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)

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Lnj ij Qo PQ P tj Qo t/Q tIS 1977 1976 Customers, at End of Period ............... 955 Thousand 936 Thousand Kilowatt-hours of Electricity Generated 33.4 Billion 28.5 Billion Operating Revenues $ 745 Million $ 644 Million Capital Provided by Investors, at End of Period $ 2.6 Billion $ 2.4 Billion Return on Average Capital Provided by Investors . 9 84 8.83%

Fixed Cost Rate of Long-Term Debt and Preferred and Preference Stock, at End of Period ......... 8.01% 7.91%

Common Stock Data Return on Average Common Equity ...... 14.01% 11.61%

Earnings Per Share $ 3.37 $ 2.68 Dividends Declared Per Share ........... $ 1.89 $ 1.80 Times Interest Earned Before Income Taxes . 3.35 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: A large 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 paired by the inability/unwilling- thousand cubic feet for new do-the third time in fiveyears that an ness to curb these rising imports. In mestic natural gas. All of this interruption in the supply of a 1977 the cost of imported oil was seems absurd.

primary fuel has shaken up the $ 45 billion. This caused a trade bal- There are strongly-held opinions nation's economy. Just as was the ance deficit of about $ 30billion- that there is only a limited supply case with the oil embargo of 1973- the worst in the nation's history. of natural gas, and this supply, 74 and last winter's natural gas The 8.7 million barrels a day of therefore, cannot be changed by shortages, it is again being petroleum products we now import deregulation. Equally strong opin-demonstrated that: are more than fivetimes larger than ions assert to the contrary that the o our society has become so de- the estimated 1980 oil production higher prices of deregulated gas pendent on the availability of from Alaska. will encourage conservation and complex energy supply systems Contrast the progress that has development of large additional that we cannot function without been made in exploring and devel- supplies. The logic of the situation them, oping offshore oil along the Atlan- suggests that this stalemate should

~ the problems created by insuf- tic coastline with what has been be terminated forthwith by total ficient energy are more costly, accomplished in the North Sea deregulation of new natural gas. If more difficultand less bearable region by oil-dependent nations of additional supplies are not ob-than the problems caused by the Europe. The scoreboard reads tained, nothing is gained and higher energy prices that are so North Sea production: 1.4 million nothing lost. If, on the other hand, frequently complained about. barrels of oil a day and increasing, new supplies are forthcoming, this These three energy interruptions United States: 0. Just six years ago would take some of the pressure are merely indicators of the serious North Sea oil production was off oil and give many hard-pressed energy problems confronting us. nonexistent. users the welcome opportunity to In comparison with most other buy the additional natural gas industrialized nations, the United Natural Gas Domestic pro- they seek.

States is still floundering rather duction of natural gas leveled off in than setting its energy affairs 1973 and has been declining since in order. A quick look at where we then. We are now down to about 13 stand with respect to oil, natural years of supply at present annual gas, coal and nuclear power ex- consumption rates. Shrinking sup-poses the absence of any coherent plies of natural gas have shifted national energy strategy more energy demands to oil and have, thereby, served to worsen the OilDomestic oil production in oil import problem.

the "Lower 48" continues to de- National policy persists in pric-cline. Oil imports continue to rise. ing Interstate natural gas at much Indeed, they have been rising less than the going market price for faster since the oil embargo of intrastate natural gas, and also at 1973-74 than ever before. In 1977 less than the world market price of imported petroleum products oil (on a comparable Btu basis),

reached an all-time high. They even though natural gas is clearly I

provided for 47 percent of our the more valuable form of energy. II I petroleum-related needs and National policy also authorizes im-about 25 percent of our total portation of foreign natural gas (in j

energy supply. liquefied form) at about $ 3 per The international value of our thousand cubic feet, but still currency is being seriously im- proposes a ceiling of $ 1.75 per Busby Campbell

~ i Coal Coal is stated again and if and when it is needed, it will be The only way that these pres-again to be our greatest energy re- available. sures can be relieved is for con-source. However, as the familiar If one were preparing a recipe for sumers to decide that their interests saying goes, there are only two energy disaster for the United will best be served by long-term problems with coal mining it and States, wouldn't it be just about thinking on energy rather than burning it. what we are now doing? Increasing short-term. This is whatcitizens While the problems inherent in our reliance on foreign oil... block- of other countries have done when the use of coal have been with us ing off economic incentives forde- faced with the energy price/supply for a long time, recent mining and veloping new supplies of natural dilemma.

air quality legislation combined gas... inhibiting the expanded use We have been spoiled by having with tighter environmental en- of coal... putting nuclearpowerde- lived, for a while, in a period when forcement regulations and prac- velopment on the back burner. We we could have low-cost energy and tices are making these traditional would beinmuchbettershapeif we plenty of it. Now we are forced to difficulties more complex and were doing just the oppositeof what make a choice are we willingto harder to handle... and much we are doing. pay higher prices for energy or will more costly. A burdensome add- We can no longerafford to debate we endure the consequences of on is the expensive retrofit require- whether or not we have an energy insufficient supply'I ments being imposed on older coal supply problem that requiresatten- Our society can cope with power plants. Despite the many tion now. When a top executive of a human problems arising fromin-pronouncements on the subject, large integrated oil company pub- adequate income, including inabil-there seems to be little real support licly states his company's ex- ity to purchase basic energy re-in policy or regulation for expand- panded commitment to non-oil quirements if we have energy ing the use of coal. This is especially diversification because "we are in a available. Without adequate true with respect to Eastern coal. business that is dying," we should energy, however, our society will Nuclear Power At a time take note. not have the productive capability when our three primary fossil fuels The probabilities of a prolonged necessary to meet human needs.

are all in trouble for one reason or and severe energy crunch are in-another, one would expect a cli- creasing. That it may not occur for mate of active support for nuclear a few years is no reason to be re- Respectfully submitted, power. But this is not the case. laxed. It takes10to15 years to make A patchwork quilt of changing significant changes in our energy standards and requirements has use patterns andin the natureofour produced an atmosphere of doubt energy supply mix. In terms of this Jack K. Busby, Chairman and uncertainty. Today the nuclear time frame, we have already en-industry is in disarray, wondering tered a high-risk era of energy whether it can survive. brinksmanship.

At the same time the administra- Why then are we at a standstill in Robert K. Campbell, President tion in Washington pushes hard to energy decision-making'F Inour terminate research programs in- opinion, the basic hangup is the fact tended to expand the nuclear en- that consumer complaints about March 1, 1978 ergy option by development of a high energy costs are placing legis-demonstration breeder reactor. lators and regulators under heavy Perhaps it will not be necessary to pressure to disregard the need for make full-scale commercial use of implementing a long-term energy the breeder in this century. Yet it supply strategy and to focus, in-seems foolhardy not to proceed stead, on providing here-and-now with its development now so that, price-protection tranquilizers.

~ Vlnl($ 'FSKP'liil IRK'VIJSM PP&L's 1977 earnings were $ 3.37 IFIIIBACIIIQ building the Susquehanna nuclear per share of common stock up PP&L's1977securitysales plant and related facilities.

69 cents from a year earlier. The im- totaled about $ 238million. This We expect our financing needs provement over1976came princi- figure is somewhat lower than the willincrease during 1978, and we pally from substantially higher 1976 level of $ 308 million, reflecting anticipate securitysales willbe sales of power to otherutilities, more moderate construction approximately $ 270 million.

primarily Pennsylvania-New expenditures for1977and pay- Acceptance of the Company's Jersey-Maryland (P JM) power- ments of $ 84 million, including a dividend reinvestment plan con-pool companies. catch-up paymentof$ 65million, by tinues to be gratifying. During 1977 The increased kilowatt-hour Allegheny ElectricCooperativefor more than 812,000 shares of com-sales to other utilities at higher its10percent share of thecost of prices were made possible by our comparatively favorable fuel costs, the excellent performance of our 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 of doing business.

We were thus able to postpone seeking a rate increase we would otherwise have had to ask for during 1977. glut Our 1977 earnings, of course, were also helped by a full year' 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 of the earnings reinvestedin PP&Lbythe owners of our common stock over the previous three years. Including sales of newshares, the total com-mon shareowner investment in- L4g creased by $ 335 million or 68 percent during this period. '

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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 capacity additions. So, even if Susquehanna plan. Under the plan, dividends growth should turn out to be lower Nuclear Project from all classes of PP&Lstock are than expected, it makes sense, reinvested in our common stock considering all the uncertainties, Construction oftwo 1,050,000-with no brokerage fees and at a 5 that we should be proceeding with kilowatt nuclear generating units percent discount from the current planning, designing and building near Berwick passed the halfway market price. new capacity to be available by the point in 1977. Unit 1, was 60 percent late 1980s. complete at year-end and Unit 2, At the end of 1977 more than was 40 percent complete.

30,000 shareowners were partici-Because of required design pating, and $ 18.2million of com- Construction changes, delays in delivery of mate-mon stock was issued through the plan during theyear Budget rial and equipment, scarcityof

$ 10.1million through reinvested dividends and The Company's estimated 1978 labor and other factors, we have

$ 8.1 million in optional cash pay-construction budget amounts to nearly exhausted schedule con-ments and employee payroll $ 475 million (including $ 4 million tingencies built into the project. As deductions. This accounted for 21 for nuclear fuel) up from the $ 357 a result, we have revised the esti-percent of the money we raisedby million expended in 1977 (includ- mated in-service date of Unit 1 from selling common stock. ing $ 16 million for nuclear fuel). November 1980 to February1981 An additional $ 23 million was ex- to recognize the potential for future pended in 1977 on the Susque- delays even though the fuel load IEnergy Use hanna plant for which deposits date has not been changed. The Moderate were received from Allegheny estimated in-service date for Unit 2 PP &L's customers used 2.8 Electric Cooperative. remains 1982.

percent more electricity in 1977 Almost $ 330 million of the 1978 The mostvisibleadditiontothe than theydidin1976. (PP&Lac- amount is budgeted for construc- project isthe540-foot-high con-quired Hershey Electric Co. on Dec. 31, 1976. If the 269 million kilo-watt hours used by Hershey tion costs at the Susquehanna plant. During the next five years, PP&L expects to spend nearly $ 2.3 crete cooling tower under con-struction for Unit1. When complete, the $ 30-million tower willcontain

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customers were included for1977, billion for construction of electric 35,000cubic yards of concrete and the growthrateofelectricalusage service facilities.

would be 4.2percent). Growth for 1977 was lower than the1976figure of 6.5 percent primarily for two reasons the weather and the economy. Even though the cold spell in early 1977 caused a lot of economic and personal hardships, the weather for all 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. If the growth rate turns out to t, iti: itIII!i,'.'"~

be in line with our projections, we should be able to meet our cus-tomers'lectrical requirements up to about 1990 with our present generating plants, plus the Sus-quehanna nuclear plant, which will come on line in the early1980s. But, with the lengthening lead times for power plant approvals and con-struction we are practically at 1990 Work continues around the clock on the Susquehanna nuclear units being today in terms of new generating built near Bervvick by PAL and Allegheny Electric Cooperative.

will be one of the tallest cooling The mine never reached pro- We also took a hard look at towers in the world. jected production levels. This, and Oneida's operations to see what Negotiations were completed other problems, resulted in un- could be done to bring coal costs and contracts signed in March 1977 usually high costs for the Oneida down. The following actions were for Allegheny Electric Cooperative coal. We notified North American taken in the latter part of 1977:

to become a10percent owner ofthe Coal Co., Oneida's parent com- ~ Abandoned asection of the mine Susquehanna nuclear plant. Alle- pany, in January1976thatwewere where minimal coal seamheight gheny supplies electric power to 14 taking over Oneida under provi- and poorroof conditions resulted rural distribution cooperatives sions of the contract. The takeover in extremely difficultandex-serving 150,000customers in Penn- was contestedin the courts until a pensive mining.

sylvania and New Jersey. Alle- February 1977 settlement gave ~ Wrote off $ 9.1 million of unamor-gheny paid its share of the Susque- us full control of Oneida. tized development costs relating hanna investment up to March and Because of thespecial situation, principally to the abandoned is making additional payments as the Companydecidedto price area. The effect was the reduc-work progresses. After all regula- Oneida coal, for purposes of the tion in PP&L's 1977net income of tory approvals had been received, fuel adjustment charges ourcus- $ 6.6 million or 20cents per share the transaction was finalized on tomers pay, at the average per ton of common stock.

Jan. 11, 1978. cost of coal produced at our other ~ Moved ahead with mining in sec-mines rather than at Oneida's tions of the mine where condi-tuilSH'CIJÃIG CII'$82 highercost. ThecostofOneida tions are more favorable.

VIIIIII' coal not recovered through the fuel clause amounted to $ 9.3mil- We have established rigid sched-The oil-fired 820,000-kilowatt lion, reducing the Company's1977 ules for checking progress on our Unit 4at the Company's Martins net income by $ 4.3 million or13 longer-range plans for Oneida. If Creek plant, on the Delaware River cents per share. adverse mining conditions prevent above Easton, workedexception-ally well during its testing and break-in stage in late1976and early 1977. It was a big help in meeting customer demand during the cold January weather. Then, on Feb.8, 1977, a fuel-oil leak caused a fire which shut down the unit.

After extensive cleanup, repairs and further testing, the unit was 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.

L'Jllnilng Gyes'tIIIHOIIIIa After nearlyayearoflitigation, PP&L, through its wholly-owned subsidiary, Pennsylvania Mines Corp., gained full control 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 of the mine's coal going to PP&L. In turn, PP&L guaranteed Oneida's With the addition of the oil-fired Unit 4 our Martins Creek plant became the financial obligations. largest generating station in the PP&L system.

us from reaching our goals, eco- dischargewateratour Brunner COIIIISulIIlelI' Hairs nomics may dictate that mining be Island plant.Sincefishgrowfaster The 1976 first-of-its-kind utility/

terminated and additional losses be in warmer water we are helping to consumer conference co-spon-written off. test thecommercial feasibilityof sored by PP&Land the national The Company in October utilizing low-grade heat energy Conference of Consumer Organi-strengthened the managementof otherwise wasted after it isdis- zations (COCO) was a big step in its mining organization by naming a charged from a power plant. expanding communications be-full-time president for Penn- Various other technical projects tween the Company and consumer sylvania Mines Corp., which oper- such asgenerator vibration anal- advocates.

ates PP8 L mining companies. The ysis, electrostatic precipitator effi- PP8 L continued taking such new on-the-scene executive is ciency improvementsandfallen steps in1977. Throughouttheyear Richard Herron, who came to PMC conductor studies were begun on a our consumeraffairs people have with nearly 30 years of extensive Company level. Our research beenmeeting withsmallgroupsof mining experienceasanexecutive budget for 1978 totals more than consumers, along with elected offi-of a major coal company. $ 3.4 million, about two thirds of cials and regulators. These meet-which will be used for our continu- ings have includedissue-oriented IReeetHII Clh ing support of industry-wide consumer-utility workshops in The goal of the research projects projects. each of our five divisions. Wecon-in which PP8 Lparticipatescon- ducted several of the workshops on tinues to be the investigation of new our own while some were co-spon-ways to provideefficientelectric sored with organizationssuchas service at the lowest practicable price.

Some of our research projects reflect the changing complexion of energy use. In 1977, wecom-pleted atwo-yearstudywithLehigh University of the incidence of windy days and sunny days in eastern Pennsylvania knowledge needed when considering the practicability of wind turbines or solar energy ES 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 fe A

feet high. The magnesium alloy rotor blades willbe 45 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-iar with wind-turbine technology as well as a chance to study problems associated with tying these non-traditional generators into our transmission/distribution system.

This is the firstsuch generator built by a Pennsylvania utility.

A cooperative "fish farming" pro- The Company is building an experimental wind turbine similar to the one ject was begun with a food proc- shown here, which was built by a PP&L customer near Allentown. The essing company in 1977. This pro- Company has agreed to purchase from the owner any of the small unit's ject utilizes the waste heat in the excess generation.

the Pennsylvania Consumer Coun- KIIIIeit'gy the owners were provided with spe-cil, the Better Business Bureau, the COIIIIGSIPUSRIIle cific recommendations on measures American Association of University they should take to reduce energy Women, social service agencies Although it was astrugglefor use. Follow-up calls indicate that and local chaptersof the Penn- many people to handle the problems over 60 percent of those surveyed sylvania League of Women Voters. of the extreme cold weather of the have put our recommendations to From these workshops have winter of1976-77, theexperiencedid use.

grown more permanent consumer make many consumers more energy conscious. Throughout theyear our residen-panels which are providing oppor- tial consultants have encouraged tunities for continuing feedback to Many homeowners are now look- builders and developers to use the Company of consumer issues. ing for ways to tighten up their higher levels of insulation fornew homes with added storm windows, home construction. Recommenda-insulation and other conservation tions include use of polystyrene CBIIZen ACflyilee measures. The Company iscon-OIIII P(enC SIIRIIIIIIttji tinuing to aid consumers in this sheathing insulation, in addition to the widelyused fiberglass, to provide After the success of a smaller- effort. better wall insulation and to reduce scale citizen advisory group which For ownersof existing homeswe air infiltration.

helped PP&Lchoosethesitefora offered a home survey tosaveen- Insulation workshops were also substation/transmission line pro- ergy. Company representatives conducted throughout our service ject, the Company invited public made more than 3,400 surveys at the area to demonstrate howhome-participationin anewapproachto request of customers. In each case, power plant siting.

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

Monthly meetings 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 from siting 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&L has been Robert Nowak (right), a PP&L residential consultant, discusses the energy placing on environmental, land use conservation merits of super-thick insulation with a Hazfeton-area and social aspects of plant siting. housing contractor.

Chas.E. Oakes, former PP8 L 0

owners may reduceenergyusewith On March 1, Virginia Knauerwas relatively simple measures such as named a directorof the Company. president and chairman of the adding attic insulation or wrapping She was former special assistant for board, died at his home in Allen-electric water heaters with fiberglass consumer affairs to the president of town on June 5. A nationally known insulation. the United States. Prior to her figure in the electric utilitybusiness Our efforts are also continuing duties in the White House, Mrs. for almost three decades,Oakes with our industrial and commercial Knauer was director of the Penn- waselected PP8 L president in customers. By late 1977, the Com- sylvania Bureau of Consumer Pro- 1945. He became chairman in1957 tection, the only woman in the and continued as chief executive pany had helped organize and train more than 1,000energy manage- country at that time to actually officer. He resigned as an employee ment teams among these cus- administer such a bureau. of the Company in1963, continuing tomers. Award programs to Brooke Hartman, executive vice as adirectorand chairman ofthe recognize outstanding energy president-Operations and a direc- board until his retirement in 1967.

management accomplishments tor of the Company, retired in were also continued through 1977. May after 47 years with PP8 L.

A two-day energy design forum for 200architects and design engi-neers, energyseminars for busi-ness executives and extensive display use atshopping centers, showsand fairsalsocontributedto the Company'sconservation awareness efforts during 1977.

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

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

V Robert Campbell, a former exec-utive of Western Electric Corp., was named PP8 Lpresidentand elected to the board as of Feb.1. Campbell V 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.

Clifford Alexander, who had been a PP8 L director since 1972, resigned from the board in Febru-ary when he was confirmedbythe U.S. Senate as secretary of the Army in the Carter administration.

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 District of Columbia. P J 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 times required for new plants, no expensive new generating capacity vigorous energy conservation energysuppliercan operateeffec- after the Susquehanna nuclear campaign for more than fiveyears. tively under the old rules. plant becomes fully operational.

The reason is simple. People can- We can no longer guarantee that There are two facets to EM/DM.

not afford to use energy like they in 10 years we'l have enough ca- Energy management isany method once did. Available sources of pacity to supply our which produces a reductionintotal fossil-fuel energy are becoming demands if there is un-customers'lectricity annu'al energy use regardless of more andmoreexpensiveand restrained energy demand growth. its effect on peak demand. Demand harder to obtain. If PP8 L were to decide today to management is any methodwhich Up to this point our efforts in en- build a new power plant, the earliest will reduce the peak, or maximum couraging energy conservation possible in-service datewouidbe load, with littleor no change in have relied on the voluntary re- around 1990. total annual energy use.

sponses of consumers responses It's the peak demand, plus ade-triggered because of the economic Alternative Yo quate reserves, which determines impact of rising energy costs, Unrestricted Growth how much generating capacity an because of theirconcern overa As an alternative to unrestricted electric system must have. There national issue of energy overuse growth, the Company in late 1977 must be enough generating capa-and, to some extent, because we adopted a policy of Energy Man- bilitytomeet thatdemand plus provided the know-howandtechni- agement and Demand Manage-cal assistance they needed to ment (EM/DM) that we hope will identify and cutdown energy stretch out the time before we need waste. Many of the actions taken by consumers required only a small expenditure or a slight change in

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their patterns of use.

Daily Load Shape We Must Go Further Kilowatts Now, though, we must go further. Load Shifted From Here It is apparent that the Company must try harder to influence the demand and energy requirements ~ t~ yo100y+

of our customers. ~y Present Load Shape

~ y~~~gO Traditionally, electric utility planning pretty much followed consumer preferences, economic conditions and commercial andin-dustrial activity. In other words, we Possible Load Shape With EM/DM figured as best we could how much ~g ~0 electricity our customers would ~~

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0 demand five or 10 years down the road and then went ahead to build facilities to meet that demand.

Now, however, becauseofshort-ages ofcapital, difficultyinfinding to Here sitesforour facilities, environ-mental constraints, problems with near-term availability of certain 8 10 12 2 4 6 8 10 12 2 4 6 8 fuels, and becauseof the long lead am pm am PP&L expects tointroduce a variety of rate structures on an experimental basis to see if consumers willshift their energy use to off-peak hours.

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some reserve capacity in case of impact on consumers to see if tion of electric service to any new equipment failure. Any way we can they willshift their energy use to off- home or business.

postpone orslowdowntheneed for peak hours. And wewanttoseeif, Although manyspecificsofthe newgenerating unitswillhavethe and how much, various pricing EM/DM program are still under long-term benefit of cost savings procedures will influence a willing- consideration,thefinal program for both PPBL and its customers. ness to conserve. These experi- will not be designed to drastically Studies indicate that a properly mental rates willhelp us determine change people's living habits. The designed EM/DM program will their acceptability by customers programs may slow down con-reduce the Company's long-term and evaluate their potential forcon- sumption of scarce resources, but construction and financing re- tributing to a reduced rate of they willnot eliminate the need for quirements. It could also mean the demand and energy growth. new fuel supply sources and fuel average costofelectricenergy will exploration.

be lower thanitwouldhavebeen More Effective Standards What we'e doing is gaining time.

without such a program even We are convinced of the need for Ifwe'e going to benefit byit, then after taking into account the in- legislation or tariff changes which we must use the time wisely to creased customer investment for would mandatethat higher, more design new and better facilities and such energy/demand management effective insulation standards be to improve energysupplysyste'ms.

"hardware" as energy storage met as a requirement forconnec- But PP&L can't do italone.Asimilar systems, timing devices or appli- commitment by stateand federal ance interlocks. government, other energysup-EM/DMwillalso have a beneficial pliers and consumers is necessary.

effect on the environment by re-ducing pollution and landuse requirements and by providing more time for development of new energy supply options, as well as Annual Load Shape fuel extraction and pollution Kifowatts control technologies.

A Number of Options Having decided to adopt a broad-based EM/DM program, the l

Company has a number of options, some of whichmayreachthe Present Load Shape desired results. Generally these I +~ +to 0~

options incorporatesomeaspects ~~

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mandatory regulatory require- I

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ments. Now we need to do more ~ ~

testing and analysis to see which ~ yl options offer the most promise. ~y~ ~ I~ 0 ~ ~ +~J ~

~ ~

To test some of these options, the ~ +0 Company expects to seek Public UtilityCommission permission in Possible Load Shape With EM/DM 1978 to experiment with a variety of residential rates. We want to test the J F M A M J J A S 0 N D lf we can lower projected load levels it means we can postpone or slow down the need for new generating units. This will have 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.

Earnings Per Share Future operating results will be affected by many 12 Months Ended Each Quarter factors such as adequate and timely rate relief, Dollars Per Share customer demand, interchange power sales, fuel costs, $ 3.40 3.40 fuel availability, governmental action and availability of capital. The Company cannot predict the combined 3.20 3.20 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 3.00 3.00 began December 6, 1977 was still unsettled. The curtailment of coal deliveries as a result of the strike has required the Company to reduce energy production 2.60 from bituminous coal-fired units and increase its production from more expensive oil-fired units.

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

2.40 2.40 ~

1973 1974 1975 1976 1977 IRIeturn for Common Shareowner The Company's earnings per share of Common Stock increased substantially during 1977 compared During 1977 and 1976, common shareowners to 1976. However, as the above chart shows, earnings increased their investment in the Company by $ 243 since mid-1974 through 1976 had suffered a general decline and 1976 earnings per share were million or 39 percent through reinvested earnings and approxImately the same as they were three years proceeds of $ 171 millionfrom the issuance of 8.4 million earlier- In 1973.

shares of new Common Stock.

Earnings applicable to common stock increased

$ 34.0 million and $ 5.7 million in 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 full year's effect of the rate increases which became effective in 1976.

Interest and Dividend Cost The change from theprioryearininterestchargesand Cost of IFixed Income Securities dividends on Preferred and Preference Stock were:

1977 1976 The increases in long-term debt interest charges and Millions of Dollars Interest charges dividends on Preferred and Preference Stock were due Long-term debt .......... 11.9

$ 11.7 to issuance of securities principally to finance the Short-term debt .......... (2.6) 0.9 Company's construction program and the refinancing Other 0.4 0.1 of maturing debt with securities bearing higher interest Dividends on preferred and preference stock ......... 3.6 6.9 rates. During 1977 and 1976, outstanding long-term debt increased by $ 217 million and Preferred and Preference Stock by $ 121 million.

12

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 Times Interest Charges Earned million.

12 Months Ended Each Quarter Times Earned (Pre Tax)

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 ability to 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 The Company derives about 99% of its operating credit standing.

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.

Operating Revenues Energy sales for 1977, excluding sales of Hershey The change in operating revenues from the prior year Electric Company (acquired December 31, 1976),

is attributable to the following: increased 578 million kwh or 2.8% over 1976. Hershey 1977 1976 Electric Company sales, which are not included in Millions of Dollars sales statistics prior to January 1, 1977, totaled 269 Electric revenues Quantity of sales to: million kwh in 1977 resulting in a consolidated sales Ultimate customers .... $ 18.0 19.3 increase of 4.2% in 1977. Energy sales increased 6.5%

Othersforresale ...... 0.4 0.3 in 1976. For more information, see "The Year in Review Rate increases .......... 36.5 40.4 - Energy Use Moderate" on page 4 and the "Statistical Fuel adjustment clauses . 36.7 33.8 Other (including tax Summary - Sales Data" on page 30.

surcharge) ............ 9.2 73 Rate increases for ultimate customers became effec-100.8 101.1 tive in September 1975 ($ 21.0 million annually), April Steam revenues . (0.2) (1.1) 1976 ($ 20.0 million annually) and August 1976 ($ 37.3 Total ..... $ 100.6 100.0 million annually).

13

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

Revenues from the fuel adjustment clauses totaled Average Price Of Electricity

$ 205.0 million in 1977 and $ 168.3 million in 1976, All Customers reflecting the increased level of fuel costs and Cents Per Kwh additional energy sales. 3.5 Fuel Ad ustment See Note 4 to Financial Statements on page 25 for 3.0 3.0 information concerning the limited recovery of the cost of coal mined at The Oneida Mining Company, a Tax Surcharge 2.5 2.5 subsidiary, and Note 2 to Financial Statements on page 24 concerriing proposed regulations by the PUC 2.0 2.0 to replace the fuel adjustment clause with a levelized energy cost rate. 1.5 1.5 Base Rate jMet Cost of Energy 1.0 1.0 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 1973 1974 1975 1975 1977 new generating units.

The above chart shows that the Increase ln the cost of Fuel fuel has been the rnaln factor in the recent price rise of electricity.

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 units No. 3 was placed in service in October 1975 and No. 4 was placed in service in March 1977. The average cost of Fuel Expense fuels consumed increased during 1977 and 1976 due to The change in fuel expense from the prior year is the combined effects of higher coal prices and the cost attributable to the following:

of oil consumed at the Martins Creek units, which have 1977 1976 a cost per kwh generated approximately twice that of Millions of Dollars the Company's coal-fired units. The average cost of Electric fuel expense Quantity of electricity fuel consumed per kwh generated was 1.04 cents in generated ................ $ 54.8 17.9 1975, 1.17 cents in 1976 and 1.35 cents in 1977. Average cost of fuels burned .. 60.0 36.0 The cost of fuel consumed which is recoverable 114.8 53.9 through fuel adjustment clauses is deferred until the Less increase in fuel costs deferred to match revenues period in which such costs are billed to customers. from fuel adjustment Interchange Power Sales clauses ................... 2.8 2.9 112.0 51.0 The total electric energy available for sale includes Steam heat fuel expense energy generated by the Company's plants and power Total .......... $ 111.9 50.2 purchased from others, after deducting Company uses and line losses. During 1977 and 1976, approximately 37% and 29%, respectively, of the total energy available was sold to other utilities under interconnection 14

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 for power sold on the interchange reflects a splitting of the difference between the buyer' and the seller's cost of generation. During 1976 there Interchange Sales was a narrowing of the differential between the The change in interchange power sales from the Company's cost of generating electricity and the price prior year is attributable to the following: received for interchange power sales. Also in 1976, 1977 1976 Millions of Dollars increased sales to customers reduced the quantity of economic power available for sales to interconnected Quantity of energy sold ....... 6 77.6 (7.9) companies.

Average price of energy sold .. 65.5 (5.7)

Other 3.2 0.9 During 1977 the Company experienced an unprece-Total ................ $ 146.3 ~(12.7 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.

t $ 3.5 3.0 Expenditures For Electric Facilities Billions of Dollars 3.5 3.0 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 of the Company's average fuel costs.

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

The increases in wages and employee benefits and 1.0 1.0 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.

1977 78 '79 '80 '81 '82 Total

'78-'82 Increased depreciation expense is due to new a Cost of Electric Facilities at End of 1977 facilities placed in service, including the Martins Creek a Expenditures to Construct New Electric units.

Facilities and Acquire Nuclear Fuel The Allowance for funds used during construction Financial health of the Company is necessary (Allowance) has increased during. the years being to raise the large amounts of money required to compared as a result of the Company's extensive finance the construction of electric facilities.

Construction expenditures In the next five years construction program. For information concerning a are expected to be $ 2.3 billion compared to change in the reporting classification of the Allowance

$ 3.2 billion of lacllitios at the end of 1977, after being In business for 57 years. 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 ll lr9COoKiltm!

1977 1976 1975 1974 1973 Thousands of Dollars Operating Revenues (Note 2) $ 744,731 644.147 544,129 472,036 384,814 Operating Expenses Net cost of energy Fuel . 433,698 321,783 271,636 192,353 125,577 Power purchases 39,783 29,657 37,698 24,176 15,299 Interchange power sales (306,456) (160,163) (172,823) (108,723) ~70.175) 167,025 191,277 136,511 107,806 70,701 Wages and employee benefits 91,822 82,583 71,773 67,374 57,421 Other operating costs 82,355 76,121 68,369 54,489 45,234 Depreciation . 68,035 62,478 58,540 52,399 48,837 Income taxes 91,501 43,828 47,298 39,211 33,943 Taxes, other than income 59,682 49,526 40,669 35,571 30,005 560,420 505,813 423,160 356,850 286,141 Operating Income 184,311 138,334 120,969 115,186 98,673 Other Income and Deductions Allowance for funds used during construction (Note 1)

Equity and borrowed funds . 45,192 36,605 20,732 14,967 Equity funds 22,459 Income tax credits . 13,708 14,457 11,201 5,076 91 Other net ~928) 1,381 3,154 3,418 1,300 35,239 61,030 50,960 29,226 16,358 Income Before Interest Charges 219,550 199,364 171,929 144,412 Interest Charges Long-term debt . 91,500 79,783 67,932 51 149

~

Short-term debt and other 5,223 7,470 6,456 9,946 4,916 Allowance for borrowed funds used during construction (Note 1) (26,936 69,787 87,253 74,388 61,095 48,119 Income Before Nonrecurring Credit ................. 149,763 112,111 97,541 83,317 66,912 Nonrecurring Credit Related to Accounting Change, Net of Income Taxes ($ 4,831) (Note 3) ............ 4,162 Net Income Before Dividends on Preferred and Preference Stock 149,763 112,111 97,541 87,479 66,912 Dividends on Preferred and Preference Stock 36,993 33,368 24,509 19,656 17,191 Earnings Applicable to Common Stock (Note 3) ..... $ 112,770 78,743 73,032 67,823 49,721 Earnings Per Share of Common Stock (Note 3)

Before Nonrecurring Credit $ 3.37 2.68 2.87 2.88 2.57 Nonrecurring Credit .19

$ 3.37 2.68 2.87 3.07 2.57 Average Number of Shares Outstanding (thousands) . 33,471 29,367 25,459 22,067 19,359 Dividends Declared Per Share of Common Stock $ 1.89 1.80 1.80 1.77 1.68 See accompanying Schedules and Notes to Financial Statements.

16

e mclhtt.dM(3. oat Vzztf.e 1977 1976 1975 1974 1973 Thousands of Dollars Income Tax Expense Included in operating expenses Provision Federal . $ 34,804 656 22,547 12,554 16,454 State 16,193 6,766 8,221 3,858 6,207 50,997 7,422 30,768 16,412 22,661 Deferred Tax depreciation (class life system) 6,173 6,463 4,540 3,715 3,057 Recoverable fuel costs 4,128 2,391 829 14,009 Forced outage reserve (344) (1,041) (3,726)

Other 2,198 932 1,899 1,538 2,680 Investment tax credits-net 28,349 27,661 12,988 3,537 5,545 91,501 43,828 47,298 39,211 33,943 Included in other income and deductions Provision (credit)

Federal . (11,008) (11,859) (9,164) (4,156) (46)

State ~2,700) (2,598) (2,037) (45)

(13,708) (14,457) (11,201) (5,076) ~(91 Total income tax expense $ 77,793 29,371(a) 36,097 34,135(b) 33,852 Computation of Income Tax Expense Indicated income tax on pre-tax income at combined Federal and State tax rates (shown below) $ 121,651 74,901 70,748 66,940 54,131 Reductions due to:

Allowance for funds used during construction .... 26,407 23,925 19,379 10,976 8,041 Tax depreciation (guideline lives and declining balance method) 10,953 15,067 9,131 8,799 7,531 Tax and pension cost . 3,753 3,354 2,998 2,491 2,687 Other net 2,745 3,184 3,143 5,708 2,020 Total . 43,858 45,530 34,651 27,974 20,279 Income tax expense $ 77,793 29,371 36,097 38,966 33,852 Combined Federal and State income tax rates  % . 53.5 52.9 52.9 52.9 53.7 Effective income tax rates  % 34.2 20.8 27.0 30.8 33.6 Taxes Other Than Income Taxes State gross receipts . $ 32,932 28,320 23,756 20,564 16,867 State capital stock . 9,996 8,860 7,284 6,263 5,403 State utility realty . 11,582 8,052 5,980 5,258 4,687 Social security and other . 5,172 4,294 3,649 3,486 3,048 Total . $ 59,682 49,526 40,669 35,571 30,005 (a) Investment tax credits eliminated the Company's Federal income tax liabilityfor 1976 and resulted in a credit to the provision for income taxes of approximately $ 5 9 million related to a carryback of investment tax credits to prior years. Total income tax expense for 1976 has been credited by approximately $ 5.0 million representing 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 Utility Plant Plant in service at original cost Electric $ 2,323,792 2,090,282 Steam heat . 8,140 7,896 2,331,932 2,098,178 Less accumulated depreciation 508,948 458,697 1,822,984 1,639,481 Construction work in progress at cost 829,481 720,544 Nuclear fuel. in process-at cost . 37,764 20,084 2,690,229 2,380,109 Investments Associated companies 'at equity 17,640 15,327 Nonutility property and other at cost or less 7,419 7,548 25,059 22,875 Current Assets Cash (Note 6) 14,098 14,955 Temporary cash investments, at cost which approximates market .. 19,993 Accounts receivable (less reserve: 1977, $ 2,715; 1976, $ 1,925)

Customers.. 52,380 49,205 Other 28,988 22,857 Notes receivable (principally from associated company) 32,543 29,570 Recoverable fuel costs 48,987 41,670 Coal and fuel oil at average cost 105,759 74,885 Materials and supplies at average cost 19,445 19,068 Other 7,811 7,219 330,004 259,429 Deferred Debits 5,030 4,884

$ 3,050,322 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 281,375 231,375 Preference stock 206,000 210,000 Common stock 582,983 495,008 Capital stock expense (10,630) (10,220)

Earnings reinvested . 286,911 237,967 1,346,639 1,164,130 Long-term debt 1,256,739 " 1,161,319 2,603,378 2,325,449 Current Liabilities Long-term debt due within one year 3,756 20,675 Commercial paper notes (Note 6) . 23,400 60,012 Accounts payable (Note 13) . 62,472 50,415 Taxes accrued . 27,263 12,564 Deferred income taxes applicable to recoverable fuel costs 26,188 22,060 Dividends payable 26,612 23,002 Interest accrued 23,013 22,589 Other (Note 13) . 25,821 21,184 218,525 232,501 Deferred and Other Credits Deferred investment tax credits 82,078 56,526 Deferred income taxes 44,887 36,860 Deposits from Allegheny Electric Cooperative (Note 5) 84,215 Other 17,239 15,961 228,419 109,347

$ 3,050,322 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 Long-Term Debt Thousands of Dollars Thousands of Dollars Preferred Stock $ 100 par, cumulative First Mortgage Bonds 4N%, authorized 629,936 shares, 3'/% series due 1978 .................. 3,000 outstanding 530,189 shares ........ $ 53,019 2e/4% series due 1980 .................. 37,000 Series, authorized 5,000,000 shares 3/e% series due 1982 .................. 7,500 3.35%, outstanding 41,783 shares ..

10/e% series due 1982 .................. 100,000 4.40%, outstanding 228,773 shares .

4,178 22,878 3k% series due 1983 .................. 25,000 3/s% series due 1985 25,000 4.60%, outstanding 63,000 shares .. 6,300 4%% series due 1991 .................. 30,000 7.40%, outstanding 400,000 shares . 40,000 4e/e% series due 1994 30,000 5e/e% series due 1996 ".................. 30,000 8.00%, outstanding 500,000 shares . 50,000 8.60%, outstanding 222,370 shares .

6e/4% series due 1997 .................. 30,000 9.00%, outstanding 77,630 shares ..

22 237 7% series due 1999 .................. 40,000 7,763 8r/e% series due 1999 .................. 40,000 9.24%, outstanding 750,000 shares . 75,000 9% series due 2000 .................. 50,000

$ 281,375 7'/4% series due 2001 .................. 60,000 7%% series due 2002 .....

Preference Stock no par, cumulative, 75,000 authorized 5,000,000 shares 7/e% series due 2003 .................. 80,000 9i/% series due 2004 .'................. 80,000

$ 8.00 series, outstanding 9e/% series due 2005 .................. 125,000 350,000 shares $ 35,000 9/% series due 2005 .................. 100,000

$ 8.40 series, outstanding 8/4% series due 2006 .................. 150,000 400,000 shares 40,000 8N% series due 2007 .................. 100,000

$ 8.70 series, outstanding 4k% to 5e/e% pollution control series A 400,000 shares due annually: $ 500, 1978-1983; 40,000

$ 900, 1984-2002; $ 7,400, 2003 27,500

$ 9.25 series, outstanding 160,000 shares 16,000 Notes 1,245,000

$ 11.00 series, outstanding 7% due 1980 20,000 500,000 shares 50,000 Other 929

$ 13.00 series, outstanding 1,265,929 250,000 shares 25,000 Unamortized (discount) and premium net (5,434)

$ 206,000 1,260,495 Common Stock no par, authorized Less amount due within one year ........ 3,756 50,000,000 shares, outstanding 34,923,452 shares .............. $ 582,983

$ 1,256,739 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 Common .............. 4,120 $ 87,753 Preferred, 8.00% series . 500 50,000 Preference, $ 9.25 series (40) (4,000) 1976 Common .............. 4,251 82,958 Preferred, 9.24% series . 750 75,000 1975 Common .............. 3,301 57,045 Preference, $ 11.00 series 500 50,000 Preference, $ 9.25 series 200 20,000 1974 Common .............. 2,200 35,156 Preference, $ 13.00 series 250 25,000 1973 Common .............. 2,000 40,900 Preferred, 7.40% series . 400 40,000 See accompanying Notes to Financial Statements.

20

SOKA(SISDI)'2 OoII'RIKI7DQSS

~ DI7il FDDDKDilCDK[l POomBDOoDi) 1977 1976 1975 1974 1973 Thousands of Dollars Source of Funds Operations Net income $ 149,763 112,111 97,541 87,479 66,912 Charges (credits) against income not involving working capital Depreciation 68,035 62,478 58,540 52,399 48,83?

Noncurrent deferred income taxes and investment tax credits net ............... 33,579 31,789 15,701 8,790 11,282 Allowance for funds used during construction . (49,395) (45,192) (36,605) (20,732) (14,967)

Other (1 191)

~ 4,669 7,464 520 220 200,791 165,855 142,641 128,456 112,284 Outside financing Common stock 87,975 82,705 57,763 35,156 40,900 Preferred and preference stock 50,000 75,000 70,000 25,000 40,000 First mortgage bonds 100,000 150,000 225,000 180,000 108,000 Other long-term debt 576 253 208 360 20,024 Short-term debt net increase 45,658 238,551 307,958 352,971 286,174 208,924 Working capital decrease (a) . 15,166 3,156 Deposits from Allegheny Electric Coop. (Note 5) 84,215 Investment in associated companies decrease ... 16,894 685 Other net 608 6,424 2,672

$ 524,165 497,131 510,778 415,315 327,036 Application of Funds Construction expenditures (Note 5) ........... $ 362,558 394,238 342,496 267,724 224,496 Nuclear fuel in process (Note 5) 17,680 13,555 2,793 3,?36 Allowance for funds used during construction . ~49.395) ~45.192 )36,605) l20,732) (14,967) 330,843 362,601 308,684 250,728 209,529 Securities retired Preference stock 4,000 First mortgage bonds 20,500 8,000 93,000 Other long-term debt 196 3,054 112 18,632 10,041 Short-term debt net decrease 36,612 13,618 11,879 56,631 61,308 24,672 104,991 18,632 66,672 Dividends on preferred, preference and common stock . 100,813 86,694 70,686 58,897 50,037 Working capital increase (a) 31,020 15,309 82,753 Acquisition of Hershey Electric Company ...... 7,855 Investment in associated companies increase . 181 23,990 798 Other net 2,427 4,305

$ 524,165 497,131 510,778 415,315 327,036 (a) Changes in components of working capital (excluding debt)

Cash and temporary cash investments ................. $ 19,136 123 (5,352) (3,792) 10,247 Accounts and notes receivable 12,279 16,394 28,757 22,896 6,745 Coal and fuel oil 30,874 6,56? (3,568) 45,002 (4,717)

Recoverable fuel costs, net of deferred taxes ........... 3,189 2,125 738 18,747 Accounts payable and accrued taxes (28,756) 8,501 (22,507) (1,811) (10,006)

Other net (7,702) (18,401) (13,234) 3,711 (5,425)

Increase (Decrease) $ 31,020 15,309 (15,166) 82.753 (3,156)

See accompanying Schedules and Notes to Financial Statements.

21

1977 1976 1975 1974 1973 Thousands of Dollars Balance, January 1 $ 237,967 212,550 185,695 157,113 140,238 Add Net Income 149,763 112,111 97,541 87,479 66,912 387,730 324,661 283,236 244,592 207,150 Deduct Cash dividends declared Preferred stock 17 123 13,128 9,393 9,393 7,551 Preference stock . 19,870 20,240 15,116 10,263 9,640 Common stock 63,820 53,326 46,177 39,241 '2,846 Other 6 100,819 86,694 70,686 58,897 50,037 Balance, December 31 (Notes 8 and 9) ... $ 286,911 237,967 212,550 185,695 157,113 Moottee Coo IPIinzneiiell maleznemittm

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

'voting securities) are recorded using the equity Accounting records are maintained in method of accounting. The Company's accordance with the Uniform System of Accounts unconsolidated subsidiaries are engaged in coal prescribed by the Federal Energy Regulatory mining operations, holding coal reserves, uranium Commission (FERC) and adopted by the Penn- exploration, oil pipeline operations and real estate.

sylvania Public Utility Commission (PUC). Except for uranium mining claims in Wyoming and Utah and minor amounts of real estate Principles of Consolidation held in other states, the Company's unconsol-The accounts of the., Company and Hershey idated subsidiaries'roperty and operations are Electric Company (Hershey), a wholly-owned in Pennsylvania.

electric distribution subsidiary acquired The Company believes that its financial position December 31, 1976, are consolidated in the and results of operations are best reflected without accompanying financial statements from the consolidation of these subsidiaries since they are acquisition date. All significant intercompany not engaged in the business of generating or transactions have been eliminated. The acqui- distributing electricity. If all the unconsolidated sition cost of the capital stock and the repayment subsidiaries were considered in the aggregate as a of all debt owed by Hershey approximated $ 7.9 single subsidiary, they would not constitute a million. The operations of Hershey are not material "significant subsidiary" as that term is defined by compared to operations of the Company. the Securities and Exchange Commission (SEC).

22

Utility Plant recorded is shown under Other Income and Deductions as Equity funds. The Company has not Additions to utility plant and replacements of reclassified the Allowance into borrowed funds units of property are capitalized at cost. Costs of and equity funds components prior to January 1, depreciable property retired or replaced are 1977 since the allocation would not be comparable removed from utility plant and such costs, plus to that required under the FERC formula.

removal costs, less salvage, are charged to accumulated depreciation. Costs of land retired or sold are removed from utility plant and any gains Depreciation or losses are reflected on the Statement of Income.

All expenditures for maintenance and repairs of For financial statement purposes, the straight-property and the cost of replacement of items line method of depreciation is used to accumulate determined to be less than units of property are an amount equal to the cost of utility plant and charged to operating expenses. removal costs, less salvage, over the estimated useful lives of property. Provisions for deprecia-tion as a percent of the average original cost of Allowance for Funds Used depreciable property have approximated 3.4% in During Construction 1973, 3.3% in 1974 and 1975 and 3.2% in 1976 and 1977. The lower composite depreciation rates for As provided in the Uniform System of Accounts, 1976 and 1977 reflect changes made in estimated the cost of funds used to finance construction useful lives of certain facilities in accordance with projects is capitalized as part of construction cost. a PUC rate order issued in 1976. No provision is After a project is placed in service the Company is being made for amortization of intangibles of ap-permitted to include in rates charged for utility proximately $ 1.3 million included in UtilityPlant.

t service a return on, and depreciation of, the cost of funds so capitalized. The components of Allowance for funds used during construction (Allowance) shown on the Statement of Income Revenues under Other Income and Deductions and Interest Revenues are based on cycle billings rendered to Charges are non-cash items equal to the cost of certain customers monthly and others bimonthly.

funds capitalized during the period and serve to The Company does not accrue revenues related to offset on the Statement of Income the cost of energy delivered but not billed.

financing construction.

Since February 1, 1974, the Allowance rate has been computed on an after-tax basis and income Fuel Costs Recoverable Under Fuel tax reductions associated with the interest AdJustment Clauses (borrowed funds) component of the Allowance are reflected in Income tax credits under Other The Company's tariffs include fuel adjustment Income and Deductions with a corresponding clauses under which fuel costs varying from the increase in the provision for income taxes charged levels allowed in approved rate schedules are to Operating Expenses. During the period reflected in customers'ills after the fuel costs February 1, 1974 through December 31, 1976, the are incurred. Fuel costs recoverable in the future Allowance rate was computed semiannually in through application of fuel adjustment clauses are accordance with procedures initiated by the PUC deferred and charged to expense during the using a specified rate for common equity and the periods in which such costsare billed to customers.

cost of fixed rate securities issued in the twelve See Notes 2 and 3 to Financial Statements.

months preceding the semiannual computation.

Effective January 1, 1977, the Company com-puted the Allowance rate in accordance with a Income Taxes 1977 FERC order which (1) provides a formula for determining the maximum Allowance rate, (2) The Company and its subsidiaries file a provides for semiannual compounding and (3) consolidated Federal income tax return. Income t provides for segregating the Allowance into two components, borrowed funds and equity funds.

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 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 for funds used during Forced Outage Reserve construction constitute the principal item of A self-insurance reserve is provided to cover the Income tax credits under Other Income and increased level of power costs which are experi-Deductions. enced when any of the Company's major generat-Deferred tax accounting is followed for items ing units are forced out of service due to damage where similar treatment in rate determinations has caused by accident or other unforeseen insurable been or is expected to be permitted by the PUC. occurrences. Increased power costs resulting The principal items are accelerated amortization from purchasing or generating replacement power of certified defense facilities and pollution control at higher costs or loss of interchange sales in equipment, deduction of costs of removing retired excess of $ 0.5 million through 1975 and $ 1.0 depreciable property, that portion of tax deprecia- million beginning in 1976 for each accident or tion arising from shortening depreciable lives by occurrence are charged to the reserve. As to 20% under the class life depreciation system, fuel certain of the Company's large generating units, costs recoverable under fuel adjustment clauses, costs chargeable to the reserve are limited to $ 12.5 the forced outage reserve and the cost of fuel million since outside insurance is carried to cover consumed during the test period of new generat- costs in excess of that amount. The reserve is ing facilities. established on the basis of historical experience Tax reductions arising principally from the use and has been recognized in rate-making pro-of the declining balance depreciation method, cedures by the PUC. At December 31, 1977 and guideline lives and certain income and expenses December 31, 1976 the reserve balance was being treated differently for tax computation pur- $ 14.5 million and $ 13.9 million, respectively.

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 In March 1975, the Company filed with the PUC property. The tax credits are generally equal to for a general increase in electric revenues of $ 78.3 10% of (1) the cost of certain property placed in million or 14.6%. Rate increases resulting from this service and (2) progress payments for the con- filing, based on annualized revenues as of July 31, struction of certain facilities that have a construc- 1975, were as follows (millions of dollars):

tion period of at least two years. The Company has adopted an Employee Stock Ownership Plan (ESOP) which permits the Company to claim an Effective Date of Increase Annual Increase additional 1% investment tax credit. An amount September 13, 1975 (interim) . ~... $ 21.0 equal to this additional credit is paid to the ESOP April 14, 1976 (interim) ........... 20.0 trustee to acquire Common Stock of the Company August 26, 1976 (final) 37.3 for employees. $ 78.3 The FERC permitted a rate increase for resale Retirement Plan customers, amounting to approximately $ 1 million annually, to become effective in November 1976, The Company has a Retirement Plan composed subject to refund.

of two parts: (1) a noncontributory portion which In November 1977, the PUC issued proposed provides benefits for all eligible active employees regulations to replace fuel adjustment clauses of with the full cost absorbed by the Company, and all major Pennsylvania electric utilities with a (2) a voluntary portion in which contributions are levelized energy cost rate effective July 1, 1978.

made by both employees and the Company, but The proposed energy cost rate would include all the full co'st of Plan improvements, including prior (1) fossil fuel costs, (2) nuclear fuel costs, (3) service costs, is borne by the Company. purchased power energy costs and (4) net inter-Approximately 95% of eligible active employees change energy sales and purchases. In applying are members of the voluntary portion of the Plan. the energy cost rate, situations could occur when Company contributions to the Plan include a utility would recover either more or less than amounts required to fund current service costs its total energy costs during a twelve-month and to amortize unfunded prior service costs over period. The proposed regulations provide that periods of not more than 20 years. See Note 10 to accumulated deferred fuel costs under the present Financial Statements. PUC fuel adjustment clause would be recoverable 24

pursuant to a reasonable plan filed by a utility. 5 Sale of 10% of In response to the PUC's request, the Company Susquehanna Plant and other interested parties have submitted comments on the proposed regulations, and the In January 1978, pursuant to agreements Company cannot predict what final action the entered into in March 1977, the Company sold to PUC will take in implementing an energy cost rate. Allegheny Electric Cooperative, Inc. (Allegheny) a 10% undivided ownership in the Susquehanna nuclear plant currently under construction.

Through December 31, 1977, Allegheny made

3. Nonrecurring Credit Belated to deposits aggregating approximately $ 84 million Accounting Change representing amounts due under the agreements.

The Nonrecurring Credit shown on the State- The Company's 1977 construction and nuclear ment of Income for 1974 represents the cumulative fuel expenditures shown on the Statement of effect to December 31, 1973 of a change in Changes in Financial Position include 100% of the accounting for fuel costs, net of related income expenditures applicable to the Susquehanna taxes. The accounting change related to deferring plant. Approximately $ 23 million of Allegheny's the charge to expense for a portion of fuel costs to deposits represented its share of the 1977 the periods in which such costs are billed to expenditures.

customers through application of fuel adjustment clauses.

Retroactive allocation of the amount of the Non- 6. Lines of Credit and recurring Credit applicable to the year 1973 would Short-Term Qebt result in Earnings Applicable to Common Stock and Earnings Per Share of Common Stock of In order to provide loans for interim financing

$ 51,066,000 and $ 2.64, respectively, compared to and provide back-up financing capability for earnings of $ 49,721,000 and earnings per share of commercial paper notes, the Company had lines of

$ 2.57 recorded in 1973.

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

4. The Oneida Mining Company of credit, $ 148 million was maintained by compensating bank balance requirements and $ 52 The Oneida Mining Company (Oneida) is a million by payment of commitment fees.

wholly-owned coal-mining subsidiary whose Compensating bank balance requirements (not entire output is purchased by the Company. For legally restricted as to withdrawal) are on an fuel adjustment clause purposes, since February 1, average annual basis which approximated $ 13.3 1977 the Company has priced the coal produced million at December 31, 1977. Commitment by Oneida at the average production cost per ton fees on an annualized basis approximated $ 0.3 of coal received from the Company's other affil- million at December 31, 1977.

iated mines, rather than at Oneida's higher cost.

The cost of Oneida coal not recovered through Commercial paper notes are generally sold for application of the fuel adjustment clauses periods ranging from 30 to 60 days. The weighted amounted to approximately $ 9.3 million ($ 4.3 average discount rate applicable to such notes million net of income taxes) in 1977. The Company outstanding at December 31, 1977 and 1976 was estimates that this method of pricing Oneida coal 6.5% and 4.7%, respectively.

for the fuel adjustment clauses will continue to Bank borrowings are generally for one year and adversely affect net income by approximately may be prepaid at any time without penalty. No

$ 400,000 per month pending further review of the bank loans were outstanding at December 31, 1977 progress of mining operations in the latter part of or December 31, 1976.

1978. The maximum aggregate amount of short-term In 1977, the Company adopted a mining plan for debt outstanding at the end of any month during Oneida which included abandonment of a section 1977 was $ 106.7 million and during 1976 was of the mine and the write-off of related develop- $ 194.6 million with an average aggregate daily ment costs. This write-off reduced the Company's amount outstanding during these years of $ 79.2 net income by approximately $ 6.6 million in 1977. million and $ 129.6 million, respectively. The For further information regarding Oneida, see approximate weighted average interest rate of "The Year in Review - Mining Operations" on short-term debt during 1977 was 5.7% and during page 5. 1976 was 5.5%, calculated by dividing the total 25

short-term debt interest expense for the year by 9. Hydroelectric Projects the average aggregate daily amount of short-term debt outstanding during the year. The Company operates two hydroelectric projects under licenses issued by the FERC.

Certain reserves required to be provided under the

7. Capital Stock Federal Power Act have not been recorded Common Stock of $ 582,983,000at December31, pending approval of the amounts by the FERC. In 1977, the FERC issued a proposed rulemaking 1977 includes $ 686,000 cash installments received under a dividend reinvestment plan as considera- which, if adopted, would require a licensee to tion for 29,603 shares of Common Stock which record these reserves by an appropriation of were issued in January 1978.

earnings reinvested. The amount of earnings reinvested so appropriated would be restricted as Each of the following series of stock contains to the payment of dividends. The Company sinking fund provisions designed to retire the estimates that such reserves applicable to the series at a redemption price of $ 100 per share: years from 1946 would not exceed $ 3.1 million at Shares to be December 31, 1977.

Redemption Redeemed Annually Period Preferred Stock 10. IRIetirement Plan 7.40% Series .... 16,000 1979 - 2003 8.00% Series .... 25,000 1983 - 2002 Obligations of the Company's Retirement Plan 9.24% Series (a). 30,000 1981 - 2005 are currently funded through a Trust Fund. At June 30, 1977, the end of the Fund's most recent fiscal Preference Stock year, the Fund's assets at market were $ 100.3

$ 9.25 Series (b) .. 40,000 1977 - 1981 million and at cost were $ 104.6 million. Pension

$ 11.00 Series (a). 25,000 1981 - 2000

$ 13.00Series(a). 12,500 1980-1999 costs were (millions of dollars): 1977, $ 11.3; 1976,

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

(a) The Company has the right to redeem on each Plan amendments effective as of July 1, 1976, sinking fund redemption date additional shares up subject to Internal Revenue Service approval, to the number of shares of this Series required to be provided for increased benefits, reduced em-redeemed annually.

ployee contributions and certain other minor (b) In January 1978, the Company redeemed 40,000 changes to comply with the Employee Retirement shares.

Income Security Act of 1974.

Based on the Fund's assets at cost, at June 30, Capital stock expense represents commissions 1977 the actuarially computed unfunded prior and expenses incurred in connection with the service cost was $ 27.2 million. As of the same date issuance and sale of capital stock. Capital stock the actuarially computed value of vested benefits expense applicable to the preferred and exceeded the cost basis of the Fund's assets by preference stock series which are to be redeemed $ 17.4 million.

through sinking fund provisions is amortized to Earnings Reinvested as the respective series of 1 1. Rentals and Lease stock are redeemed. The unamortized balance Commitments applicable to these series of stocks was $ 3.2 million at December 31, 1977. No amortization Principal rental costs affecting expense were plan is 'in effect for Capital stock expense as follows:

Charged To applicable to other issues of capital stock. Operating Fuel Expense Inventory (a)

Thousands of Dollars

8. Dividend IRestrictions 1977 $ 11,023 2,349 1976 10,502 1,761 The Company's charter and mortgage 1975 9,477 1,276 indentures restrict the payment of cash dividends 1974 8,911 870 on Common Stock under certain conditions. 1973 7,515 942 Under the charter provisions, which are the more limiting, no restrictions are effective at December (a) Represents rental of railroad coal cars which amounts are charged to fuel inventory and subse-31, 1977 on the payment of such dividends out of quently included in fuel expense.

earnings reinvested. For information on a possible future restriction see Note 9 to Financial At December 31, 1977, the Company had long-Statements. term lease agreements which require future 26

minimum rentals as follows (millions of dollars): 12. Coininitinents and 1978, $ 14.5; 1979, $ 13.5; 1980, $ 12.7; 1981, $ 11.7; Contingent Liabilities 1982, $ 10.5; after 1982, $ 89.3. The Company also leases other property under short-term The Company estimates that about $ 1.31 billion agreements with rentals currently amounting to will be required to complete construction projects approximately $ 3.3 million annually. Generally the in progress at the end of 1977, excluding nuclear Company's long-term leases contain renewal fuel payments. Of this amount, approximately $ 1.05 options and obligate the Company to pay billion is related to completion of the Company's maintenance, insurance and other related costs. share of two nuclear generating units at the The leases do not include restrictions on any of the Susquehanna power plant. The scheduled in-Company's other financial activities. service dates of the Susquehanna units are 1981 Certain of the Company's leases meet the for Unit No. 1 and 1982 for Unit No. 2. Expenditures capitalization criteria established by the Financial for construction during 1978 are estimated at $ 475 Accounting Standards Board in 1977 which would million, including $ 4 million for nuclear fuel and normally require (1) that an asset and associated $ 27 million related to environmental protection liability be recorded at an amount equal to the facilities. Estimated construction expenditures for present value of the minimum lease payments and the three years 1978 - 1980 are approximately (2) that expense be charged with amortization of $ 1.54 billion, including $ 100 million for nuclear the lease asset and interest expense on the liability. fuel and $ 150 million related to environmental However, in accordance with the manner in which protection facilities.

the Company's rates have been established by the Certain of the Company's facilities are not in PUC, the Company accounts for such leases as compliance with present environmental laws and operating leases and appropriate accounts have regulations. In order to comply with such laws and been charged with actual rental expense, and an regulations, the Company will be required to make asset and associated liabilityrelated to such leases substantial capital expenditures. In addition, the have not been recorded. Company may be subject to certain penalties not In accordance with SEC disclosure require- now determinable but which could be material ments applicable to all regulated companies in amount.

subject to the rate-making process that do not In connection with providing for its future record capital leases as assets with associated bituminous coal supply, the Company at liabilities, the Company has computed the December 31, 1977 had guaranteed capital and aggregate asset and liability balances that would other obligations of certain coal suppliers have been recorded had all leases meeting the (including owned coal companies) aggregating definition of a capital lease been capitalized as $ 160.8 million.

follows:

December 31 1977 1976 0 3. IReclassif ication Thousands of Dollars Approximately $ 9.9 million representing an Capital lease asset ........ $ 104,291 78,713 accrual at December 31, 1976 for current liabilities Accumulated amortization . ~(37.855 (3~3.320 related to construction of facilities has been

$ 66,436 45,393 reclassified on the Balance Sheet from Accounts payable to Other current liabilities to make the Current obligations under item comparable to the classification in 1977.

capital leases ............. $ 8 173 7 543 Noncurrent obligations under capital leases ............. 61,333 40,445

$ 69,506 47,988 04. Heplaceinent Cost Qata (Unaudited)

The excess of the above liability balances over The impact of the rate of inflation experiencedin the related asset balances represents the difference recent years has resulted in replacement costs of between (1) the amortization and interest expense productive capacity that are significantly greater that would have been recorded since inception of than the historical costs of such assets reported in the leases and (2) the actual rentals recorded. The the Company's financial statements. In compli-difference in the amount of such amortization and ance with reporting requirements of the SEC, esti-interest expense compared to actual rentals re- mated replacement cost information is disclosed corded is not material for each of the years in the Company's annual report to the SEC on 1973-1977. Form 10-K.

27

05. Summary of Quarterly Results of Operations (Unaudited)

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

Thousands of Dollars 1977 March 31 ................... $ 208,894 $ 47,017 $ 40,114 $ 31,066 $ 1.00 June 30................... 173,299 43,912 35,547 26,498 0.79 September 30 (b) ........... 174,067 48,913 34,936 25,888 0.75 December 31 ............... 188,471 44,469 39,166 29,318 0.84 1976 March 31 ................... 166,269 34,360 25,189 17,781 0.67 June 30 149,281 28,006 21,281 13,603 0.46 September 30 ............... 149,580 35,241 30,423 21,282 0.70 December 31 (c) ............ 179,017 40,727 35,218 26,077 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 million due 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 five years 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 Securities l.isted on Exchanges TRANSFER AGENTS FOR PREFERRED, NEW YORK STOCK EXCHANGE PREFERENCE AND COMMON STOCK First Mortgage Bonds, 10%% Series due 1982 Industrial Valley Bank and Trust Company 4~8% Preferred Stock (Code: PPLPRB) 634 Hamilton Mall 4.40% Series Preferred Stock Code: PPLPRA)

Allentown, Pennsylvania 18101 8.60% Series Preferred Stock Code: PPLPRG)

Irving Trust Company 9.24% Series Preferred Stock Code: PPLPRM)

One Wall Street Preference Stock, $ 8.00 Series (Code: PPLPRJ)

New York, New York-10015 Preference Stock, $ 8.40 Series (Code: PPLPRH)

Pennsylvania Power & Light Company Preference Stock, $ 8.70 Series (Code: PPLPRI)

Two North Ninth Street Preference Stock, $ 11.00 Series (Code: PPLPRL)

Allentown, Pennsylvania 18101 Preference Stock, $ 13.00 Series (Code: PPLPRK)

Common Stock (Code: PPL)

REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK The First National Bank of Allentown PHILADELPHIASTOCK EXCHANGE Hamilton Mall at Seventh 4~8% Preferred Stock Allentown, Pennsylvania 18101 3.35% Series Preferred Stock Morgan Guaranty Trust Company of New York 4.40% Series Preferred Stock 23 Wall Street 4.60% Series Preferred Stock t

New York, New York-10015 8.60% Series Preferred Stock 9% Series Preferred Stock 9.24% Series Preferred Stock DIVIDEND DISBURSING OFFICE AND Preference Stock, $ 8.00 Series DIVIDEND REINVESTMENT PLAN AGENT Preference Stock, $ 8.40 Series Treasurer Preference Stock, $ 8.70 Series Pennsylvania Power & Light Company Preference Stock, $ 11.00 Series Two North Ninth Street Preference Stock, $ 13.00 Series Allentown, Pennsylvania 18101 Common Stock 29

mAellle(IIIC@( SL(I)mmm) If P 1977 1976 1975 1974 1973 Financial Data Capital provided by investors thousands (a) (b) . $ 2,630,534 2,406,136 2,100,003 1,828,888 1,533,861 Return on average capital provided by investors-% (c) . 9.84 8.83 8.76 8.49 7.90 Return on average'common equity  % (c) ..... 14.01 11.61 12.52 12.65 11.89 Fixed cost rate'on long-term debt and preferred and preference stock  % (a) 8.01 7.91 7.76 6.82 6.17 Common stock data Book value (a) (c) $ 24.58 23.45 23.17 22.91 22.51 Dividend payout rate  % (c) ................ 57 68 63 62 64 Dividend yield-% (d) . 8.17 8.61 9.52 9.76 7.47 Price earnings ratio (c) (d) 6.86 7.80 6.59 6.30 8.52 Times interest earned before income taxes (c) . 3.35 2.62 2.80 2.92 3.15 Number of shareowners preferred, preference and common (a) ................ 195,229 184,841 171,766 154;126 142,235 Sales Data Electric customers (a) 954,613 936,219 917,920 902,148 886,378 Electric energy sales millions of kwh Residential 7,539 7,267 6,818 6,494 6,324 Commercial 5,211 4,874 4,575 4,275 4,262 Industrial . 7,697 7,481 7,020 7,170 6,881 Other 754 732 700 1,024 1,398 21,201 20,354 19,113 18,963 18,865 Sources of energy sold millions of kwh Generated Coal-fired steam stations ............ 26,299 25,751 25,384 24,186 24,782 Oil-fired steam station (e) 6,271 1,947 1,149 Combustion turbines and diesels 115 40 84 247 Hydroelectric stations 735 809 859 772 %86 33,420 28,547 27,476 25,205 25,871 Power purchases 1,977 2,126 2,241 1,570 1,968 Interchange power sales (12,433) (8,358) '8,757)

(6,079) (7,237)

Company uses and line losses .............. (1,763) (1,961) (1,847) (1,733) (1,737)

Total electric energy sales .............. 21,201 20,354 19,1 13 18,963 18,865 Average annual residential kwh use ...........

9,063 8,931 8,528 8,287 8,253 Average price per kwh for all customers cents.. 3.45 3.10 2.78 2.44 2.00 Generation Data Generating capability-thousands of kw (a)..... 6,546 5,717 5,717 4,901 4,903 Winter peak demand thousands of kw (f) ...... 4,431 4,514 4,122 3,772 3,662 Generation by fuel sources-%

Coal 78.7 90.2 92.4 96.0 95.8 Oil (e) 19.1 7.0 4.5 1.0 1.1 Hydro 2.2 2.8 3.1 3.0 3.1 Steam station availability  %

Coal-fired 77.8 78.1 79.0 72.3 80.6 Oil-fired (e) 80.3 68.8 75.4 Steam station utilization  %

Coal-fired 72.6 70.6 70.1 66.7 71.6 Oil-fired (e) 46.5 26.4 31.4 Fuel cost cents per kwh 1.35 1.17 1.04 0.88 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 if a 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(f k(t.l

~ %If'(lett'g 'vtoo((I'D() Q N(the MI(i'Bl) ss Reported Market Price Dollars per Share Quarterly Dividends 1st Quarter 2nd Quarter 3rd Quarter 4th Quarter Declared High Low High Low High Low High Low 1977 Common Stock .......... $ 0.48 (a) 22th 24'/s 21% 25'/s 22'ls 24'h 22'/4 Preferred Stock 20'6 4'h% 1.125 517~ 55'h 52 56 50'h 55th 51'h Series 3.35% 0.8375 38 ye 36s/ 39 37'ls 40'h 39 39'h 37%

44p 1.10 55 51 54 51 55 52%a 54'/4 50'/4 46p 1.15 53 52th 53'/s 52'ls 55M 53 55'h 52'ls 7.40% (b) ............ 1.85 8.00% (b) 2.00 (c) 86P 2.15 102 97th 102 99'/s 103 99 102'h 99'/i 9.00% 2.25 102 99 102 100'h 108 101 103'h 101'h 9.24% 2.31 108 104'h 108'/s 105 109 105 108rh 105th 1

Preference Stock

$ 8.00 .................. 2.00 92'h 87th 93th 89 96 92'h 94'h 89r/s

$ 8.40 .................. 2.10 97 93 97'h 92'/s 100 97 99 95

$ 8.70 .................. 2.175 99'h 95'h 102 92 102% 99 101M 97th

$ 9.25 (b) 2.3125

$ 11.00 ................. 2.75 116 111 114 110 116 111 114 110%

$ 13.00 ................. 3.25 133'/4 128 132 128'/4 134'h 127 130 123 1976 Common Stock . $ 0.45 21s/s 19'/s 20/4 19th 21 /4 20 22'h 20s/s Preferred Stock 4th 1.125 53 47 51'h 47'/s 52'/s 48 54'h 50'h Series 3.35% 0.8375 37'h 34 . 36 33 36r/s 34 38 36'h 4.40% 1.10 51'h 44r/s 50 46 51/4 47'ls 53'h 48 46p 1.15 50 48'h 48th 46 49'/s 47'h 52 49 7.40% (b) 1.85 86P 2.15 98 87 95 90 98 92'/4 99th 95 9 P0% 2.25 97 92 96 89 97'/s 94 101 98 9.24% (d) 104'h 99'/i 106th 103 Preference Stock

$ 8.00 ........... 2.00 86 77 87 81% 88 83'h 90'h 82'/4

$ 8.40 ........... 2.10 89 80'/4 89 82'h 92 87'h 95'h 91

$ 8.70 ........... 2.175 94 82, 94 87 /4 94 88 99 91'h

$ 9.25(b) 2.3125

$ 11.00 .......... 2.75 111'h 102'h 112 107 112% 109'/4 114th 109'h

$ 13.00 .......... 3.25 125'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

jest OOPP fg! Ij'@

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

'JOHN T. KAUFFMAN, Vice President, RALPH R. CRANMER, Williamsport Member of Board ol Directors-Grit Publishing Company System Power 8 Engineering EDGAR L. DESSEN, Hazleton EMMET M. MOLLOY, Vice President, Physician-Radiologist Human Resource & Development LEON L. NONEMAKER, Vice President, ROBERT R. FORTUNE, Allentown Executive Vice President, Financial Division Operations HARRY A. JENSEN, Lancaster President snd Chief Executive Oificer, Armstrong Cork Company Manufacturer ol interior furnishings and specialty products CHESTER R. COLLYER, Treasurer VIRGINIAH. KNAUER, Washington, D.C.

NORMAN W. CURTIS, Vice President, President, Virginia Knauer and Associates, inc.

Engineering & Construction Consumer consultants JOSEPH L. DONNELLY, Vice President, Finance W. DEMING LEWIS, Bethlehem President of Lehlgh University LOUISE A. EARP, Assistant Secretary JOHN A. NOBLE, Scranton CHARLES E. FUQUA, Vice President, Susquehanna Division Chairman of the Board snd Chief Executive Oflicer of Clelsnd Simpson Company CHARLES J. GREEN, Vice President, Harrisburg Division Department stores RICHARD H. LICHTENWALNER, Vice President, RUTH PATRICK, Philadelphia Information Services Chief Curator of the Limnology Department, CARL R. MAIO, Vice President, Lehigh Division Academy of Natural Sciences

'JAMES J. McBREARTY, Vice President, Northeast Division NORMAN ROBERTSON, Pittsburgh Senior Vice President and Chief Economist of EDWARD M. NAGEL, Vice President, Mellon Bank, N.A.

General Counsel snd Secretary JOSEPH T. SIMPSON, Harrisburg

'HERBERT D. NASH JR., Vice President, Chairman of the Board of Harsco Corporation Consumer & Community Services Diversified manufacturer of fabricated metal products EDWIN H. SEIDLER, Vice President, Distribution CHARLES H. WATTS II, Vienna, Va.

Educational snd business consultant BRENT S. SHUNK, Vice President, Lancaster Division Former President of Bucknell University JEAN A. SMOLICK, Assistant Secretary Executive Committee: Jack K. Busby, chalrmare Messrs. Campbell, Cranmor, Jensen and Simpson.

DONALD J. TREGO, Assistant Treasurer Audit Commluoo: Harry A. Jensen, chalrmaro Mrs. Knauor, Mossrs. Noble, GEORGE F. VANDERSLICE, Vice President and Comptroller Robertson and Watts.

Compensation Committee: Norman Robertson, chairman; Dr. Dosson, and PAULINE L. VETOVITZ, Assistant Secretary Messrs. Nobio and Simpson.

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

HELEN J. WOLFER, Assistant Secretary Cranmor and Simpson.

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

Corporate Management Committee: Robert K. CampboII, chalrmom Messrs. Dosson, Lowis and Patrick.

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 will be succeeded as vlco president-System Power

& Engineering by Hsrfoy L. Collins, manager-Sysfom Planning and Inter-connection Affairs. James J. McBroarfy will retire June I atter 40 years with PP8 L. At that limo Iho forgo Northeast Division will be reorganized into Iwo divisions. Herbert D. Nash Jr. will become 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 will be succeeded as vice president-Consumer 8 Community Sorvicos by Merlin F. Horfzog, director-Systems and Computer Services.

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.

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