ML18023B293

Annual Report 1977 Pennsylvania Power & Light Company

ML18023B293
Person / Time
Site:	Susquehanna
Issue date:	03/01/1978
From:	Pennsylvania Power & Light Co
To:	Office of Nuclear Reactor Regulation
References
Download: ML18023B293 (34)

Text

1l ;.8 t

,1 (I

't I

I Pjg$

F>>

e

~~kg g) 55ggP<~

m $f "J

I l;.4~faalkfk

!f)~;l,

.';,i> I

'"i" I'.lPP4~

N C,.!X5.,'~l<g~d[~<<Q"g+jg<J)I, g)Qpjg~pqk p ~4<<i~r V

66IItk 15k

, Ij;

>> 4'

.'.a).t,.5's k,k ~Ad.

Vjgp II,['

Ilk

'gal

.C.,'."q<!

Lnj ij Qo PQ P tj Qo t/QtIS Customers, at End of Period...............

Kilowatt-hours of Electricity Generated Operating Revenues Capital Provided by Investors, at End of Period Return on Average Capital Provided by Investors Fixed Cost Rate of Long-Term Debt and Preferred and Preference Stock, at End of Period.........

Common Stock Data Return on Average Common Equity......

Earnings Per Share Dividends Declared Per Share...........

Times Interest Earned Before Income Taxes 1977 955 Thousand 33.4 Billion

$745 Million

$2.6 Billion 9 84 8.01%

14.01%

$3.37

$ 1.89 3.35 1976 936 Thousand 28.5 Billion

$644 Million

$2.4 Billion 8.83%

7.91%

11.61%

$2.68

$1.80 2.62 Pennsylvania Power 8 Light Company is an electric utility providing service to 955,000 homes and businesses over a 10,000-square-mile area in 29 counties of central-eastern Pennsylvania.

Principal cities in the PPBL service area are Allen-town, Bethlehem, Harrisburg,

Hazleton, Lancaster,

Scranton, Williamsport and Wilkes-Barre.

Comments by the Chairman and President 1

The Year in Review 3

PP&L/PJM Map 9

Energy/Demand Management Feature 10 Analysis of Statement of Income 12 Financial Statements 16 Notes to Financial Statements 22 Statistical Summary 30 Dividends and Stock Prices 31 Officers and Directors 32 Cover Photo: Alarge earth mover adds to an already mountainous stockpile of coal at PP&L's Montour Plant-the largest coal-burning generating station on our system.

Taken in November, the photo depicts the culmination of many months'ffort during 1977 to build up our stockpiles for the expected coal-mining strike which became a reality on Dec.6. By late February1976, though, the strike was into its third month with no end in sight, and dwindling coal stocks were becoming an ever more severe national problem.

O [RKIRji'pop lUlpo(ojSl'2S. QOoEKEESHgee lo)p g[)lj(Q Q[ltj@jjj(/pl)cj]pg Q((lj(oj Pj('(Q@ji(o][gg This winter's coal strike marks the third time in fiveyears that an interruption in the supply of a primary fuel has shaken up the nation's economy. Just as was the case with the oil embargo of 1973-74 and last winter's natural gas shortages, it is again being demonstrated that:

o our society has become so de-pendent on the availability of complex energy supply systems that we cannot function without

them,

~ the problems created by insuf-ficient energy are more costly, more difficultand less bearable than the problems caused by the higher energy prices that are so frequently complained about.

These three energy interruptions are merely indicators ofthe serious energy problems confronting us.

In comparison with most other industrialized nations, the United States is stillfloundering rather than setting its energy affairs in order. A quick look at where we stand with respect to oil, natural gas, coal and nuclear power ex-poses the absence of any coherent national energy strategy OilDomestic oilproduction in the "Lower 48" continues to de-cline. Oil imports continue to rise.

Indeed, they have been rising faster since the oil embargo of 1973-74 than ever before. In 1977 imported petroleum products reached an all-time high. They provided for 47 percent ofour petroleum-related needs and about 25 percent of our total energy supply.

The international value ofour currency is being seriously im-paired by the inability/unwilling-ness to curb these rising imports. In 1977 the cost of imported oilwas

$45 billion.This caused a trade bal-ance deficit of about $30billion-the worst in the nation's history.

The 8.7 millionbarrels a day of petroleum products we now import are more than fivetimes larger than the estimated 1980 oil production from Alaska.

Contrast the progress that has been made in exploring and devel-oping offshore oil along the Atlan-tic coastline with what has been accomplished in the North Sea region by oil-dependent nations of Europe. The scoreboard reads North Sea production: 1.4 million barrels of oila day and increasing, United States: 0. Just six years ago North Sea oil production was nonexistent.

Natural Gas Domestic pro-duction of natural gas leveled offin 1973 and has been declining since then. We are now down to about 13 years ofsupply at present annual consumption rates. Shrinking sup-plies of natural gas have shifted more energy demands to oil and have, thereby, served to worsen the oil import problem.

National policy persists in pric-ing Interstate natural gas at much less than the going market price for intrastate natural gas, and also at less than the world market price of oil (on a comparable Btu basis),

even though natural gas is clearly the more valuable form of energy.

National policy also authorizes im-portation of foreign natural gas (in liquefied form) at about $3 per thousand cubic feet, but still proposes a ceiling of $ 1.75 per I

II I j

Busby Campbell thousand cubic feet for new do-mestic natural gas. Allofthis seems absurd.

There are strongly-held opinions that there is only a limited supply of natural gas, and this supply, therefore, cannot be changed by deregulation. Equally strong opin-ions assert to the contrary that the higher prices of deregulated gas willencourage conservation and development of large additional supplies. The logic ofthe situation suggests that this stalemate should be terminated forthwith by total deregulation of new natural gas. If additional supplies are not ob-tained, nothing is gained and nothing lost. If, on the other hand, new supplies are forthcoming, this would take some of the pressure offoil and give many hard-pressed users the welcome opportunity to buy the additional natural gas they seek.

CoalCoal is stated again and again to be our greatest energy re-source. However, as the familiar saying goes, there are only two problems with coalmining itand burning it.

While the problems inherent in the use of coal have been with us for a long time, recent mining and air quality legislation combined with tighter environmental en-forcement regulations and prac-tices are making these traditional difficultiesmore complex and harder to handle... and much more costly. A burdensome add-on is the expensive retrofit require-ments being imposed on older coal power plants. Despite the many pronouncements on the subject, there seems to be littlereal support in policy or regulation forexpand-ing the use ofcoal. This is especially true with respect to Eastern coal.

Nuclear PowerAta time when our three primary fossil fuels are all in trouble forone reason or another, one would expect a cli-mate of active support fornuclear power. But this is not the case.

A patchwork quilt of changing standards and requirements has produced an atmosphere ofdoubt and uncertainty. Today the nuclear industry is in disarray, wondering whether it can survive.

Atthe same time the administra-tion in Washington pushes hard to terminate research programs in-tended to expand the nuclear en-ergy option by development of a demonstration breeder reactor.

Perhaps it willnot be necessary to make full-scale commercial use of the breeder in this century. Yet it seems foolhardy not to proceed with its development now so that, ifand when it is needed, itwillbe available.

Ifone were preparing a recipe for energy disaster forthe United States, wouldn't it be just about what we are now doing? Increasing our reliance on foreign oil... block-ing offeconomic incentives forde-veloping new supplies of natural gas... inhibiting the expanded use ofcoal... putting nuclearpowerde-velopment on the back burner. We would beinmuchbettershapeif we were doing just the oppositeof what we are doing.

We can no longerafford to debate whether or not we have an energy supply problem that requiresatten-tion now. When a top executive of a large integrated oilcompany pub-liclystates his company's ex-panded commitment to non-oil diversification because "we are in a business that is dying," we should take note.

The probabilities of a prolonged and severe energy crunch are in-creasing. That it may not occur for a few years is no reason to be re-laxed. Ittakes10to15 years to make significant changes in our energy use patterns andin the natureofour energy supply mix. In terms of this time frame, we have already en-tered a high-risk era of energy brinksmanship.

Why then are we at a standstill in energy decision-making'F Inour opinion, the basic hangup is the fact that consumer complaints about high energy costs are placing legis-lators and regulators under heavy pressure to disregard the need for implementing a long-term energy supply strategy and to focus, in-stead, on providing here-and-now price-protection tranquilizers.

The only way that these pres-sures can be relieved is forcon-sumers to decide that their interests willbest be served by long-term thinking on energy rather than short-term. This is whatcitizens of other countries have done when faced with the energy price/supply dilemma.

We have been spoiled by having lived, for a while, in a period when we could have low-cost energy and plenty of it. Now we are forced to make a choiceare we willingto pay higher prices forenergy orwill we endure the consequences of insufficient supply'I Our society can cope with human problems arising fromin-adequate income, including inabil-ityto purchase basic energy re-quirements if we have energy available. Without adequate energy, however, our society will not have the productive capability necessary to meet human needs.

Respectfully submitted, Jack K. Busby, Chairman Robert K. Campbell, President March 1, 1978

~

i

~ Vlnl($ 'FSKP'liil IRK'VIJSM PP&L's 1977 earnings were $3.37 per share of common stockup 69 cents from a year earlier. The im-provement over1976came princi-pally from substantially higher sales ofpower to otherutilities, primarily Pennsylvania-New Jersey-Maryland (PJM) power-pool companies.

The increased kilowatt-hour sales to other utilities at higher prices were made possible by our comparatively favorable fuel costs, the excellent performance ofour large generating units and our strong electrical capacity reserve position.

The power pool sales to other companies improved our plant utilization and contributed sub-stantial funds to help offset the rising costs ofdoing business.

We were thus able to postpone seeking a rate increase we would otherwise have had to ask for during 1977.

Our 1977 earnings, of course, were also helped by a fullyear' effect of rate increases which were granted in 1976 by the Pennsyl-vania Public UtilityCommission (PUG).

QividleIId IIIIC:Ieaeedl The board of directors on May 25 increased the quarterly dividend rate to 48centspershareof common stock beginning July 1, 1977. Ithadbeen45centsashare since July 1974.

The dividend increase was in partial recognition ofthe earnings reinvestedin PP&Lbythe owners ofour common stock over the previous three years. Including sales of newshares, the total com-mon shareowner investment in-creased by $335 millionor 68 percent during this period.

IFIIIBACIIIQ PP&L's1977securitysales totaled about $238million. This figure is somewhat lower than the 1976 level of$308 million,reflecting more moderate construction expenditures for1977and pay-ments of$84 million,including a catch-up paymentof$ 65million,by Allegheny ElectricCooperativefor its10percent share ofthecost of L4g Lhwk~ ~

building the Susquehanna nuclear plant and related facilities.

We expect our financing needs willincrease during 1978, and we anticipate securitysales willbe approximately $270 million.

Acceptance of the Company's dividend reinvestment plan con-tinues to be gratifying. During 1977 more than 812,000 shares ofcom-glut r

Operating records were set by large coal-burning generating units at our Brunner Island (top) and Montour (bottom) plants in 1977. The excellent performance by our coal units made possible substantially higher sales of energy to other uti%ties.

mon stock were issued throughthe plan. Under the plan, dividends from all classes of PP&Lstock are reinvested inour common stock with no brokerage fees and at a 5 percent discount from the current market price.

Atthe end of 1977 more than 30,000 shareowners were partici-pating, and $18.2millionofcom-mon stock was issued through the plan during theyear $10.1million through reinvested dividends and

$8.1 millionin optional cash pay-ments and employee payroll deductions. This accounted for 21 percent ofthe money we raisedby selling common stock.

IEnergy Use Moderate PP &L'scustomers used 2.8 percent more electricity in 1977 than theydidin1976. (PP&Lac-quired Hershey Electric Co. on Dec. 31, 1976. Ifthe 269 million kilo-watt hours used by Hershey customers were included for1977, the growthrateofelectricalusage would be 4.2percent). Growth for 1977 was lowerthan the1976figure of 6.5 percent primarilyfortwo reasons the weather and the economy. Even though the cold spell in early 1977 caused a lotof economic and personal hardships, the weather forall of 1977 was more moderate than for 1976. This meant somewhat lower electric usage. Additionally,there was a tempering of general economic growth in our service area.

From a capacity-planning view-point, we consider moderate growth in electrical usage as good news. Ifthe growth rate turns out to be in line with our projections, we should be able to meet our cus-tomers'lectrical requirements up to about 1990 withour present generating plants, plus the Sus-quehanna nuclear plant, which will come on line inthe early1980s. But, with the lengthening lead times for power plant approvals and con-struction we are practically at 1990 today in terms of new generating capacity additions. So, even if growth should turn out to be lower than expected, it makes sense, considering all the uncertainties, that we should be proceeding with planning, designing and building new capacity to be available by the late 1980s.

Construction Budget The Company's estimated 1978 construction budget amounts to

$475 million (including $4 million for nuclear fuel)up from the $357 million expended in 1977 (includ-ing $ 16 millionfornuclear fuel).

An additional $23 millionwas ex-pended in 1977 on the Susque-hanna plant forwhich deposits were received from Allegheny Electric Cooperative.

Almost $330 millionof the 1978 amount is budgeted forconstruc-tion costs at the Susquehanna plant. During the next fiveyears, PP&L expects to spend nearly $2.3 billionforconstruction of electric service facilities.

Susquehanna Nuclear Project Construction oftwo 1,050,000-kilowatt nuclear generating units near Berwick passed the halfway point in 1977. Unit 1, was 60 percent complete at year-end and Unit2, was 40 percent complete.

Because of required design changes, delays in delivery ofmate-rialand equipment, scarcityof labor and other factors, we have nearly exhausted schedule con-tingencies builtinto the project. As a result, we have revised the esti-mated in-service date of Unit 1 from November 1980 to February1981 to recognize the potential forfuture delays even though the fuel load date has not been changed. The estimated in-service date forUnit2 remains 1982.

The mostvisibleadditiontothe project isthe540-foot-high con-crete cooling tower under con-struction forUnit1.When complete, ~

the $30-milliontower willcontain 35,000cubic yards ofconcrete and t, iti: itIII!i,'.'"~

Work continues around the clock on the Susquehanna nuclear units being built near Bervvick by PAL and Allegheny Electric Cooperative.

willbe one ofthe tallest cooling towers in the world.

Negotiations were completed and contracts signed in March 1977 forAllegheny Electric Cooperative to become a10percent owner ofthe Susquehanna nuclear plant. Alle-gheny supplies electric power to 14 rural distribution cooperatives serving 150,000customers in Penn-sylvania and New Jersey. Alle-gheny paid its share ofthe Susque-hanna investment up to March and is making additional payments as work progresses. Afterall regula-tory approvals had been received, the transaction was finalized on Jan. 11, 1978.

tuilSH'CIJÃIG CII'$82 VIIIIII' The oil-fired820,000-kilowatt Unit4at the Company's Martins Creek plant, on the Delaware River above Easton, workedexception-ally well during its testing and break-in stage in late1976and early 1977. Itwas a big help in meeting customer demand during the cold January weather. Then, on Feb.8, 1977, a fuel-oilleak caused a fire which shut down the unit.

Afterextensive cleanup, repairs and further testing, the unitwas put into commercial operation on March 15making the Martins Creek generating plant the largest on the PP &Lsystem with a capability of 1,940,000 kilowatts.

The mine never reached pro-jected production levels. This, and other problems, resulted in un-usually high costs forthe Oneida coal. We notified North American Coal Co., Oneida's parent com-pany, in January1976thatwewere taking over Oneida under provi-sions ofthe contract. The takeover was contestedin the courts untila February 1977 settlement gave us fullcontrol of Oneida.

Because ofthespecial situation, the Companydecidedto price Oneida coal, forpurposes ofthe fuel adjustment charges ourcus-tomers pay, at the average per ton cost ofcoal produced at our other mines rather than at Oneida's highercost. ThecostofOneida coal not recovered through the fuel clause amounted to $9.3mil-lion, reducing the Company's1977 net income by $4.3 millionor13 cents per share.

We also took a hard look at Oneida's operations to see what could be done to bring coal costs down. The followingactions were taken in the latter part of 1977:

~ Abandoned asection ofthe mine where minimal coal seamheight and poorroof conditions resulted in extremely difficultandex-pensive mining.

~ Wrote off$9.1 millionofunamor-tized development costs relating principallyto the abandoned area. The effect was the reduc-tion in PP&L's 1977net income of

$6.6 millionor 20cents per share of common stock.

~ Moved ahead with mining in sec-tions of the mine where condi-tions are more favorable.

We have established rigid sched-ules for checking progress on our longer-range plans forOneida. If adverse mining conditions prevent L'Jllnilng Gyes'tIIIHOIIIIa Afternearlyayearoflitigation, PP&L, through its wholly-owned subsidiary, Pennsylvania Mines Corp., gained fullcontrol in1977of The Oneida Mining Co.

PP&L became associatedwith Oneida in 1970 when we were ex-panding our efforts to secure long-term coal supplies. Oneida agreed at that time todevelopanunder-ground bituminous coal mine in west-central Pennsylvania, with all ofthe mine's coal going to PP&L. In turn, PP&L guaranteed Oneida's financial obligations.

With the addition of the oil-fired Unit 4 our Martins Creek plant became the largest generating station in the PP&L system.

us from reaching our goals, eco-nomics may dictate that mining be terminated and additional losses be written off.

The Company in October strengthened the managementof its mining organization by naming a full-timepresident for Penn-sylvania Mines Corp., which oper-ates PP8 Lmining companies. The new on-the-scene executive is Richard Herron, who came to PMC with nearly 30 years ofextensive mining experienceasanexecutive of a major coal company.

IReeetHII Clh The goal ofthe research projects in which PP8 Lparticipatescon-tinues to be the investigation ofnew ways to provideefficientelectric service at the lowest practicable price.

Some ofour research projects reflect the changing complexion of energy use. In 1977, wecom-pleted atwo-yearstudywithLehigh University ofthe incidence ofwindy days and sunny days in eastern Pennsylvania knowledge needed when considering the practicability ofwind turbines or solar energy devices.

The data this study provided heipedin ourdecision to construct an experimental wind-driven gen-erator near Hazieton. The 45-kilo-watt generatorandits four-bladed rotor willstand on a steel tower 40 feet high. The magnesium alloy rotor blades willbe45 feet in diam-eter. We expect the wind turbine will provide valuable information after it begins operationinmid-1978. We see this experiment as a good opportunity to become more famil-iarwithwind-turbine technology as wellas a chance to study problems associated withtying these non-traditional generators intoour transmission/distribution system.

This is the firstsuch generator built by a Pennsylvania utility.

Acooperative "fishfarming" pro-ject was begun witha food proc-essing company in 1977. This pro-ject utilizes the waste heat in the dischargewateratour Brunner Island plant.Sincefishgrowfaster in warmer water we are helping to test thecommercial feasibilityof utilizinglow-grade heat energy otherwise wasted after itisdis-charged from a power plant.

Various other technical projects such asgenerator vibration anal-ysis, electrostatic precipitator effi-ciency improvementsandfallen conductor studies were begun on a Company level. Our research budget for 1978 totals more than

$3.4 million,about twothirds of which willbe used for ourcontinu-ing support ofindustry-wide projects.

COIIIISulIIlelI' Hairs The 1976 first-of-its-kindutility/

consumer conference co-spon-sored by PP&Land the national Conference ofConsumer Organi-zations (COCO) was a big step in expanding communications be-tween the Company and consumer advocates.

PP8 Lcontinued taking such steps in1977. Throughouttheyear our consumeraffairs people have beenmeeting withsmallgroupsof consumers, along withelected offi-cials and regulators. These meet-ings have includedissue-oriented consumer-utility workshops in each of our fivedivisions. Wecon-ducted several ofthe workshops on our own while some were co-spon-sored withorganizationssuchas ES A

fe The Company is building an experimental wind turbine similar to the one shown here, which was built by a PP&L customer near Allentown. The Company has agreed to purchase from the owner any of the small unit's excess generation.

the Pennsylvania Consumer Coun-cil, the Better Business Bureau, the American Association ofUniversity Women, social service agencies and local chaptersof the Penn-sylvania League of Women Voters.

From these workshops have grown more permanent consumer panels which are providing oppor-tunities forcontinuing feedback to the Company of consumer issues.

CBIIZen ACflyilee OIIII P(enC SIIRIIIIIIttji Afterthe success ofa smaller-scale citizen advisory group which helped PP&Lchoosethesitefora substation/transmission line pro-ject, the Company invited public participationin anewapproachto power plant siting.

The 24 Pennsylvanians who be-came the Permanent Siting Advi-sory Committee (PSAC) are envi-ronmental, industrial, politicaland public-agency leaders from throughout Pennsylvania.

Monthlymeetings have taken members of PSAC throughout PP&L's service area studying detailed reports, participating in extensive discussion sessions, touring power plants and evalu-ating the power plant siting pro-cess. In December the committee endorsed this processandrecom-mended that the preferredsites be given more detailed study.

The siting study began with a screening process to eliminate some areas fromsiting consider-ation such as prime agricultural areas, recreation sites, conser-vation areas, and state parks and game lands.

Studies ofpossiblesitesincluded evaluation oftheeffectsagener-ating station wouldhaveon airand water quality, and the impact it would have on the residents of nearby communities, as well as on plant and animal life.

This newapproach reflects the greater emphasis PP&Lhas been placing on environmental, land use and social aspects of plant siting.

KIIIIeit'gy COIIIIGSIPUSRIIle Although itwas astrugglefor many people to handle the problems ofthe extreme cold weather ofthe winter of1976-77, theexperiencedid make many consumers more energy conscious.

Many homeowners are now look-ing forways to tighten up their homes with added storm windows, insulation and other conservation measures. The Company iscon-tinuing to aid consumers inthis effort.

For ownersof existing homeswe offered a home survey tosaveen-ergy. Company representatives made more than 3,400 surveys at the request ofcustomers. In each case, the owners were provided withspe-cificrecommendations on measures they should take to reduce energy use. Follow-up calls indicate that over 60 percent of those surveyed have put our recommendations to use.

Throughout theyear our residen-tial consultants have encouraged builders and developers to use higher levels of insulation fornew home construction. Recommenda-tions include use of polystyrene sheathing insulation, in addition to the widelyused fiberglass, to provide better wall insulation and to reduce air infiltration.

Insulation workshops were also conducted throughout our service area to demonstrate howhome-Robert Nowak (right), a PP&L residential consultant, discusses the energy conservation merits of super-thick insulation with a Hazfeton-area housing contractor.

owners may reduceenergyusewith relatively simple measures such as adding attic insulation or wrapping electric water heaters withfiberglass insulation.

Our efforts are also continuing withour industrial and commercial customers. By late 1977, the Com-pany had helped organize and train more than 1,000energy manage-ment teams among these cus-tomers. Award programs to recognize outstanding energy management accomplishments were also continued through 1977.

Atwo-day energy design forum for200architects and design engi-neers, energyseminars forbusi-ness executives and extensive display use atshopping centers, showsand fairsalsocontributedto the Company'sconservation awareness efforts during 1977.

On March 1, VirginiaKnauerwas named a directorof the Company.

She was former special assistant for consumer affairs to the president of the United States. Priorto her duties in the White House, Mrs.

Knauer was director ofthe Penn-sylvania Bureau ofConsumer Pro-tection, the only woman in the country at that time to actually administer such a bureau.

Brooke Hartman, executive vice president-Operations and a direc-tor of the Company, retired in May after 47 years with PP8 L.

Chas.E. Oakes, former PP8 L president and chairman ofthe board, died at his home in Allen-town on June 5. Anationally known figure in the electric utilitybusiness foralmost three decades,Oakes waselected PP8 Lpresident in 1945. He became chairman in1957 and continued as chief executive officer. He resigned as an employee ofthe Company in1963, continuing as adirectorand chairman ofthe board until his retirement in 1967.

0 KIInscIlement Chsnges A number of management changes took place in 1977.

Jack Busby, PP8L president since 1957, became chairman ofthe board on Feb.1. He remains the Company's chief executive officer.

Robert Campbell, a former exec-utive ofWestern Electric Corp., was named PP8 Lpresidentand elected to the board as ofFeb.1. Campbell on Jan.1,1978, became chairman of the Company's Corporate Manage-ment Committee (CMC)formerly headed by Busby. The CMC is the Company's main internal manage-ment policy-and decision-making body. This change is partofan orderly transition of management responsibility.

CliffordAlexander, who had been a PP8 Ldirector since 1972, resigned fromthe board in Febru-ary when he was confirmedbythe U.S. Senate as secretary ofthe Army in the Carter administration.

V V

PP8L people worked under severe weather conditions to restore electrical service as snow andice storms made 1977 the worst everin terms ol weather-related customer interruptions.

10 10 PA.

MD.

1977 marked the 50th anniversary of the PJM (Pennsylvania-New Jersey-Maryland)

Inter-connection, the world's first integrated power pool.

It was formed in 1927 by PP&L, Philadelphia Electric and Public Service Electric and Gas. Today the PJM coordinates the bulk power supplies of 11 electric utilities serving 21,000,000 people in a 50,000-square-mile area of five Mid-Atlanticstates and the Districtof Columbia. PJ M computers coordinate and schedule the operation of generating units each day from hour-to-hour using the most economical units as demand for electricity increases during the day. These operations reduce energy costs and the amount of reserve capacity each individual company would otherwise need without power pooling.

PJM Companies

1. Public Service Electric and Gas Company

2. Philadelphia Electric Company

3. Atlantic Electric Company

4. Delmarva Power & Light Company

5. Pennsylvania Power & Light Company

6. Luzerne Electric Division-UGI Corporation

7. Baltimore Gas and Electric Company

8. Jersey Central Power & Light Company

9. Metropolitan Edison Company

10. Pennsylvania Electric Company

11. Potomac Electric Power Company

PP&L has been conducting a vigorous energy conservation campaign formore than fiveyears.

The reason is simple. People can-not afford to use energy likethey once did. Available sources of fossil-fuel energy are becoming more andmoreexpensiveand harder to obtain.

Up to this point our efforts in en-couraging energy conservation have relied on the voluntary re-sponses ofconsumers responses triggered because ofthe economic impact of rising energy costs, because oftheirconcern overa national issue ofenergy overuse and, to some extent, because we provided the know-howandtechni-cal assistance they needed to identifyand cutdown energy waste. Many ofthe actions taken by consumers required only a small expenditure or a slight change in

~

their patterns of use.

We Must Go Further Now, though, we must go further.

It is apparent that the Company must try harder to influence the demand and energy requirements of our customers.

Traditionally, electric utility planning pretty much followed consumer preferences, economic conditions and commercial andin-dustrial activity. In other words, we figured as best we could how much electricity our customers would demand fiveor 10 years down the road and then went ahead to build facilities to meet that demand.

Now, however, becauseofshort-ages ofcapital, difficultyinfinding sitesforour facilities, environ-mental constraints, problems with near-term availability of certain fuels, and becauseof the long lead times required for new plants, no energysuppliercan operateeffec-tively under the old rules.

We can no longer guarantee that in 10 years we'l have enough ca-pacity to supply our customers'lectricity demands ifthere is un-restrained energy demand growth.

IfPP8 Lwere to decide today to build a new power plant, the earliest possible in-service datewouidbe around 1990.

Alternative Yo Unrestricted Growth As an alternative to unrestricted growth, the Company in late 1977 adopted a policyof Energy Man-agement and Demand Manage-ment (EM/DM)that we hope will stretch out the time before we need expensive new generating capacity after the Susquehanna nuclear plant becomes fullyoperational.

There are twofacets to EM/DM.

Energy management isany method which produces a reductionintotal annu'al energy use regardless of its effect on peak demand. Demand management is any methodwhich willreduce the peak, or maximum load, withlittleor no change in total annual energy use.

It's the peak demand, plus ade-quate reserves, which determines how much generating capacity an electric system must have. There must be enough generating capa-bilitytomeet thatdemand plus Kilowatts Daily Load Shape Load Shifted From Here

~yo100y+

~t Present Load Shape

~y

~ y~~~gO Possible Load Shape With EM/DM

~g

~0

~ ~

~ 0

~ +osooooo~~

to Here 8

10 12 2

4 6

8 10 12 2

4 6

8 am pm am PP&L expects tointroduce a variety of rate structures on an experimental basis to see ifconsumers willshift their energy use to off-peak hours.

10

some reserve capacity in case of equipment failure. Anyway we can postpone orslowdowntheneed for newgenerating unitswillhavethe long-term benefit ofcost savings for both PPBL and its customers.

Studies indicate that a properly designed EM/DMprogram will reduce the Company's long-term construction and financing re-quirements. Itcould also mean the average costofelectricenergy will be lower thanitwouldhavebeen without such a program even after taking into account the in-creased customer investment for such energy/demand management "hardware" as energy storage systems, timing devices or appli-ance interlocks.

EM/DMwillalso have a beneficial effect on the environment by re-ducing pollution and landuse requirements and by providing more time fordevelopment ofnew energy supply options, as well as fuel extraction and pollution control technologies.

A Number of Options Having decided to adopt a broad-based EM/DMprogram, the Company has a number ofoptions, some ofwhichmayreachthe desired results. Generally these options incorporatesomeaspects of both economic incentives and mandatory regulatory require-ments. Nowwe need to do more testing and analysis to see which options offer the most promise.

To test some ofthese options, the Company expects to seek Public UtilityCommission permission in 1978 to experiment with a variety of residential rates. We want to test the impact on consumers to see if they willshifttheirenergy use to off-peak hours. And wewanttoseeif, and how much, various pricing procedures willinfluence a willing-ness to conserve. These experi-mental rates willhelp us determine their acceptability by customers and evaluate their potential forcon-tributing to a reduced rate of demand and energy growth.

More Effective Standards We are convinced ofthe need for legislation or tariffchanges which would mandatethat higher, more effective insulation standards be met as a requirement forconnec-tion of electric service to any new home or business.

Although manyspecificsofthe EM/DMprogram are stillunder consideration,thefinal program willnot be designed to drastically change people's livinghabits. The programs may slow down con-sumption of scarce resources, but they willnot eliminate the need for new fuel supply sources and fuel exploration.

What we'e doing is gaining time.

Ifwe'e going to benefit byit,then we must use the time wisely to design new and better facilities and to improve energysupplysyste'ms.

But PP&Lcan't do italone.Asimilar commitment by stateand federal government, other energysup-pliers and consumers is necessary.

Kifowatts Annual Load Shape Present Load Shapel e + ~ +to

~I 0~

~~

~~ ~y~ ~

~I~

~

~

~yl

~ 0 ~

~ y ~ ~I

~

+ ~ J ~

~

~

~

+0 Possible Load Shape With EM/DM J

F M

A M

J J

A S

0 N

D lfwe can lower projected load levels itmeans we can postpone or slow down the need for new generating units. This willhave the long-term benelit of cost savings for both PP8L and its customers.

11

8 iftiekyeiie OoQ SR@QeZIIIeifiIQ ao8 lliftiCOoZne The following analysis highlights changes in the financial results of the Company as reflected on the Statement of Income shown on page 16. The periods compared are the years 1977 to 1976 and 1976 to 1975.

Future operating results will be affected by many factors such as adequate and timely rate

relief, customer demand, interchange power sales, fuel costs, fuel availability, governmental action and availabilityof capital. The Company cannot predict the combined effect of such factors on its future operating results. At the time this analysis was prepared in February1978, a strike by the United Mine Workers of America, which began December 6, 1977 was still unsettled.

The curtailment ofcoal deliveries as a result ofthe strike has required the Company to reduce energy production from bituminous coal-fired units and increase its production from more expensive oil-fired units.

Continuation ofthe strike for a prolonged period would have an adverse impact on the economy in general and on the Company's generating capability and earnings.

IRIeturn forCommon Shareowner During 1977 and

1976, common shareowners increased their investment in the Company by $243 million or 39 percent through reinvested earnings and proceeds of$171 millionfromthe issuance of8.4 million shares of new Common Stock.

Earnings applicable to common stock increased

$34.0 millionand $5.7 millionin 1977 and 1976, respec-tively. Earnings per share of common stock were $3.37 in 1977 and $2.68 in 1976. The earnings improvement in 1977 was primarily the result of sharply increased en-ergy sales at higher prices to interconnected utilities with the added benefit of a fullyear's effect of the rate increases which became effective in 1976.

$3.40 3.20 3.00 2.60 2.40 Earnings Per Share 12 Months Ended Each Quarter Dollars Per Share 1973 1974 1975 1976 1977 The Company's earnings per share of Common Stock increased substantially during 1977 compared to 1976. However, as the above chart shows, earnings since mid-1974 through 1976 had suffered a general decline and 1976 earnings per share were approxImately the same as they were three years earlier-In 1973.

3.40 3.20 3.00 2.40 ~

Cost of IFixed Income Securities The increases in long-term debt interest charges and dividends on Preferred and Preference Stock were due to issuance of securities principally to finance the Company's construction program and the refinancing of maturing debt with securities bearing higher interest rates. During 1977 and 1976, outstanding long-term debt increased by $217 million and Preferred and Preference Stock by $ 121 million.

Interest charges Long-term debt..........

Short-term debt..........

Other Dividends on preferred and preference stock.........

$11.7 11.9 (2.6) 0.9 0.4 0.1 3.6 6.9 Interest and Dividend Cost The change fromtheprioryearininterestchargesand dividends on Preferred and Preference Stock were:

1977 1976 Millionsof Dollars 12

Times Interest Charges Earned 12 Months Ended Each Quarter Times Earned (Pre Tax)

At December 31, 1977, the Company's outstanding long-term debt required annual interest payments of

$99.5 millionand outstanding Preferred and Preference Stock required annual dividend payments of $40.2 million.

The Company presently has a middle-of-the-road bond rating by electric industry standards (rated Double A by Moody's and Fitch's and A Plus by Standard 8

Poor's).

One of the most important measures in determining a company's bond rating and credit standing is its abilityto cover interest payments (see adjacent chart).

. Bank loans and commercial paper notes are used to provide working capital and interim construction financing. Interest charges on such debt varies from year-to-year in relation to the amount of short-term debt outstanding and the interest rates in effect. For more information on short-term debt, see Note 6 to Financial Statements on page 25.

1973 1974 1975 1976 1977 Energy Sales and Qperating Revenues The improvement In the number of times interest was earned In 1977 has strengthened the Company's credit standing.

Electric revenues Quantity of sales to:

Ultimate customers....

Othersforresale Rate increases..........

Fuel adjustment clauses Other (including tax surcharge)............

Steam revenues Total.....

$18.0 0.4 36.5 36.7 9.2 100.8 (0.2)

$100.6 19.3 0.3 40.4 33.8 73 101.1 (1.1) 100.0 Operating Revenues The change in operating revenues from the prioryear is attributable to the following:

1977 1976 Millionsof Dollars The Company derives about 99% of its operating revenues from supplying electric service and the balance from supplying steam for heating and other purposes in the city of Harrisburg.

Rates applicable to sales to ultimate customers are

,regulated by the Pennsylvania Public Utility Commission (PUC) and accounted for 98% of the Company's revenues from energy sales in 1977. The Federal Energy Regulatory

'Commission (FERC) regulates sales to others for resale.

Energy sales for 1977, excluding sales of Hershey Electric Company (acquired December 31, 1976),

increased 578 million kwh or 2.8% over 1976. Hershey Electric Company sales, which are not included in sales statistics prior to January 1, 1977, totaled 269 million kwh in 1977 resulting in a consolidated sales increase of 4.2% in 1977. Energy sales increased 6.5%

in 1976. For more information, see "The Year in Review

- Energy Use Moderate" on page 4 and the "Statistical Summary - Sales Data" on page 30.

Rate increases forultimate customers became effec-tive in September 1975 ($21.0 million annually), April 1976 ($20.0 million annually) and August 1976 ($37.3 millionannually).

13

The Company's tariffs include fuel adjustment clauses which adjust prices for electric service for variations in the cost offuel used to generate electricity.

Revenues from the fuel adjustment clauses totaled

$205.0 million in 1977 and

$168.3 million in 1976, reflecting the increased level of fuel costs and additional energy sales.

See Note 4 to Financial Statements on page 25 for information concerning the limited recovery of the cost of coal mined at The Oneida Mining Company, a subsidiary, and Note 2 to Financial Statements on page 24 concerriing proposed regulations by the PUC to replace the fuel adjustment clause with a levelized energy cost rate.

3.0 2.5 2.0 1.5 Average Price Of Electricity AllCustomers Cents Per Kwh Fuel Ad ustment Tax Surcharge Base Rate 3.5 3.0 2.5 2.0 1.5 jMet Cost of Energy The net cost of energy includes fuel expense plus power purchases less power sold to other utilities.

Included in power purchases is the value of electricity generated during the test period for the Company's new generating units.

Fuel The cost of fuel consumed increased during 1977 and 1976 as a result of greater generation of energy and increases in the cost of fuels purchased.

The increase in energy generated was due principally to the addition of the oil-fired Martins Creek unitsNo. 3 was placed in service in October 1975 and No. 4 was placed in service in March 1977. The average cost of fuels consumed increased during 1977 and 1976 due to the combined effects of higher coal prices and the cost of oil consumed at the Martins Creek units, which have a cost per kwh generated approximately twice that of the Company's coal-fired units. The average cost of fuel consumed per kwh generated was 1.04 cents in 1975, 1.17 cents in 1976 and 1.35 cents in 1977.

The cost of fuel consumed which is recoverable through fuel adjustment clauses is deferred until the period in which such costs are billed to customers.

Interchange Power Sales The total electric energy available for sale includes energy generated by the Company's plants and power purchased from others, after deducting Company uses and line losses. During 1977 and 1976, approximately 37% and 29%, respectively, ofthe total energy available was sold to other utilities under interconnection 1.0 1.0 1973 1974 1975 1975 1977 The above chart shows that the Increase ln the cost of fuel has been the rnaln factor in the recent price rise of electricity.

Electric fuel expense Quantity of electricity generated................

$ 54.8 Average cost of fuels burned..

60.0 114.8 17.9 36.0 53.9 Less increase in fuel costs deferred to match revenues from fuel adjustment clauses...................

Steam heat fuel expense Total..........

2.8 2.9 112.0 51.0

$111.9 50.2 Fuel Expense The change in fuel expense from the prior year is attributable to the following:

1977 1976 Millions of Dollars 14

Quantity of energy sold.......

6 77.6 (7.9)

Average price of energy sold..

65.5 (5.7)

Other 3.2 0.9 Total

$146.3

~(12.7 Expenditures For Electric Facilities t

Billionsof Dollars

$3.5 3.0 3.5 3.0 2.5 Interchange Sales The change in interchange power sales from the prior year is attributable to the following:

1977 1976 Millionsof Dollars arrangements.

As required by both the PUC and the FERC, such sales are not recorded as Operating Revenues but are credited to Operating Expenses on the Statement of Income.

The price received forpower sold on the interchange reflects a splitting ofthe difference between the buyer' and the seller's cost of generation. During 1976 there was a narrowing of the differential between the Company's cost of generating electricity and the price received for interchange power sales. Also in 1976, increased sales to customers reduced the quantity of economic power available for sales to interconnected companies.

During 1977 the Company experienced an unprece-dented level of interchange sales at higher prices.

These sales were the result of many factors, including the addition of new generating capacity(Martins Creek Unit No. 4), excellent performance of the Company's generating units, extreme weather conditions during certain winter and summer months and the extended outages of several major generating units of other interconnected companies.

The average price the Company received for inter-change power sales was 1.97 cents per kwh in 1975, 1.90 cents per kwh in 1976 and 2.43 cents per kwh in 1977. These amounts weresubstantially in excess ofthe Company's average fuel costs.

2.0 1.5 1.0 1977 78

'79

'80

'81

'82 Total

'78-'82 a Cost of Electric Facilities at End of 1977 a Expenditures to Construct New Electric Facilities and Acquire Nuclear Fuel Financial health of the Company is necessary to raise the large amounts of money required to finance the construction of electric facilities.

Construction expenditures In the next five years are expected to be

$2.3 billion compared to

$3.2 billion of lacllitios at the end of 1977, after being In business for 57 years.

2.0 1.5 1.0 Other Matters See the "Schedule of Taxes" on page 17 for information relating to income taxes and other taxes.

The increases in wages and employee benefits and other operating costs such as materials and supplies, rents and insurance principally reflect the effects of inflation, increases associated with operation and maintenance of new facilities placed in service, includ-ing the new Martins Creek units.

Increased depreciation expense is due to new facilities placed in service, including the Martins Creek units.

The Allowance for funds used during construction (Allowance) has increased during. the years being compared as a result of the Company's extensive construction program. For information concerning a change in the reporting classification of the Allowance on the Statement of Income effective January 1, 1977, see Note 1 to Financial Statements on page 23.

15

MKQ(Sli)T)imam!K'2 Oo'P lllr9COoKiltm!

Operating Revenues (Note 2)

Operating Expenses Net cost of energy Fuel Power purchases Interchange power sales Wages and employee benefits Other operating costs Depreciation Income taxes Taxes, other than income Operating Income Other Income and Deductions Allowance for funds used during construction (Note 1)

Equity and borrowed funds Equity funds Income tax credits Othernet Income Before Interest Charges Interest Charges Long-term debt Short-term debt and other Allowance for borrowed funds used during construction (Note 1) 433,698 39,783 (306,456) 167,025 91,822 82,355 68,035 91,501 59,682 560,420 184,311 321,783 29,657 (160,163) 191,277 82,583 76,121 62,478 43,828 49,526 505,813 138,334 271,636 37,698 (172,823) 136,511 71,773 68,369 58,540 47,298 40,669 423,160 120,969 192,353 24,176 (108,723) 107,806 67,374 54,489 52,399 39,211 35,571 356,850 115,186 125,577 15,299

~70.175) 70,701 57,421 45,234 48,837 33,943 30,005 286,141 98,673 22,459 13,708

~928) 35,239 219,550 91,500 5,223 (26,936 45,192 14,457 1,381 61,030 199,364 79,783 7,470 36,605 11,201 3,154 50,960 171,929 67,932 6,456 20,732 5,076 3,418 29,226 144,412 51

~149 9,946 14,967 9 1 1,300 16,358 4,916 1977 1976 1975 1974 1973 Thousands of Dollars

$744,731 644.147 544,129 472,036 384,814 Income Before Nonrecurring Credit.................

Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($4,831) (Note 3)............

Net Income Before Dividends on Preferred and Preference Stock Dividends on Preferred and Preference Stock Earnings Applicable to Common Stock (Note 3).....

Earnings Per Share of Common Stock (Note 3)

Before Nonrecurring Credit Nonrecurring Credit Average Number of Shares Outstanding (thousands)

Dividends Declared Per Share of Common Stock 69,787 149,763 149,763 36,993

$112,770 3.37 3.37 33,471 1.89 87,253 112,111 74,388 97,541 112,111 33,368 78,743 97,541 24,509 73,032 2.68 2.87 29,367 25,459 1.80 1.80 2.68 2.87 61,095 83,317 48,119 66,912 4,162 87,479 19,656 67,823 66,912 17,191 49,721 2.88

.19 3.07 2.57 2.57 22,067 19,359 1.77 1.68 See accompanying Schedules and Notes to Financial Statements.

16

e mclhtt.dM(3. oat Vzztf.e 1977 1976 1975 1974 Thousands of Dollars 1973 Income Tax Expense Included in operating expenses Provision Federal State Deferred Tax depreciation (class life system)

Recoverable fuel costs Forced outage reserve Other Investment tax credits-net

$ 34,804 16,193 50,997 6,173 4,128 (344) 2,198 28,349 91,501 656 6,766 7,422 6,463 2,391 (1,041) 932 27,661 43,828 22,547 8,221 30,768 4,540 829 (3,726) 1,899 12,988 47,298 12,554 3,858 16,412 3,715 14,009 1,538 3,537 39,211 16,454 6,207 22,661 3,057 2,680 5,545 33,943 Included in other income and deductions Provision (credit)

Federal State Total income tax expense (11,008)

~2,700)

(13,708)

$ 77,793 (11,859)

(9,164)

(2,598)

(2,037)

(14,457)

(11,201) 29,371(a) 36,097 (4,156)

(5,076) 34,135(b)

(46)

(45)

~(91 33,852 Computation of Income Tax Expense Indicated income tax on pre-tax income at combined Federal and State tax rates (shown below)

Reductions due to:

Allowance for funds used during construction....

Tax depreciation (guideline lives and declining balance method)

Tax and pension cost Othernet Total Income tax expense Combined Federal and State income tax rates %

Effective income tax rates %

$121,651 26,407 10,953 3,753 2,745 43,858

$ 77,793 53.5 34.2 74,901 23,925 15,067 3,354 3,184 45,530 29,371 52.9 20.8 70,748 19,379 9,131 2,998 3,143 34,651 36,097 52.9 27.0 66,940 10,976 8,799 2,491 5,708 27,974 38,966 52.9 30.8 54,131 8,041 7,531 2,687 2,020 20,279 33,852 53.7 33.6 Taxes Other Than Income Taxes State gross receipts State capital stock State utility realty Social security and other Total

$ 32,932 9,996 11,582 5,172

$ 59,682 28,320 8,860 8,052 4,294 49,526 23,756 7,284 5,980 3,649 40,669 20,564 6,263 5,258 3,486 35,571 16,867 5,403 4,687 3,048 30,005 (a) Investment tax credits eliminated the Company's Federal income tax liabilityfor 1976 and resulted in a credit to the provision forincome taxes of approximately $5 9 millionrelated to a carryback of investment tax credits to prioryears. Total income tax expense for 1976 has been credited by approximately $5.0 millionrepresenting adjustments of prior years'ax liabilities. The principal adjustment, related to adoption ot the modified half-year convention method of computing tax depreciation in the Company's 1975 Federal income tax return, reduced total income tax expense by approximately $2.8 million.

(b) Excludes $4,831 deferred income taxes related to Nonrecurring Credit. See Note 3 to Financial Statements.

See accompanying Notes to Financfat Statements.

17

131(einICtt. Slhtt.t8,(I Assets December 31 1977 1976 Thousands of Dollars UtilityPlant Plant in service at original cost Electric Steam heat Less accumulated depreciation Construction work in progress at cost Nuclear fuel.in process-at cost

$2,323,792 8,140 2,331,932 508,948 1,822,984 829,481 37,764 2,690,229 2,090,282 7,896 2,098,178 458,697 1,639,481 720,544 20,084 2,380,109 Investments Associated companies

'at equity Nonutility property and otherat cost or less 17,640 7,419 25,059 15,327 7,548 22,875 Current Assets Cash (Note 6)

Temporary cash investments, at cost which approximates market..

Accounts receivable (less reserve: 1977, $2,715; 1976, $ 1,925)

Customers..

Other Notes receivable (principally from associated company)

Recoverable fuel costs Coal and fuel oilat average cost Materials and supplies at average cost Other 14,098 19,993 52,380 28,988 32,543 48,987 105,759 19,445 7,811 330,004 14,955 49,205 22,857 29,570 41,670 74,885 19,068 7,219 259,429 Deferred Debits 5,030

$3,050,322 4,884 2,667,297 See accompanying Schedules and Notes to Financial Statements.

18

Liabilities December 31 1977 1976 Thousands of Dollars Capitalization Shareowners investment (Notes 7, 8 and 9)

Preferred stock Preference stock Common stock Capital stock expense Earnings reinvested 281,375 206,000 582,983 (10,630) 286,911 1,346,639 231,375 210,000 495,008 (10,220) 237,967 1,164,130 Long-term debt 1,256,739 2,603,378

" 1,161,319 2,325,449 Current Liabilities Long-term debt due within one year Commercial paper notes (Note 6)

Accounts payable (Note 13)

Taxes accrued Deferred income taxes applicable to recoverable fuel costs Dividends payable Interest accrued Other (Note 13) 3,756 23,400 62,472 27,263 26,188 26,612 23,013 25,821 218,525 20,675 60,012 50,415 12,564 22,060 23,002 22,589 21,184 232,501 Deferred and Other Credits Deferred investment tax credits Deferred income taxes Deposits from Allegheny Electric Cooperative (Note 5)

Other 82,078 44,887 84,215 17,239 228,419

$3,050,322 56,526 36,860 15,961 109,347 2,667,297 lI ~

See accompanying Schedules and Notes to Financial Statements.

19

s@gtfCofoii[jtth Oog QZpoiiQZp 59Oott,"k KIE(5 K OOF9Q~V(Sit RK DOSING December 31,1977 Capital Stock Thousands of Dollars Preferred Stock$100 par, cumulative 4N%, authorized 629,936 shares, outstanding 530,189 shares........

Series, authorized 5,000,000 shares 3.35%, outstanding 41,783 shares 4.40%, outstanding 228,773 shares 4.60%, outstanding 63,000 shares..

7.40%, outstanding 400,000 shares 8.00%, outstanding 500,000 shares 8.60%, outstanding 222,370 shares 9.00%, outstanding 77,630 shares 9.24%, outstanding 750,000 shares Preference Stockno par, cumulative, authorized 5,000,000 shares

$8.00 series, outstanding 350,000 shares

$8.40 series, outstanding 400,000 shares

$8.70 series, outstanding 400,000 shares

$9.25 series, outstanding 160,000 shares

$ 11.00 series, outstanding 500,000 shares

$ 13.00 series, outstanding 250,000 shares Common Stockno par, authorized 50,000,000 shares, outstanding 34,923,452 shares..............

$ 53,019 4,178 22,878 6,300 40,000 50,000 22 237 7,763 75,000

$281,375

$ 35,000 40,000 40,000 16,000 50,000 25,000

$206,000

$582,983 Long-Term Debt Thousands of Dollars First Mortgage Bonds 3'/%

series due 1978..................

2e/4%

series due 1980..................

3/e%

series due 1982..................

10/e% series due 1982..................

3k%

series due 1983..................

3/s%

series due 1985 4%%

series due 1991..................

4e/e%

series due 1994 5e/e%

series due 1996 "..................

6e/4%

series due 1997..................

7%

series due 1999..................

8r/e%

series due 1999..................

9%

series due 2000..................

7'/4%

series due 2001..................

7%%

series due 2002.....

7/e%

series due 2003..................

9i/%

series due 2004.'.................

9e/%

series due 2005..................

9/%

series due 2005..................

8/4%

series due 2006..................

8N%

series due 2007..................

4k% to 5e/e% pollution control series A due annually: $500, 1978-1983;

$900, 1984-2002; $7,400, 2003 Notes 7% due 1980 Other Unamortized (discount) and premium net Less amount due within one year........

3,000 37,000 7,500 100,000 25,000 25,000 30,000 30,000 30,000 30,000 40,000 40,000 50,000 60,000 75,000 80,000 80,000 125,000 100,000 150,000 100,000 27,500 1,245,000 20,000 929 1,265,929 (5,434) 1,260,495 3,756

$1,256,739 Common..............

Preferred, 8.00% series Preference,

$9.25 series Common..............

Preferred, 9.24% series Common..............

Preference,

$11.00 series Preference,

$9.25 series Common..............

Preference,

$ 13.00 series Common..............

Preferred, 7.40% series 1975 Capital Stock Changes Changes in capital stock during the five years 1977-1973, excluding cash installments received at year-end under the dividend reinvestment plan, were as follows (shares and amount in thousands):

Year Class Shares Amount Issued (Redeemed) 1977 4,120

$87,753 500 50,000 (40)

(4,000) 1976 4,251 82,958 750 75,000 3,301 57,045 500 50,000 200 20,000 1974 2,200 35,156 250 25,000 1973 2,000 40,900 400 40,000 See accompanying Notes to Financial Statements.

20

SOKA(SISDI)'2 OoII'RIKI7DQSS

~

DI7il FDDDKDilCDK[l POomBDOoDi) 1977 1976 1975 1974 Thousands of Dollars 1973 Source of Funds Operations Net income Charges (credits) against income not involving working capital Depreciation Noncurrent deferred income taxes and investment tax credits net...............

Allowance forfunds used during construction Other

$ 149,763 68,035 33,579 (49,395)

(1

~191) 200,791 62,478 31,789 (45,192) 4,669 165,855 58,540 15,701 (36,605) 7,464 142,641 52,399 8,790 (20,732) 520 128,456 48,83?

11,282 (14,967) 220 112,284 112,111 97,541 87,479 66,912 Outside financing Common stock Preferred and preference stock First mortgage bonds Other long-term debt Short-term debtnet increase Working capitaldecrease (a)

Deposits from Allegheny Electric Coop. (Note 5)

Investment in associated companies decrease...

Othernet 87,975 50,000 100,000 576 238,551 84,215 608

$524,165 82,705 75,000 150,000 253 307,958 16,894 6,424 497,131 57,763 70,000 225,000 208 352,971 15,166 35,156 25,000 180,000 360 45,658 286,174 40,900 40,000 108,000 20,024 208,924 3,156 685 2,672 510,778 415,315 327,036 Application of Funds Construction expenditures (Note 5)...........

Nuclear fuel in process (Note 5)

Allowance for funds used during construction Securities retired Preference stock First mortgage bonds Other long-term debt Short-term debtnet decrease

$362,558 17,680

~49.395) 330,843 4,000 20,500 196 36,612 61,308 394,238 13,555

~45.192 362,601 8,000 3,054 13,618 24,672 342,496 2,793

)36,605) 308,684 93,000 112 11,879 104,991 267,724 3,?36 l20,732) 250,728 18,632 18,632 224,496 (14,967) 209,529 10,041 56,631 66,672 Dividends on preferred, preference and common stock Working capitalincrease (a)

Acquisition of Hershey Electric Company......

Investment in associated companies increase Othernet 100,813 31,020 181

$524,165 86,694 70,686 58,897 50,037 15,309 82,753 7,855 23,990 798 2,427 4,305 497,131 510,778 415,315 327,036 (a) Changes in components of working capital (excluding debt)

Cash and temporary cash investments.................

Accounts and notes receivable Coal and fuel oil Recoverable fuel costs, net of deferred taxes...........

Accounts payable and accrued taxes Othernet Increase (Decrease)

$ 19,136 12,279 30,874 3,189 (28,756)

(7,702)

$31,020 123 16,394 6,56?

2,125 8,501 (18,401) 15,309 (5,352) 28,757 (3,568) 738 (22,507)

(13,234)

(15,166)

(3,792) 22,896 45,002 18,747 (1,811) 3,711 82.753 10,247 6,745 (4,717)

(10,006)

(5,425)

(3,156)

See accompanying Schedules and Notes to Financial Statements.

21

1977 1976 1975 1974 Thousands of Dollars 1973 Balance, January 1

Add Net Income

$237,967 149,763 387,730 212,550 112,111 324,661 185,695 97,541 283,236 157,113 87,479 244,592 140,238 66,912 207,150 Deduct Cash dividends declared Preferred stock Preference stock Common stock Other 17 123 19,870 63,820 6

13,128 20,240 53,326 9,393 15,116 46,177 9,393 7,551 10,263 9,640 39,241

'2,846 100,819 Balance, December 31 (Notes 8 and 9)...

$286,911 86,694 237,967 70,686 212,550 58,897 185,695 50,037 157,113 Moottee Coo IPIinzneiiell maleznemittm

1. Summary of Accounting Policies Accounting System Accounting records are maintained in accordance with the Uniform System of Accounts prescribed by the Federal Energy Regulatory Commission (FERC) and adopted by the Penn-sylvania Public UtilityCommission (PUC).

Principles of Consolidation The accounts of the., Company and Hershey Electric Company (Hershey),

a wholly-owned electric distribution subsidiary acquired December 31,

1976, are consolidated in the accompanying financial statements from the acquisition date.

All significant intercompany transactions have been eliminated.

The acqui-sition cost of the capital stock and the repayment of all debt owed by Hershey approximated

$7.9 million.The operations of Hershey are not material compared to operations of the Company.

Associated Companies Investments in unconsolidated subsidiaries (all wholly-owned) and in Safe Harbor Water Power Corporation (one-third of the outstanding capital stock representing one-half of that company's

'voting securities) are recorded using the equity method of accounting.

The Company's unconsolidated subsidiaries are engaged in coal mining operations, holding coal reserves, uranium exploration, oil pipeline operations and real estate.

Except for uranium mining claims in Wyoming and Utah and minor amounts of real estate held in other states, the Company's unconsol-idated subsidiaries'roperty and operations are in Pennsylvania.

The Company believes that its financial position and results ofoperations are best reflected without consolidation of these subsidiaries since they are not engaged in the business of generating or distributing electricity. If all the unconsolidated subsidiaries were considered in the aggregate as a single subsidiary, they would not constitute a

"significant subsidiary" as that term is defined by the Securities and Exchange Commission (SEC).

22

UtilityPlant Additions to utility plant and replacements of units of property are capitalized at cost. Costs of depreciable property retired or replaced are removed from utility plant and such costs, plus removal

costs, less

salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utilityplant and any gains or losses are reflected on the Statement of Income.

All expenditures for maintenance and repairs of property and the cost of replacement of items determined to be less than units of property are charged to operating expenses.

Allowance for Funds 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.

After a project is placed in service the Company is permitted to include in rates charged for utility service a return on, and depreciation of, the cost of funds so capitalized.

The components of t

Allowance for funds used during construction (Allowance) shown on the 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 and serve to offset on the Statement of Income the cost of financing construction.

Since February 1, 1974, the Allowance rate has been computed on an after-tax basis and income tax reductions associated with the interest (borrowed funds) component of the Allowance are reflected in Income tax credits under Other Income and Deductions with a corresponding increase in the provision for income taxes charged to Operating Expenses.

During the period February 1, 1974 through December 31, 1976, the Allowance rate was computed semiannually in accordance with procedures initiated by the PUC using a specified rate for common equity and the cost of fixed rate securities issued in the twelve months preceding the semiannual computation.

Effective January 1, 1977, the Company com-puted the Allowance rate in accordance with a 1977 FERC order which (1) provides a formula for determining the maximum Allowance rate, (2) provides for semiannual compounding and (3) provides for segregating the Allowance into two components, borrowed funds and equity funds.

t The gross borrowed funds component recorded since January 1, 1977 is included as a credit in the Interest Charges section of the Statement of Income and the remainder of the total Allowance recorded is shown under Other Income and Deductions as Equity funds. The Company has not reclassified the Allowance into borrowed funds and equity funds components prior to January 1,

1977 since the allocation would not be comparable to that required under the FERC formula.

Depreciation For financial statement

purposes, the straight-line method of depreciation is used to accumulate an amount equal to the cost of utility plant and removal costs, less salvage, over the estimated useful lives of property. Provisions for deprecia-tion as a percent of the average original cost of depreciable property have approximated 3.4% in 1973, 3.3% in 1974 and 1975 and 3.2% in 1976 and 1977. The lower composite depreciation rates for 1976 and 1977 reflect changes made in estimated useful lives of certain facilities in accordance with a PUC rate order issued in 1976. No provision is being made for amortization of intangibles of ap-proximately $1.3 million included in UtilityPlant.

Revenues Revenues are based on cycle billings rendered to certain customers monthly and others bimonthly.

The Company does not accrue revenues related to energy delivered but not billed.

Fuel Costs Recoverable Under Fuel AdJustment Clauses The Company's tariffs include fuel adjustment clauses under which fuel costs varying from the levels allowed in approved rate schedules are reflected in customers'ills after the fuel costs are incurred. Fuel costs recoverable in the future through application of fuel adjustment clauses are deferred and charged to expense during the periods in which such costsare billed to customers.

See Notes 2 and 3 to Financial Statements.

Income Taxes The Company and its subsidiaries file a

consolidated Federal income tax return. Income taxes are allocated to the individual companies based on their respective taxable income or loss.

Income taxes are allocated to Operating Expenses and Other Income and Deductions on the Statement of Income. Income tax reductions associated with the interest (borrowed funds) 23

component of the Allowance forfunds used during construction constitute the principal item of Income tax credits under Other Income and Deductions.

Deferred tax accounting is followed for items where similar treatment in rate determinations has been or is expected to be permitted by the PUC.

The principal items are accelerated amortization of certified defense facilities and pollution control equipment, deduction of costs of removing retired depreciable property, that portion of tax deprecia-tion arising from shortening depreciable lives by 20% under the class life depreciation system, fuel costs recoverable under fuel adjustment clauses, the forced outage reserve and the cost of fuel consumed during the test period of new generat-ing facilities.

Tax reductions arising principally from the use of the declining balance depreciation

method, guideline lives and certain income and expenses being treated differently for tax computation pur-poses than for book purposes are accounted for under the flow-through method.

Investment tax credits, which result in a reduc-tion of Federal income taxes payable, are deferred and amortized over the average lives of the related property. The tax credits are generally equal to 10% of (1) the cost of certain property placed in service and (2) progress payments for the con-struction of certain facilities that have a construc-tion period of at least two years. The Company has adopted an Employee Stock Ownership Plan (ESOP) which permits the Company to claim an additional 1% investment tax credit. An amount equal to this additional credit is paid to the ESOP trustee to acquire Common Stock of the Company for employees.

In March 1975, the Company filed with the PUC for a general increase in electric revenues of $78.3 millionor 14.6%. Rate increases resulting from this filing, based on annualized revenues as of July 31, 1975, were as follows (millions of dollars):

Effective Date of Increase September 13, 1975 (interim)

. ~...

April 14, 1976 (interim)...........

August 26, 1976 (final)

Annual Increase

$21.0 20.0 37.3

$78.3 Forced Outage Reserve Aself-insurance reserve is provided to cover the increased level of power costs which are experi-enced when any of the Company's major generat-ing units are forced out of service due to damage caused by accident or other unforeseen insurable occurrences.

Increased power costs resulting from purchasing or generating replacement power at higher costs or loss of interchange sales in excess of $0.5 million through 1975 and

$1.0 million beginning in 1976 for each accident or occurrence are charged to the reserve.

As to certain of the Company's large generating units, costs chargeable to the reserve are limited to $ 12.5 million since outside insurance is carried to cover costs in excess of that amount. The reserve is established on the basis of historical experience and has been recognized in rate-making pro-cedures by the PUC. At December 31, 1977 and December 31, 1976 the reserve balance was

$14.5 million and $ 13.9 million, respectively.

Retirement Plan The Company has a Retirement Plan composed of two parts: (1) a noncontributory portion which provides benefits for all eligible active employees with the full cost absorbed by the Company, and (2) a voluntary portion in which contributions are made by both employees and the Company, but the full co'st of Plan improvements, including prior service

costs, is borne by the Company.

Approximately 95% of eligible active employees are members of the voluntary portion of the Plan.

Company contributions to the Plan include amounts required to fund current service costs and to amortize unfunded prior service costs over periods of not more than 20 years. See Note 10 to Financial Statements.

The FERC permitted a rate increase for resale customers, amounting to approximately $ 1 million annually, to become effective in November 1976, subject to refund.

In November 1977, the PUC issued proposed regulations to replace fuel adjustment clauses of all major Pennsylvania electric utilities with a levelized energy cost rate effective July 1, 1978.

The proposed energy cost rate would include all (1) fossil fuel costs, (2) nuclear fuel costs, (3) purchased power energy costs and (4) net inter-change energy sales and purchases.

In applying the energy cost rate, situations could occur when a utility would recover either more or less than its total energy costs during a twelve-month period. The proposed regulations provide that accumulated deferred fuel costs under the present PUC fuel adjustment clause would be recoverable 24

pursuant to a reasonable plan filed by a utility.

In response to the PUC's request, the Company and other interested parties have submitted comments on the proposed regulations, and the Company cannot predict what final action the PUC willtake in implementing an energy cost rate.

3. Nonrecurring Credit Belated to Accounting Change The Nonrecurring Credit shown on the State-ment of Income for 1974 represents the cumulative effect to December 31, 1973 of a change in accounting for fuel costs, net of related income taxes. The accounting change related to deferring the charge to expense for a portion of fuel costs to the periods in which such costs are billed to customers through application of fuel adjustment clauses.

Retroactive allocation of the amount of the Non-recurring Credit applicable to the year 1973 would result in Earnings Applicable to Common Stock and Earnings Per Share of Common Stock of

$51,066,000 and $2.64, respectively, compared to earnings of $49,721,000 and earnings per share of

$2.57 recorded in 1973.

4. The Oneida Mining Company The Oneida Mining Company (Oneida) is a wholly-owned coal-mining subsidiary whose entire output is purchased by the Company. For fuel adjustment clause purposes, since February 1, 1977 the Company has priced the coal produced by Oneida at the average production cost per ton of coal received from the Company's other affil-iated mines, rather than at Oneida's higher cost.

The cost of Oneida coal not recovered through application of the fuel adjustment clauses amounted to approximately

$9.3 million ($4.3 million net of income taxes) in 1977. The Company estimates that this method of pricing Oneida coal for the fuel adjustment clauses will continue to adversely affect net income by approximately

$400,000 per month pending further review of the progress of mining operations in the latter part of 1978.

In 1977, the Company adopted a mining plan for Oneida which included abandonment of a section of the mine and the write-off of related develop-ment costs. This write-offreduced the Company's net income by approximately $6.6 million in 1977.

For further information regarding

Oneida, see "The Year in Review - Mining Operations" on page 5.

5 Sale of 10% of Susquehanna Plant In January

1978, pursuant to agreements entered into in March 1977, the Company sold to Allegheny Electric Cooperative, Inc. (Allegheny) a 10% undivided ownership in the Susquehanna nuclear plant currently under construction.

Through December 31, 1977, Allegheny made deposits aggregating approximately

$84 million representing amounts due under the agreements.

The Company's 1977 construction and nuclear fuel expenditures shown on the Statement of Changes in Financial Position include 100% of the expenditures applicable to the Susquehanna plant. Approximately $23 million of Allegheny's deposits represented its share of the 1977 expenditures.

6. Lines of Credit and Short-Term Qebt In order to provide loans for interim financing and provide back-up financing capability for commercial paper notes, the Company had lines of credit with banks aggregating

$200 million at December 31, 1977. Use of these lines of credit was restricted to the extent of $4 millionby loans to two subsidiary companies. Of the Company's lines of

credit,

$ 148 million was maintained by compensating bank balance requirements and $52 million by payment of commitment fees.

Compensating bank balance requirements (not legally restricted as to withdrawal) are on an average annual basis which approximated

$ 13.3 million at December 31, 1977.

Commitment fees on an annualized basis approximated

$0.3 million at December 31, 1977.

Commercial paper notes are generally sold for periods ranging from 30 to 60 days. The weighted average discount rate applicable to such notes outstanding at December 31, 1977 and 1976 was 6.5% and 4.7%, respectively.

Bank borrowings are generally for one year and may be prepaid at any time without penalty. No bank loans were outstanding at December 31, 1977 or December 31, 1976.

The maximum aggregate amount of short-term debt outstanding at the end of any month during 1977 was

$ 106.7 million and during 1976 was

$194.6 million with an average aggregate daily amount outstanding during these years of $79.2 million and

$ 129.6 million, respectively.

The approximate weighted average interest rate of short-term debt during 1977 was 5.7% and during 1976 was 5.5%, calculated by dividing the total 25

short-term debt interest expense for the year by the average aggregate daily amount of short-term debt outstanding during the year.

7. Capital Stock Common Stock of $582,983,000at December31, 1977 includes $686,000 cash installments received under a dividend reinvestment plan as considera-tion for 29,603 shares of Common Stock which were issued in January 1978.

Each of the following series of stock contains sinking fund provisions designed to retire the series at a redemption price of $ 100 per share:

Preferred Stock 7.40% Series....

8.00% Series....

9.24% Series (a).

Shares to be Redeemed Annually 16,000 25,000 30,000 Redemption Period 1979 - 2003 1983 - 2002 1981 - 2005 Capital stock expense represents commissions and expenses incurred in connection with the issuance and sale of capital stock. Capital stock expense applicable to the preferred and preference stock series which are to be redeemed through sinking fund provisions is amortized to Earnings Reinvested as the respective series of stock are redeemed.

The unamortized balance applicable to these series of stocks was

$3.2 million at December 31, 1977. No amortization plan is 'in effect for Capital stock expense applicable to other issues of capital stock.

8. Dividend IRestrictions The Company's charter and mortgage indentures restrict the payment of cash dividends on Common Stock under certain conditions.

Under the charter provisions, which are the more limiting, no restrictions are effective at December 31, 1977 on the payment of such dividends out of earnings reinvested. For information on a possible future restriction see Note 9

to Financial Statements.

Preference Stock

$9.25 Series (b)..

40,000 1977 - 1981

$ 11.00 Series (a).

25,000 1981 - 2000

$13.00Series(a).

12,500 1980-1999 (a) The Company has the right to redeem on each sinking fund redemption date additional shares up to the number of shares of this Series required to be redeemed annually.

(b) In January 1978, the Company redeemed 40,000 shares.

9. Hydroelectric Projects The Company operates two hydroelectric projects under licenses issued by the FERC.

Certain reserves required to be provided under the Federal Power Act have not been recorded pending approval of the amounts by the FERC. In 1977, the FERC issued a proposed rulemaking which, if adopted, would require a licensee to record these reserves by an appropriation of earnings reinvested.

The amount of earnings reinvested so appropriated would be restricted as to the payment of dividends.

The Company estimates that such reserves applicable to the years from 1946 would not exceed

$3.1 million at December 31, 1977.

1 1. Rentals and Lease Commitments Principal rental as follows:

1977 1976 1975 1974 1973 costs affecting expense were Charged To Operating Fuel Expense Inventory (a)

Thousands of Dollars

$11,023 2,349 10,502 1,761 9,477 1,276 8,911 870 7,515 942 (a) Represents rental of railroad coal cars which amounts are charged to fuel inventory and subse-quently included in fuel expense.

At December 31, 1977, the Company had long-term lease agreements which require future

10. IRIetirement Plan Obligations of the Company's Retirement Plan are currently funded through a Trust Fund. AtJune 30, 1977, the end of the Fund's most recent fiscal year, the Fund's assets at market were $ 100.3 million and at cost were $ 104.6 million. Pension costs were (millions of dollars): 1977, $ 11.3; 1976,

$9.8; 1975, $8.8; 1974, $6.7; and 1973, $6.8.

Plan amendments effective as of July 1, 1976, subject to Internal Revenue Service

approval, provided for increased

benefits, reduced em-ployee contributions and certain other minor changes to comply with the Employee Retirement Income Security Act of 1974.

Based on the Fund's assets at cost, at June 30, 1977 the actuarially computed unfunded prior service cost was $27.2 million.As of the same date the actuarially computed value of vested benefits exceeded the cost basis of the Fund's assets by

$ 17.4 million.

26

minimum rentals as follows (millions of dollars):

1978, $ 14.5; 1979, $ 13.5; 1980, $ 12.7; 1981, $11.7; 1982, $ 10.5; after 1982, $89.3. The Company also leases other property under short-term agreements with rentals currently amounting to approximately $3.3 million annually. Generally the Company's long-term leases contain renewal options and obligate the Company to pay maintenance, insurance and other related costs.

The leases do not include restrictions on any ofthe Company's other financial activities.

Certain of the Company's leases meet the capitalization criteria established by the Financial Accounting Standards Board in 1977 which would normally require (1) that an asset and associated liability be recorded at an amount equal to the present value of the minimum lease payments and (2) that expense be charged with amortization of the lease asset and interest expense on the liability.

However, in accordance with the manner in which the Company's rates have been established by the PUC, the Company accounts for such leases as operating leases and appropriate accounts have been charged with actual rental expense, and an asset and associated liabilityrelated to such leases have not been recorded.

In accordance with SEC disclosure require-ments applicable to all regulated companies subject to the rate-making process that do not record capital leases as assets with associated liabilities, the Company has computed the aggregate asset and liability balances that would have been recorded had all leases meeting the definition of a capital lease been capitalized as follows:

12. Coininitinents and Contingent Liabilities The Company estimates that about $ 1.31 billion will be required to complete construction projects in progress at the end of 1977, excluding nuclear fuel payments. Ofthis amount, approximately $ 1.05 billion is related to completion of the Company's share of two nuclear generating units at the Susquehanna power plant. The scheduled in-service dates of the Susquehanna units are 1981 for Unit No. 1 and 1982 for Unit No. 2. Expenditures forconstruction during 1978 are estimated at $475 million, including $4 million for nuclear fuel and

$27 million related to environmental protection facilities. Estimated construction expenditures for the three years 1978 - 1980 are approximately

$ 1.54 billion, including $ 100 million for nuclear fuel and

$ 150 million related to environmental protection facilities.

Certain of the Company's facilities are not in compliance with present environmental laws and regulations. In order to comply with such laws and regulations, the Company willbe required to make substantial capital expenditures.

In addition, the Company may be subject to certain penalties not now determinable but which could be material in amount.

In connection with providing for its future bituminous coal

supply, the Company at December 31, 1977 had guaranteed capital and other obligations of certain coal suppliers (including owned coal companies) aggregating

$ 160.8 million.

Capital lease asset........

Accumulated amortization Current obligations under capital leases.............

Noncurrent obligations under capital leases.............

December 31 1977 1976 Thousands of Dollars

$ 104,291 78,713

~(37.855 (3~3.320

$ 66,436 45,393 8 173 7 543 61,333 40,445

$ 69,506 47,988 The excess of the above liability balances over the related asset balances represents the difference between (1) the amortization and interest expense that would have been recorded since inception of the leases and (2) the actual rentals recorded. The difference in the amount of such amortization and interest expense compared to actual rentals re-corded is not material for each of the years 1973-1977.

0 3. IReclassif ication Approximately

$9.9 million representing an accrual at December 31, 1976 for current liabilities related to construction of facilities has been reclassified on the Balance Sheet from Accounts payable to Other current liabilities to make the item comparable to the classification in 1977.

04. Heplaceinent Cost Qata (Unaudited)

The impact of the rate of inflationexperiencedin recent years has resulted in replacement costs of productive capacity that are significantly greater than the historical costs of such assets reported in the Company's financial statements.

In compli-ance with reporting requirements of the SEC, esti-mated replacement cost information is disclosed in the Company's annual report to the SEC on Form 10-K.

27

05. Summary of Quarterly Results of Operations (Unaudited)

Quarter Ended Operating Revenues Earnings Operating Net Applicable to Income Income Common Stock Thousands of Dollars Earnings Per Share of Common Stock (a)

$47,017 43,912 48,913 44,469

$31,066 26,498 25,888 29,318 17,781 13,603 21,282 26,077 1977 March 31...................

$208,894

$40,114

$ 1.00 June 30...................

173,299 35,547 0.79 September 30 (b)...........

174,067 34,936 0.75 December 31...............

188,471 39,166 0.84 1976 March 31...................

166,269 34,360 25,189 0.67 June 30..

149,281 28,006 21,281 0.46 September 30...............

149,580 35,241 30,423 0.70 December 31 (c)............

179,017 40,727 35,218 0.85 (a) Based on the average number of shares outstanding during the quarter.

(b) Results for the third quarter of 1977 include a $6.6 million(net of income taxes) loss of a subsidiary company which was recorded by the Company in accordance with equity accounting. See Note 4 to Financial Statements.

(c) Results for the fourth quarter of 1976 include a reduction in income tax expense of $2.4 milliondue to increased tax depreciation applicable to Martins Creek Unit No. 4 which began test operation in December 1976 and a $2.1 million charge to expense (net of income taxes) to adjust the amortization of deferred fuel costs for the years 1970-1975 to the actual fuel adjustment revenues billed during those years.

28

Ol4MQ<> II80<li'8 Oop<IIE)IIOc(m Naskins I Sells Certified Public Accountants Two Broadway New York 10004 The Shareowners and Board of Directors of Pennsylvania Power 8 Light Company:

We have examined the balance sheets of Pennsylvania Power 8 Light Company as of December 31, 1977 and 1976 and the related statements of income, earnings reinvested, and changes in financial position for each of the fiveyears in the period ended December 31, 1977.

Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing pro-cedures as we considered necessary in the circumstances.

In our opinion, such financial statements present fairly the financial position of the Company at December 31, 1977 and 1976 and the results of its operations and changes in its financial position for each of the five years in the period ended December 31, 1977, in con-formity with generally accepted accounting principles consistently applied during the period except for the change in 1974, with which we concur, in the method of accounting for recoverable fuel costs as described in Note 3 of the Notes to Financial Statements.

February 3, 1978 IFiscal Agents TRANSFER AGENTS FOR PREFERRED, PREFERENCE AND COMMON STOCK Industrial Valley Bank and Trust Company 634 Hamilton Mall Allentown, Pennsylvania 18101 Irving Trust Company One Wall Street New York, New York-10015 Pennsylvania Power & Light Company Two North Ninth Street Allentown, Pennsylvania 18101 REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank of Allentown Hamilton Mall at Seventh Allentown, Pennsylvania 18101 Morgan Guaranty Trust Company of New York 23 Wall Street New York, New York-10015 t

DIVIDENDDISBURSING OFFICE AND DIVIDENDREINVESTMENT PLAN AGENT Treasurer Pennsylvania Power & Light Company Two North Ninth Street Allentown, Pennsylvania 18101 Securities l.isted on Exchanges NEW YORK STOCK EXCHANGE First Mortgage Bonds, 10%% Series due 1982 4~8% Preferred Stock (Code: PPLPRB) 4.40% Series Preferred Stock Code: PPLPRA) 8.60% Series Preferred Stock Code: PPLPRG) 9.24% Series Preferred Stock Code: PPLPRM)

Preference Stock, $8.00 Series (Code: PPLPRJ)

Preference Stock, $8.40 Series (Code: PPLPRH)

Preference Stock, $8.70 Series (Code: PPLPRI)

Preference Stock, $ 11.00 Series (Code: PPLPRL)

Preference Stock, $13.00 Series (Code: PPLPRK)

Common Stock (Code: PPL)

PHILADELPHIASTOCK EXCHANGE 4~8% Preferred Stock 3.35% Series Preferred Stock 4.40% Series Preferred Stock 4.60% Series Preferred Stock 8.60% Series Preferred Stock 9% Series Preferred Stock 9.24% Series Preferred Stock Preference Stock, $8.00 Series Preference Stock, $8.40 Series Preference Stock, $8.70 Series Preference Stock, $ 11.00 Series Preference Stock, $ 13.00 Series Common Stock 29

mAellle(IIIC@( SL(I)mmm)IfP Financial Data Capital provided by investors thousands (a) (b).

Return on average capital provided by investors-% (c)

Return on average'common equity% (c).....

Fixed cost rate'on long-term debt and preferred and preference stock% (a)

Common stock data Book value (a) (c)

Dividend payout rate% (c)................

Dividend yield-% (d)

Price earnings ratio (c) (d)

Times interest earned before income taxes (c).

Number of shareowners preferred, preference and common (a)................

Sales Data Electric customers (a)

Electric energy sales millions of kwh Residential Commercial Industrial Other Sources of energy soldmillions of kwh Generated Coal-fired steam stations............

Oil-fired steam station (e)

Combustion turbines and diesels Hydroelectric stations Power purchases Interchange power sales Company uses and line losses..............

Total electric energy sales..............

Average annual residential kwh use...........

Average price per kwh forall customers cents..

Generation Data Generating capability-thousands of kw (a).....

Winter peak demand thousands of kw (f)......

Generation by fuel sources-%

Coal Oil (e)

Hydro Steam station availability%

Coal-fired Oil-fired (e)

Steam station utilization%

Coal-fired Oil-fired (e)

Fuel costcents per kwh 1977

$2,630,534 9.84 14.01 8.01

$24.58 57 8.17 6.86 3.35 195,229 954,613 7,539 5,211 7,697 754 21,201 26,299 6,271 115 735 33,420 1,977 (12,433)

(1,763) 21,201 9,063 3.45 6,546 4,431 78.7 19.1 2.2 77.8 80.3 72.6 46.5 1.35 1976 2,406,136 8.83 11.61 7.91 23.45 68 8.61 7.80 2.62 184,841 936,219 7,267 4,874 7,481 732 20,354 25,751 1,947 40 809 28,547 2,126 (8,358)

(1,961) 20,354 8,931 3.10 5,717 4,514 90.2 7.0 2.8 78.1 68.8 70.6 26.4 1.17 1975 2,100,003 8.76 12.52 7.76 23.17 63 9.52 6.59 2.80 171,766 917,920 6,818 4,575 7,020 700 19,113 25,384 1,149 84 859 27,476 2,241

'8,757)

(1,847) 19,1 13 8,528 2.78 5,717 4,122 92.4 4.5 3.1 79.0 75.4 70.1 31.4 1.04 1974 1,828,888 8.49 12.65 6.82 22.91 62 9.76 6.30 2.92 154;126 902,148 6,494 4,275 7,170 1,024 18,963 24,186 247 772 25,205 1,570 (6,079)

(1,733) 18,963 8,287 2.44 4,901 3,772 96.0 1.0 3.0 72.3 66.7 0.88 1973 1,533,861 7.90 11.89 6.17 22.51 64 7.47 8.52 3.15 142,235 886,378 6,324 4,262 6,881 1,398 18,865 24,782

%86 25,871 1,968 (7,237)

(1,737) 18,865 8,253 2.00 4,903 3,662 95.8 1.1 3.1 80.6 71.6 0.50 Note: Statistics include korshey Electric Company since January 1, 1977.

(a) Year-end.

(b) includes short-and long.term debt, preferred and preference stock and common equity.

(c) Reflects retroactive allocation to prior years of Nonrecurring Credit recorded in 1974 related to a chango In accounting for fuel costs.

(d) eased on average of monthwnd market prices.

(e) One oil-fired steam unit began commercial operation in 1975 and a second unit began commercial operation in March 1977.

(f) Winter peak shown was reached early in subsequent year. In 1976. peak is that which would have occurred ifa So/o voltage reduction had not been in effect.

Actual 1976 peak was 4,425,000 kilowatts.

30

QG((iiei78(t.(f.lly Dol)~HI(t (ll)die Zi)t)dl Rile(fk(t.l

~ %If'(lett'g 'vtoo((I'D()Q N(the MI(i'Bl)ss Reported Market PriceDollars per Share Quarterly Dividends Declared 1st Quarter High Low 2nd Quarter High Low 3rd Quarter High Low 4th Quarter High Low 1977 Common Stock..........

Preferred Stock 4'h%

Series 3.35%

44p 46p 7.40% (b)............

8.00% (b) 86P 9.00%

9.24%

Preference Stock

$8.00..................

$8.40..................

$8.70..................

$9.25 (b)

$11.00.................

$13.00.................

$0.48 (a) 1.125 0.8375 1.10 1.15 1.85 2.00 (c) 2.15 2.25 2.31 2.00 2.10 2.175 2.3125 2.75 3.25 22th 20'6 517~

24'/s 21%

55'h 52 25'/s 22'ls 56 50'h 38 ye 36s/

55 51 53 52th 39 37'ls 54 51 53'/s 52'ls 40'h 39 55 52%a 55M 53 102 97th 102 99'/s 103 99 102 99 102 100'h 108 101 108 104'h 108'/s 105 109 105 116 111 114 110 116 111 133'/4 128 132 128'/4 134'h 127 92'h 87th 93th 89 96 92'h 97 93 97'h 92'/s 100 97 99'h 95'h 102 92 102%

99 24'h 22'/4 55th 51'h 39'h 37%

54'/4 50'/4 55'h 52'ls 102'h 99'/i 103'h 101'h 108rh 105th 1

94'h 89r/s 99 95 101M 97th 114 110%

130 123 1976 Common Stock Preferred Stock 4th Series 3.35%

4.40%

46p 7.40% (b) 86P 9 P0%

9.24%

Preference Stock

$8.00...........

$8.40...........

$8.70...........

$9.25(b)

$ 11.00..........

$ 13.00..........

$0.45 1.125 0.8375 1.10 1.15 1.85 2.15 2.25 (d) 2.00 2.10 2.175 2.3125 2.75 3.25 21s/s 19'/s 20/4 19th 21 /4 20 22'h 20s/s 53 47 51'h 47'/s 52'/s 48 54'h 50'h 37'h 34.

36 33 36r/s 34 38 36'h 51'h 44r/s 50 46 51/4 47'ls 53'h 48 50 48'h 48th 46 49'/s 47'h 52 49 98 87 95 90 98 92'/4 99th 95 97 92 96 89 97'/s 94 101 98 104'h 99'/i 106th 103 86 77 87 81%

88 83'h 90'h 82'/4 89 80'/4 89 82'h 92 87'h 95'h 91 94 82, 94 87 /4 94 88 99 91'h 111'h 102'h 112 107 112%

109'/4 114th 109'h 125'h 117'h 124 119 130 120'h 130'h 125 The principal trading markot for all classes of stock is the New York Stock Exchange except for the 3.35%. 4.60'/o and 9.00'/o Series Preferred Stocks which are listed on the Philadelphia Stock Exchange but are traded primarily over-tho-counter. Price ranges for the 3.35'/o, 4.60% and 9.00% Series Preferred Stocks are based on the best available high and low bid prices during the periods and should be viewed as reasonable approximations.

(a) First quarter dividend was $0.45.

(b) Stock was a private placement and is not publicly traded.

(c) Stock issued October 1977. fourth quarter dividend only.

(d) Stock issued June 1976. the third quarter dividend was $2.67 and the fourth quarter dividend was $2.31.

31

OOPP jest fg!Ij'@

JACK K. BUSBY, Chairman of the Board and Chlel Executive Oflicer ROBERT K. CAMPBELL,President ROBERT R. FORTUNE, Execulive Vice President, Financial

'JOHN T. KAUFFMAN,Vice President, System Power 8 Engineering EMMET M. MOLLOY, Vice President, Human Resource

& Development LEON L. NONEMAKER, Vice President, Division Operations CHESTER R. COLLYER, Treasurer NORMAN W. CURTIS, Vice President, Engineering & Construction JOSEPH L. DONNELLY, Vice President, Finance LOUISE A. EARP, Assistant Secretary CHARLES E. FUQUA, Vice President, Susquehanna Division CHARLES J. GREEN, Vice President, Harrisburg Division RICHARD H. LICHTENWALNER,Vice President, Information Services CARL R. MAIO, Vice President, Lehigh Division

'JAMES J. McBREARTY, Vice President, Northeast Division EDWARD M. NAGEL, Vice President, General Counsel snd Secretary

'HERBERT D. NASH JR., Vice President, Consumer & Community Services EDWIN H. SEIDLER, Vice President, Distribution BRENT S. SHUNK, Vice President, Lancaster Division JEAN A. SMOLICK,Assistant Secretary DONALDJ. TREGO, Assistant Treasurer GEORGE F. VANDERSLICE, Vice President and Comptroller PAULINE L. VETOVITZ,Assistant Secretary HELEN J. WOLFER, Assistant Secretary Corporate Management Committee: Robert K. CampboII, chalrmom Messrs.

Busby, Fortune, Kauffman, Molioy,NonomakorandFrodKornot Jr.,managor-Corporate Administration serving as the commiuoo's executive secretary.

The oxocufivo organization chart of the Company is Included in the PP&L Profiio.

'Tho following management changes have been announced and will be effective June 1, 1978. John T. Kauffman will become oxocuilvo vice president-Operations.

Ho willbe succeeded as vlco president-System Power

& Engineering by Hsrfoy L. Collins, manager-Sysfom Planning and Inter-connection Affairs. James J. McBroarfy willretire June I atter 40 years with PP8 L. At that limo Iho forgo Northeast Division willbe reorganized into Iwo divisions. Herbert D. Nash Jr. willbecome vice prosldont of the new Central Division and John E. Rolh, division oporaiing manager-scranfon,will bocomo vice president of the new Northern Division. Mr. Nash willbe succeeded as vice president-Consumer 8 Community Sorvicos by Merlin F. Horfzog, director-Systems and Computer Services.

JACK K. BUSBY, Allentown Chairman of the Board snd Chief Executive Officer ROBERT K. CAMPBELL, Allentown President RALPH R. CRANMER, Williamsport Member of Board ol Directors-Grit Publishing Company EDGAR L. DESSEN, Hazleton Physician-Radiologist ROBERT R. FORTUNE, Allentown Executive Vice President, Financial HARRY A. JENSEN, Lancaster President snd Chief Executive Oificer, Armstrong Cork Company Manufacturer ol interior furnishings and specialty products VIRGINIAH. KNAUER, Washington, D.C.

President, Virginia Knauer and Associates, inc.

Consumer consultants W. DEMING LEWIS, Bethlehem President of Lehlgh University JOHN A. NOBLE, Scranton Chairman of the Board snd Chief Executive Oflicer of Clelsnd Simpson Company Department stores RUTH PATRICK, Philadelphia Chief Curator of the Limnology Department, Academy of Natural Sciences NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chief Economist of Mellon Bank, N.A.

JOSEPH T. SIMPSON, Harrisburg Chairman of the Board of Harsco Corporation Diversified manufacturer of fabricated metal products CHARLES H. WATTS II, Vienna, Va.

Educational snd business consultant Former President of Bucknell University Executive Committee: Jack K. Busby, chalrmare Messrs. Campbell, Cranmor, Jensen and Simpson.

Audit Commluoo: Harry A. Jensen, chalrmaro Mrs. Knauor, Mossrs. Noble, Robertson and Watts.

Compensation Committee: Norman Robertson, chairman; Dr. Dosson, and Messrs. Nobio and Simpson.

Sofocfion Committee: W. Doming Lewis, chairman; Dr. Patrick and Messrs.

Cranmor and Simpson.

Corporate Responsibility Committee: Ralph R. Cranmor, chairman; Drs.

Dosson, Lowis and Patrick.

The Company files Form 10-K annually with the Securities and Exchange Commission. Form 10-K is composed of this Annual Report to sharoownors and additional Information concerning the Company and Its operations. This additional information will be availabio without charge after April 1, 1978, by writing to Pennsylvania Power & Light Company, Two North Ninth Street, Allentown, Pa. 18101, altenllom Mr. George I. Klino, Investor Services Manager.

32