (i) base rate charges; (ii) the ECR which is a supplemental charge or credit for fuel and other energy costs over or under the levels included in base rates; (iii) a state tax adjustment surcharge (STAS) which adjusts retail customers'ills for the effects of changes in state tax rates; and (iv) a special base rate credit adjustment (SBRCA) that flows through to customers the effects of certain nonrecurring items.

The last base rate increase for PUC-jurisdictional customers went into effect in April 1985. The Company is unable to predict the timing of its next PUC-jurisdictional base rate filing, but intends to delay that filing for as long as possible.

Billings to utilities are subject to FERC jurisdiction. In the case of certain small utilities, billings include base rate charges and a supplemental charge or credit for fuel costs over or under the levels included in base rates. See "Rate Matters" on page 28 for additional information concerning rates for these customers.

The FERC also regulates contractual sales to other major utilities, PJM interchange power sales and capacity-related and transmission entitlement transactions. Sales to Atlantic, BG&E and JCP&L are made at a

~ ~

~

ice covering the 'Company s cost of service, including a return on

~ ~

vestment. ~ Energy sales relating to the reservation of output from the Martins Creek units are generally made at a price equal to the cost of fuel

~ ~

plus an amount to reflect foregone interchange savings. PJM interchange power sales are made at a price equal to the midpoint between the costs and costs that the buyers would have incurred to produce thesellers'ctual energy. Capacity-related and transmission entitlement transactions are made at prices negotiated by the Company and the purchaser, subject to a price cap accepted by the FERC.

Fuel Expense Fuel expense for 1993 decreased by $ 38.5 million from 1992. The decrease was primarily due to lower unit fuel costs for coal-fired generation, partially offset by higher oil-fired generation and the write-off of $ 11.0 million of the deferred cost of retired miners'ealth care benefits. For 1993, the cost of coal delivered to the Company's generating stations declined to $ 36.23 per ton from $ 41.44 per ton for 1992.

Power Purchases In 1993, power purchases were $ 278.8 million, an increase of $ 3.3 million over 1992. The increase was the result of additional purchases from other electric utilities and the PJM, partially offset. by a lower evel of purchases from non-utility generating companies.

30

Other Operation, Maintenance and Depreciation The reduction in revenues resulting from flowing the benefits of a settlement of certain claims arising from construction of the Susquehanna

,station through to customers in the SBRCA is offset by a credit to other operation expense on the Consolidated Statement of Income (see Financial Note 3). The credit was $ 14.3 million in 1993, and $ 8.5 million in 1992.

During 1993, the Company recorded an estimated minimum liability of

$ 4.4 million for the cost of environmental remediation at. several sites.

At December 31, 1993, the estimated minimum liability recorded for such remediation totaled $ 5.2 million. The Company's share of actual remediation costs may, be greater than the minimum amounts accrued, but the Company at this time cannot reasonably estimate its expected cost.

During 1993, the Company wrote off $ 9.1 million of obsolete and excess materials and supplies at its fossil-fueled steam generating stations. Of this amount, $ 2.2 million was charged to other operation expense and $ 6.9 million was charged to maintenance expense.

In December 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) 112, "Employers'ccounting for Postemployment Benefits," as discussed in Financial Note 13. The adoption of SFAS 112 resulted in a $ 5.5 million charge to other operation expense.

Excluding the credits associated with the.SBRCA, the accruals for the environmental remediation costs, the recognition of obsolete and exces~

materials and supplies and the expense associated with the adoption of SFAM 112 discussed above, other operation expense remained essentially unchanged in 1993 compared to 1992.

The Company intends to reduce the number of full-time employees by approximately 6.84 from 8,043 at year-end 1991 to about 7,500 by the mid-1990s. This is one of the actions being taken to contain costs and keep the price of the Company s electric service competitive. This reduction is expected to come primarily from normal attrition and close examination of the need to fill employees was 7,677.

vacancies. As of year-end 1993, the number of full-time The amortization of the deferred income effect of adopting the inventory method of accounting for power plant spare parts is credited to maintenance expense on the Consolidated Statement of Income (see Financial Note 3). Excluding this amortization, which amounted to $ 24.3 million in 1993 and $ 23.5 million in 1992, and the write-off of obsolete and excess materials and supplies as discussed above, maintenance expense decreased by

$ 14. 1 million, or 6. 34, in 1993 compared to 1992. The reduction in maintenance expense resulted primarily from lower costs associated with maintaining the Company's generating stations.

Higher depreciation expense in 1993 reflects the annual increase associated with, the method of depreciating the Susquehanna station and the depreciation of new property, plant and equipment placed in service. As approved by the PUC and the FERC, depreciation expense for the Susquehann station will increase annually through the year 1998. In 1993, the amount of depreciation expense applicable to the Susquehanna station exceeded the 31

amount that would have been recorded using the straight-line method, esulting in an amortization of previously deferred depreciation.

~

ginning in 1999, depreciation will change to the straight-line method at

~ ~

a level substantially less than the amount expected to be recorded in 1998.

~

The amount of depreciation applicable to that portion of the Susquehanna station subject to an annual increasing amount of depreciation was $ 116 million in 1993 and will increase annually to $ 192 million in 1998 and then decline to $ 102 million in 1999.

Taxes Effective January 1, 1993, the'ompany adopted SFAS 109, "Accounting for Income Taxes." Under the provisions of SFAS 109, the Company, in January 1993, recorded an increase of approximately $ 1.1 billion in its deferred tax liability for tax benefits previously flowed through to customers and for other temporary differences. The increased tax liability was offset by a corresponding asset representing the future revenue expected through the ratemaking process to pay for the taxes based on the established regulatory practice and legislative history in Pennsylvania permitting recovery of actual taxes payable.

In August 1991, Pennsylvania enacted legislation that increased the Company's state taxes by approximately $ 38,million on an annual basis. The Company recovered substantially all of the increased state taxes through application of a surcharge on billings to retail customers and through billings for the contractual sale of capacity and related energy to other tilities. Except into

~ ~ ~

~ for recovery of a prior undercollection, the tax the Company's base rates effective April 1, 1993.

rcharge was rolled In August 1993, the Omnibus Budget Reconciliation Act of 1993 was enacted, which contains a provision that increased the Company s federal income tax rate from 344 to 354 retroactive to January 1, 1993. This higher tax rate increased the Company's federal income tax expense for 1993 by about $ 5.9 million. Additionally, the Company recorded an increase in deferred income tax liabilities and taxes recoverable through future rates of $ 79.5 million due to the increase in the federal tax rate.

'f Financing Costs The Company has continued to take advantage of opportunities to reduce its financing costs by the retirement of long-term debt. and preferred and preference stock with the proceeds from the sales of securities. at a lower cost. Interest on long-term debt and dividends on preferred and preference stock have decreased by $ 25 million from $ 285 million in 1990 to $ 260 million in 1993. Additionally, interest on 'short-term debt has decreased by $ 13 million for the same period.

Financial Condition Financing and Licgxidity For the years 1991-1993, the Company issued $ 1.39 billion of long-term ebt, $ 300 million of preferred stock and about $ 21 million of common stock, and also incurred $ 218 million of obligations under capital leases (primarily nuclear fuel). In 1993, the Company sold $ 850 million principal 32

amount of first mortgage bonds and $ 300 million of preferred stock, increased its short-term debt by $ 43 million and issued $ 7 million o~

common stock to the Employee Stock Ownership Plan. During the year, Company retired $ 809 million of long-term debt and $ 343 million of th~

preferred and preference stock.

After the payment of dividends, internally generated funds during the years 1994-1996 are currently expected to provide approximately 86% of the Company's construction expenditures.

Sales of securities will be undertaken during the 1994-1996 period as needed to meet the Company's capital requirements, to meet a total of $ 166 million of long-term debt maturities and preferred stock sinking fund requirements and to provide funds for the early retirement of high cost securities if such retirements are determined to be appropriate in the light of market conditions and other factors. The Company expects to issue

$ 55 million of common stock in 1994 through its Dividend Reinvestment Plan.

In addition, depending on market conditions and other factors, the Company plans to issue up to an additional $ 150 million of preferred stock through the end of 1994, of which about $ 80 million is expected to be used to refinance higher cost preferred stock at a lower cost and the balance is to provide financing for the Company's capital requirements. The Company also plans to issue up to an additional $ 750 million principal amount of- first mortgage bonds through the end of 1994, which is expected to be used to refinance higher cost first mortgage bonds at a lower cost. Of this amount, $ 300 million is expected to be redeemed through the provisions of the maintenance and replacement fund under the Company's Mortgage. In addition, the Company expects to arrange 'for the refinancing of $ 16~

million of higher cost tax-exempt securities issued to provide pollution control and solid waste disposal facilities at the Company's generating stations.'he Company's ability to issue securities during the 1994-1996 period is not expected to be limited by earnings or other issuance tests. To enhance financing flexibility, a $ 140 million revolving credit arrangement is maintained with a group of banks and is used principally as a back-up for the Company's commercial paper and $ 60 million in credit arrangements are maintained with a group of banks to provide back-up for the Company's commercial paper and short-term borrowings of certain subsidiaries. The Company also maintains a $ 5 million bank line of credit. No borrowings were outstanding at December 31, 1993 under these arrangements.

Capital Expenditure Requirements The following schedule shows the Company's actual capital expenditures for electric utility operations for the years 1991-1993 and current projections for the years 1994-1996. Construction expenditures during the years 1991-1993 totaled about $ 1.2 billion and are expected to be about

$ 1.3 billion during the years 1994-1996.

33

Capital Expenditure Requirements (a)

Actual -Prop ected 1991 1992 1993 1994 1995 1996 (Millions of Dollars)

Construction expenditures Generating facilities $ 124 $ 136 $ 142 $ 94 $ 107 $ 74 Transmission and distribution facilities 165 186 173 183 183 192 Environmental 11 13 65 135 55 105 Other 37 52 51 59 53 51

'3 337 387 431 471 398 422 Nuclear fuel owned and leased 64 44 58 82 Other leased property 20 27 22 Total ~515 ~542 ~478 ~527 (a) Capital expenditure plans are revised from time to time to reflect changes in conditions. Actual expenditures may vary from those projected because of changes in plans, cost, fluctuations, environmental regulations and other factors.

Construction expenditures include allowance for funds used during construction (AFUDC) which is expected to'e less than $ 25 million in each of the years 1994-1996.

llowance for Funds Used During Construction The AFUDC, a non-cash credit to income, accounted for about 54 of earnings in 1993. In 1994, AFUDC is expected to increase as the Company accelerates capital expenditures to comply with clean air legislation. The amount of AFUDC recorded will depend on the timing and level construction work in progress as well as the rate treatment afforded the

'f capital expenditures required to comply with the clean air legislation.

Under current Pennsylvania law, construction work in progress for non-revenue producing assets, such as capital expenditures for pollution control equipment, can be claimed in rate base.

Financial Indicators The Company earned a 13.06% return on average common equity during 1993, down slightly from the 13.114 earned in 1992. The ratio of the Company's pretax income to interest charges increased slightly from 3.2 times in 1992 to 3.3 times in 1993. The Company increased .common stock dividends from an annual per share rate of $ 1.60 in 1992 to $ 1.65 in 1993.

The book value per share of common stock increased 2.44 from $ 15.58 at. the end of 1992 to $ 15.95 at the end of 1993. The ratio of the market price to book value of common stock was 1694 at the end of 1993 compared with 175%

at the end of 1992.

Termination of Coal-Mining Operations The Company has ceased "its subsidiary coal-mining operations due principally to the depletion of coal reserves and the high cost of mined 34

coal as compared to the price of coal purchased on the open market. One of the three operating mines closed at the end of June 1991. A second~

operating mine closed at the end of March 1992, and a third mine was sold~

in September 1992. A coal processing and loading facility was sold in November 1993, completing the planned phase-out of coal-mining operations.

The Energy Policy Act of 1992 (Energy Act) imposed a new liability on the Company or its coal-mining subsidiaries for the health care of retired coal miners previously employed by those subsidiaries. The estimated liability amounts to approximately operations

$ 68 million on a net present subsidiary mining value basis. At the time coal-mining ceased, companies had accrued $ 32 million for anticipated payments to the care trust funds to provide for health care benefits of retired miners'ealth miners. Under the Energy Act, the Company or its subsidiaries will be directly liable for these benefits and the $ 32 million will not have to be paid to the trust funds. The Company intends to use the amount accrued by its subsidiary mining companies to partially offset the new liability.

In December 1992, the Company recorded an additional liability of approximately $ 36 million representing the balance of the liability imposed by the Energy Act for health care benefits for retired coal miners. The charge to expense was deferred. The net PUC-jurisdictional amount of this liability is $ 30 million, and in 1993 theto PUC permitted the Company to retail customers through the begin recovery of these costs applicable ECR over ten years. The OCA and certain industrial customers filed complaints against the Company's 1993-94 ECR opposing, among other things, the Company's recovery of these costs.

In the fourth quarter of 1993, the company charged to expense 911.0 million of the deferred cost of retired miners'ealth care benefits

~

representing all of the FERC-jurisdictional portion of the deferral and part of the PUC-jurisdictional portion of the deferred costs. The write-off was related to the ECR agreement and the agreements to reduce rates to certain small utilities discussed on page 28 under the caption "Rate Matters." The Company expects to recover the remaining PUC-jurisdictional amount of deferred retired miners'ealth care benefits costs of $ 24.1 million through the ECR.

Clean Air Legislation and Other Environmental Matters The Federal Clean Air Act Amendments of 1990 deal, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions. The acid rain provisions, which are contained in Title IV of the legislation, specify Phase I sulfur dioxide emission limits on about 554 of the Company's coal-fired generating capacity by January 1, 1995, and more stringent Phase II sulfur dioxide emission limits for all of the Company's fossil-fueled generating units by January 1, 2000.

The Company expects to meet the 1995 Phase I sulfur dioxide standards by the use of lower sulfur coal, additional processing of coal through cleaning plants, and the installation of scrubbers at the Conemaugh station, in which the Company has an 11.394 ownership interest.

Company may also choose to limit the generation of certain units and bank or trade emission allowances among its generating units or with other~

t~

The-utilities to the extent permitted by the legisl'ation.

35

I The acid rain provisions also require installation of low nitrogen ide burners on each unit by the same date that sulfur dioxide limits apply to that unit. In addition, the ambient ozone attainment provisions contained in Title I of the legislation specify other nitrogen oxide emission reductions. In this regard, the legislation defines a Northeast Ozone Transport Region that includes all of Pennsylvania in addition to all states in the Northeast from northern Virginia to Maine. All major stationary sources within the region must install reasonably available control technology (RACT) for nitrogen oxide emissions by May 1995.

The Company expects to meet this RACT requirement by installing low nitrogen oxide burners on the Phase I units as required by the acid rain title and by advancing the installation of low nitrogen oxide burners on certain Phase II units, where technically feasible, that would have been required in 2000 by the acid rain title.

The Company, currently estimates that the cost of compliance with the Phase I sulfur dioxide standards and installation of the low nitrogen oxide burners will require capital expenditures of about. $ 200 million (in estimated 1994 dollars) and additional operating expenses which will result in an increase in customer rates of about 1.,5% (based on 1993 revenue levels).

To meet the Phase Company expects to II acid install flue rain sulfur dioxide emission standards, the gas desulfurization (FGD) on up to 604 of its coal-fired generating capacity, to continue to purchase

~ ~

lower sulfur al for its remaining generating capacity and to bank or trade emission

~

lowances among its generating units or with other utilities to the extent permitted by the legislation. The exact mix of lower sulfur fuel, emission

~

allowance purchases, sales or trades, and the amount and timing of FGD will be determined based on FGD installation costs, fuel cost and availability, and emission allowance prices.

The Company currently estimates that the cost of compliance with the Phase II sulfur dioxide standards will require additional capital expenditures in the later half of the 1990s of $ 400 million to $ 500 million (in estimated 1994 dollars) and additional operating expenses which will result in an increase in customer rates (based on 1993 revenue levels) of about 34 above the increase expected to result from Phase I compliance with the sulfur dioxide standards of the legislation and installation of low nitrogen oxide burners.

The ambient ozone attainment provisions also require modeling of nitrogen oxide and volatile organic compound emissions in the Northeast Ozone Transport Region to determine what further reductions are needed beyond the RACT requirements to achieve ambient ozone attainment.

results indicate further reductions are needed in power plant nitrogen If the oxide emissions, the Company may be required to install additional nitrogen oxide reduction equipment, such as selective catalytic reduction, on some or all of the fossil units around 2000. The Company's preliminary estimates indicate that the cost of compliance could require additional pital expenditures of up to $ 600 million (in estimated 1994 dollars) and ditional operating expenses which will result in a further increase in customer rates of as much as 4w (based on 1993 revenue levels).

36

In addition to acid rain and ambient ozone attainment provisions, the legislation requires the Environmental Protection Agency (EPA) to conduct study of hazardous air emissions from power plants. Adverse findings froM

~

this study could cause the EPA to mandate additional ultra high efficiency particulate removal baghouses .or specialized flue gas scrubbing to remove certain vaporous trace metals and certain gaseous'missions. If it is determined that the installation of such additional equipment is required, the Company's preliminary estimates indicate that the cost of compliance could require additional capital expenditures of up to $ 400 million (in estimated 1994 dollars) and additional operating expenses which will result in a further increase in customer rates of as much as 24 (based on 1993 revenue levels).

Under current Pennsylvania law, construction work in progress for non-revenue producing assets, such as capital expenditures for pollution control equipment, can be claimed in rate base.

In February 1993, the PUC adopted a policy statement regarding the trading and usage of, and the ratemaking treatment for, emission allowances by Pennsylvania electric utilities. The policy statement determines, among other things, that the PUC will not require approval of specific transactions and the cost of allowances will be recognized as energy-related power production expenses and recoverable through the ECR.

The Pennsylvania Air Pollution Control Act, as amended, implements the 1990 federal clean air legislation. The state legislation essentially requires that new state air emission standards be no more stringent tha~

federal standards. This legislation has no effect on the Company's plan+

for compliance with the Federal Clean Air Act Amendments of 1990.

Until, action has been taken by the appropriate regulatory bodies, the Company will not be able to determine the exact method of compliance with the acid rain, ambient ozone and hazardous air emission provisions of the legislation, or the cost thereof and its impact on customer rates.

The Pennsylvania Department of Environmental Resources (DER) regulations governing the handling and disposal of industrial (or residual) solid waste require the Company to submit detailed information on waste generation, minimization and disposal practices. They also require the Company to upgrade and repermit existing ash basins at all of its coal-fired generating stations by applying updated standards for waste disposal.

Ash basins that cannot be repermitted are required to close by July 1997.

Any groundwater contamination caused by the basins must also be addressed.

Any new ash basin must meet the rigid site and design standards set forth in the regulations. In addition, the siting of future facilities at Company facilities could be affected.

The fly ash basin at the Martins Creek station and the dry fly ash disposal area at the Montour station are expected to comply with the DER regulations. However, the fly ash basins at other fossil-fueled generating stations, bottom ash basins at all fossil-fueled generating stations and the coal refuse basin at the Brunner Island station do not meet the new requirements and must be retired by July 1997. The Company, in addressin~

the requirements of these regulations, plans to install dry fly ash~

handling systems at the Brunner Island, Sunbury and Holtwood stations. The Company, with siting assistance from a public advisory group, plans to use 37

the dry fly ash from the Sunbury and Holtwood stations to reclaim strip

'nes

~

in the anthracite coal region.

~

The Company is exploring portunities to beneficially

~ ~

use coal ash from Brunner Island in various roadway construction proj'ects in the vicinity of the plant that may delay or preclude the need for a new disposal facility.

Groundwater degradation related to fuel oil leakage from underground facilities and to seepage from coal refuse disposal areas and coal storage piles has been identified at several generating stations. Many requirements of the DER regulations address these groundwater degradation issues. The Company has reviewed its remedial action plans with the DER.

Remedial work has begun at one generating station, and remedial work may be required at others.

The DER has adopted, and recently revised, regulations to implement the toxic control provisions of the Federal Water Quality Act of 1987 and to advance Pennsylvania's toxic control program. These regulations authorize the DER to use both biomonitoring and a water quality based chemical-specific approach in National Pollutant Discharge Elimination System (NPDES) permits to control toxics. In the third quarter of 1993, the Company received a new NPDES permit for the Montour and Holtwood stations. The Montour permit contains very stringent limits for certain toxic metals and increased monitoring requirements. More toxic reduction studies will be conducted at Montour before the permit limits become effective. Additional water treatment facilities may be needed at Montour, depending on the results of the studies. At Holtwood, toxics are required to be monitored at the fly ash basin until its closure in 1997. No limits ve been set at this point. The Company will therefore comply with an mplementation schedule for such closure and for construction of a new dry ash handling system at Holtwood.

The Company currently estimates that about $ 238 million of capital expenditures could be required to comply with the residual waste regulations, correct groundwater degradation at fossil-fueled generating stations and address waste water control at Company facilities. Such expenditures during the years 1994-1996 could total about $ 137 million, of which about $ 68 million is included in the Company's estimate of 1994-1996 construction expenditures shown on page 33. Actions taken to correct groundwater degradation, to comply with the DER's regulations and to address waste water contxol are also expected to result in increased operating costs in amounts which are not now determinable but could be material.

The issue of potential polychlorinated biphenyl (PCB) contamination at certain of the Company's substations and pole sites is currently being pursued by the DER. In this regard, the DER sent, the Company a proposed Consent Order under which the Company would assess and, remediate sites where PCB contamination may exist.

if necessary, The, Company is continuing to negotiate with the DER. The costs of addressing these PCB issues are not now determinable but could be material.

At December 31, 1993, the Company had accrued $ 5.2 million, epresenting the minimum amount the Company at this time can reasonably

~ ~

timate

~

it will have to spend to remediate sites involving the removal of

~

azardous or toxic substances.

~

The Company is involved in several other sites where it may be required, along with other parties, to contribute to

~ ~ ~

38

such remediation. Some of these sites have been listed by the EPA under the federal Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (Superfund), and others may be candidates for listing 'at a future date. Future clean-up or remediation work at sites currently under review, or at sites currently unknown, may result in material additional operating costs which the Company cannot estimate at this time.

Concerns have been expressed by some members of the scientific community and others regarding the potential health effects of electric and magnetic fields (EMF). These fields are emitted by all devices carrying electricity, including electric transmission and distribution lines and substation equipment. Federal, state and local officials are focusing increased attention on this issue. The Company is actively participating in the current research effort to determine whether or not EMF causes any human health problems and is taking steps to reduce EMF, where practical, in the design of new transmission and distribution facilities. The Company is unable to predict what effect the EMF issue might have on Company operations and 'facilities.

In complying with statutes, regulations and actions by regulatory bodies involving environmental matters, including the areas of water and air quality, hazardous and solid, waste handling and disposal and toxic substances, the Company may be required to modify, replace or cease operating certain of its facilities. The Company may also incur material capital expenditures and operating expenses in amounts which are not now determinable.

Uranium Enrichment Decontamination and Decommissioning Fund The Energy Act established the Uranium Enrichment Decontamination and Decommissioning Fund (Fund) and provides for an assessment on domestic utilities with nuclear power operations, including the Company.

Assessments are based on the amount of uranium a utility had processed for enrichment prior to enactment of the Energy Act and are expected to be paid to the Fund by such utilities over a 15-year period. Amounts paid to the Fund are to be used for the ultimate decontamination and decommissioning of the Department of Energy's uranium enrichment facilities. The Energy Act states that the assessment shall be deemed a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in all jurisdictions in the same manner as the utility s other fuel costs.

As of December 31, 1993, the Company's recorded liability for its total assessment amounted to about $ 34.5 million. The liability is subject to adjustment for inflation. The corresponding charge to expense was deferred because the Company includes its annual payments to the Fund of approximately $ 2.6 -million, subject to adjustment for inflation, in the ECR which is in the Company's PUC tariffs and in the fuel adjustment clause which is in the Company's FERC tariffs. As a result, the Company does not expect the assessment to have an adverse effect on net income.

39

Postretirement Benefits Other Than Pensions d Postemployment Benefits Effective January 1, .1993, the Company adopted SFAS 106, for Postretirement Benefits Other Than Pensions." "Employers'ccounting SFAS 106 establishes new rules for accounting for the costs of postretirement benefits other than pensions. The statement requires accrual, during the years that the employees render the necessary service, of the expected cost of providing those benefits. Caps have been established on the amount the Company will pay for retiree health care costs for,all employees who retire on. or after April 1, 1993. The Company's transition obligation on January 1, 1993 amounted to $ 173.8 million and is being amortized over a 20-year period. The increase in the cost of retiree benefits attributable to PUC-jurisdictional customers due to the adoption of SFAS 106 is being deferred in accordance with a PUC order. Recovery of the PUC-jurisdictional deferred costs will be requested in the Company's next base rate proceeding., Current accounting rules permit deferral of the costs for about five years. At December 31, 1993, the deferred costs totaled $ 14.9 million. In the fourth quarter of 1993, the Company charged to expense

$ 2.3 million of the cost of postretirement benefits other than pensions attributable to FERC-jurisdictional service, which, net of applicable income taxes, reduced earnings by 0.9 cents per share of common stock. See "Rate Matters" on page 28 and Financial Note 13 for additional information.

The Company provides health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employees.

December 1993, the Company adopted SFAS 112, "Employers'ccounting for stemployment Benefits," which requires the Company to accrue, during the years that the employees render the necessary service, the expected cost of providing benefits to former or inactive employees after employment but before retirement. In connection with the adoption of SFAS 112, the Company recorded a charge to operating expense of $ 5.5 million, which, after applicable income taxes, reduced net income by 93.1 million or about 2.1 cents per share of common stock.

Accounting Statement Adopted After December 31, 1993 Effective January 1, 1994, the Company adopted SFAS 115, >>Accounting for Certain Investments in Debt and Equity Securities." SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt, securities. The adoption of SFAS 115 did not have a material effect on the Company's net income.

Increasing Competition The Energy Act will have a significant impact on the Company and the electric utility industry, primarily through amendments to the Public Utility Holding Company Act of 1935 thatFederal creates a new class of independent tpower producers, and amendments to the Power Act that opens access to electric transmission systems for wholesale transactions. These changes re expected to increase competition in the wholesale energy supply market.

40

In response to the increased competition, the Company has undertaken initiatives to strengthen its position in the wholesale market. The Company entered into new five-year supply agreements at reduced prices wit its existing wholesale customers. These agreements are subject to FERC approval. The Company is actively participating in negotiations and proceedings involving the sale of electricity to wholesale customers currently served by other electric utilities. These wholesale customers are generally small utilities that do not have their own generating capability and purchase electricity from others.

While there is currently no comparable competition in the retail electric market, the Company anticipates that it will face similar competitive pressures in the industrial and large commercial sectors of that market in the future.

The Company's strategic initiatives also include an assessment of entering power-related businesses outside of the Company's service territory, both domestically and in foreign countries. Any expansion by the Company into these areas would, be methodical and deliberate. To take advantage of these new business opportunities, in February 1994 the Company's Board of Directors approved a plan to (i) make an initial investment of $ 50 mil'lion in these new businesses; and (ii) pursue the formation of a holding company structure to facilitate such investment, subject to the receipt of appropriate regulatory approvals and, ultimately, shareowner approval at the 1995 annual meeting.

41

(THIS PAGE LEFT BLANKINTENTIONALLY.)

42

Independent Auditors~ Report Deloitte a Touche Two Hilton Court Telephone: (201) 631-7000

/W P.O. Box 319 Facsimile: (201) 631-7459 Parsippany, New Jersey 07054-0319 Pennsylvania Power & Light Company:

We have audited the accompanying consolidated balance sheets and statements of preferred and preferen'ce stock and long-term debt of Pennsylvania Power & Light Company and its subsidiaries as of December 31, 1993 and 1992, and the related consolidated statements of income, shareowners'ommon equity, and cash flows for each of the three years in the period ended December 31, 1993. Our audits also included the financial statement schedules listed in the Index at Item 8. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on the financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.

We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Pennsylvania Power & Light Company and its subsidiaries at December 31, 1993 and 1992, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1993 in conformity with generally accepted accounting principles. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

As discussed in Notes 5 and 13 to the consolidated financial statements, in 1993 the Company changed its method of accounting for postretirement benefit costs, income taxes and postemployment benefits to conform with Statements of Financial Accounting Standards Numbers 106, 109 and 112, respectively.

Deloitte Touche Tohmatsu 4, llltemNOMI

Mana ement's Re ort on Res onsibi19. for Financia1 Statements The management of Pennsylvania Power a Light: Company is responsible for the preparation, grity and objectivity of the consolidated financial statements and all other sections of this annual report. The financial statements were prepared in accordance with generally accepted accounting principles and the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission. Zn preparing the financial statements, management makes informed estimates and judgments of the expected effects of events and transactions based upon currently" available facts and circumstances. Management believes that the financial statements are free of material misstatement and present fairly the financial position, results of operations and cash flows of the Company.

The Company's consolidated financial statements have been audited by Deloitte a Touche, independent certified public accountants, whose report with respect to the financial statements appears on page 42. Deloitte a Touche's appointment as auditors was previously ratified by the shareowners. Management has made available to Deloitte a Touche all the Company' financial records and related data, as well as the minutes of shaieowners'nd directors'eetings.

Management believes that all representations made to Deloitte a Touche during its audit were valid and appropriate.

The Company maintains a system of inteznal control designed to provide reasonable, but not absolute, assurance as to the integrity and reliability of the financial statements, the protection of assets from unauthorized use or disposition and the prevention and detection of fraudulent financial reporting. The concept of reasonable assurance recognizes that the cost of a system of internal control should not exceed the benefits derived and that there are inherent limitations in the effectiveness of any system of internal control.

Fundamental to the control system is the selection and training of qualified personnel, an organizational structure that provides appropriate segregation of duties, the utilization of written policies and procedures and the continual monitoring of the system for compliance. Zn

'tion, the Company maintains an internal auditing program to evaluate the Company's system of mal control foz adequacy, application and compliance. Management considers the internal auditors'nd Deloitte 6 Touche's recommendations concerning its system of internal control and has taken actions which aze believed to be cost-effective in the circumstances to respond appropriately to these recommendations. Management believes that the Company's system of internal control is adequate to accomplish the objectives discussed in this report.

The Board of Directors, acting through its Audit Committee, oversees management's responsibilities in the preparation of the financial statements. Zn performing this function, the Audit Committee, which is composed of five independent directors, meets periodically with management, the internal auditors and the independent certified public accountants to review the work of each. Deloitte & Touche and the internal auditors have free access to the Audit Committee and to the Board of Directors, without management present, to discuss internal accounting control, auditing and financial fepozting matters.

Management also recognizes its responsibility for fostering a strong ethical climate so that the Company's affairs are conducted according to the highest standards of personal and corporate conduct. This responsibility is characterized and reflected in the Company's Standards of Integrity, which is publicized throughout the Company. The Standards of Integrity addresses:

the necessity of ensuring open communication within the Company; potential conflicts of interest; proper procurement activities; compliance with all applicable laws, including those relating to financial disclosure; and the confidentiality of proprietary information. The Company maintains a systematic program to assess compliance with these policies.

I William F. Hecht Chairman, President and Chief Executive Officer R. E. Hill Senior Vice President Financial 44

CONSOLIDATED STATEMENT OF INCOME Pennsylvania Power & Light Company and Subsidiaries 1993 1992 1991 thousands of Dollars)

Operating Revenues (Notes 1, 2, 3 and 4).......................... $ 2,727,002 $ 2,744,122 $ 2,740,715 Operating Expenses Operation Fuel. 506,900 545,361 586,325 Power purchases ~ ~ ~ ~~~~~~~~~ I ~ ~ ~ ~ 278,800 275,499 256,320 Ot her.. ~ ~ ~ ~0 ~ ~ ~ ~ ~ ~ ~ 460,482 452,999 461,921 Maintenance.. 193,242 201,254 206,861 Depreciation (Notes 1 and 10).. 271,390 258,357 246,212 Amortized (deferred) depreciation (Notes 1 and 10)........~.... 14,249 3,563 (7,047)

Income taxes (Note 5).. 235,164 228,340 217,366 Taxes, other than income (Note 5)..................... 203,967 205,318 190,426 2,164,194 2,170,691 2,158,384 0 perattng 4

Income................................................................ 562,808 573,431 582,331 Other Income and (Deductions)

Allowance for equity funds used during construction (Note 1).. 7,981 6,771 2,961 Income tax credits (expense) (Note 5)..... 1,280 (322)

Other net 8,700 12,337 7,616 17,961 18,786 11,480 Income Before Interest Charges. 580,769 592,217 593.811 Interest Charges Long-term debt.. 225,800 240,260 232,092 Short-term debt and other. 14,443 13,402 22,254 Allowance for borrowed funds used during construction and interest capitalized (Note 1)..................... (7,600) (8,169) (8,949) 232,643 245,493 245,397 N et Income........................................................................... 348,126 346,724 348,414 Dividends on Preferred and Preference Stock......~................. 33,885 40,495 44,687 Earnings Applicable to Common Stock.............................. $ 314,241 $ 306,229 $ 303,727 Earnings Per Share of Common Stock (a).......................... $ 2.07 $ 2.02 $ 2.01 Average Number of Shares Outstanding (thousands)........ 151,904 151,676 151,382 Dividends Declared Per Share of Common Stock......~........... $ 1.65 $ 1.60 $ 1.55 (a) Based on average number of shares outstanding.

See eooompenying Notes to Ftnencial Statements.

45

CONSOLIDATED STATEMENT OF CASH FLOWS Pennsylvania Power & Light Company and Subsidiaries 1993 1992 1991 (Thousands of Dollar)

Cash Flows From Operating Activities Net income $ 348,126 $ 346,724, $ 348,414 Adjustments to reconcile net income to net cash provided by operating activities Depreciation.. 289,055 270,048 261,180 Amortization of property under capital leases................ . ~ 79,437 81,916 96,565 Amortization of contract settlement proceeds and deferred cost of power plant spare parts....................... (38,602) (31,973) (17,818)

Deferred income taxes and investment tax credits......~... 12@29 18,309 52,118 Equity component of AFUDC.. (7,981) (6,771) (2,961)

Change in current assets and current liabilities Accounts receivable. 4,672 16,010 (14,380)

Unbilled and refundable electric revenues..................... (10+91) (37,865) (45,725)

Fuel inventories.. 46,672 16,997 25,887 Material and supplies.. 4,541 9,071 1,200 Accounts payable 9,991 41,790 (11,835)

Accrued interest and taxes.. 598 4,525 17,858 Other. 1,630 (11,876) 8,012 Other operating activities net. 29,656 52,985 49,432 Net cash provided by operating activities.............~...... 769,733 769,890 767,947 Cash Flows From Investing Activities Property, plant and equipment expenditures..................... (487,836) (422,209) (374,397)

Proceeds from sales of nuclear fuel to trust...................... 63,431 42,778 48,914 Financial investments.. (705) (17,796) (50,876)

Other investing aclivities net.. 6,825 4,509 4,191 Net cash used in investing activities............................ 418,285 392,718 372,168 Cash Flows From Financing Activities Issuance of long-term debt.. 850,000 390,000 150,000 Issuance of common stock..... 6,635 6,151 8,401 Issuance of preferred stock. 300,000 Retirement of long-term debt. (809,000) (346,400) (37,460)

Retirement of preferred and preference stock..~............... (342,837) (46,753) (19,100)

Payments on capital lease obligations................. .~...........

~ (83,868) (85,733) (100,227)

Dividends paid. ~ (284,642) (282,209) (277,323)

Net increase (decrease) in short-term debt....................... 42,912 12,178 (118,770)

Costs associated with issuance and retirement of securities...................... (37,448) (16,682) (2,136)

Other financing activities net. 39 126 160 Net cash used in financing activities............................ 358,287 369,574 396,775 Net Increase (Decrease) in Cash and Cash Equ>valents.... (6,839) 7,598 (996)

Cash and Cash Equivalents at Beginning of Period....... .. ~ 15,110 7,512 8,508 Cash and Cash Equivalents at End of Period................... ~ $ 8,271 $ 15,110 $ 7,512 Supplemental Disclosures of Cash Flow Information Cash paid during the year for interest (net of amount capitalized). $ 205,090 $ 249,303 $ 229,066 Income taxes.. $ 221,049 $ 197,594 $ 154,136 See eccompunyfng Notes to i-inenciel Statements.

46

CONSOLIDATED BALANCE SHEET AT DECEMBER 31 Pennsylvania Power 8 Light Company and Subsidiaries Assets 1993 1992 frhousands of Dolats)

Property, Plant and Equipment Electric utility plant in service at original cost... . .~.....

~ ~ $ 8,912,473 $ 8,591,544 Accumulated depreciation (Notes 1 and 10)............ (2,686,967) '2,495,972)

Deferred depreciation (Notes 1 and 10) 282,115 296,285 6,507,621 6,391,857 Construction work in progress-at cost 238,600 211,534 Nuclear fuel owned and leased net of amortization (Note 9) ................. 174,979 174,368 Other leased property net of amortization (Note 9) 75,630 76,974 Electric utility plant net 6,996,830 6,854,733 Other property net of depreciation, amortization and depletion (1 993, $ 49,166; 1992, $ 64,286) . 148,751 164,771 7,145,581 7,019,504 Investments Associated company at equity 17,069 17,088 Nuclear plant decommissioning trust fund (Notes 1 and 6)...... 76,913 65,159 Financial investments (Notes 1 and 7) . 140,569 121,500 Other at cost or less (Note 7) 31,249 33,657 265,800 237,404 Current Assets Cash and cash equivalents (Note 1).... 8,271 15,110 Accounts receivable (less reserve: 1993, $ 29,429; 1992, $ 27,660)

Customers . 183,364 184,149 interchange power sales 7,261 Other. ~~ ~ ~ I ~ at ~ 17,502 14,128 Unbilled revenues 120,589 109,906 Fuel (coal and oil) at average cost ..........................................~.... 95,702 142,374 Materials and supplies at average cost 125,676 139,360 Common stock held for dividend reinvestment plan at cost (Note 8) 15,937 14,383 Deferred income taxes (Note 5)..................................................... 12,688 6,776 Other 37,083 52,153 616,812 685,600 Deferred Debits Utility plant carrying charges net of amortization (Notes 1 and 10).. 24,097 24,965 Reacquired debt costs (Notes 1 and 10).. 101,836 78,917 Assessment for decommissioning uranium enrichment facilities (Notes 3 and 10) .. 33,710 38,925 Retired miners'ealth care benefits (Notes 3 and 10).. 24,096 36,600 Taxes recoverable through future rates (Notes 5 and 10).. ~..................

~ 1,166,118 Postretirement benefits other than pensions (Notes 10 and 13).... ........ ~ 14,855 Other. 61,208 69,853 1,425,920 249,260

$ 9,454,113 $ 8,191,768 ~

See accompanying Notes to Financial Statements.

47

Liabilities 1993 1992 p'housands of Dottats)

Capitalization Common equity Common stock. $ 1,370,783 $ 1,364,148 Capital stock expense (10,906) (11,969)

Earnings reinvested 1.065.958 1,014,760 2,425,835 2,366,939 Preferred and preference stock With sinking fund requirements ........ 335,000 325,600 Without sinking fund requirements . 171,375 223,612 Long-term debt .. 2,618,031 2,620,720 5,550,241 5,536,871 Current Liabilities Commercial paper (Note 12) 117,000 67,000 Bank loans (Note 12) 85,260 92,348 Long-term debt due within one year 44,539 6,439 Capital lease obligations due within one year (Note 9) ........~..... 78,740 86,899 Accounts payable ........... 156,992 147,001 Taxes accrued 62,721 63,067 interest accrued . 60,373 59,429 Dividends payable . 70,41 0 70,556 Accrued mine closing costs - current 7,842 20,296 Other .. 88,791 91,105 772,668 704,140 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits (Note 5) ..~................ 242,317 255,823 Deferred income taxes (Note 5) ......................... 2,269,648 1,079,744 Capital lease obligations (Note 9) 170,285 164,159 Unamortized cost of power plant spare parts (Note 3)... 51,147 75,457 Accrued nuclear plant decommissioning costs (Notes 1 and 6) ............... 78,947 67,435 Accrued mine closing costs 55,876 61,841 Contract settlement proceeds to be credited to customers (Note 3). 43,894 55,794 Accrued pension costs (Note 13).. 92,024 73,902 Accrued assessment for decommissioning uranium enrichment facilities (Note 3). 31,871 39,600 Accrued retired miners'ealth care benefits (Note 3). 38,751 36,600 Accrued postretirement benefits other than pensions and postemployment benefits (Note 13).. 9,862 Other.. 46,582 40,402 3,131,204 1,950,757 Commitments and Contingent Liabilities (Note 15) .............................

$ 9,454,113 $ 8,191,768 See accompanying Notes to Financial Statements.

48

CONSOLIDATED STATEMENT OF SHAREOWNERS'OMMON EQUITY Pennsylvania Power 8 Light Company and Subsidiaries Common Stock Outstanding .Capital Stock Earnings Shares (a) Amount Expense Reinvested Total frhovsands of Dolem)

Balance at December 31, 1990................. 151,297,940 $ 1,351,046 $ (12,449) $ 883,162 $ 2,221,759 Net income. 348,414 348,414 Cash dividends declared Preferred stock.. (35,047) (35,047)

Preference stock................................. (9,640) (9,640)

Common stock ($ 1.55)........................... (234,626) (234,626)

Stock redemption costs............................. (157) (157)

Employee stock ownership plan (b)........... 357,328 7,045 7,045 Other. 262 Balance at December 31, 1991.................

Net income.. 346,724 346,724 Cash dividends declared Preferred stock.. (30,855) (30,855)

Preference stock. (9,640) (9,640)

Common stock ($ 1.60) .......................... (242,655) (242,655)

Stock redemption costs............................. (920) (920)

Employee stock ownership plan (b)........... 230,067 6,057 6,057 Other. 218 218 Balance at December 31, 1992..~.............. 151,885,335 $ 1,364,148 $ (11,969) $ 1,014,760 $2,366,939 Net income. 348,126 348,126 Cash dividends declared Preferred stock. (29,065) (29,065)

Preference stock.. (4,820) (4,820)

Common stock ($ 1.65) .......................... (250,611) (250,611)

Stock redemption costs............................. (12,432) (12,432)

Employee stock ownership plan ............... 246,754 6,635 6,635 Other. 1,063 1,063 Balance at December 31, 1993.................

(a) No par value, 170,000,000 shares authorized. Each share entitles the holders to one vote on any question presented to any shareowners'eeting.

(b) Indudes employee subscrlplions.

CONSOLIDATED STATEMENT OF PREFERRED AND PREFERENCE STOCK AT DECEMBER 31 Pennsylvania Power 8 Light Company and Subsidiaries Shares Outstanding Outstanding Shares 1993 1992 1993 Authorized Phousands of Dc//aa)

Preferred Stock $ 100 par, cumulative (a) 4-1/2%. $ 53,019 $ 53,019 530,189 629,936 Series. 453,356 381,193 4,533,556 10,000,000 Preference Stock no par, cumulative (a) $ 115,000 5,000,000 (a) Each share of preferred and preference stock entitles the holders to one vote on any question presented to any shareowners'eeting.

(b) The involuntary liquidation price of the preferred stock is $ 100 per share. The optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4-1/2% Preferred Stock for which such price is $ 100 per share (plus in each case any unpaid dividends).

(c) The aggregate amount of sinking fund redemption requirements through 1998 are (thousands of dollars):

1994, $ 30,000; 1995, $ 30,000; 1996, $ 30,000; 1997, $ 30,000; 1998, $ 0.

(d) This series of preferred stock is not redeemable prior to 2003.

(e) Shares to be redeemed annually on October 1 as follows: 2003-2007, 57,500; 2008, 862,500.

(f) Shares to be redeemed annually on July 1 as follows: 2003-2007, 50,000; 2008, 750,000.

(g) On certain sinking fund redemption dates, additional shares may be redeemed up to the number of shares required to be redeemed annually.

(h) In January 1994, the Company redeemed through sinking fund provisions at $ 100 per share 200,000 shares of 7.00% Series Preferred Stock.

See accompanying Notes to Financial Statements.

49

Details of Preferred and Preference Stock (b)

Optional Sinking Fund Redemption Provisions (c)

Shares Price Per Sharestobe Outstanding Outstanding Share Redeemed Redemption 1993 1992 1993 1993 Annually Period frhousands of Doffaa)

With Sinking Fund Requirements Series Preferred

'.125%..

$ 115,000 1,150,000 (d) (e) 2003-2008 6.33ok 100,000 1,000,000 (d) (f) 2003-2008 6.875ok(g) 40,000 $ 50,000 400,000 $ 101.72 100,000 1994-1 997 7.00ok(g)(h) 80,000 100,000 800,000 101.75 200,000 1994-1 997 1l 7.375% . 50,000 7.40%. 17,600 7.82ok 50,000 7.927% 3,000 8.00o/o 25,000 8.75ok 30,000

~PHU" ~%VER" Without Sinking Fund Requirements 4-1/2% Preferred........................; $ 53,019 $ 53,019 530,189 $ 110.00 Series Preferred 3.35%. 4,178 4,178 41,783 103.50 4.4p 22,878 22,878 228,773 102.00 4.60% 6,300 6,300 63,000 103.00 6.75% 85,000 850,000 (d) 8 60% 22,237 eference 8.00.. 35,000

$ 8.40.. 40,000

$ 8.70.. 40,000 W~V7575 522YPi~

E increases(Decreases) in Preferred and Preference Stock (Thousands of Dollars) 1993 1992 1991 Shares Amount Shares Amount Shares Amount Series Preferred Stock 6.125%. 1,150,000 $ 115,000 6.33% 1,000,000 100,000 6.75% 850,000 85,000 6.875% . (100,000) (10;000) 7PP (200,000) (20,000) 7.375%. (500,000) (50,000) 7.40%.. (176,000) (17,600) (16,000) $ (1,600) (16,000) $ (1,600) 7.82ok (500,000) (50,000) 7.927'k. (30,000) (3,000) . (30,000) (3,000) (30,000) (3,000) 8 PPok (250,000) (25,000) (25,000) (2,500) (25,000) (2,500) 8 60/o (222,370) (22,237) '

8.75%.. (300,000) (30,000)

(60,000) (6,000) (60,000) (6,000) 9PP (77,630) (7,763) 9.24%.. (258,900) (25,890) (60,000) (6,000)

Preference Stock 8.00.. (350,000) (35,000) 40.. (400,000) (40,000)

.70.. (400,000) (40,000)

Decreases in Preferred and Preference Stocks represent: (i) the redemption of stock pursuant to sinking fund requirements, or (u) shares redeemed pursuant to optional redemption provisions.

See accompanying Notes to Financial Statements. 50

CONSOLIDATED STATEMENT OF LONG-TERM DEBT AT DECEMBER 31 Pennsylvania Power 8 Light Company and Subsidiaries Outstanding 1993 1992 Maturity(b)

Company (Thousands of Doree')

First Mortgage Bonds (a) 4-5/8% $ 30,000 $ 30,000 March 1, 1994 5-5/8%.. 30,000 30,000 June 1, 1996 6-3/4%.. 30,000 30,000 November 1, 1997 9 1/4 125,000 March 1, 1998 5-1/2% 150,000 April 1, 1998 9-5/8%......,. 125,000 June 1, 1998 6% to 9%........... 720,000 495,000 1999-2003 6-1/2% to 9-3/4%.. 375,000 555,000 2004-2008 9% to 9-1/2%. 250,000 2014-2018 6-3/4% to 10%.. 1,025,000 675,000 2019-2023 First Mortgage Pollution Control Bonds(a) 5-5/8% Series A. 15,500 15,500 (c) 10-5/8% Series E 37,750 37,750 March 1, 2014 10-5/8% Series F . ~~ ~0~~~~ ~~~~~~ ~~~~~~ 115,500 115,500 September 1, 2014 9 3/8 /o Series Q 55,000 55,000 July 1, 2015 6.40% Series H.. 90,000 90,000 November 1, 2021 2,673,750 2,628,750 Miscellaneous promissory notes ..................... ~ . 77 116 1994-1 995 2,673,827 2,628,866 Unamortized (discount) and premium net ...... (24,857) (19,307) 2,648,970 2,609,559 Less amount due within one year...................... 30,939 39 2,618,031 2,609,520 Subsidiaries Notes(d) 13,600 17,600 Less amount due within one year ........ 13,600 6,400 11,200 Total long-term debt ............................. $ 2,618,031 $ 2,620,720 (a) Substantially all owned electric utility phnt h subject to the lien of the Company's first mortgage.

(b) Aggregate long4erm debt maturities through 1998 are (thousands of dolhrs): 1994, $ 44,539; 1995, $ 938; 1996, $30,900; 1997, $ 30,990; 1998, St 50,900. Maximum sinking fund requirements aggregate $ 25.8 million through 1998 and may be met with property addIons or retirement of bonds.

(c) Bonds mature annually on May 1 as follows (thousands of dolhrs): 1994-2002, $ 900; 2003, $ 7,400.

(d) Fixed rates ranging from 9% to 12%. During 1993, a subsidiary company retired $ 4.0 million of maturing notes. In January 1994, a subsidiary company repaid $ 13.6 million of its notes.

See accompanying Notes to Financial Statements.

NOTES TO FXNANCXAL STATEMENTS

1. Summary of Significant Accounting Policies Accounting Records Accounting records for utility operations are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the Pennsylvania Public Utility Commission (PUC).

Principles of Consolidation All wholly owned subsidiaries (principally involved in holding coal reserves, oil pipeline operations and passive financial investments) have been consolidated in the accompanying financial statements and all significant intercompany transactions have been eliminated. Income and expenses of subsidiaries not related to utility operations have been classified, under other income and deductions on the Consolidated Statement of Income.

The investment in Safe Harbor Water Power Corporation (Safe Harbor),

of which the Company owns one-third of the outstanding capital stock representing one-half of the voting securities, is recorded using the equity method of accounting. The Company s principal transaction with Safe bor is the purchase of electricity amounting to (millions of dollars):.

3, $ 9.9; 1992, $ 9.4 and 1991, $ 9.3. Under equity accounting, the operations of Safe Harbor resulted in additional income to the Company of (millions of dollars): 1993, $ 2.1; 1992, $ 2.1 and 1991, $ 2.2.

Utility Plant and Depreciation Additions to utility plant and replacement of units of property are capitalized at cost. The cost of units of property retired or replaced is removed from utility plant accounts and charged to accumulated depreciation. Expenditures for maintenance and repairs of property and the cost of replacing items determined to be less than units of property are charged to operating expense.

For financial statement purposes, depreciation is being provided over the estimated useful lives of property and is computed using a straight-line method for all property except for property placed in service prior to January 1, 1989 at the nuclear-fueled .Susquehanna steam electric station.

Current PUC and FERC rate orders provide for an increasing amount of annual depreciation for property placed in service prior to January 1, 1989 at the Susquehanna station through 1998, at which time depreciation will change to the straight-line method. Provisions for depreciation, as a percent of average depreciable property, approximated 3.3w in 1993, 3.24 in 1992 and 3.14 in 1991.

ility Plant Carrying Charges Carrying charge accruals on certain facilities for the Susquehanna and Martins Creek stations are recorded as deferred debits in accordance with a 52

FERC order. These amounts are being remaining lives of the stations.

Nuclear Decommissioning and Puel Disposal An annual amortized to expense provision for the Company's share of the future t

over the decommissioning of the Susquehanna station, equal to the amount allowed for ratemaking purposes, is charged to operating expense. Such amounts are invested in a trust fund which can be used only for future decommissioning costs. (See Note 6.)-

The U.S. Department of Energy,(DOE) is responsible for the permanent storage and disposal of spent nuclear fuel removed from nuclear reactors.

The Company currently pays DOE a fee for future disposal services and recovers such costs in customer rates.

Pinancial Investments Marketable equity securities are carried at the lower of their aggregate cost or market value, determined at the balance sheet. date.

Noncurrent marketable debt securities are carried at amortized cost.

Current marketable debt securities are carried at the lower of amortized cost or market value. Gains and losses on the sale of marketable securities are recognized upon realization utilizing the specific cost identification method. Investments in financial limited partnerships are accounted for using the equity method of accounting and venture capital investments are recorded at cost. (See Note 7.)

Premium on Reacquired Long-Term Debt As provided in the Uniform System of Accounts, the premium paid and t

expenses incurred to redeem long-term debt are deferred and amortized over the life of the new debt issue or the remaining life of the retired debt when the redemption is not, financed by a new issue.

Allowance for Punds Used During Construction As provided in the Uniform System of Accounts, the cost of funds used to finance construction projects is capitalized as part of construction cost. The components of allowance for funds used during construction (AFUDC) shown on the Consolidated Statement of Income under other income and deductions and interest charges are non-cash items equal to the cost of funds capitalized during the period.

AFUDC serves to offset on the Consolidated Statement of Income the interest charges on debt and dividends on preferred and preference stock incurred to finance construction. In addition, a return on common equity used to finance construction is imputed.

Capital Leases Leased property capitalized on the Consolidated Balance Sheet is recorded at the present value of future lease payments and is amortized s~

that the total of interest on the lease obligation and amortization of t?JQ leased property equals the rental expense allowed for ratemaking purposes.

(See Note 9.)

53

avenues Electric revenues are recorded based on the amounts of electricity delivered to customers through the end of each accounting period. This includes amounts customers will be billed for electricity delivered from the time meters were last read to the end of the respective period.

The Company's PUC tariffs contain an Energy Cost, Rate (ECR) under which customers are billed an estimated amount for fuel and other energy costs. Any difference between the actual,and estimated amount for such costs is collected from or refunded to customers in a subsequent period.

Revenues applicable to ECR billings are recorded at the level of actual energy costs and the difference is recorded as payable to or receivable from customers.

The Company's PUC tariffs include a Special Base Rate Credit Adjustment (SBRCA) that currently credits retail customers'ills for three nonrecurring items related to: (i) the use of an inventory method of accounting for certain power plant spare parts; (ii) the sale of capacity and related energy from the Company's wholly owned coal-fired stations to Atlantic City Electric Company (Atlantic); and (iii) the proceeds from a settlement of outstanding contract claims arising from construction of the Susquehanna station. (See Note 3.)

In April 1993, the Company rolled into base rates the level of increased state taxes recovered since August 1991 through a State Tax

~

'ustment Surcharge

~

(STAS) and revised the STAS to collect an dercollection of state taxes during the period April 1992 through March 1993. ~ (See Note 3.)

Income Taxes The Company and its wholly owned subsidiaries file a consolidated federal income tax return. Income taxes are allocated to operating expenses and other income and deductions on the Consolidated Statement of Income.

In January 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) 109, "Accounting for Income Taxes." SFAS 109 requires a change from the deferred method to the asset and liability method of accounting for income taxes. (See Note 5.)

The provision for deferred income taxes included on the Consolidated Statement of Income represents the amount of deferred tax expense reflected in rates established by the PUC and FERC. The difference in the provision for deferred income taxes determined under SFAS 109 and the amount recorded based on ratemaking procedures adopted by the PUC and FERC is deferred and included in taxes recoverable through future rates on the Consolidated Balance Sheet. (See Note 5.)

Investment tax credits were deferred when utilized and are amortized er the average lives of the related property. The investment tax credit repealed effective December 31, 1985.

54

Pension Plan and Other Postretirement and Postemployment Benefits noncontributory pension plan covering substantiall

'he Company has a all employees, and subsidiary mining companies havefull-time a noncontributory pension plan for substantially all non-bargaining employees.

Funding is based upon actuarially determined computations that take into account the amount deductible for income tax purposes and the minimum contribution required under the Employee Retirement Income Security Act of 1974. (See Note 13.)

In January 1993, the Company adopted SFAS 106, "Employers'ccounting for Postretirement Benefits Other Than Pensions." SFAS 106 requires the Company to accrue, during the years that the employees render the necessary service, the expected cost of providing retiree health care and life insurance benefits. (See Note 13.)

In accordance with a PUC order, the Company is deferring the accrued cost of the PUC-jurisdictional portion of retiree health and life insurance benefits in excess of actual claims paid pending recovery of the increased costs in retail rates.

In December 1993, the Company adopted SFAS 112, "Employers'ccounting for Postemployment Benefits." SFAS 112 requires the accrual of the expected cost of providing benefits to former or inactive employees after employment but before retirement. (See Note 13.)

Accounting Statement Adopted After December 31, 1993 Effective January 1, 1994, the Company adopted SFAS 115, "Accountin for Certain Investments in Debt and Equity Securities." SFAS 115 addresses the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. The adoption of SFAS 115 did not have a material effect on the Company's net income.

Unusual Items Recognized in the'Fourth Quarter In the fourth quarter of 1993, the Company recorded charges against income that, in the aggregate, adversely affected net income by about $ 18 million or 12. cents per share of common stock. The charges related to: (i) credits to be included in the Company's ECR due to entering a settlement agreement with complainants against the Company's ECR; (ii) the write-off of certain deferred retiree benefits costs; and (iii) the recognition of certain employee benefit costs in connection with the adoption of a new accounting standard. (See Notes 3 and 13.)

Cash Equivalents The Company considers all highly liquid debt instruments purchased with original maturities of three months or less to be cash equivalents.

Reclassification Certain amounts from prior years'inancial statements have bee reclassified to conform to the current year presentation.

55

Sources of Revenues The Company is an operating electric utility serving about 1.2 million S

customers in a 10,000 square-mile territory of central eastern Pennsylvania with a population of approximately 2.6 million persons. Substantially all of the Company's operating revenues, are derived from the sale of electric energy subject to PUC and FERC regulation. Customers are generally billed for electric service on a monthly basis after electricity is delivered.

During 1993, about 98% of total operating revenues was derived from electric energy sales with 344 coming from residential customers, 27% from commercial customers, 204 from industrial customers, 44 from interchange power sales to members of the Pennsylvania-New Jersey-Maryland Inter-connection Association (PJM), 124 from contractual sales to other major utilities and 34 from others. The Company'ssaleslargest industrial customer provided about 1.44 of revenues from energy during 1993. Twenty-nine industrial customers, whose billings exceeded $ 3 million each, provided about 7.58 of such revenues. Industrial customers are broadly distributed among industrial classifications.

3. Rate Matters Energy Cost Rate Issues Several complaints have been filed with the PUC against the Company's by the Pennsylvania Office of Consumer Advocate (OCA) and certain

~

ECR ustrial customers.

~

~ These complaints relate to the Company's ECRs ginning with the 1990-91 ECR through the 1993-94 ECR, which became

~ ~

effective in April

~ ~

1993.

The complaints by industrial customers generally oppose the Company's recovery on a current basis through the ECR of the cost of output purchased from non-utility generating companies or question the manner in which the cost of such purchases is recovered through the ECR. The OCA and industrial customers complaints also request a PUC investigation into whether the revenues received from the Company's sales of installed capacity credits, reservation of output and transmission entitlements (capacity-related transactions) should be credited to customers through the ECR. These transactions are discussed in Note 4.

With respect to the 1993-94 ECR, certain of the complaints also oppose the Company's request to recover through the ECR the liability imposed on the Company or its coal-mining subsidiaries by th'e Energy Policy Act of 1992 (Energy Act) for the cost of health care for retired coal miners previously employed by those subsidiaries.

The Energy Act imposed a new liability on the Company or its coal-mining subsidiaries for the health care of retired coal miners previously employed by those subsidiaries. The estimated liability amounts to approximately $ 68 million on a net present value basis. At the time coal-mining operations ceased, subsidiary mining companies had accrued $ 32

'llion for anticipated payments to the miners'ealth care trust funds to ovide for health care benefits for retired miners. Under the Energy Act, the Company or its coal-mining subsidiaries will be directly liable for these benefits and the $ 32 million will not have to be paid to the trust 56

funds. =-

The Company intends to use the amount accrued by its subsidiary mining companies to partially offset the liability.

In December 1992, the Company recorded an additional liability o approximately $ 36 million representing the balance of the liability imposed by the Energy Act for health care benefits for retired coal miners. The charge to expense was deferred. The net PUC-jurisdictional amount of this liability was $ 30 million. The balance of the deferral pertains to FERC-jurisdictional service.

In addition, certain complaints challenge the Company's request for ECR recovery in the 1993-94 ECR of the additional costs associated with the 12-month extension of the Company's agreement to purchase coal from the operator of a mine formerly owned by the Company. The additional costs in question total approximately $ 3 million.

With regard to the Company's 1991-92 ECR, the PUC ordered hearings regarding ECR treatment- of capacity-related sales made possible by the purchase of output from non-utility generating companies. The PUC also ordered hearings on the Company~s 1993-94 ECR. The Administrative Law Judge assigned to the case excluded from the scope of the hearings issues regarding the Company's recovery of the cost of output purchased from non-utility generating companies and also indicated that the scope of the other cases .would be limited to the Company's capacity-related transactions and various coal-related issues.

As a result of discussions which began in late 1993, the Company and the complainants reached a settlement agreement which provides fo~

crediting the 1994-95 ECR with a portion of the receipts from install~

capacity credit sales from April 1990 through December 31, 1993; credits a portion .of the receipts from future installed capacity credit sales to the ECR and excludes from recovery through the ECR a portion of the PUC-jurisdictional amount of deferred retired miners'ealth care benefits costs.

This agreement is subject to PUC approval. As a result of this agreement, in the fourth quarter of 1993 the Company recorded a charge to expense of $ 17.1 million, which after income taxes, reduced net income by approximately $ 9.7 million or 6.4 cents per share of common stock.

Postretirement Benefits Other Than Pensions In March 1993, the PUC approved the Company's petition to defer the increase in retiree benefits costs arising from adoption of SFAS 106, "Employers'ccounting for Postretirement Benefits Other Than Pensions."

The increased costs applicable to PUC-jurisdictional customers will be deferred from January 1, 1993 until such costs are included in customer rates in the Company's next retail base rate proceeding. Accounting rules permit deferral of the costs for about five years.

In June 1993, the OCA appealed the PUC's decision permitting deferral and future recovery of the increased retiree benefits costs to the Commonwealth Court of Pennsylvania. The filing of the appeal does not operate as a stay of the PUC's order, and the Company is continuing to def such costs in accordance with the PUC's order.

57

The Company cannot predict the ultimate outcome of this matter before e Commonwealth Court.

The Company also began to defer the increased costs applicable to i

FERC-jurisdictional service pursuant to a FERC policy statement, but

~ ~ ~ ~

subsequently charged the increased costs of $ 2.3 million to expense due to a settlement agreement reached with municipalities and other small utilities served under FERC tariffs. As a result of this agreement, the Company will be unable to file for recovery of the increased costs within the time period specified in the FERC policy statement. See "FERC Wholesale Rates" for more information.

Uranium Enrichment Decontamination and Decommissioning Fund The Energy Act also provides for an assessment on utilities with nuclear power operations, including the Company, to establish a Uranium Enrichment Decontamination and Decommissioning Fund (Fund). Assessments are based on the amount of uranium a utility had processed for enrichment prior to enactment of the Energy Act and are expected to be paid to the Fund by such utilities over a 15-year period. Amounts paid to the Fund are to be used for the ultimate decontamination and decommissioning of the DOE's uranium enrichment facilities. The Energy Act states that the assessment shall be deemed a necessary and reasonable current cost of fuel and shall be fully recoverable in rates in all jurisdictions in the same manner as the utility's other fuel costs.

As of December 31, 1993, the Company's recorded liability for its al assessment amounted to about $ 34.5 million. The liability is subject adjustment for inflation. The corresponding charge to expense because the Company includes its annual payments to the Fund of was'eferred approximately $ 2.6 million, subject to adjustment for inflation, in the ECR which is in the Company's PUC tariffs and in the fuel adjustment clause which is in the Company's FERC tariffs. As a result, the Company does not expect the assessment to have an adverse effect on net income.

Special Base Rate Credit Adjustment The SBRCA has been in effect since April 1, 1991,and currently reduces retail customers'ills for the effects of three nonrecurring items. The first item is the annual amortization of a credit to income for associated with the Company's using an inventory method of accounting spare parts beginning January 1, 1991. The amortization of the cost of spare parts on hand at January 1, 1991 is being included in the SBRCA over a five-year period.

The second relates to costs that are being recovered from Atlantic pursuant to the sale of 125,000 kilowatts of capacity (summer rating) and related energy from the Company's wholly owned coal-fired stations beginning October 1, 1991. The costs recovered from Atlantic are currently reflected in retail base rate tariffs. Accordingly, the Company included a credit in the SBRCA for the costs, except energy costs, recovered from the sale of coal-fired capacity and related energy to Atlantic. The change in ergy costs associated with the sale, is reflected in the ECR.

~

The third is the proceeds from the settlement of outstanding contract

~

claims arising from construction of the nuclear-fueled Susquehanna steam

~ ~

58

generating station. In accordance with approval of the settlement by the PUC, the Company began on April 1, 1992 to return the settlement proceed~

to retail customers through the SBRCA at the rate of $ 11 million per for five years. In addition, the proceeds from the settlement applicable ye~

to wholesale and bulk power customers are being credited to those customers.

The SBRCA reduced revenues from retail customers by about $ 44.5 million in 1993, $ 39.1 million in 1992 and $ 16.7 million in 1991. The reductions in revenues due to the SBRCA do not adversely affect the Company's net income.

Recovery of State Tax Increase In August 1991, Pennsylvania enacted legislation that increased the Company's state taxes by approximately $ 38 million on an annual basis.

Certain of these tax increases were effective as of January 1, 1991. The Company's retail rates include a provision for a STAS which provides for recovery of costs associated with new or increased state taxes, and the Company recovered the increased taxes applicable to retail customers through application of the STAS. In April 1993, the Company rolled into base rates the level of increased state taxes previously recovered in the STAS and the STAS was revised to collect an undercollection of state. taxes during the period April 1992 through March 1993. The portion of the increased taxes applicable to the Company's contractual sales of capacity and related energy to other utilities is recovered as a cost of providing such service.

RERC Wholesale Rates The Company has negotiated new five-year, lower-priced sales contracts with certain small utilities it currently serves. The contracts are subject to FERC approval and will reduce rates to these small utilities by about $ 3.6 million in 1994 and 1995 and by about an additional $ 4.1 million for the years 1996 through 1998. In connection with the agreement, in 1993, the Company wrote off the deferred portions of retired miners'ealth care benefits costs and postretirement benefits other than pensions applicable to FERC-jurisdictional services. The charge to expense amounted to $ 8.9 million and, after income taxes, reduced net income by $ 5.1 million or about 3.4 cents per share of common stock.

4. Sales to Other Major Electric Utilities The Company provided Atlantic with 126,000 kilowatts of the Company's share of capacity and related energy from the Susquehanna station from 1983 through September 30, 1991. Another agreement provides Atlantic with 125;000 kilowatts of capacity (summer rating) and related energy from the Company's wholly owned coal-fired stations from October 1, 1991 through September 2000.

On October 1, 1991, immediately following the expiration of the agreement with Atlantic, the Company began providing Baltimore Gas &

Electric (BG&E) with 126,000 kilowatts of the Company's share of capacit~

and related energy from the Susquehanna station. Sales to BG&E wil+

continue through May 2001.

59

The Company provides Jersey Central Power and Light Company (JCP&L) h 945,000 kilowatts of capacity and related energy from all the pany's generating units. Sales to JCP&L began in 1985 and will continue a the 945,000 kilowatt level through 1995, with the amount then declining uniformly each year until the end of the agreement in 1999.

These agreements provide that sales are to be made at a price equal to the Company's cost of providing service, which includes a return on the Company's'nvestment in generating capacity. Revenues from these sales totaled $ 282.2 million in 1993, $ 293.8 million in 1992 and $ 284.2 million in 1991.

Xn addition to these bulk power contractual sales, the Company has entered into several agreements with other electric utilities in the PJM for the sale of capacity credits from the Company's system capacity. These capacity credits are 'used by the other utilities to meet their installed capacity obligation in the PJM. The price received for these sales is based on a percentage of the rate the utilities would have paid to purchase installed capacity under the PJM agreement. The length of these agreements

.and the amount of capacity credits sold vary. The longest agreement.

currently in effect is scheduled to terminate in 1996.

The Company has entered into arrangements with several utilities both inside and outside the PJM for the reservation of output from either the oil-fired or coal-fired units at the Company's Martins Creek station during certain periods of time. Specific deliveries of energy are requested by the purchasing utility as needed during the reservation period. One

'lity has 'agreed to purchase a from

~ ~

maximum of 10 megawatt hours per hour of non-utility generating companies for e output the Company purchases the period June

~

1990 through May 1995. The Company includes as a credit to the ECR the revenue received for deliveries of energy from Martins Creek, the revenue received for deliveries of output from non-utility generating companies and the foregone PJM interchange savings that were not realized when interchange sales are reduced because of reservation agreements.

Arrangements also have been entered into whereby PJM utilities can purchase a portion of the Company's entitlement to use the PJM transmission system to import energy from utilities outside the PJM. These transactions are made through negotiated prices for various periods of time. The Company includes, as a credit to the ECR, the foregone interchange savings that are not realized when the sale of transmission entitlements reduces the amount of energy the Company imports and sells to other utilities.

Revenues from the sale of capacity credits, the reservation of output from the Martins Creek units and the sale of transmission entitlements (net of foregone interchange savings included in the ECR) totaled $ 35.0 million in 1993, $ 35.0 million in 1992 and $ 35.4 million in 1991. For information relating to proceedings pending before the PUC and a settlement agreement between the Company and complainants to the ECR with respect to capacity-related sales, see Note 3.

5.~ Taxes In January 1993, the Company adopted SFAS 109, "Accounting for Income axes." SFAS 109 requires a change from the deferred method to the asset and liability

~ ~

method of accounting for income taxes. Under the asset and 60

liability method, deferred income tax assets and liabilities are recognized for the tax consequences of temporary differences by applying enacte~

statutory tax rates applicable to future years to differences between th~'

financial statement carrying amount and the tax bases of existing assets and liabilities.

In adopting SFAS 109, the Company recorded in January 1993 an increase of approximately $ 1.1 billion in its deferred tax liability for tax benefits previously flowed through to customers and for other temporary differences. The increased tax liability was offset by a corresponding asset representing the future revenue expected through the ratemaking process to pay for the taxes based on the established regulatory practices and legislative history in Pennsylvania permitting recovery of actual taxes payable. The adoption of SFAS 109 did not have a material effect on the Company's net income.

In August 1993, federal legislation was enacted that increased the corporate federal income tax rate to 354 from 344 retroactive to January 1, 1993. For 1993, the Company recorded additional income tax expense of $ 5.9 million and an increase in deferred income tax liabilities and taxes recoverable through future rates of $ 79.5 million to reflect the new tax rate.

The provision for deferred income taxes included on the Consolidated Statement of Income represents the amount of deferred tax expense reflected in rates established by the PUC and FERC. The difference in the provision for deferred income taxes for 1993 determined under SFAS 109 and the amount recorded based on ratemaking procedures adopted by the PUC and FERC deferred and included in taxes recoverable through future rates on thW Consolidated Balance Sheet.

The tax effects of significant temporary differences comprising the Company's net deferred income tax liability at December 31, 1993 were as follows (thousands of dollars):

Deferred tax assets Deferred investment tax credits 103) 084

~*)

Accrued pension costs 38( 821 Other 108, 441 Valuation allowance 241 652 Deferred tax li'abilities Electric utility plant net 1,892) 366 Other property net 26,629 Taxes recoverable through future rates 500,959 Reacquired debt costs 43,580 Other 35 120 2 498 654 Net deferred tax liability 2 257 002 The valuation allowance related to deferred tax assets at December 31, 1993 amounted to $ 8,694,000, a decrease of $ 2,882,000 from the $ 11,576,000 established upon the adoption of SFAS 109 at January 1, 1993.

61

In August 1991, Pennsylvania enacted legislation that increased the mpany's state income and other taxes retroactive to January 1, 1991.

~

See e 3 for information concerning the recovery of these increased taxes.

~ ~

During 1991, the Company utilized the remaining $ 16 million of

~

previously unused tax credits to reduce its federal income tax liability.

Details of the components of income tax expense and a reconciliation

~

of federal income taxes derived from statutory tax rates applied to income from continuing operations for accounting purposes are as follows (thousands of dollars):

1993 1992 1991 Income Taz Ezpense Included in operating expenses Provision -Federal $ 158,106 9144,546 $ 114,904 Federal tax rate change 4,689 State 63 508 64 648 49 534 226 303 209 194 164 438 Deferred Federal 219 280 30,654 51,547 Federal tax rate change 1,211 State ~124) 22 367 2 521 33 175 225 51 772 Investment tax credit, net Federal ~13 506) ~14 029) 1 156 235 164 228 340 217 366 ncluded in other income and deductions Provision(credit)-Federal (4, 976), 676 (126)

Federal-tax rate change (158)

State 486 483 33 Deferred-Federal

~4648) 1 159 (441)

~93(640)

)

3, 907 Federal-tax rate change 140 State ~679) ~396) ~170) 3 368 ~837) ~810)

~1280) 322 ~903)

Total income tax expense-Federal 170, 693 161,406 166,841 State 63 191 67 256 49 622 233 884 228 662 216 463 Detail of deferred taxes in operating expenses Tax depreciation 33 6 195 $ 38 ~ 026 9 72,113 Reacquired debt costs 9,927 5,405 (1,938)

Other ~18 403)

~22 367 ~33 175 ~51 772 62

Reconciliation of Income Taz Expense Indicated federal income tax on pretax income at statutory tax rate (1993( 35% 1992-1991) 344) ~203 704 195 631 '192 058 Increase (decrease due to:

State income taxes 41,829 44,575 34, 319 Depreciation differences not normalized 8,470 6,805 9,080 Amortization of investment tax credit, (13,506) (14,029) (15,048)

AFUDC (Note 1) (2,794) (2,302) (1,007)

Other ~3819) ~2018) ~2939) 30 180 33 031 24 405 Total income tax expense $ 233 884 228 662 216 463 Effective income tax rate 40.24 39.74 38.3S Taxes, other than income, consist of the following (thousands of dollars):

Taxes, Other Than Income State gross receipts $ 98,280 $ 94,926 $ 91,504 State utility realty 45,292 48,511 43,432 State capital stock 35,943 37,279 32,579 Social security and other 24 452 24 602 22 911

~203 967 ~205 3 18 190 426

6. Nuclear Decommissioning Costs The Company's most recent site specific decommissioning study, based on immediate dismantlement and decommissioning each unit following fin shutdown, indicates that its share of the total estimated cost o decommissioning the Susquehanna station is approximately $ 725 million in 1993 dollars. The operating licenses for Units 1 and 2 expire in 2022 and 2024, respectively.

Under current rates, the Company collects about $ 6.9 million annually from customers for the cost of decommissioning the Susquehanna station.

The amounts collected, less 'applicable taxes, are deposited in an external trust fund for investment and can be used only for future decommissioning costs. The market value of securities held and accrued income in the trust fund at December 31, 1993 aggregated approximately $ 82.9 million.

The most recent estimated cost of decommissioning Susquehanna is substantially higher than the estimate used to determine the amount currently collected in retail rates. As a result, the Company would expect to request recovery of a higher level of decommissioning expense in its next retail base rate proceeding.

7. Financial Instruments The carrying amount and the estimated fair value of the Company's financial instruments are as follows (thousands of dollars):

63

December 31 1993 December 31 1992 Carrying Pair Carrying Fair Amount Value Amount Value Assets Nuclear plant decommissioning trust fund (a) .

$ 76,913 $ 82 g 860 $ 65 ~ 159 69,104 Financial investments (b) 140,569 145 g 482 12 1 ~ 500 124,203 Other investments (a) 31,249 31,182 33,657 33,638 Cash and cash equivalents (c) 8,271 8J271 15g110 15,110 Marketable debt securities and other assets included in other current assets,(a) 6, 266 6, 274 16'42, 16'62 Liabilities Preferred stock with sinking fund requirements (d) 335 000 6 336 I 388 325 600

~ 334 g 090 Long-term debt (d) 2g 662'70 2f 843'35 2g 627'59 2/758/ 176 Commercial paper and bank loans (c) 202 6 260 202 g 260 159 I 348 159 g 348 Taxes and interest accrued, dividends payable and other liabilities included in other current liabilities(c) 219I 505 219'05 222 f 338 222 g 338 Accrued nuclear assessment noncurrent (c) 31,871 31,871 39,600 39,600 (a) The fair value generally is based, on established market prices. For a minor portion, the fair value approximates the carrying amount.

(b) The fair value is based on established market prices. For venture, capital investments included in financial investments, fair value is determined in good faith by management of the venture capital entity.

(c) The fair value approximates the carrying amount.

(d) The fair value is based on quoted market prices for the security or similar securities where available and estimates based on current rates offered to the Company where quoted market prices are not available.

Financial investments consist of the following (thousands of dollars):

December 31 1993 1992 Marketable equity securities $ 10(854 $ 11,320 Marketable debt securities 61,294 78,942 Financial limited partnerships 65,378 39,256 Venture capital investments 6 207 6 393 143,733 135'11 Less marketable debt securities included in other current assets (at the lower of amortized cost or market value) 3 164 14 411 Total ~140 569 121 500 64

Marketable equity securities at December 31, 1993" and 1992 are stat at the lower of aggregate cost or market. The market value of marketab equity securities was $ 12,995,000 at December 31, 1993 and $ 11,546,000 at December 31, 1992. The market value of marketable debt securities was

$ 65,562,000 at December 31, 1993 and $ 80,588,000 at December 31, 1992.

8. Stack Held Ror Dividend Reinvestment Plan At December 31, 1993, the Company temporarily held 585,506 shares of common stock which were acquired in the open market. These shares were distributed to participants in the Dividend Reinvestment Plan in January 1994.

9. Leases The Company and a subsidiary have entered into capital leases consisting of the following (thousands of dollars):

H December 31 1993 1992 Nuclear fuel, net of accumulated amortization (1993i $ 191(812'992i $ 191(002) '$173 I395 $ 171i901 Vehicles, oil storage tanks and other property, net of accumulated amortization (1993'83i224i 1992'93i730) 75 630 79 157 Net property under capital leases ~249 025 ~251 058 Capital lease obligations incurred for the acquisition of nuclear fuel and other property were (millions of dollars): 1993, $ 84.0; 1992, $ 64.8 and 1991, $ 69.5.

Nuclear fuel lease payments, which are charged to expense as the fuel is used for the generation of electricity, were (millions of dollars):

1993, $ 67.6; 1992, $ 70.4 and 1991, $ 95.5. 'uture nuclear fuel lease payments will be based on the quantity of electricity produced by the Susquehanna station. The maximum amount of unamortized nuclear fuel leasable under current arrangements is $ 200 million.

Future minimum lease payments under capital leases in effect at December 31, 1993 (excluding nuclear fuel) would aggregate $ 86.6 million, including $ 10.9 million in imputed interest. During the five years ending 1998, such payments would decrease from $ 22.3 million per year to $ 6.5 million per year.

Interest on capital lease obligations was recorded as operating expenses on the Consolidated Statement of Income in the following amounts (millions of dollars): 1993, $ 9.1; 1992, $ 10.5 and 1991, $ 20.5.

Generally, capital leases contain renewal options and obligate the Company and a subsidiary to pay maintenance, insurance and other relat costs. Various operating leases have also been entered into which are n material with respect to the Company s financial position.

65

10. Regulatory Assets The Company has deferred certain costs in accordance with the rate actions of the PUC and FERC and is recovering or expects to recover such costs in electric rates charged to customers. Regulatory assets consist of the following (thousands of dol'lars):

December 31 1993 1992 Deferred depreciation $ 282,115 $ 296,285 Deferred operating and carrying costs Susquehanna 39,215 39,215 Utility plant carrying charges-net of amortization 24,097 24,965 Deferred refueling outage costs Susquehanna 16,027 17, 446 Reacquired debt costs 101,836 78,917 Taxes recoverable through future rates 1,166,118 Postretirement benefits other than pensions '14,855 Retired miners'ealth care benefits 24,096 36,600 Assessment for decommissioning uranium enrichment facilities 33 710 38 925 1 702 069 ~532 353 Deferred depreciation is the difference between the straight-line depreciation of property placed in service at the Susquehanna station prior to January 1, 1989 and the amount of depreciation on such property vided for financial reporting purposes and included in rates, and is the ult of a rate phase-in plan meeting the criteria of SFAS 92, "Regulated Enterprise Accounting for Phase-in Plans." The annual difference is shown as amortized (deferred) depreciation on the Consolidated Statement of Income.

Deferred operating and carrying costs Susquehanna consist of certain operating and capital costs, net of energy savings, associated with Units 1 and 2 at the Susquehanna station. The costs, deferred in accordance with orders from the PUC, were incurred from the date the units were placed in commercial operation until the effective dates of the rate increases reflecting operation of the units. The deferred costs include related deferred income taxes. Recovery of these costs will be subject to PUC approval. No return is being accrued on the deferred costs.

Utility plant carrying charges are carrying charge accruals that were reclassified from electric utility plant in service to a deferred debit in accordance with a FERC order. Such charges are being amortized over the remaining depreciable life of the related property and are included in PUC electric service rates.

Deferred refueling outage costs Susquehanna represent incremental maintenance costs incurred during refueling and inspection outages which are deferred and subsequently amortized over the period of time that begins upon the cessation of the outage and ends with the start of the next

~

heduled refueling and inspection outage. Such costs are included in ctric service rates.

~

66

Reacquired debt costs represent premiums and expenses incurred in the redemption of long-term debt. In accordance with FERC regulations~

reacquired debt costs are amortized over either the life of the refundin~

issue or the remaining life of the redeemed issue, as appropriate.

Reacquired debt costs are included in electric service rates.

For a discussion of taxes recoverable through future rates, postretirement benefits other than pensions, retired miners health care benefits and assessment for decommissioning uranium enrichment facilities, see Notes 5, 13 and 3, respectively.

11. Termination of Coal<<Mining Operations The Company has ceased its subsidiary coal-mining operations. One of the three operating mines closed at the end of June 1991. A second operating mine closed at the end of March 1992, and a third mine was sold in September 1992. A coal processing and loading facility was sold in November 1993, completing the planned phase-out of coal mining operations.

The Company replaced the coal produced by its subsidiaries with coal acquired through new contracts with non-affiliated suppliers and open market purchases. A subsidiary continues to sell purchased coal to the Company.

The Company purchased coal from certain subsidiaries at prices equal to the cost incurred by those subsidiaries for mining, processing and purchasing coal. These purchases totaled approximately $ 20 million in 1993, $ 109 million in 1992 and $ 188 million in 1991. The cost of coal purchased was included in energy costs collected from customers.

All the coal produced at the now closed Greenwich mines was delivered to the Company's Montour generating station. The PUC adopted a standard based on the cost of coal purchased by other Pennsylvania electric .

utilities against which the cost of all coal delivered to Montour was measured. The standard covered the three-year period from April 1, 1990 through March 31, 1993. At the end of this period, the cost of coal delivered to Montour was less than the standard.

The Energy Act imposed a new liability on the Company or its coal-mining subsidiaries for the cost of health care for retired coal miners previously employed by those subsidiaries. See Note 3 for information concerning this liability.

12. Credit Arrangements The Company issues commercial paper and, from time to time, borrows from banks to provide short-term funds required for general corporate purposes. In addition, certain subsidiaries also borrow from banks to obtain short-term funds. Bank borrowings generally bear interest at rates negotiated at the time of the borrowing.

A $ 140 million revolving credit arrangement is maintained with a group of banks in return for the payment of commitment fees. The line of credit is maintained principally as a back-up for the Company's commercial paper~

Any loans made under this credit arrangement would mature on June 30, 199+

and, at the option of the Company, interest rates would be based upon certificate of deposit rates, Eurodollar deposit rates or the prime rate.

67

The Company has additional credit arrangements with another group of banks return for the payment of commitment fees. The banks have committed to at d the Company up to $ 60 million under these credit arrangements interest rates based upon Eurodollar deposit rates or the prime rate.

These credit arrangements mature on May 1, 1994 with provisions to extend every six months. These arrangements produce a total $ 200 million of lines of credit to provide back-up for the Company's commercial paper and were the short-term borrowings of certain subsidiaries. No borrowings outstanding at December 31, 1993 under these credit arrangements.

The Company also maintains a $ 5 million line of credit with a bank in return for the maintenance of a compensating balance. No borrowings were outstanding at December 31, 1993 under this line of credit.

The Company leases its nuclear fuel from a trust funded by sales of commercial paper. The maximum financing capacity of the trust under existing credit arrangements is $ 200 million.

Commitment fees incurred were (millions of dollars): 1993, $ 0.3; 1992, $ 0.4 and 1991, $ 0.4.

13. Pension Plan and Other Postretirement and Postemployment Benefits Pension Plan The Company has a funded noncontributory defined benefit pension plan lan) covering substantially all employees. Benefits are based upon a icipant's earnings and length of participation in the Plan, subject to eting certain minimum requirements.

The Company also has two supplemental retirement plans for certain management employees and directors that are not funded. Benefit payments pursuant to these supplemental plans are made directly by the Company. At December 31, 1993, the projected benefit obligation of these supplemental plans was approximately $ 12.9 million.

The components of the Company's net periodic pension cost for the three plans were (thousands of dollars):

1993, 1992 '991 Service cost-benefits earned during t the period $ 316381 $ 296967 $ 28i 188 Interest cost 40I 605 Actual return on plan assets Net amortization and deferral 48I 266 (92 I 085) 29 696 '0 44 i 203 (95 I 969 )

251

( 182 6 956) 134 268 Net periodic pension cost ~17 258 ~18 452 ~20 105 The net periodic pension cost charged to operating expenses was $ 10.1 million in 1993, $ 11.6 million in 1992 and $ 12.6 million in 1991. The balance was charged to construction and other accounts. The funded status the Company's= Plan was (thousands of dollars):

I~

68

December 31 1993 . 1992 Fair value of plan assets ~94 3 889 ~877 887 Actuarial present value of benefit obligations:

Vested benefits 490,567 407, 164 Nonvested benefits 1 543 1 119 Accumulated benefit obligation 492, 110 408 i 283 Effect of projected future compensation 191 302 201 594 Projected benefit obligation 683 412 609 877 Plan assets in excess of projected benefit obligation 260,477 268'10 Unrecognized transition assets (being amortized over 23 years) (72,316) (76, 836)

Unrecognized prior service cost 34,240 36,731 Unrecognized net gain (305 577)

Accrued expense ~83 17 6)

The weighted average discount rate used in determining the actuarial present value of projected benefit obligations was 7.04 and 7.5%,

respectively, on December 31, 1993 and December 31, 1992. The rate of increase in future compensation used in determining the actuarial present value of projected benefit obligations was 5.74 and 6.2%, respectively, on December 31, 1993 and December 31, 1992. The assumed long-term rates of return on assets used in determining pension cost in 1993 and 1992 w 8.0%. Plan assets consist primarily of common stocks, government a corporate bonds and temporary cash investments.

Subsidiary mining compan'ies have a noncontributory defined benefit pension plan covering substantially all non-bargaining, full-time employees which is fully funded primarily by group annuity contracts with insurance companies. Substantially all union employees of these subsidiaries were covered by a pension plan administered by the Trustees of the United Mine Workers of America (UMWA) Health and Retirement Funds. The pension cost for non-bargaining employees together with retirement contributions to the UMWA Health and Retirement Funds for 1991, 1992 and 1993 aggregated $ 5.4 million, $ 2.0 million and $ 0.0 million, respectively.

Subsidiary mining companies are liable under federal and state laws to pay black lung benefits to claimants and dependents, with respect to approved claims, and 'are members of a trust which was established to facilitate payment of such liabilities. The actuarially determined expense for black lung benefits was $ 0.5 million in 1991 and $ 0.2 million in 1992.

There was no expense for black lung benefits in 1993.

Postretirement Benefits Other Than Pensions Substantially all employees of the Company and its subsidiaries will become eligible for certain health care and life insurance benefits upon retirement. The Company sponsors four defined benefit health and welfar plans that cover substantially all management and bargaining unit employe upon retirement One plan provides for retiree health care benefits t certain management employees, another plan provides retiree health care 69

benefits to bargaining unit employees, a third plan provides retiree life

~

urance benefits to certain management employees up to a specified amount a fourth plan provides retiree life insurance benefits to bargaining unit

~

employees.

Life insurance benefits for certain management employees beyond a specified amount are not included in the plan for retiree life insurance benefits to management employees but are combined with the disclosures below for the health care and life insurance plans. The cost of retiree health care and life insurance benefits for officers of the Company are not material and are not combined with the disclosures below for health care and life insurance plans.

Dollar limits have been established for the amount the Company will contribute annually toward the cost of retiree health care for employees retiring on or after April 1, 1993. Through December 31, 1992, the Company recognized the cost of these benefits for retired employees when payments were made.

Effective January 1, 1993, the Company adopted SFAS 106, for Postretirement Benefits Other Than Pensions," which requires "Employers'ccounting the Company to accrue, during the years that the employees render the necessary service, the expected cost of providing retiree health care and life insurance benefits. The transition obligation at January 1, 1993, which is being amortized over a 20-year period, amounted to $ 173.8 million.

In accordance with a PUC order, the Company is deferring the PUC-jurisdictional accrued cost of retiree health and life insurance benefits

~ ~ ~ ~

excess of actual claims paid pending recovery of the increased cost in ail rates. See Note 3 for additional information.

~

~

In December 1993, the Company established a separate Voluntary Employee Benefit Association (VEBA) trust for each of the four health and welfare benefit. plans for retirees and adopted a funding policy that takes into account. the maximum amount allowed as a deduction for federal income tax purposes.

The following table sets forth the plans'ombined funded status reconciled with the amount shown on the Company's Consolidated Balance Sheet at December 31, 1993 (thousands of dollars):

Accumulated postretirement benefit obligation:

Retirees 95,046 Fully eligible active plan participants 32,742 Other active plan participants 75 185 202,973 Plan assets at fair value, primarily temporary cash investments 14 848 Accumulated postretirement benefit obligation in excess of plan assets 188,125 Unrecognized net loss (20,573)

Unrecognized transition obligation Accrued postretirement benefit cost 2 412 70

The plan that provides retiree health, care benefits to certain-management employees is currently unfunded; the amount included in accumulated postretirement benefit obligation attributable to that plan th~

i (thousands of dollars) $ 70,630.

The net periodic postretirement benefit cost for 1993 included the following components (thousands of dollars):

Service cost benefits attributed to service during the period $ 3, 699 Interest cost on accumulated postretirement benefit obligation 13, 008 Net amortization and deferral 8 691 Net periodic postretirement benefit cost 25 398 Through 'December 31, 1993, the Company deferred $ 14.9 million of retiree benefits costs. See Note 3 for additional information concerning the recovery of the deferred costs. The benefit cost charged to operating expenses was $ 6.9 million in 1993. The balance was charged to construction and other accounts. The cost of retiree health and life insurance benefits recognized as expense by the Company and its subsidiaries was approximately (millions of dollars): 1992, $ 5.5 and 1991, $ 7.2.

For measurement purposes, a 104 annual rate of increase in the per capita cost of covered health care benefits was assumed for 1994; the rat was assumed to decrease gradually to 64 by 2006 and remain at that leveM thereafter. Increasing the assumed health care cost trend rates by 14 in each year would increase the accumulated postretirement benefit obligation as of December 31, 1993 by about $ 11.2 million and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for the year then ended by about $ 1.1 million.

In determining the accumulated postretirement benefit obligation, the weighted average discount rate used was 74. The three trusts holding plan assets are tax-exempt. The unfunded trust will be subject to federal income taxes at a 35% tax rate. The expected long-term rate of return on plan assets for the tax-exempt trusts was 6.5>.

Subsidiary coal-mining companies had accrued $ 32 million for an estimated payment they expected to make to the UMWA health trust funds for future retiree health care. However, the Energy Act imposed a new liability, estimated to about $ 68 million on a net present value basis, on the Company or its subsidiary coal-mining companies for the cost of health care of retired miners previously employed by those subsidiaries. See Note 3 for information concerning this liability.

Postemployment Benefits The Company provides health and life insurance benefits to disabled employees and income benefits to eligible spouses of deceased employees~

In December 1993, the Company adopted SFAS 112, "Employers'ccounting fo Postemployment Benefits," which requires the Company to accrue, during the years that the employees render the necessary service, the expected cost of 71

t providing benefits to former or inactive employees after employment but

~ ~ ~ ~

ore retirement.

~

~ In connection with the adoption of SFAS 112, the

~

pany recorded an obligation for postemployment benefits of $ 7.5 million

~

and a charge to operating expense of $ 5.5 million. The balance of the

~

~ ~

postemployment benefit obligation was charged

~ ~

to construction ~

and other accounts. The one-time charge to operating expense, which after income taxes', reduced net income by $ 3.1 million or about 2.1 cents per share of common stock.

Employee Stock Ownership Plan The Company has an Employee Stock Ownership Plan (ESOP) for all full-time employees having more than one year of service. Contributions to the ESOP had been funded with investment and payroll-based tax credits previously available to the Company under federal law to acquire shares of the Company's common stock. Contributions funded with these tax credits were completed in 1991. Since 1990, all dividends on shares credited to participants'ccounts have been paid in cash. The Company deducts the amount of those dividends for, income tax purposes and contributes to the ESOP shares having a cost equal to the tax savings resulting from that deduction and contribution.

14. Jointly Owned Facilities At December 31, 1993, the Company or a subsidiary owned undivided interests in the following facilities (millions of dollars):

Merrill Generating Stations Creek Susquehanna Keystone Conemaugh Reservoir Own e r shi p interest 90 00+o

~ 12.344 11.39< 8.37<

Electric utility plant in service $ 3,984 $ 55 $ 57 Other property $ 22 Accumulated depreciation 592 27 24 5 Construction work in progress 64 .2 26 Each participant in these facilities provides its own financing. The Company receives a portion of the total output of the generating stations equal to its percentage ownership. The Company's,share of fuel and other operating costs associated with the stations is reflected on the Consolidated Statement of Income. The Merrill Creek Reservoir provides water during periods of low river flow to replace water from the Delaware River used by the Company and other utilities in the production of electricity.

15. Commitments and Contingent Liabilities The Company's construction expenditures are estimated to aggregate

$ 471 million in 1994, $ 398 million in 1995 and $ 422 million in 1996, including AFUDC. For discussion pertaining to construction expenditures, e Review of the Company's Financial Condition and Results of Operations

~ ~ ~

er the caption "Financial Condition Capital Expenditure Requirements"

~ ~ ~ ~

on page 33.~

72

The 'Company is a member of certain insurance programs which provide coverage for property damage to members'uclear generating stations~

Facilities at the 'Susquehanna station are insured against property. dama~

losses up to $ 2.7 billion under these programs. The Company is also a member of an insurance program which provides insurance coverage for the cost of replacement power during prolonged outages of nuclear units caused by certain specified conditions. Under the property and replacement power insurance programs, the Company could be assessed retrospective premiums in the event the insurers'osses exceed their reserves. The maximum amount the Company could be assessed under these programs at December 31, 1993 was about $ 20.1 million.

Nuclear Regulatory Commission regulations, as amended, require that in the event of an accident, where the estimated cost of stabilization and decontamination exceeds $ 100 million, proceeds of property damage insurance be segregated and used, first, to place and maintain the reactor in a safe and stable condition and, second, to complete required decontamination operations before any insurance proceeds would be made available to the Company or the trustee under the Mortgage. The Company's on-site property damage insurance policies for the Susquehanna station conform to these regulations.

The Company's public liability for claims resulting from a nuclear incident at the Susquehanna station is limited to about $ 9.4 billion under provisions of The Price Anderson Amendments Act of 1988 (the Act). The Company is protected against this liability by a combination of commercial utility liability insurance and an industry assessment program. A s under the assessment program will be indexed not less than once during each five+

o&

year period for inflation and will be subject to an additional surcharge 50 in the event the total amount of public claims and costs exceeds the basic assessment. In the event of a nuclear incident at any of the reactors covered by the Act, the Company could be assessed up to $ 151 million per incident, payable at a rate of $ 20 million per year, plus the additional 5% surcharge, if applicable.

In August 1991, a group of 21 fuel oil dealers in the'ompany's service area filed a complaint against the Company in United States District Court for the Eastern District of Pennsylvania (Court) alleging that the Company's promotion of electric heat pumps and off-peak thermal storage systems had violated and continues to violate the federal antitrust laws. The complaint also alleged that the Company's use of a cash grant program to developers and contractors for the installation of high efficiency heat pumps violated and continues to violate the Racketeer Influenced and Corrupt Organizations Act (RICO).

The complaint requested judgment against the Company for a sum in excess of $ 10 million for the alleged antitrust violations, treble the damages alleged to have been sustained by the plaintiffs. Separately, the complaint requested judgment for a sum in excess of $ 10 million for the alleged RICO violations, treble the damages alleged to have been sustained by the plaintiffs. Finally, the complaint requested a permanent injunction against all activities found to be illegal, including the cash grant program.

In April 1992, a fuel oil dealer in the Company's service area filed a class action complaint against the Company in the Court alleging, as did 73

the August 1991 complaint, that the Company's promotion of electric heat ps and off-peak thermal storage systems had violated and continues to late the federal antitrust laws. The complaint did not allege any violation of RICO, but did allege that the Company engaged in a civil conspiracy and unfair competition in violation of Pennsylvania law.

The plaintiff sought to represent as,a class all fuel oil dealers in the Company's service area. The complaint requested a permanent injunction against all activities found to be illegal and treble the damages alleged to have been sustained by the class. No specific damage amount was set forth in the complaint. This second antitrust complaint was consolidated with the August 1991 complaint for pre-trial purposes.

In September 1992, the Court granted the Company's motion for summary judgment and dismissed both suits filed against the Company. The plaintiffs have appealed the decision to the United'States Court of Appeals for the Third Circuit. The Company cannot predict the ultimate outcome of these proceedings.

The Federal Clean Air Act Amendments of 1990 deal, in part, with acid rain, attainment of federal ambient ozone standards and toxic air emissions. The acid rain provisions, which are contained in Title IV of the legislation, specify Phase I sulfur dioxide emission limits on about 55% of the Company's coal-fired generating capacity by January 1, 1995, and more stringent Phase II sulfur dioxide emission limits for .all of the Company's fossil-fueled generating units by January 1, 2000.

The Company expects to meet the 1995 Phase I sulfur dioxide standards the use of lower sulfur coal, additional processing of coal through cleaning plants, and the installation of scrubbers at the Conemaugh

~

station, in which the Company has an 11.394 ownership interest.

~

The Company may also choose to limit the generation of certain units and to bank or trade emission allowances among its generating units or with other utilities to the extent permitted by the legislation.

The acid rain provisions also require installation of low nitrogen oxide burners on each unit by the same date that, sulfur dioxide limits apply to that unit. In addition, the ambient ozone attainment provisions contained in Title I of the legislation specify other nitrogen oxide emission reductions. In this regard, the legislation defines a Northeast Ozone Transport Region that includes all of Pennsylvania in addition to all states in the Northeast from northern Virginia to Maine. All major stationary sources within the region must install 'easonably available control technology (RACT) for nitrogen oxide emissions by May 1995.

The Company expects to meet this RACT requirement by installing low nitrogen oxide burners on the Phase I units as required by the acid rain title and by advancing the installation of low nitrogen oxide burners on certain Phase II units, where= technically feasible, that would have been required in 2000 by the acid rain title.

The Company currently estimates that the cost of compliance with the ase I sulfur dioxide standards and installation of the low nitrogen oxide ners will require capital expenditures of about $ 200 million (in estimated 1994'ollars) and additional operating expenses which will result 74

in an increase in customer rates of about 1.5% (based on 1993 revenue levels) .

To meet the Phase II acid install flue rain sulfur dioxide emission standards, the Company expects to gas desulfurization (FGD) on up to 604 of its'oal-fired generating capacity, to continue to purchase lower sulfur coal for its remaining generating capacity and to bank or trade emission allowances among its generating units or with other utilities to the extent permitted by the legislation. The exact mix of lower sulfur fuel, emission allowance purchases, sales or trades, and the amount and timing of FGD will be determined based on FGD installation costs, fuel cost and availability, and emission allowance prices.

The Company currently estimates that the cost of compliance with the Phase II sulfur dioxide standards will require additional capital expenditures in the later half of the 1990s of $ 400 million to $ 500 million (in estimated 1994 dollars) and additional operating expenses which will result in an increase in customer rates (based on 1993 revenue levels) of about 34 above the increase expected to result from Phase I compliance with the sulfur dioxide standards of the legislation and installation of low nitrogen oxide burners. I The ambient ozone attainment provisions also require modeling of nitrogen oxide and volatile organic compound emissions in the Northeast Ozone Transport Region to determine what further reductions are needed beyond the RACT requirements to achieve ambient ozone attainment.

results indicate further reductions are needed in power plant nitrogen If the oxide emissions, the Company may be required to install additional nitroge+

oxide reduction equipment, such as selective catalytic reduction, on somW or all of its fossil units around 2000. The Company s preliminary estimates indicate that the cost of compliance could require additional capital expenditures of up to $ 600 million (in estimated 1994 dollars) and additional operating expenses which will result in a further increase in customer rates of as much as 44 (based on 1993 revenue levels).

In addition to acid rain and ambient ozone attainment provisions, the legislation requires the Environmental Protection Agency (EPA) to conduct a study of hazardous air emissions from power plants. Adverse findings from this study could cause the EPA to mandate additional ultra high efficiency particulate removal baghouses or specialized flue gas scrubbing to remove certain vaporous trace metals and certain gaseous- emissions. If it is determined that the installation of such additional equipment is required, the Company's preliminary estimates indicate that, the cost of compliance could require additional capital expenditures of up to $ 400 million (in estimated 1994 dollars) and additional operating expenses which will result in a further increase in customer rates of as much as 2C (based on 1993 revenue levels).

Under current Pennsylvania law, construction work in progress for non-revenue producing assets, such as capital expenditures for pollution control equipment, can be claimed in rate base.

In February 1993, the PUC adopted a policy statement regarding th~

trading and usage of, and the ratemaking treatment for, emission allowanc~

by Pennsylvania electric utilities. The policy statement determines, among other things, that the PUC will not require approval of specific 75

transactions and the cost of allowances will be recognized as energy-ated power production expenses and recoverable through the ECR.

The Pennsylvania Air Pollution Control Act, as amended, implements the 1990 federal clean air legislation. The state legislation essentially requires that new state air emission standards be no more stringent than federal standards. This legislation has no effect on the Company's plans for compliance with the Federal Clean Air Act Amendments of 1990.

Until action has been taken by the appropriate regulatory bodies, the Company will not be able to determine the exact method of compliance with the acid rain, ambient ozone and hazardous air emission provisions of the legislation, or the cost thereof and its impact on customer rates. 1 The Pennsylvania Department of Environmental Resources (DER) regulations governing the handling and disposal of industrial (or residual) solid waste require the Company to submit detailed information on waste generation, minimization and disposal practices. They also require the Company to upgrade and repermit existing ash basins at all of its coal-fired generating stations by applying updated standards for waste disposal.

Ash basins that cannot be repermitted are required to close by July 1997.

Any groundwater contamination caused by the basins must also be addressed.

Any new ash basin must meet the rigid site and design standards set forth in the regulations. In addition, the siting of future facilities at Company facilities could be affected.

The fly ash basin at the Martins Creek station and the dry fly ash I

posal area at the Montour station are expected to comply with the DER lations. However, the fly ash basins at other fossil-fueled generating

~

~

stations, bottom ash basins at all fossil-fueled generating stations and

~

the coal refuse basin at the Brunner Island station do not meet the new requirements and must be retired by July 1997. The Company, in addressing the requirements of these regulations, plans to install dry fly ash handling systems at. the Brunner Island, Sunbury and Holtwood stations. The Company, with siting assistance from a public advisory group, plans to use the dry fly ash from the Sunbury and Holtwood stations to reclaim strip mines in the anthracite coal region. The Company is exploring opportunities to beneficially use coal ash from Brunner Island in various roadway construction projects in the vicinity of the plant that may delay or preclude the need for a new disposal facility.

I Groundwater degradation related to fuel oil leakage from underground facilities and'o seepage from coal refuse disposal areas and coal storage piles has been identified at several generating stations. Many requirements of the DER regulations address these groundwater degradation issues. The Company has reviewed its remedial action plans with the DER.

Remedial work has begun at one generating station, and remedial work may be required at others.

The DER has adopted, and recently revised, regulations to implement the toxic control provisions of the, Federal Water Quality Act of 1987 and to advance Pennsylvania's toxic control program... These regulations thorize, the DER to use both biomonitoring and a water quality based mical-specific approach in National Pollutant Discharge Elimination stem (NPDES) permits to control toxics. In the third quarter of 1993, the Company received a new NPDES permit for the Montour and Holtwood 76

stations. The Montour permit contains very stringent limits for certain toxic metals and increased monitoring requirements. More toxic limits reduction~

studies will be conducted at Montour before the permit becom~

effective. Additional water treatment facilities may be needed at Montour, depending on the results of the studies. At Holtwood, toxics are required to be monitored at the fly ash basin until its closure in 1997. No limits have been set at this point. The Company will therefore comply with an implementation schedule for such closure and for construction of a new dry ash handling system at Holtwood.

The Company currently estimates that about $ 238 million of capital expenditures could be required to comply with the residual waste regulations, correct groundwater degradation at fossil-fueled generating stations and address waste water control at Company facilities. Such expenditures during the years 1994-1996 could total about $ 137 million, of which about $ 68 million is included in the Company's estimate of 1994-1996 construction expenditures shown on page 33. Actions taken to correct groundwater degradation, to comply with the DER's regulations and to address waste water control are also expected to result in increased operating costs in amounts which are not now determinable but could be material.

The issue of potential polychlorinated biphenyl (PCB) contamination at certain of the Company's substations and pole sites is currently being pursued by the DER. Xn this regard, the DER sent the Company a proposed Consent Order under which the Company 'ould assess and, remediate sites where PCB contamination may exist.

if necessary, The Company is continuing to negotiate with the DER. The costs of addressing these PC issues are not now determinable but could be material.

At December 31, 1993, the Company had accrued $ 5.2 million, representing the minimum amount the Company at this time can reasonably estimate it will have to spend to remediate sites hazardous or toxic substances.

involving the removal of The Company is involved in several other sites where it such remediation.

may be required, along with other parties, to contribute to Some of these sites have been listed by 'the EPA under the federal Comprehensive Environmental Response Compensation and Liability Act of 1980, as amended (Superfund), and others may be candidates for listing at a future date. Future clean-up or remediation work at sites currently under review, or at sites currently unknown, may result in material additional operating costs which the Company cannot estimate at this time.

Concerns have been expressed by some members of the scientific community and others regarding the potential health effects of electric and magnetic fields (EMF). These fields are emitted by all devices carrying electricity, including electric transmission and distribution lines and substation equipment. Federal, state and local officials are focusing increased attention on this issue. The Company is actively participating in the current research effort to determine whether or not EMF causes any human health 'problems and is taking steps to reduce EMF, where practical, in the design of new transmission and distribution facilities. The Company is unable to predict what effect the EMF issue might have on Compan operations and facilities.

77

In complying with statutes, regulations and actions by regulatory

~ ~

ies involving environmental matters, including'he areas of water and

~ ~ ~

quality, hazardous and solid waste handling and disposal

~

and toxic substances, the Company may be required to modify, replace or cease operating certain of its facilities.

~ ~ ~

The Company may also incur material capital expenditures and operating expenses in amounts which are not now determinable.

At December 31, 1993, the Company had guaranteed $ 13.3 million of obligations of Safe Harbor. The Company does not expect to fund 'he guarantee and has concluded value of the guarantee.

that it is impractical to determine the fair 78

SELECTED FlNANCIALAND OPERATlNG DATA 1993 1992 1991 1990 CONSOLIDATED OPERATIONS Income Items - thousands Operating revenues $ 2,727,002 $ 2,744,122 $ 2,740,715 $ 2,637,922 Operating income.. 562,808 573,431 582,331 590,366 Net income. 348,126 346,724 348,414 343,906 Earnings applicable to common stock................ 314,241 306,229 303.727 297,781 Balance Sheet Items - thousands (a)

Electric utility plant in service - net. $ 6,507,621 $ 6,391,857 $ 6,296,496 $ 6,240,608 Construction work in progress.. '38,600 211,534 183,242 143,084 Other property, plant and equipment - net.......... 399,360 416,113 449,840 510,529 Total assets 9,454,113 8,191,768 7,934.595 7,735.442 Long-term debt.. 2,662,570 2,627,159 2,582,233 2,470,596 Preferred and preference stock With sinking fund requirements. 335,000 325,600 364,590 383,690 Without sinking fund requirements 171,375 223,612 231,375 231,375 Common equity.. 2,425,835 2,366,939 2,298,010 2,221,759 Short-term debt. 202,260 159,348 147,170 265,940 Total capital provided by investors. 5,797.040 5,702,658 5,623,378 5,573,360 Capital lease obligations ........ 249,025 251,058 2?1,976 302,754 Financial Ratios Return on average common equity -% ............. 13.06 13.11 13.42 Embedded cost rates (a) 13.65'.63 Long-term debt - %. 9.36 9.72 9.69 Preferred and preference stock - %.................. 6.30 7.36 7.51 7.54 Times interest earned before income taxes...., .. 3.33 3.18 3.06 2.86 Ratio of earnings to fixed charges - total enterprise basis (b). 3.31 3.15 3.04 2.81 Depreciation as % of average depreciable property. 3.3 3.2 3.1 2.9 Common Stock Data Number of shares outstanding - thousands Year-end.. 152,132 151,885 151,655 151,298 Average............................ 151,904 151,676 151,382 150,924 Number of shareowners (a). 130,677 129,394 127,272 130,719 Earnings per share . $ 2.07 $ 2.02 $ 2.01 $ 1.97 Dividends declared per share $ 1.65 $ 1.60 $ 1.55 $ 1.49 Book value per share (a). $ 15.95 $ 15.58 $ 15.15 $ 14.68 Market price per share (a).. $ 27 $ 2?-1/4 $ 26-3/8 $ 21-7/8 Dividend payout rate - %. 80 79 77 76 Dividend yield - % (c).. 5.64 6.07 6.69 7.15 Price earnings ratio (c).... 14.14 13.05 11.55 10.56 ELECTRIC OPERATIONS Revenue Data By class of service - thousands Residential. $ 905,650 $ 876,531 $ 842,771 $ 800,587 Commercial. 735,192 713,406 687,632 647,949 Industrial.. 524.160 523,367 506,038 503,806 Other energy sales. 91,205 85,456 83,630 78,489 System sales..

Contractual sales to other utilities. 313,578 330,017 322,298 313,207 PJM Interchange Power Sales 96,848 111,602 180,434 217,430 Total from energy sales billed..

Unbilled revenues - net. (2,455) 36,567 47,022 5,043 Other operating revenues 61,561 64,670 68,868 69,725 Total electric operating revenues ................

Average price per kwh billed - cents Residential. 8.20 8.27 8.12 7.92 Commercial.. 7.84 7.89 7.76 7.59 Industrial. 5.76 5.98 5.98 5.78 Total for ultimate customers. 7.37 7.48 7.39 7.17 Total for system sales. 7.27 7.39 7.30 7.08 a) At year-end.

b) Computed using earnings and fixed cha rges of the Company a nd all of its affiliated companies. Fixed charges consist of interest on short- and long-te rm debt, other interest ch arges, interest on capital lease obligations and the estimated interest component of other rentals.

79

1983-1 993 1989 1988 1987 1986 1985 1984 1983  % Change 632,915 $ 2,495,640 $ 2,457,153 $ 2.480.006 $ 2,566,288 $ 2.212,482 $ 1.991,773 36.9 18,850 605,051 590,637 597.529 536,115 418,689 300,563 87.3 353,436 332,042 302.461 300.108 290,613 318,903 296,011 17.6 305,018 279,865 248,035 231.051 199,327 226.758 210,173 49.5

$ 6,198,693 $ 6,056,723 $ 5,970,000 $ 5.815,838 $ 5,776,687 $ 3,856,738 $ 3;842.826 69.3 115,799 177,333 141,960 224,426 161,684 2,020,780 1,730.223 (86.2) 552,150 607,528 655.254 691.820 699,448 733.002 670.239 (40.4) 7.598,968 7,524,648 7.457.346 7.413.105 7,255,918 7,231.058 6,744.180 40.2 2,650,276 2,626,784 2.587,500 2.849.972 2,664,564 2,674,036 2,477,700 7.5 409.990 438,290 495.590 475.239 691,010 738,027 714,830 (53.1) 231,375 231,375 231,375 231.375 231,375 231,375 231,375 (25.9) 2,139,338 2,049,831 1,969,971 1.915,649 1,905,700 1,896,987 1,767,949 37.2 95,429 201,652 298,321 243,588 247,260 278,652 351,194 (42.4) 5,526,408 5,547,932 5,582.757 5.715,823 5,739,909 5,819,077 5,543.048 4.'6 342,912 372,806 415,206 411,886 405,456 411,225 379,725 (34.4) 14.62 13.86 12.78 12.11 10.42 12.30 12.29 6.3 9.80 10.15 10.31 10.53 11.23 11.11 10.98 (21.4) 7.62 7.66 7.77 8.33 10.02 9.94 9.66 (34.8) 2.78 2.65 2.62 2.69 2.28 2.24 2.20 51.4 2.69 2.57 2.53 2.58 2.19 2.06 2.05 61.5 2.7 2.6 2.5 2.3 2.3 2.7 2.9 13.8 50,845 150,497 149.945 149.026 149,026 149,026 140,670 8.1 150,628 150,141 149.289 149,026 149,026 145,534 137,284 10.6 132,197 137,450 141,843 147,611 151,025 162,903 169,142 (22.7)

$ 2.02 $ 1.86 $ 1.66 $ 1.55 $ 1.34 $ 1.56 $ 1.53 35.3

$ 1.43 $ 1.38 $ 1.34 $ 1.29 $ 1.28 $ 1.24 $ 1.20 37.5

$ 14.18 $ 13.62 $ 13.13 $ 12.85 $ 12.79 $ 12.73 $ 12.56 2?.0

$ 21-1/2 $ 18-1/8 $ 16-1/2 $ 18-1/4 $ 14-3/8 $ 12-5/8 $ 10-3/8 160.2 71 74 81 83 96 80 79 1.3 7.33 7.70 7.37 7.30 9.81 11.00 10.48 (46.2) 9.63 9.61 10.95 11.39 9.76 7.24 7.48 89.0

$ 776,673 $ T68,051 $ 737.066 $ 714,753 $ 634,669 $ 591,922 $ 529,911 70.9 612,762 592,023 572,623 557,216 492,686 441,651 '86;617 90.2 488,691 495,968 492,491 473,488 438,427 411,533 367,950 42.5 80,144 75,507 74.22S 74,047 64,223 59,526 47.275 92.9 69.4 316,508 277,971 282,799 299.663 255,875 52,724 39,012 703.8 255,245 268,526 359,449 282.259 556,926 623,328 720,462 (86.6) 27.5 39,628 (18,187) (84,888) 52,344 78,545 (9,725) (119,539) 97.9 61,588 34,073 21.900 25.033 38,163 33,657 13,694 349.5 37.3 7.72 7.79 8.05 8.15 7.60 7.00 6.51 2B.O 7.40 7.46 7.68 7.78 7.32 6.77 6.32 24.1 5.60 5.64 5.84 5.93 5.55 5.07 4.83 19.3 7.02 7.23 7.34 6.85 B.30 5.91 24.7

6. 89 6.91 T.12 7.25 6.77 6.23 5.83 24.7 (c) Based on average of month-end market prices.

80

SELECTED FINANCIALAND OPERATING DATA 1993 1992 1991 1990 ELECTRIC OPERATIONS (Continued)

Sales Data Customers(a) . 1,203,139 1,186,682 1,173,680 1,161,232 Average annual residential kwh use 10,503 10,207 10,101 9,947 Electric energy sales billed millions of kwh Residential 11,043 10,604 10,385 10,103 Commercial . 9,373 9,039 8,861 8,538 Industrial 9,100 8,746 8,456 8,716 Other 1,534 1,366 1,334 1,315 System sales ~SU 257!K ~FUSE 2F672 Contractual sales to other utilities . 7,142 7.327 7,183 7,028 P JM interchange power sales Total electric energy sales billed ........~........

Sources of energy sold millions of kwh 4.142

~nor ~sjl2 5,160 7.553 8,971

~7T Generated Coal-fired steam stations 24,960 25,153 24,805 26,409 Nudear steam station (b) 12,181 12,216 14,271 13,254 Oil-fired steam station . 1,452 1,057 1,939 1,442 Combustion turbines and diesels (oil) .......... 16 10 15 33 Hydroelectric stations 637 750 521 804 SP248 . PP% ~%2 Power purchases . 5,586 5,347 4,542 4,634 Company use, line losses and other .... (2,498) (2,291) (2,321) (1,905)

Total electric energy sales billed ....... ~KSSW ~F242 ~5772 Generation Data Net system capacity thousands of kw (a)(c) ... 7,802 7,802 7,797 7,912 Winter peak demand thousands of kw (d) ...... 6,403 B,130 5,974 5,661 Generation by fuel source 'k Coal 63.6 64.2 59.7 B3.0 Nud ear(b) . 31.0 31.2 34.3 31.6 Oil..

Hydroelectric Steam station availability 'k Coal-fired 3.8 1.6 82.6 2.7 1.9 81.7 4.7 1.3 78.1 3.5 82.5

~

Nudear (b) . 73.8 73.7 88.3 80.2 Oil-fired 81.9 94.8 88.7 82.8 Steam station capacity factor /o Coal-fired ~ ~~~0 ~ 0 00 ' ~ 68.5 68.8 68.2 72.7 Nudear (b) . 73.0 73.0 85.8 80.1 Oil-fired 10.1 7.3 13.5 10.0 Fuel Cost Data Cost per kwh generated cents Coal-fired steam stations 1.53 1.74 1.75 1.BB Nuclear steam station (b) 0.54 0.54 0.57 0.59 Oil-fired steam station . 3.89 3.73 3.58 4.18 Combustion turbines and diesels (oil) ..............~........ 7.03 7.50 7.52 7.68 Average 1.31 1.42 1.43 1.41 Cost of fossil fuel received at steam stations

$ 3S.23 $ 41.44 $ 42.87 $ 40.64 Residual oil per barrel . $ 18.70 $ 16.5B $ 18.76 $ 21.52 Capitalization Ratios 'h (a)

Long-term debt 46.5 46.7 48.3 44.5 Short-term debt . .......~......................~........................

~ 2.0 1.2 1.3 3.8 Preferred and preference stock . 8.9 9.8 10.8 11.2 Common equity 42.6 42.3 41.6 40.5 Times Interest Earned Before Income Taxes ............ 3.37 321 3.11 2.93 Em ployees (a) ..................................... 7,765 7,981 8,144 8,149 (a) At year~.

(b) The Company's fiat nuclear unit was placed in commercial operation on June 8, 19a3 and the second unit on February 12, 1985.

81

1983-1993 1969 1988 1987 1986 1985 1984 1983 'tr Change t 1,143,593 10,064 10.061 8.285 8,723 1 ~ 122,633 10,059 9,856 7,932 8,799 1,097,522 9,565 9,157 7,457 8,438 1,073,151 9,344 8,771 7,159 7,986 1,055,550 9,034 8,354 6,728 7,907 1,039,385 9,282 8,454 6,527

'8,117 1,026,149 9,051 8,138 6,119 7,623 17.2 16.0 35.7 53.2 19.4 1.333 1,360 1,285 1.170 1,082 1,043 968 58.5 2rm2 '273K 2EYV 6 2UJTI 2 35.9 6,956 6,268 6.201 5,602 4,850 1,002 845 745.2 9.234 10,855 12.682 11,018 15,433 14,732 15,769 (73.7) 2 6 6 m875 ~62 7.3 27,104 26,607 26,465 25.151 26,237 26,695 26,885 (7 2) 11,916 12,867 13.285 10,151 11,534 6,295 4,509 170.1 3,817 4,186 4.095 5,453 4,316 4,121 5,581 (74.0) 107 57 28 17 18 32 45 (64.4) 714 573 689 739 612 747 700 (9.0) 3.586

~WK 3,027 ZW62 2.707 2.032 3,716 Irate 3,765

,3T720 3,880 4.0 44.0 (2,652) (2,247) (2.049) (1,837) (2,079) (1,780) (2.138) (1 B.8)

~20 6 'SFH75 ,Pg82 7.3 7,864 7,479 7.499 7.519 7,513 7,484 7,494 4.1 6,000 5,566 5,591 5,154 4,981 5,519 4,869 31.5 62.1 60.1 59.4 60.6 61.4 70.4 71.3 (10.8) 27.3 29.0 29.8 24.4 27.0 1B.B 11.9 1B0.5 9.6 9.3 13.2 10.2 11.0 14.9 (74.5) 1.3 1.5 1.8 1.4 2.0 1.9 (15.8) 81.1 81.3 83.3 78.8 78.6 75.2 78.8 4.8 72.1 77.7 80.4 61.7 70.7 66.7 B7.7 9.0 76.3 90.1 84.7 84.7 87.2 68.0 75.8 8.0 74.6 73.1 72.9 69.3 72.3 73.3 74.0 (7.4) 72.0 77.7 80.5 61.3 70.5 65.7 67.5 8.1 26.6 29.1 28.5 38.0 30.0 28.6 38.8 (74.0) 1.61 1.64 1.63 1.67 1.78 1.75 1.68 (8.9) 0.58 0.56 0.56 0.58 0.61 0.54 0.66 (18.2) 3.03 2.76 3.23 2.96 5.02 5.31 5.23 (25.6) 5.95 5.89 6.51 7.81 9.31 9.82 10.21 (31.1) 1.46 1.44 1.46 1.57 1.81 1.98 2.15 (39.1)

$ 39.04 $ 39.52 $ 39.30 $ 40.17 $ 42.00 $ 42.75 $ 39.37 (8 0)

$ 17.71 $ 15.95 $ 18.51 $ 16.83 $ 28.42 $ 31.32 $ 29.79 (37.2) 48.3 47.9 46.9 50.4 47.1 46.7 45.1 3.1 0.2 1.7 3.1 2.1 1.7 1.9 3.6 (44.4) 11.9 12.4 13.5 12.8 16.7 17.4 17.9 (50.3) 39.6 38.0 36.5 34.7 34.5 34.0 33.4 27.5 2.88 2.73 2.71 '.80 2.37 2.35 2.29 47.2 O 8,108 8,306 8,301 8,339 (c) Total generating capacity pius finn capacity purchases less finn capacity sales.

8,433 8,386 8,160 (4.8)

(d) Except for 1989. the winter peaks shown were reached eany in the subsequent year.

82

SHAREOWNER AND INVESTOR INFORMATION The following information is provided as a service to shareowners and other investors. Por any questions you may have or additional information you may require about PPSL or your investments in the company, please feel free to call the toll-free number listed below, or write to:

George I. Kline, Manager Investor Services Department Pennsylvania Power 6 Light Co.

Two North Ninth Street Allentown, PA 18101-1179 Toll<<Pree Phone Number: For information regarding your investor account, or other inquiries, call toll-free: 800-345-3085.

Annual Meeting: The annual meeting of shareowners is held each year on the fourth Wednesday of April. The 1994 annual meeting will be held at 1:30 p.m. on Wednesday, April 27, 1994, at the F. M. Kirby Center for the Performing Arts, Public Square, Wilkes-Barre, Pa. A reservation card for meeting attendance is included with shareowners'roxy material.

Proxy Material: A proxy statement, a proxy and a reservation card for the company's annual meeting are mailed in a package that includes this report. This material was mailed beginning March 15, 1994, to all shareowners of record as of March 10, 1994.

Dividends: For 1994, the dates the declaration of dividends is consideied by the board or its executive committee are:

February 23, May 25, August 24 and November 23, for payment on April 1, July 1 and October 1, 1994, and January 1, 1995, respectively. Dividend checks are mailed ahead of those dates with the intention they arrive as close as possible to the payment dates.

Record Dates: The 1994 record dates for dividends are March 10, June 10, September 9 and December 9.

Direct Deposit of Dividends: Shareowners may 'choose to have their'ividend checks deposited directly into their checking or savings account. Quarterly dividend payments are electronically credited on the dividend date, or the first business day thereafter.

Dividend Reinvestment Plan: Shareowners may choose to have dividends on their common or preferred stocks reinvested in PPSL common stock instead of receiving the dividend by check.

83

Certi ficate Saf ekeeping: Shareowners participating in the Dividend Reinvestment Plan may choose to have their common stock certificates forwarded to the company for safekeeping.

These shares will be registered in the name of the company as agent for plan participants and will be credited to the participants'ccounts.

Lost Dividend or Interest checks: Dividend or interest checks lost by investors, or those that may be lost in the mail, will be replaced if the check has not been located by the 10th business day following the payment date.

Transfer of Stock or Bonds: Stock or bonds may be transferred from one name to another or to a new account in the name of another person. Please call or write regarding transfer instructions.

Bondholder Information: Much of the information and many of the procedures detailed here for shareowners also apply to bondholders. Questions related to bondholder accounts should be directed to Investor Services.

Lost Stock or Bond Certificatess Please call or write to Investor Services for an explanation of the procedure to replace lost stock or bond certificates.

Publications: Several publications are prepared each year and sent to all invi stors of record and to others who request their names be placed on our mailing lists. These publications are:

Annual Report published and mailed to all shareowners of record in mid-March.

Shareomers'ewsletter an easy-to-read newsletter containing current items of interest to shareowners published and mailed at the beginning of each quarter.

Additionally, a special year-end edition containing unaudited results of the year's operations is mailed in early February.

Quarterly Review published in May, August and November to provide quarterly financial information to investors.

Periodic Mailings: Letters from the company regarding new investor programs, special items of interest, or other

~

pertinent information are mailed on a non-scheduled basis as necessary.

Duplicate Mailings: Annual reports and other investor publications are mailed to each investor account.

have more than one account, or if If you there is more than one investor in your household, you may call or write to request 84

that only one publication be delivered to your address.

Please provide account numbers for all duplicate mailings.

Form 10-K and PP&L Profile: The company's annual report, filed with the Securities and Exchange Commission on Form 10-K, is available about mid-March. The PP&L Profile, a 10-year statistical review containing in-depth information about the company, is available in May. Investors may obtain a copy of these publications, at no cost, by calling or writing to Investor Services.

Listed Securities: Piscal Agents:

New York Stock Exchange Stock Transfer Agents and Common Stock (Code: PPL) Registrars 4-1/24 Preferred Stock First Chicago Trust Co. of (Code: PPLPRB) New York 4.404 Series Preferred Stock P.O. Box 2506 (Code: PPLPRA) Suite 4659 Jersey City, NZ 07303-2506 Philadelphia Stock Exchange Pennsylvania Power & Light, Co.

Common Stock Investor Services Department 4-1/24 Preferred Stock Dividend Disbursing Offi.ce 3.354 Series Preferred Stock and Dividend Reinvestment 4.404 Series Preferred Stock Plan Agent 4.604 Series Preferred Stock Pennsylvania Power & Light Co.

Investor Services Department Mortgage Bond Trustee Morgan Guaranty Trust Co. of New York Corporate Trust Operations 55 Exchange Place Basement "A" New York, New York 10260-0023 .

Bond Interest Paying Agent Pennsylvania Power & Light. Co.

Investor Services Department 85

Quarterly Financial, Common Stock Price and Dividend Data (Unaudited)

For the Quarters Ended (a)

March 31 June 30 Sept. 30 Dec. 31 (Thousands of Dollars, Except Per Share Amounts) 1993 Operating revenues ..............'........ $ 727,386 $ 620,439 $ 683,466 $ 695,711 Operating income............................... 171,476 123,849 134,129 133,354 Net income. 115,749 69,867 81,775 80,735 Earnings applicable to common stock..... 106,206 60,231 74,826 72,978 Earnings per common share (b). 0.70 0.40 0.49 '0.48 Dividends declared per common share (c). 0.4125 0.4125 0.4125 0.4125 Price per common share High. 30-1/2 30-3/4 31 30-1/4 Low. 26-1/4 28-3/8 29-1/2 26-1/8 1992 Operating revenues . $ 756,834 $ 645,093 $ 655,912 $ 686,283 Operating income. 170,505 128,162 ,

128,061, 146,703 Net income.............................................. 113,025 69,790 72,900 91,009 Earnings applicable to common stock................ 102,603 59,686 62,825 81,115 Earnings per common share (b). 0.68 0.39 0.41 0.53 Dividends declared per common hare (c) o.4o 0.40 0.40 0.40 per common share igh. 26-1/2 26-1/8 28-1/4 27-7/8 Low........... .... . 23-7/8 24-1/8 25-3/4 25-7/8 (a) The Company's electric utility business is seasonal in nature with peak sales periods generally occurring in the winter months. Accordingly, comparisons among quarters of a year may not be indicative of overall trends and changes in operations.

(b) The sum of the quarterly amounts may not equal annual earnings per share due to changes in the number of common shares outstanding during the year or rounding.

(c) The Company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in 1993 and 1992 were

$ 1.6375 and $ 1.5875, respectively. The most recent regular quarterly dividend paid by the Company was 41.25 cents per share (equivalent to $ 1.65 per annum) paid January 1, 1994. Future dividends will be dependent upon future earnings, financial requirements and other factors.

86

Pennsylvania Power & Light Company and Subsidiaries SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT Column A Column B Column C Column D Column E Column Balance at Other Changes Balance at Beginning Additions Retirements Add End of

~Deecrt ttce of Period at Cost or Sales (Thousands of Dollars)

Year Ended December 31 1993 Electric Plant in Service Intangible $ 14.856 $ 150 , $ 15,006 Steam Production 1.687.011 124,346 $ 17,063 $ 308 1,794,602 Nuclear Production . 3.940.623 42,070 15,213 4 3,967,484 Hydraulic Production ............................ 70,713 9,338 99 79,952 Other Production 33,2B3 1,772 218 34,817 Transmission 409.798 18,946 5,583 571 423,732 Distribution . 2.154.914 156,481 18,722 (834) "

2,291,839 General . 250,046 25.943 3.872 53 272,170 Held for Future Use ............................. 30.320 2,837 60 226 32.871 Total Electric Plant in Service ............ 8.591.544 381,883 60,830 (124) 8,912,473 Construction Work in Progress .............. 211.534 27,066 (B) 238,600 Nuclear Fuel-Owned 2.467 62,548 (63,431) 1,584 Leased Property Nuclear Fuel .. 362,903 968 1,336 365,207 Other 162,191 19,618 22,955 158,854 Total Leased Property (C)................... 525.094 20,586 22,955 1.336 524,061 Total Electric Utility Plant ................... 9.330.639 492,083 83,785 (62.219) 9,676,7 Other Property 229,057 2,629 21,537 12,232 197,9 Total Property, Plant and Equipment . 9.559,696 494,712 105,322 (74,451) 9,874,635 Utility Plant Carrying Charges(D) ........... 29.401 29,401 Total 9.589.097 94.712 105.322 $ 4,451 9,904.036 Year Ended December 31 1992 Electric Plant in Service Intangible $ 14.879 $ 693 $ 716 $ 14,856 Steam Production . 1,621.980 76,476 11,456 $ 11 1,687,011 Nuclear Production 3.919,303 37,716, 16,467 71 3,940,623 Hydraulic Production ............................ 70,366 334 (14) (1) 70,713 Other Production . 31,323 1,915 (25) 33,263 Transmission 394.210 1B,996 1,445 37 409,798 Distribution 1,999,593 170,711 15,962 572 2,154,914 General 219,621 31,770 1,350 5 250,046 Held for Future Use 29.B39 1,533 97 55 30,320 Total Electric Plant in Service ............ 8,300,914 338,144 47,454 (60) 8,591,544 Construction Work in Progress .............. 183,242 28,292 (B) 211,534 Nuclear Fuel-Owned 5,198 40,258 (42,989) 2,467 Leased Property Nuclear Fuel . 431,472 1,756 (70,325) 362,903 Other 151,937 20,281 10,027 162,191 Total Leased Property (C)................... 583,409 22.037 10.027 0.325 525,094 Total Electric Utility Plant ................... 9,072,763 428,731 57,481 (113,374) 9,330,6 Other Property . 310.744 1,504 78.911 4,280 229, Total Property, Plant and Equipment . 9,383,507 430,235 136,392 (1 17,654) 9,559,6 Utility Plant Carrying Charges(D) ........... 29.401 29.401 Total $ 9,412.908 30,235 136.392 117.654 9.589.097 87

Pennsylvania Power & Light Company and Subsidiaries SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT Column A Column B Column C Column D Column E Column F Balance at Other Changes Balance at Beginning Additions Retirements Add End of

~oescri tion of Period at Cost or Sales Deduct A Period (Thousands of Dollars)

Year Ended December 31 1991 Electric Plant in Service Intangible . $ 1,646 $ 544 $ 12,689 $ 14,879 Steam Production . 1,560,916 76,069 $ 15,264 259 1,821,980 Nuclear Production . 3.917,265 35,928 33,890 3,919,303 Hydraulic Production ............................ 60,388 10,529 549 (2) 70,366 Other Production 29,335 2,319 331 31,323 Transmission 391,886 3,059 380 (335) 394,210 Distribution .. 1.875.992 141,058 18,039 582 1,999,593 General . 228,319 6,396 2,396 (12,698) 219,B21 Held for Future Use ............................ 29.636 571 568 29,639 Total Electric Plant in Service ............ 8.095.363 276,473 70,849 (73) 8,300,914 Construction Work in Progress .............. 143,084 40,158 (B) 183,242 Nuclear Fuel-Owned 15,991 38,210 (49,003) 5,198 Leased Property Nuclear Fuel . 436.124 3,058 (7,710) 431,472 er 143,500 17,476 9,039 151.937 al Leased Property (C)................... 579.624, 20,534 9,039 otal Electric Utility Plant ................... 8,834,062 375,375 79,888 (56,786) 9,072,763 Other Property . 337,782 2,425 24,887 4,576 310,744 Total Property, Plant and Equipment . 9,171.844 377,800 104,775 (B1.362) 9,383,507 Utility Plant Carrying Charges(D) ........... 29.401 29,401 Total 9.201. 245 377.800 104,775 (A) Unless otherwise noted, amounts generally reflect transfers of land and facilities to and from other categories of property, plant and equipment, sale and leaseback of nuclear fuel and reacquisition of leased nuctear fuel.

(B) Net of transfers to electric plant.

(C) See footnote (E) on Schedule Vl - Accumulated Provision for Depreciation, Depletion and Amortization of Property, Plant and Equipment on page 91 for reconciliation of Leased Property.

(D) Represents utility plant carrying charges of $ 28,502 transferred from Nuctear Production and $ 899 transferred from Steam Production to a Deferred Debit Account in 1986 per Federal Energy Regulatory Commission (FERC) order FA84-12-001.

88

Pennsylvania Power & Light Company and Subsidiaries SCHEDULE Vl - ACCUMULATEDPROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATIONOF PROPERTY, PLANT AND EQUIPMENT Column B Column C Column D Column E 'olumn Additions Charged to Retirements Other

~Descri tion Balance at Beginning of Period ~*

Charged to Expense Clearing and Other Plus Removal Costs Less (Thousands of Dollars)

Changes Add Deduct B Balance at End of Period Year Ended December 31 1993 Electric Plant in Service Intangible $ 3.364 $ 878 $ 273 $ 4,515 Steam Production . 741.961 58,717 $ 25,417 $ 130 775,391 Nuclear Production (C) ........................ 486.735 125,451 20,051 1 592,137 Hydraulic Production ............................ 20,918 1,114 198 21,834 Other Production 25.207 1.895 262 26,840 Transmission . 129.889 8,505 5,697 648 133,345 Distribution..... 709.584 79,391 26,783 (777) 761,415 General . 82.029 10.312 1,023 3,985 4 89;375 Total Electric Plant in Service ............ 2.199,687 286,263 1,297 82,393 (2) 2 404 852 Leased Property Nuclear Fuel (D) . 191.002 62,905 (62,095) 191,812 Other 85.217 16,532 4,192 22,717 83.224 Total Leased Property (E)................... 276.219 79,437 4,192 22.717 Total Electric Utility Plant ................... 2,475.906 365,700 5,489 105,110 (62,097) 2,679, Other Property 64.286 3,684 1S,804 49, Total Property, Plant and Equipment . 2,540,192 369,384 5,489 123,914 (62,097) 2,729,054 Amortization of Utility Plant Canying Charges 4.436 5,304 Total . 2.544.628 370,252 K5.489 3123.914 62,09 '~2.734,358 Year Ended December 31 1992 Electric Plant in Service Intangible $ 3,069 $ M5 $ 146 $ 716 '3,364 Steam Production . 703,618 54,344 16,008 $7 741,961 Nuclear Production (C) ................... 398,733 112,513 24,558 47 486,735 Hydraulic Production ...................... 20,272 1,115 468 (1) 20,918 Other Production . 24,512 936 241 25,207 Transmission 123,251 8,207 1,572 3 129,889 Distribution 658,278 74,435 23,104 (25) 709,584 General 72.685 9,828 985 1,421 Total Electric Plant in Service ...... 2,004,418 262,243 1,131 68,088 (17) 2 199 687 Leased Property Nuclear Fuel (D) 238,876 65,229 (113,103) 191,002 Other 75,586 15.841 3,656 9,866 85,217 Total Leased Property (E)............. 314,462 81.070 3,656 9,866 113,103 276,219 Total Electric Utility Plant ............. 2,318.880 343,313 4,787 77,954 (113,120) 2,475,906 Other Property 135,049 7,935 78,715 17 64,288 Total Property, Plant and Equip ment 2,453,929 351,248 4,787 156,669 (113,103) 2,540. 92 Amortization of Utility Plant Carrying Charges.. 3,644 792 4, Total . 2.457.573 352,040 89

Pennsylvania Power & Light Company and Subsidiaries SCHEDULE VI - ACCUMULATEDPROVISION FOR DEPRECIATION, DEPLETION AND AMORTIZATIONOF a Column A PROPERTY, PLANT AND EQUIPMENT Column B Column C Column D Column E Column F Additions Charged to Retirements Other

~Deecri iicn Balance at Beginning

~*Charged to Expense Clearing and Other Plus Removal Costs Less (Thousands of Dollars)

Changes Add Balance at End of Period Year Ended December 31 1991 Electric Plant in Service Intangible . $ 620 $ 826 $ 204 $ 1,419 $ 3,069 Steam Production........... 671,538 50,707 $ 22,151 3,524 703,618 Nuclear Production (C) ........................ 338,903 98,990 39,435 275 398,733 Hydraulic Production .......'..................... 19,800 909 616 179 20,272 Other Production 24,417 480 394 9 24,512 Transmission 119.017 8,029 426 (3,369) 123,251 Distribution . 614.914 68,475 24,827 (284) 658,278 General 65,546 10,603 898 2,597 1,765 72,685 Total Electric Plant in Service ............ 1,854.755 239,019 1,102 90,446 (1 2) 2,004,418 Leased Property Nuclear Fuel (D) 213,755 81,745 (58,624) 238,876 Other 68.924 14,039 3,537 8,914 75,588 tal Leased Property (E)................... 280.679 95,784 3,537 al Electric Utility Plant ................... 2,135,434 334,803 4,639 99,360 (56,636) 2,318,880 Ot r Property .. 142.189 17,717 24,867 10 135,049 Total Property, Plant and Equipment . 2,277,623 352,520 4,639 124,227 (56,626) 2,453,929 Amortization of UtilityPlant Carrying Charges...................... 2.901 743 3,644 Total 2.280.524 $ 35 3 , 263 ~639 (A) Accounts charged on the Consolidated Statement of Income were as follows (thousands of dollars):

1993 1992 1991 Depreciation. $ 271,390 $ 258,357 $ 246,212 Amortized (deferred) depreciation..... 14,249 3,563 (7,047)

Fuel. 65,362 71,782 98,043 Other operating expenses................. 18,292 17,378 15,096 Other income and (deductions) other - net. 959 959

$ 357263 (Footnotes continued on the following page.)

90

Depreciation on the Consolidated Statement of Income reconciles with depreciation on the Consolidated Statement of Cash Flows as follows (thousands of dollars):

1993 1992 1991 Depreciation as shown on the Consolidated Statement of Income Depreciation. $ 271,390 $ 258,357 $ 246,212 Amortized (Deferred) depreciation.... 14.249 3,563 Depreciation included in fuel expense 2.457 5,708 15,516 Depreciation included in Other Income and Deductions. Other - net..................... 959 958 Amortization of deferred mine development costs included in fuel expense................... 1,462 Depreciation as shown on the Consolidated Statement of Cash Flows................... $ 289,055 $ 270,048 8281.180 Depreciation included in fuel expense represents depreciation of property, plant and equipment used in coal mining opera-tions and oil transportation to provide fuel consumed at generation stations to produce electricity. Depreciation included in Other-net under Other Income and (Deductions) represents depreciation of property not related to utility operations.

Amortization of deferred mine development costs included in fuel expense represented the accumulated development costs amortized ratably over the recoverable tonnage of coal produced.

(B) Unless otherwise noted, amounts generally reflect accumulated depreciation on property transferred to and from other categories of property, plant and equipment and reacquisition of leased nuclear fuel.

(C) Consistent with PUC and FERC rate orders. the annual depreciation for, property placed in service at the Susquehanna station prior to January 1, 1989 was lower through 1991 than the amount that would have been recorded using straight-line depreciation. The amount of depreciation recorded increases each year through 1998 when the cumulative amount of depreciation recorded will equal the amount that would have been recorded using straight-line depreciation. The cumulative difference between the amount of depreciation recorded for Susquehanna and the amount that would have been record~

using the straight-line depreciation at the end of 1993, 1992 and 1991 was $ 282,115, $ 296,285 and $ 299,848, respectiv~

See Note 1 on page 52 and Note 10 on page 65 for additional information.

(D) There is no amortization of owned nuctear fuel reflected in Schedule Vl. Only leased nuclear fuel is contained in the Company's reactor and subject to amortization as it is utilized to produce electricity, and that amortization is shown on Schedule VI under Leased Property Nuctear Fuel.

(E) Reconciliation of Leased Property - net of amortization with Schedule V and Schedule VI and with the note to the financial statements concerning leases (1993. Note 9: 1992 and 1991, Note 13 of Form 10-K) is as follows (thousands of dollars):

1993 1992 1991 Total Leased Property (Schedule V)... $ S24,061 $ S25,094 $ 583,409 Accumulated Provision for Depreciation, Depletion and Amortization (Schedule Vl)....... 275.036 276,219) 314,462 Total Leased Property - Net...........

Total Leased Property - Net was composed of:

Nuclear fuel owned and leased - net of amortization as shown on the Consolidated Balance Sheet.. $ 174,979 $ 174,368 $ 197,794 Less nuclear fuel owned.................... 1,584 2,46 ~5,198 Nuclear fuel leased (1993, Note 9; 1992 and 1991, Note 13).......................... 173,395 171,901 192,596 Electric utility plant-other leased property - net of amortization as shown on the Consolidated Balance Sheet. 75,630 76,974 Total as shown above....................

Leased property included in other property - net of depreciation, amortization and depletion.. 2.183 3,028 Net property under capital leases (1993.

Note 9; 1992 and 1991, Note 13)..... $ 249.025 $ 251,058 $ 271,975 91

Pennsylvania Power & Light Company and Subsidiaries SCHEDULE Vill - VALUATIONAND QUAUFYING ACCOUNTS AND RESERVES Column A Column B Column C Column D Column E Deductions from Balance Additions Reserves-at Charges Losses or Balance at Beginning Charged to Other Expenses End of

~Deecri tice of Period to Income Accounts ~Aticebte Period (Thousands of Dollars)

Year Ended December 31 1993 Reserves deducted from assets in the Balance Sheet Uncollectible accounts $ 27,660 $ 18,660 $ 16,891 $ 29,429 Obsolete inventory - Materials and Supplies ... 1,406 1,234 (A) 172 Valuation allowance for deferred tax assets..... 0 $ 8,694 (B) 8,694 Year Ended December 31 1992 Reserves deducted from assets in the Balance Sheet Accumulated provision for amortization of Mine Development Costs .......................... 41,785 1,462 43,247 0 Uncollectible accounts 27,655 16,162 16,157 27,660 Obsolete inventory- Materials and Supplies .... 1,886 10 ,

490 (A)(C) 1,406 Y nded December 31 1991 Reserves deducted from assets in the Balance Sheet Accumulated provision for amortization of Mine Development Costs ..... 39,218 5,554 2,987 41,785 Uncollectible accounts 27,198 21,996 21,539 27,655 Obsolete inventory - Materials and Supplies..... 2.028 264 406 (A) 1,886 Allowance for net unrealized loss on marketable equity securities........................... 175 175 (A) Amount reflects sale or use of obsolete inventory.

(B) Amount charged to accrued mine dosing costs.

(C) Indudes $ 441 in connection with the sale of the common stock of a former subsidiary.

92

Pennsylvania Power & Light Company and Subsidiaries SCHEDULE IX - SHORT-TERM BORROWINGS goOg~(, ~li~ QolQIBKg Average QdttmnZ Weighted Maximum Daily Average Category of Balance Weighted Amount Amount Interest Aggregate at Average Outstanding Outstanding Rate Short-Term End of Interest During the During the During the Rmm!m Period Rate Period (A) Period (B) Period (C)

(Thousands of Dollars)

Y r d Bank Loans. $ 85,260 3.4 % $ 92,674 $ 80,935 3.3 %

Commercial Paper 117,000 3.3 210,000 87,571 32 Y r nded Bank Loans .. 3.9 93,485 87,618 3.9 Commercial Paper . 3.6 218,000 82,410 3.9 Y r r 1 Bank Loans.. 73,170 5.1 88,501 81,779 62 Commercial Paper . 74,000 4.9 229,000 118,817 6.3 (A) Maximum amount outstanding at any month end during the year.

(8) Computed by dividing the sum of the daily ending balances by the number of days in the year.

(C) Calculated by dMding applicable interest expense for the period by the average daily amount of debt outstanding during the period.

93

PART IZZ ITEM 10 DIRECTORS AND EXECUTIVE ORRZCERS OR THE REGISTRANT Information for this item concerning directors of the Company will be set forth in the sections entitled ".Nominees for Directors" and "Directors Continuing in Office" in the Company's 1994 Notice of Annual Meeting and Proxy Statement, which will be filed with the Securities and Exchange Commission not. later than 120 days after December 31, 1993, and which information is incorporated herein by reference.

Information required by this item concerning the executive officers of the Company is set forth on pages 21 through 23 of this report.

ZTEM 11 EXECUTZVE COMPENSATION Information for this item will be set forth in the sections entitled "Compensation of Directors," "Summary Compensation Table" and "Retirement Plans" in the Company's 1994 Notice of Annual Meeting and Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1993, and which information is incorporated herein by reference.

ITEM 12 SECURITY OWNERSHIP OR CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information for this item will be set forth in the section entitled "Stock Ownership" in the Company's 1994 Notice of Annual Meeting and Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1993, and which information is incorporated herein by reference.

ZTEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information for this item will be set forth in the section entitled "Certain Transactions Involving Directors or Executive Officers" in the Company's 1994 Notice of Annual Meeting and Proxy Statement, which will be filed with the Securities and Exchange Commission not later than 120 days after December 31, 1993, and which information is incorporated herein by reference.

94

PART 1V ITEM 14 'XHIBITS'INANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM '8 K (a) The following documents are filed as part of this report:

1. Financial Statements included in response to Item 8.

Independent Auditors'eport Consolidated Statement of Income for the Three Years Ended December 31, 1993 Consolidated Statement of Cash Flows for the Three Years Ended December 31, 1993 Consolidated Balance Sheet at December 31, 1993 and 1992 Consolidated Statement of Shareowners'ommon Equity for the Three Years Ended December 31, 1993 Consolidated Statement of Preferred and Preference Stock at December 31, 1993 and 1992 Consolidated Statement of Long-Term Debt at December 31, 1993 and 1992 Notes to Financial Statements

2. Supplementary Data and Supplemental Financial Statement Schedules included in response to Item 8.

Schedule V Property, Plant and Equipment for the Three Years Ended December 31, 1993 Schedule VI Accumulated Provision for Depreciation, Depletion and Amortization of Property, Plant and Equipment for the Three Years Ended December 31, 1993 Schedule VIII - Valuation and Qualifying Accounts and Reserves for the Three Years Ended December 31, 1993 Schedule IX Short-Term Borrowings for the Three Years Ended December 31, 1993 All other schedules are omitted because of the absence of the conditions under which they are required or because the required information is included in the financial statements or notes thereto.

3. Exhibits Exhibit Index on page 98.

(b) Reports on Form 8-K:

The following Reports on Form 8-K were filed during the three months ended December 31, 1993:

Re ort dated October 6 1993 Item 7. Financial Statements, Pro Forma Financial 95 Information and Exhibits

Conformed copy of Underwriting Agreement and Statement with Respect to Shares Domestic Business Corporation related to the sale by the Company of 850,000 shares of 6.754 Series Preferred Stock ($ 100 Par, Cumulative) filed as Exhibits to the Report, on Form S-K.

No financial statements were required to be filed with the above-referenced report.

Re ort dated October 29 1993 Item 7. Financial Statements, Pro Forma Financial Information and Exhibits Conformed copy of Underwriting Agreement and Fifty-eighth Supplemental Indenture related to the Company's issuance of

$ 150,000,000 principal amount of First Mortgage Bonds, 6-3/44 Series due 2023, filed as Exhibits to the Report on Form S-K.

filed with the 4

No financial statements were recpxired to be above-referenced report.

96

SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

PENNSYLVANIA POWER & LIGHT COMPANY (Registrant)

B Si ned William F. Hecht William F. Hecht Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.

Title B Si ned William F. Hecht Principal Executive William F. Hecht Chairman, President Officer and Director and Chief Executive Officer B Si ned R. E. Hill Principal Financial and R. E. Hill Senior Vice President: Accounting Officer Financial Richard S. Barton Nance K. Dicciani Edward Donley Rev. Daniel G. Gambet Elmer D. Gates John T. Kauffman Directors Robert Y. Kaufman Francis A. Long Norman Robertson B Si ned William F. Hecht William F. Hecht, Attorney-in-fact Date: February 23, 1994 97

PENNSYLVANIA POWER AND LIGHT COMPANY EXHIBIT INDEX The following Exhibits indicated by an asterisk preced-ing the Exhibit number are filed herewith. The balance of the Exhibits have heretofore been filed with the Commission and pursuant to Rule 12(b)-32 are incorporated herein by reference. Exhibits indicated by a a are filed or listed pursuant to Item 601(b)(10)(iii) of Regulation S-K.

3 (i) Copy of Restated Articles of Incorpora-tion (Exhibit 3(i) to the Company's Form 8-K Report (File No. 1-905) dated January 26, 1994)

• 3 (ii) Copy of By-laws (paper filing as Exhibit

'3(b) to the Company's Form 10-'K Report (File No. 1-905) for the year ended December 31, 1991i electronic filing made herein) 4 (a) -1 Copy of Amended and Restated Employee Stock Ownership Plan, dated October 26, 1988 (Exhibit 4(b) to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1988) 4 (a) -2 Copy of Amendment No. 1 to said Employee Stock Ownership Plan, effective January 1, 1989 (Exhibit 4(b)-2 to the Company's Form 10-K Report, (File No. 1-905) for the year ended December 31, 1989) 4 (a) -3 Copy of Amendment No. 2 to said Employee Stock Ownership Plan, effective January 1, 1990 (Exhibit 4(b)-3 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1989) 4(a) -4 Copy of Amendment No. 3 to said Employee Stock Ownership Plan, effective January 1, 1991 (Exhibit 4(b) -4 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1990) 98

Copy of Amendment No. 4 to said Employee Stock Ownership Plan, effective January 1, 1991 (Exhibit 4(a)-5 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991)

Copy of Amendment No. 5 to said Employee Stock Ownership Plan, effective October 23, 1991 (Exhibit 4(a)-6 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991)

Copy of Amendment No. 6 to said Employee Stock Ownership Plan, 1, 1990 and January 1, 1992 effective'anuary (Exhibit 4(a)-7 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991)

Copy of Amendment No. 7 to said Employee Stock Ownership Plan, effective January 1, 1992 (Exhibit 4(a)-8 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991) n Copy of Amendment No. 8 to said Employee Stock Ownership Plan, effective July 1, 1992 (Exhibit 4(a)-9 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1992)

Copy of Amendment No. 9 to said Employee Stock Ownership Plan, effective January 1, 1993 (Exhibit 4(a)-10 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1992)

Copy of Amendment No. 10 to said Employee Stock Ownership Plan, effective January 1, 1993 Mortgage and Deed of Trust, dated as of October l, 1945, between the Company and Guaranty Trust Company of New York (now Morgan Guaranty Trust Company of New, York),, as Trustee (Exhibit 2(a)-4 to Registration Statement No. 2-60291)

Supplement, dated as of July 1, 1954, to said Mortgage and Deed of Trust (Exhibit 2(b)-5 to Registration Statement No. 219255)

Supplement, dated as of March 1, 1964, to said Mortgage and Deed of Trust (Exhibit 2(a)-12 to Registration Statement No.

2-60291)

Supplement, dated as of June l, 1966, said Mortgage and Deed of Trust (Exhibit to 2(a)-13 to Registration Statement No.

2-60291)

Supplement, dated as of November 1, 1967, to said Mortgage and Deed of Trust (Exhibit 2(a)-14 to Registration State-ment No. 2-60291)

Supplement, dated as of January 1, 1969, to said Mortgage and Deed of Trust (Exhibit 2(a)-16 to Registration State-ment No. 2-60291)

Supplement, dated as of June 1, 1969, to said Mortgage and Deed of Trust (Exhibit 2(a)-17 to Registration Statement No.

2-60291)

Supplement, dated as of March 1, 1970, to said Mortgage and Deed of Trust (Exhibit 2(a)-18 to Registration Statement No.

2-60291)

Supplement, dated as of February 1, 1971, to said Mortgage and Deed of Trust (Exhibit 2(a)-19 to Registration State-ment No. 2-60291)

Supplement, dated as of February 1, 1972, to said Mortgage and Deed of Trust (Exhibit 2(a)-20 to Registration State-ment No. 2-60291)

Supplement, dated as of January 1, 1973, to said Mortgage and Deed of Trust (Exhibit 2(a)-21 to Registration State-ment No. 2-60291) 100

Supplement, dated as of May 1, 1973, to said Mortgage and Deed of Trust (Exhibit 2(a)-22 to Registration Statement No.

2-60291)

Supplement, dated as of December 1, 1976, to said Mortgage and Deed of Trust (Exhibit 2(a)-26 to Registration State-ment No. 2-57633)

Supplement, dated as of December 1, 1977, to said Mortgage and Deed of Trust (Exhibit 2(a)-28 to Registration State-ment No. 2-60291)

Supplement, dated as of March 1, 1984, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated April 24, 1984)

Supplement, dated as of August 15, 1984, to said Mortgage and Deed of Trust (Exhibit 4(b) to the Company's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1984)

Supplement, dated as of June 15, 1985, to said Mortgage and Deed of Trust (Exhibit 4(a)-35 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1985)

Supplement, dated as of January 1, 1989, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form'-K Report (File No. 1-905) dated February 2, 1989)

Supplement, dated as of October 1, 1989, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated November 6, 1989)

Supplement, dated as of July 1, 1991, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated July 29, 1991)

Supplement, dated as of May 1, 1992, to said Mortgage and Deed of Trust, (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated June 1, 1992)

Supplement, dated as of November 1, 1992, to said Mortgage and Deed of Trust (Exhibit 4(b)-29 to the Company's Form 10-K Report (File 1-905) for the year ended December 31, 1992)

Supplement, dated as of February 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated February 16, 1993)

Supplement, dated as of= April 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated April 30, 1993 Supplement, dated as of June 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated July 7, 1993)

Supplement, dated as, of October 1, 1993, to said Mortgage and Deed of Trust (Exhibit 4(a) to the Company's Form 8-K Report (File No. 1-905) dated October 29, 1993)

Conformed copy of Revolving Credit, and Term Loan Agreement, dated as of July 1, 1985, between the Company and the Banks named therein (Exhibit 10(a)-2 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1986)

Copy of First Amendment, dated September 30, 1989, to said Revolving Credit and Term Loan Agreement (Exhibit 10(a)-2 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 102

10 (a) -3 Copy of Second Amendment, dated June 30, 1991, to said Revolving Credit and Term Loan Agreement (Exhibit 10(a)-3 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991) 10(a) -4 Copy of Third Amendment, dated June 30, 1991, to said Revolving Credit and Term Loan Agreement (Exhibit 10(a)-4 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991) 10 (a) -5 Copy of Fourth Amendment, dated September 30, 1991, to said Revolving Credit and Term Loan Agreement (Exhibit 10(a)-5 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991) 10 (a) -6 Copy of Fifth Amendment, dated June 1, 1992, to said Revolving Credit and Term Loan Agreement (Exhibit 10(a) -6 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1992) 10 (b) Copy of Pollution Control Facilities Agreement, dated as of May 1, 1973, between the Company and the Lehigh County Industrial Development Authority (Exhibit 5(z) to Registration Statement No.

2-60834) 10 (c) -l Copy of Interconnection Agreement, dated September 26, 1956, among Public Service Electric & Gas Company, Philadelphia Electric Company, the Company, Baltimore Gas & Electric Company, Pennsylvania Electric Company, Metropolitan Edison Company, New Jersey Power & Light Company and Jersey Central Power & Light Company (Exhibit 5(e) to Registration Statement No. 2-60291) 10 (c) -2 Copy of Supplemental Agreement, dated April 1, 1974, to said Interconnection Agreement (Exhibit 5(f)-4 to Registration Statement No. 2-51312)

Copy of Supplemental Agreement, dated June 15, 1977, to said Interconnection Agreement (Exhibit 5(e)-5 to Registration Statement No. 2-60291)

Copy of Agreement of Settlement and Com-promise, dated July 25, 1980, among the parties to said Interconnection Agreement (Exhibit 20(b)-8 to the Company's Form 10-Q Report (File No. 1-905) for the quarter ended September 30, 1980)

Copy of Supplemental Agreement, dated March 26, 1981, to said Interconnection Agreement (Exhibit 10(b)-10 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1981)

Copy of Revisions to Schedules 4.02, 7.01, and 9.01, all effective August 9, 1982, to said Interconnection Agreement (Exhibit 10(e)-11 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1982)

Copy of Schedules 4.02, 5.01, 5.02, 5.04, 5 05@ 6 '1i 6 03' '4i 7 '1g 7 '2 7 03/

all effective February 6, 1984, to said Interconnection Agreement (Exhibit 10(e)-

8 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1985)

Copy of Schedule 5.03, Revision l, Exhibit A, revised May 31, 1985, to said Interconnection Agreement (Exhibit 10(e)-10 to the Company's Form 10-K Report (File No. 1-905) for the year ended'December 31, 1985)

Copy of Schedule 4.02, Revision No. 2, effective December 4, 1989, to said Interconnection Agreement (Exhibit 10(d)-13 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 104

, 10(c) -10 Copy of Schedule 5.06, Revision No. 1, effective June 1, 1990, to said Inter-connection Agreement (Exhibit 10(d)-14 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1990) 10 (c) -11 Copy of Schedule 2.21, Revision No. 1, effective June 1, 1990, to said Inter-connection Agreement (Exhibit 10(d)-15 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1990) 10 (c) -12 Copy of Schedule 2.212, Revision No. 2, effective June 1, 1990, to said Inter-connection Agreement (Exhibit 10(d)-16 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31,

,1990) 10 (c) -13 Copy of Schedule 9.01, Revision No. 4, effective June 1, 1992, to said Inter-connection Agreement (Exhibit 10(d)-18 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1990) 10 (c) -14 Copy of Schedule 3.01, Revision No. 3, effective June 1, 1992, to said Inter-connection Agreement (Exhibit 10(c)-15 to

,the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991

• 10(c)-15 Copy of Schedule 4.01, Revision No. 13, effective June 1, 1993, to said Intercon-nection Agreement 10 (d) Copy of Capacity and Energy Sales Agree-ment, dated June 29, 1983, between the Company and Atlantic City Electric Company (Exhibit 10(f)-2 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1983) 105

Copy of Capacity and Energy Sales Agree-ment, dated March 9, 1984, between the Company and Jersey Central Power & Light Company (Exhibit 10(f)-3 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1984)

Copy of First Supplement, effective February 28, 1986, to said Capacity and Energy Sales Agreement (Exhibit 10(e)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1986)

Copy of Second Supplement, effective January 1, 1987, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-3 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989)

Copy of amendments to Exhibit A, effec-tive October 1, 1987, to said Capacity and Energy Sales Agreement (Exhibit 10(e)-6 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987)

Copy of Third Supplement, effective December 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(g)-5 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989)

Copy of Fourth Supplement, effective December 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(g) -6 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989)

Copy of Capacity and Energy Sales Agree-ment, dated December 21, 1989, between the Company and GPU Service Corporation (Exhibit 10(h) to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 106

10(f) -2 Copy of First Supplement, effective June 1, 1991, to said Capacity and Energy Sales Agreement between the Company and GPU Service Corporation (Exhibit 10(f)-2 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991) 10(g) -1 Copy of Capacity and Energy Sales Agree-ment, dated January 28, 1988, between the Company and Baltimore Gas and Electric Company (Exhibit 10(e)-7 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987) 10(g) -2 Copy of First Supplement, effective November 1, 1988, to said Capacity and Energy Sales Agreement (Exhibit 10(i)-2 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1989) 10 (e) -3 Copy of Second Supplement, effective June 1, 1989, to said Capacity and Energy Sales Agreement (Exhibit 10(i)-3 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1989) 10(g) -4 Copy of Third Supplement, effective June 1, 1991, to said Capacity and Energy Sales Agreement between the Company and Baltimore Gas & Electric Company (Exhibit 10(g)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991) a10 (h) -1 Copy of Amended and Restated Directors Deferred Compensation Plan, effective January 1, 1990 (Exhibit 10(q) to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1990)

~ 10 (h) -2 Copy of Amendment No. 1 to said Directors Deferred Compensation Plan, effective January 1, 1991 (Exhibit 10(h)-2 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991) 107

Copy of Amendment No. 2 to said Directors Deferred Compensation Plan, effective October 23, 1991 '(Exhibit 10(h)-3 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991)

Copy of Amendment No. 3 to said Directors Deferred Compensation Plan, effective January 1, 1992 and April 1, 1992 (Exhibit 10(h)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991)

Copy of Directors Retirement Plan, effec-tive January 1, 1988 (Exhibit 10(f) -2 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1988)

Copy of Amendment No. 1 to said Directors Retirement Plan, effective January 1, 1991 (Exhibit 10(i)-2 to the Company's Form 10-K'eport (File No. 1-905) for the year ended December 31, 1991)

Copy of Amendment No. 2 to said Directors Retirement Plan, effective October 23, 1991 (Exhibit 10(i)-3 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991)

Copy of Amendment No. 3 to said Directors Retirement Plan, effective January 1, 1992 (Exhibit 10(i)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991)

Copy of Amended and Restated Deferred Compensation Plan for Executive Officers, effective January 1, 1990 (Exhibit 10(s) to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1990)

Copy of Amendment No. 1 to said Officers Deferred Compensation Plan, effective January 1, 1991 (Exhibit 10(j)-2 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991) 108

>>0(j) -3 Copy of Amendment No. 2 to said Officers Deferred Compensation Plan, effective October 23, 1991 (Exhibit 10(j)-3 to the Company's Form 10-K Report (File No.

1-905) for the year ended December 31, 1991)

~ 10(j) -4 Copy of Amendment No. 3 to said Officers Deferred Compensation Plan, effective January 1, 1992 and April 1, 1992 (Exhibit 10(j)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991),

~ 10(k) -1 Copy of Supplemental Executive Retirement Plan, effective January 1, 1987 (Exhibit 10(f)-3 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1986)

~ 10 (k),-2 Copy of Amendment No. 1, effective January 1, 1987, to said Supplemental Executive Retirement Plan (Exhibit 10(f)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1987)

~ 10 (k) -3 Copy of Amendment No. 2, effective January 1, 1990, to said Supplemental Executive Retirement Plan (Exhibit 10(t)-3 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1990)

~ 10 (k) -4 Copy of Amendment No. 3, effective November 1, 1990, to said Supplemental Executive Retirement Plan (Exhibit 10(t)-

4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1990) a10 (k) -5 Copy of Amendment No. 4, effective January 1, 1991, to said Supplemental Executive 'Retirement Plan (Exhibit 10(k)-5 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991) 109

Copy of Amendment No. 5, effective October 23, 1991, to said Supplemental Executive Retirement Plan (Exhibit 10(k)-6 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991)

Copy of Amendment No. 6, effective January 1, 1992, to said Supplemental Executive Retirement Plan (Exhibit 10(k)-7 to the Company's Form 10-K Report (File No., 1-905) for the year ended December 31, 1991)

Copy of Amendment,No. 7, effective July 1, 1992, to said Supplemental Execu-tive Retirement Plan (Exhibit 10(k)-8 to the Company's Form 10-K Report (File No.

'1-905) for the year ended December 31, 1992)

Copy of Amendment No. 8, effective.

January 1, 1993, to said Supplemental Executive Retirement Plan Copy of Executive Retirement Security Plan, effective January 1, 1987 (Exhibit 10(f) -4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1986)

Copy of Amendment No. 1, effective January 1,1987, to said Executive Retirement Security Plan (Exhibit 10(f)-6 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31I 1987)

Copy of Amendment No. 2, effective January 1, 1990, to said Executive Retirement Security Plan (Exhibit 10(u)-3 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1990)

Copy of Amendment No. 3, effective November 1, 1990, to said Executive Retirement Security, Plan (Exhibit 10(u)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1990) 110

a10 (l) -5 Copy of Amendment No. 4, effective January 1, 1991, to said Executive Retirement Security Plan (Exhibit 10(l)-5 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31', 1991)

~ 10 (l) -6 Copy of Amendment No. 5, effective October 23, 1991, to said Executive Retirement Security Plan (Exhibit 10(l)-6 to the Company's Form 10-K Report (File No. 1-905) for the year ended December

31) 1991) a10 (l) -7 Copy of Amendment No. 6, effective January 1, 1992, to said Executive Retirement Security Plan (Exhibit 10(l)-7 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1991)

• a10 (l) -8 Copy of Amendment No. 7, effective January 1, 1993, to said Executive Retirement Security Plan a10 (m) -1 Copy of Amended and Restated Incentive Compensation Plan, effective July 1, 1992 (Exhibit 10(m)-4 to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1992)

~ 10 (n) Description of Executive Incentive Cash Award Program, effective January 1, 1990-" (Exhibit 10(n) to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1992) 10 (o) Conformed copy of Nuclear Fuel Lease, dated as of February 1, 1982, between the Company, as lessee, and Newton I.

Waldman, not in his individual capacity, but solely as Cotrustee of the Pennsyl-vania Power & Light Energy Trust, as lessor (Exhibit 10(g) to the Company's Form 10-K Report (File No. 1-905) for the year ended December 31, 1981)

'/

This description is provided pursuant to 17 C.F.R.

g 229 '01(b)(10)(iii)(A) .

• 12 Computation of Ratio of Earnings to Fixed Charges

• 23(a) Consent of Deloitte & Touche

• 23 (b) Consent of Counsel

• 24 Power of Attorney II Certain long-term debt instruments of the Company's consolidated subsidiaries have been omitted from this filing pursuant to 17 C.F.R. Q 229.601(b)(4)(iii)(A). The Company will furnish a copy of any such instrument to the Commission upon request.

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Exhibit 12 PENNSYLVANIAPOWER 8 LIGHT COMPANY AND SUBSIDIARIES COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (Thousands of Dollars) 1993 1992 1991 1990 1989 Fixed charges, as defined:

Interest on long-term debt $ 225,800 $ 240,260 $ 232,092 $ 239,250 $ 255,223 Interest on short-term debt and other interest '2,645 11,955 20,875 26,130 30,302 Amortization of debt discount, expense and premium - net. 1,798 1,447 1,379 1,429 1,497 Interest on capital lease obligations Charged to expense . 9,059 10,473 20,518 23,012 25,178 Capitalized 927 1,618 2,894 6,124 11,666 Estimated interest component of operating rentals 5,411 5,357 4,854 4,995 5,073 Proportionate share of fixed charges of 50-percent-or-less-owned persons. .~ 1,299 1,456 1,567 1,662 1,698 Total fixed charges . $ 256.939 $ 272,566 $ 284,179 $ 302.602 $ 330,637 Earnings, as defined:

N et income . ~ 10 ~ ~ ~~~ ~ ~ ~ ~~~ ~ ~ ~ ~ ~ ~ I ~~~~~ $ 348,126 $ 346,724 $ 348,414 $ 343,906 $ 353,436 Less undistributed income of less than 50-percent-owned persons ...................... 40 348,126 346,724 348,414 343,906 353,396 Add (Deduct):

Federal income taxes , 162,795 144,546 114,904 86,950 85,634 State income taxes ............ 63,508 64,648 49,534 30,564 30,853 Deferred income taxes . 22,367 33,175 51,772 68,903 76,786 investment tax credit - net (13,506) (14,029) 1,156 9,884 13,916 Income taxes on other income and deductions - net (1,280) 322 (903) (2,174) (3,514)

Amortization of capitalized interest on capital leases ............. 11,696 12,820 16,965 15,785 13,496 Total fixed charges as above (excluding capitalized interest on capital lease obligations) ......... 256,012 270,948 281,285 296,478 318.971 Total earnings . $ 849,718 $ 859.154 $ 863,127 $ 850,296 $ 889,538 Ratio of earnings to fixed charges ~ 3.31 3.15 3.04 2.81 2.69

~

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