ML18040B207

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Pennsylvania Power & Light Co Annual Rept 1987. W/880330 Ltr
ML18040B207
Person / Time
Site: Susquehanna  Talen Energy icon.png
Issue date: 12/31/1987
From: Campbell R, Keiser H
PENNSYLVANIA POWER & LIGHT CO.
To:
References
PLA-3009, NUDOCS 8804060175
Download: ML18040B207 (49)
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Text

~m4 Pennsylvania Power & Light Company

~ ~ 215/7706151 Two North Ninth Street Allentown, PA 18101 Harold W. Keiser Vice President-Nuclear Operations 21 5/770-7502 MAR 30 1988 Dr. Thomas E. Murley Office of Nuclear Reactor Regulation U.S. Nuclear Regulatory Commission Washington, D.C. 20555 SUSQUEHANNA STEAM ELECTRIC STATION ANNUAL FINANCIAL REPORT Docket Nos. 50-387 PLA-3009 FILE R41-2A 50-388

Dear Dr. Murley:

In accordance with 10CFR50.71(b), enclosed is the 1987 annual report for Pennsylvania Power 6 Light Co. The annual report for Allegheny Electric Cooperative, Inc., will be forwarded later.

Very truly yours, H. W. Keiser Vice President-Nuclear Operations Attachment cc: NRC Document Control Deck (original)

NRC Region l Mr. F. I. Young NRC Sr. Resident Inspector Mr. M. C. Thadani NRC Project Manager

7 OVER ONTENTS PP8,L residential consultant Carol Seitzinger illustrates a distinguishing feature Highlights 1 of the company's marketing programs Chairman's Letter 2 personal contact. Because of Carol's marketing Year In Review 4 efforts, the Robert Gownley family of Financial Revtew 18 Frackvilie in Schuylkill County, reconsidered Financial Statements 25 their decision to install an oil hot-air heating system in their new home and instead chose Notes to Financial Statements 33 to go all-electric with a hydronic thermal Selected Financial and storage Heat Pump Plus system for their Operating Data 42 heating and cooling needs. Mr. Gownley, Officers and Directors 44 pictured with daughter Colleen, is so pteased with the system and his reasonable service bills, that three additional homeowners have committed to the Heat Pump Plus system NOTICE OF ANNUAI.NIEETING based on his testimonial. Electric heat was not The 1988 annual meeting of shareowners will the first choice for the Gownley family they be held at1:30 p.m. on Wednesday, April 27, had to be sold the benefits of electricity 1988, at the F.M. Kirby Center for the through personal contact with a PP8,L Performing Arts, Public Square, Wilkes-Barre, marketing representative. The personal touch Pa. Formal notice of the meeting and a is what has made the company successful In reservation card for meeting attendance are the past and what will help PP8L continue to included with shareowners'roxy material.

hold its competitive edge in the future. The personal touch builds credibility with PP8,L's customers. If it's a residence, company (I, ERVICE AREA consultants talk with the homeowner, if it's a business or industry, PP8,L's marketing ~ Pennsylvania Power 8 Light Co., based in Allentown, Pa., provides electric service to representatives seek out the decision-makers, more than a million homes and businesses be they owners, officers, architects or throughout a 10,5&square-mite area In 29 engineers. Personal contact builds trust for counties of Central Eastern Pennsylvania.

PP&L one customer at a time. In the long- Principal cities in the PP&L service area are run that is the company's competitive edge enthusiastic people who know their Allentown, Bethlehem, Harrisburg, Hazleton, Lancaster, Scranton, Wilkes-Barre and product applications, and know how to make Williamsport.

electricity work to provide gains in productivity, a better lifestyle, a safer energy alternative or a cost-benefit advantage. llortnern Division Pictured on pages 4 through 17 are additional Marketing 8 Economtc Development Department employees who are representative of the more than 275 people who are PP&L's marketing lifeblood throughout the company's10,000-square-mite Senlgrl Division service territory.

Harrisburg Division sancasre Division Pennsylvania

1987 1986 Customers (a) 1,097,518 1,073,146 Common Shareowners (a) . 141,843 147,611 Electric Energy Sales, Kilowatt-hours .. 82.2 Billion 30.4 Billion Interchange Power Sales, Kilowatt-hours 18.0 Billion 11.3 Billion Electricity Generated, Kilowatt-hours ............ ~... 44.6 Billion 41.5 Billion Operating Revenues $ 2.1 Billion $ 2.2 Billion Capital Provided by Investors (a) . $ 5.4 Billion $ 5.5 Billion UtilityPlant (a)

Net Plant in Service ... $ 6.0 Billion $ 5.8 Billion Construction Work in Progress . $ 0.1 Billion $ 0.2 Billion Common Stock Data Return on Average Common Equity ~....... ~........ 12.78% 12.11%

Earnings Per Share ........... ... ..... .........

~ ~ ~ ~ $ 3.32 $ 3.10 Dividends Declared Per Share . $ 2.68 $ 2.58 PP8IL

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Market Price Per Share (a). $ 38 $ 36M Book Value Per Share (a) $ 26.26 $ 25.71 Times Interest Earned Before Income Taxes 2.71 2.80 (a) At year-end.

Where the PP8L Income Dollar Went in1987 oepreclatlon Earnings Relnvested

~Yc ~~ ec SC Net Cost of Energy 18C Materials, services, Rents, etc. 1 4C Employees 15C Taxes 18C Income Indudes revenues, Other Income and the alliance Interest for funds used during constructIon.

14C

The continuation of PP&L's strong financial These sales to other utilities are made ~,<

performance in 1987 was the result of the possible by'he outstanding performanceof following three major initiatives undertaken our generating units and by our favorable over the past few years to position the mix of low-cost coal and uranium fuels.

company to succeed in a more competitive Largely because of the effectiveness of our marketplace: marketing and cost containment efforts, the

~ Aggressive marketing and service-area company's 1987 earnings were $ 3.32 per economic development, share, up 22 cents from 1986. Again this

~ Cost containment, and year, our program to refinance high-cost

~ Achieving specific operational securities at lower cost provided a significant performance objectives. contribution to 1987's earnings improvement.

These three integrated initiatives are Since holding down the price of our service designed to strengthen PP&L as a supplier of is essential in today's competitive energy low-cost and reliable electric service in a market, future earnings improvement will rapidly evolving competitive market where continue to require holding the line on costs low cost and superior customer service are and continuing to be successful in meeting essential for success. our marketing objectives.

Since a key to maintaining our competitive edge in the marketplace is holding the line on the price of our service, one of our prima- ARKETING AND ECONOMIC ry objectives is to avoid base rate increases DEVELOPMENT CHAIRMAN'S for at least the remainder of the 1980s. Our marketing and economic development Actually, PP&L's electricity rates are lower programs were more successful than ever in

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>. Hecht, vice president-reactor were replaced and more than System Power, assumed the vice president-3,300 maintenance and inspection tasks Marketing & Customer Services position held by Grayson E. McNair who moved were completed before the unit was put back in service on Nov. 24. into the System Power slot vacated by Hecht. The rotation is part of a company-wide NIT 2 SETS RECORD program that provides opportunities for "Making history at an early age, Unit 2 management personnel at all levels to established a company record on Nov. 16, when it completed its 205th consecutive day of generating electricity, breaking a 15 accept challenges needed for their Bruce D. Kenyon, senior vice president-personal development and to experience Nuclear, will succeed Nonemaker as new approaches which will be needed in senior vice president-Division Operations. managerial positions. Kenyon will continue to serve as a member George F. Vanderslice, vice president of the Corporate Management Committee. and comptroller, retired on April 1, 1987, Harold W. Keiser, vice president-after 29 years with the company. Nuclear Operations, has been appointed Vanderslice joined PP&L in 1958 as senior vice president-Nuclear and will manager of Auditing. He was named succeed Kenyon on April 1, 1988. He will manager of Budgets in 1962 and became become a member of the Corporate comptroller in 1965. He was named vice Management Committee. president and comptroller in 1975. Nonemaker joined PP&L in 1948. He Succeeding Vanderslice, Ronald E. Hill advanced through various positions in the became vice president and comptroller on company's Engineering, Union Relations April 1, 1987. and Personnel departments and in 1962 was named salary administrator. In 1964 Hill began his career with PP&L in he was appointed operating manager of 1964 as a graduate trainee. After a two- PP&L's Lehigh Division and promoted to year military leave, he rejoined the YEAR company as a systems analyst and later vice president-Lehigh Division in 1969. He subsequently served as vice was appointed an accountant in the IN: Budget Department. Following a number of advancements, he was named manager-president-Marketing and vice president-Consumer and Community Affairs, before Financial Reporting in 1979 and became being named to the position of senior vice g - 'v assistant comptroller in 1986. Gennaro D. Caliendo, vice president and president-Division Operations in 1980. As the new head of Division Operations, general counsel, was appointed to the Kenyon will have responsibility for the company's Corporate Management company's six operating divisions and the Committee, effective Jan. 1, 1988. 2,600 employees involved in the key field functions that meet the electric service Caliendo joined the company in 1968 as needs of PP&L's million-plus customers. an attorney and was named assistant counsel in 1975. He was appointed chief Kenyon joined PP&L in 1976 as counsel-Regulatory Affairs in 1978 and manager-Nuclear Support in the Power vice president and chief counsel- Production Department. He was named Regulatory Affairs in 1981. He has been manager-Construction Department in vice president and general counsel and 1978, and a year later he was promoted to head of the Office of General Counsel since assistant vice president-Nuclear. He was 1985. appointed vice president-Nuclear Operations in 1980, and had been senior Several changes in the top management vice president-Nuclear since 1985. of the company were announced in December 1987 in anticipation of the As the new senior vice president-retirement of a senior officer on April 1, Nuclear, Keiser will have responsibility 1988. for all nuclear-related functions, primarily the Susquehanna nuclear plant and all its Leon L. Nonemaker, senior vice president-Division Operations, will retire support services. About 1,200 employees comprise the plant and support staffs. April 1, 1988, after a 40-year career with PP&L. Keiser joined PP&L as superintendent of the Susquehanna nuclear plant in 1980 and supervised the station during the start of its successful commercial operation phase in the early 1980s. He became vice president-Nuclear Operations in 1985. 16 Regional Director-Economic Development "While air is free, electricity is / /1 not. We consider electricity our raw material. By com- ~4 Cl > pressing and separating air =e into its components, we manufacture hundreds of g tons of industrial gases a day. =i-- Low-cost PP8 L electricity is j.".TfI O'PD 00 0 < 9.g ~~IfUfUfII'[ p<, air. <II the primary reason we'e in Pennsylvania." 0 go ll0 G0 0903 e~s go HQ LI ci g g EONQ IIII g libel I%%5 IIIIII tl IIII 3) NIPS ID Bl IIII 9 3g g) g EID QQ QQ IIIII 9 IIII II) Ic)QQR QQ IIIIIIIII HDD gggPiIIII IIIII,IIII g >>>< gg 8 lN II IIIIIIIIII 98si S PP a a II II II II I, h 9 )IIII !3 H 0 ~ II II II II II Qtlii g )II II F-'=- I f1 l PP IE;IIIII v.-,II <lE" ~0 L David Kelerleber Manager-Cryogenic Operations l.lquld Carbonic/Industrial Medical Gases Corp. Chicago, III. Qy X" New Industries PP8 L Helped Bring To CEP Through print advertising and personal William Jermyn, PPSL RegIonal contact, PPE,L's Economic Development Dtrector.Economic regional directors generate Inquiries about Development, with Central Eastern Pennsylvania, then follow David Kelerleber. them closely in an effort to attract new industry to the area. When Liquid 1985 Carbonic/Industrial Medical Gases Corp., headquartered in Chicago, was looking for an 1986 eastern location for a new air separation plant, PP8L identified 44 sites that met their 0 requirements. After 11 separate Inspections, 0 0 and with the incentive of an attractive interruptible rate In PPLL's tariffs, the $19 million plant was located in Northampton 1987 County near Allentown. 17 Review of the Comp any's Financial Condition ancI ResLI ts of Operations This review provides a discussion of the Energy Sales and Operating Company's financial condition and res~its Revenues of operations. Additional information on Total electric energy sales were 1.8 these matters is set forth in the financial billion kwh, or 5.9%, higher in 1987 than statements, schedules and notes on, pages in 1986, reflecting increased sales to 85-41 and the selected financial and customers and increased contractual sales operating data on pages 48 and 4S. to other utilities. System sales, which exclude contractual sales to other utilities, were 1.3 billion kwh, or 5.0%, higher in 1987 than in 1986. Sales to residential customers increased 386 million kwh, or 4.4%. Sales to commercial and industrial Results of Operations customers increased 298 million kwh, or Earnings per share of common stock 4.2%, and 452 million kwh, or 5.7%, were $ 3.32 in 1987, $ 3.10 in 1986 and respectively, reflecting continued $ 2.68 in 1985. The earnings improvement economic growth and the beneficial effect reflects strong energy sales growth and of the Company's marketing and economic FINANCIAL continued cost containment initiatives, development efforts. including the favorable impact of refinanc- Contractual sales to other utilities I, ing high-cost securities at a lower cost. represent the energy sold to Atlantic City The 1987 improvement in earnings was Electric Company from the nuclear-fueled grQ somewhat reduced by an accrual for the refund of approximately $ 17.5 million Susquehanna Steam Electric Station and the energy sold to Jersey Central Power & collected from customers in prior periods Light Company (JCP&L) from all of the for certain taxes and energy costs. See Company's generating units, These sales Note 2 to Financial Statements for were 529 million kwh, or 9.9%, higher in additional information concerning this 1987 than in 1986, reflecting increased refund. output from the Company's generating The primary reason for the lower plants. earnings in 1985 was the April 1985 rate Lower costs being passed through to decision of the Pennsylvania Public Utility customers resulted in a net revenue de-Commission (PUC) which granted the crease of 4.6% for 1987. The decrease in Company only $ 121 million of the $ 330 revenues was due in part to reduced electric million net rate increase requested. rates subject to PUC jurisdiction that began Earnings and Dividends Common Stock Book Value Per Share vs. Market Price (Year EAd) Denary Prr Stare Dollars Pn Skarc 84.00 3.00 30 20 1.00 10 83 84 85 86 87 83 8S 85 86 87 H Earnings Cl Deok value per share D Dividends declared Cl Market price per share 18 n January 1, 1987 to reflect lower income are classified as a credit to operating tax expense resulting from the Tax expenses. Reform Act of 1986 (Tax Act) and a lower Billings to customers under PUC State Tax Adjustment Surcharge (STAS). jurisdiction include: (i) base rate charges; A reduction in fuel and energy costs and (ii) supplemental charges or credits for lower costs reflected in billings for energy costs and state taxes over or under contractual sales to other utilities also the levels included in base rates and (iii) contributed to the revenue decline. Since effective January 1, 1987, an Income Tax the reduction in revenues was essentially Adjustment (ITA) credit which passes the same as the decrease in these costs, the through the effect of lower income taxes revenue decline had no adverse impact on resulting from the Tax Act. Also effective earnings. Details of changes from the January 1, 1987, the Company rolled into prior year in operating revenues are base rates a level of state taxes previously shown in the schedule below. recovered through the STAS. The last Tariffs subject to PUC jurisdiction base rate increase for customers under the accounted for approximately 84% of the jurisdiction of the PUC went into effect Company's revenues in 1987. The April 1985. Billings to FERC customers, remaining 16% of revenues are regulated excluding contractual sales to other by the Federal Energy Regulatory utilities, include base rate charges and a Commission (FERC). The FERC also supplemental charge for fuel costs over regulates interchange power sales which the level included in base rates. Changes in Operating Revenues 1987 1986 1985 (M2llions of Dollars) Electric Base rate increases . $ 80.4 $ 138.2 Roll-in of state taxes into base rates ....... 92.5 State tax adjustment surcharge........... (123.5) (12.4) 8.3 Income tax adjustment credit............. (55.2) Recovery of fuel and energy costs ......... (50.0) 53.3 50.3 Change in customer usage .. 52.0 34.7 13.1 Contractual sales to other utilities......... (16.7) 59.4 200.8 Other . 0.7 23 3.8 Total electric (100.2) 217.7 414.5 Steam heat (operations sold in 1985) ........ (5.3) (0.8) Total . $ (100.2) $ 212.4 $ 413.7 Sources of Energy Dispositton of Energy 50 Bgl~ojÃea Biliioas o/Kwa 40 40 30 20 20 10 10 85 86 87 83 84 85 86 87 D Hydro and purchased power D Company use. line losses and other D Oil-fired generation D Interchange power sales D Nuclear generation D Contractual sales to other utilities D Coal. fired generation D System sales to customers 19 Net Cost of Energy billion kwh, an increase of 1.7 billion kwh In 1987, the output from the Company's or 15.4%, from 1986. The increase was generating units was a record 44.6 billion primarily due to the record generation of kwh, an increase of 3.1 billion kwh from the Susquehanna station, which resulted 1986. The increase reflects excellent in more energy available for sale to the performance of all the Company's interchange. The average price received generating units, highlighted by the for interchange power sales was 2.8 cents record generation of the Susquehanna per kwh in 1987 and 2.6 cents per kwh in station. The Company's 90% share of the 1986. The increase primarily reflects the Susquehanna station's output was 13.3 effect of higher oil prices and increased billion kwh in 1987, a 30.9% increase over demand for energy by interconnected 1986 generation. Coal-fired units utilities. generated about 26.5 billion kwh in 1987, Wages and Benefits, Other a 5.2% increase over 1986, with the balance of total generation coming from Operating Costs and Depreciation oil-fired and hydro units. Wages and employee benefits were essentially unchanged in 1987 compared to Although generation was up, total fuel 1986. Higher wages were offset by lower expense in 1987 was about the same as employee benefit costs principally that in 1986. This was primarily due to the reflecting a change in the method used to change in the mix of generation by fuel compute pension costs. See Note 11 for source in 1987 compared with 1986. additional information concerning Nuclear generation accounted for 29.8% of pensions. Other operating costs increased total output in 1987, up from 24.5% in $ 15.7 million, or 5.7%, over 1986 reflecting 1986, while higher fuel cost oil generation in part higher prices and the costs declined to 9.2% in 1987 from 13.1% in associated with increased generation at 1986. Also, the average cost of fuel per the Susquehanna station. Higher kwh generated by nuclear and coal-fired depreciation in 1987 reflects the normal generation was 3.4% and 2.4% lower, annual increase associated with the use of respectively, in 1987 than in 1986, while a modified straight line method of the fuel cost per kwh of oil-fired depreciating the Susquehanna station generation increased 9.1%. along with the depreciation of new The amount received for interchange facilities. power sales in 1987 was $ 77.1 million, or 26.7%, more than in 1986 due to the higher Income Taxes quantity of energy sold on the interchange Total income tax expense was $ 44 and an increase in the selling price. million lower in 1987 than in 1986 Interchange power sales in 1987 were 13.0 primarily reflecting the lower federal Capital Requirements Sources of Capital jlMt/ossa/Dollars hlillbns o/&4ars 81200 81200 1000 1000 800 800 600 600 400 200 83 81 83 86 87 83 84 83 86 87 D Other D Capital lease obligations D Security retirements D Outside financing (sales of debt and equity securities) D Construction, nuclear fuel and other leased property D Internal sources(principally from operations plus AFUDC less dividends) 20 ,income tax rate included in the Tax Act. Capital Expenditure Requirements The lower tax expense is being passed The schedule below shows actual through to PUC customers in the ITA. construction, nuclear fuel and capital lease Total income tax expense was $ 113 expenditures for the years 1985-1987 and million higher in 1986 than in 1985. Taxes current projections for the years 1988-for 1985 were reduced by the utilization of 1990. Construction expenditures during a tax loss carryforward of approximately the three years 1985-1987 totaled $ 726 $ 100 million. Taxable income in 1986 million and are expected to be about $ 845 included a full year's effect of higher rates million during the three years 1988-1990. permitted by the PUC in April 1985 and a full year's effect of contractual sales to Allowance for Funds Used JCP&L. The Tax Act repealed the investment During Construction tax credit and reduced the amount of Allowance for funds used during unused investment tax credits that can be construction (AFUDC) totaled about $ 12 used to offset 1987 and future federal million in 1987 and $ 11 million in 1986. income tax liabilities. At December 31, The total amount of AFUDC recorded in 1985 was negative due to an adjustment of 1987, approximately $ 157 million of unused investment and payroll-based tax the income tax component of AFUDC credits were available to reduce future attributable to the utilization of tax loss federal income tax liabilities. carryforwards. With no new generating facilities under construction, AFUDC is For additional information concerning not expected to be material in the income taxes, see the Schedule of Taxes on foreseeable future. See Note 6 to Financial page 29 and Notes 5 and 15 to Financial Statements for additional information Statements. concerning AFUDC. Lower Financing Costs Financing The retirement of high-cost securities During the three years 1985-1987, the during 1986 and 1987 through cash Company sold about $ 1.0 billion of generated from operations and securities and also incurred $ 258 million refinancing efforts has helped the of obligations under capital leases Company reduce interest on long-term (primarily nuclear fuel). The Company's debt and dividends on preferred and 1987 financing program involved the sale preference stock to $ 326 million in 1987 of $ 150 million of preferred stock, the from $ 360 million in 1986 and $ 376 issuance of $ 18 million of common stock million in 1985. for the Employee Stock Ownership Plan, Construction, Nuclear Fuel and Capital Lease Expenditures Actual 1985 1986 1987 Projected 1988 1989 1990 (Millions of Dollars) Construction expenditures (a) Generating facilities . $ 84 $ 150 $ 102 $ 119 $ 121 $ 110 Transmission and distribution facilities ..... 93 97 106 114 126 141 , Environmental . 6 9 21 22 20 5 Other 17 20 21 25 21 21 200 276 250 280 288 277 Nuclear fuel owned and leased 74 65 40 43 'a) 43 64 Other leased property 21 14 20 24 14 18 Total . $ 295 $ 355 $ 310 $ 347 $ 345 $ 359 Construction plans are revised from time to time to reflect changes in conditions. Actual construction costs may vary from those projected because of changes in plans, cost fluctuations, environmental regulations and other factors. Construction expenditures include AFUDC which is expected to be less than $ 20 million in each of the years 1988-1990. V the early redemption of $ 277 million of Earnings per share of common stock, at high-cost first mortgage bonds and $ 3.32, have increased to the highest level preference stock and the scheduled retire- since 1982. Certain key financial ratios, ment of $ 100 million of first mortgage which are indicators of liquidity, re-bonds and preferred and preference stock. mained at about last year's levels. The Details of the amount of securities sold ratio of the Company's pre-tax income to and redeemed and other information on interest charges dropped slightly from 2.8 sources and uses of funds during 1985- times in 1986 to 2.7 times for 1987. The 1987 are set forth in the Statement of cash flow coverage of the Company's com-Changes in Financial Position on page 28. mon stock dividends was 3.2 times for Internally generated funds during the 1987. This is the highest level for this ratio next three years are expected to in many years. essentially meet the Company's needs for Future financial condition and earnings construction expenditures, maturing long- performance could be adversely affected term debt, and preferred and preference by many factors including unanticipated stock sinking fund requirements, which increases in future capital requirements, are expected to aggregate about $ 1.0 the level of economic activity in the billion. As a result, outside financing will Company's service area, future action by be undertaken primarily to provide funds legislative bodies or rate-regulatory for the reduction of short-term debt, the agencies and additional costs incurred in early retirement of certain high-cost connection with the Company's program of securities or to take advantage of favor- phasing out affiliated coal-mining able market conditions. The exact amount, operations. Of particular importance in nature and timing of sales of securities 1988 is the Company's need to request will be determined in the light of market regulatory approval to change the method conditions and other factors. of depreciating the Susquehanna station to comply with the provisions of a new accounting standard. See Note 14 to Financial Condition Financial Statements for additional The Company's overall financial information concerning this accounting condition continued to improve in 1987. standard. Times Interest Cash Flow Coverage Charges Earned of Common Stock Dividends (12 Months Ended Each Quarter) (12 Months Ended Each Quarter) Tieue Zoracd(&r.Tcu) 83 81 88 86 87 83 84 83 86 87 22 ..Index of Financial Data Auditors'pinion 23 Management's Report on Responsibility for Financial Statements...... 24 Financial Statements Statement of Income . 25 Balance Sheet. 26 Statement of Changes in Financial Position 28 Schedule of Taxes . 29 Schedule of Capital Stock 30 Schedule of Long-Term Debt. 32 Statement of Earnings Reinvested . 33 Notes to Financial Statements 33 Selected Financial and Operating Data 42 Auditors'pinion Deloitte Has kins+Sells One World Trade Center Certified Public Accountants New York, New York 10048 To the Shareowners and Board of Directors of Pennsylvania Power & Light Company: We have examined the balance sheets of Pennsylvania Power & Light Company as of December 31, 1987 and 1986 and the related statements of income, earnings reinvested, and changes in financial position for each of the three years in the period ended December 31, 1987. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances. In our opinion, such financial statements present fairly the financial position of the Company at December 31, 1987 and 1986 and the results of its operations and the changes in its financial position for each of the three years in the period ended December 31, 1987, in conformity with generally accepted accounting principles consistently applied during the period except for the change, with which we concur, in 1987 in the method of accounting for pension costs as described in Note 11 to the financial statements. February 3, 1988 J Management's Report on Responsibility.. for Financial Statements The management of Pennsylvania program to evaluate the Company's Power & Light Company is responsible for internal accounting controls, policies and the preparation, integrity and objectivity procedures as to adequacy, application of the financial statements and all other and compliance. sections of this annual report. The Deloitte Haskins & Sells, independent financial statements have been prepared certified public accountants, have been in conformity with generally accepted engaged to examine the Company's accounting principles and the Uniform financial statements and to render an System of Accounts prescribed by the opinion as to whether such financial Federal Energy Regulatory Commission. statements, considered in their entirety, In preparing the financial statements, present fairly the Company's financial management makes informed estimates position, operating results and changes in and judgments of the expected effects of financial position, in conformity with events and transactions based upon cur- generally accepted accounting principles. rently available facts and circumstances. Their examination is conducted in The Company maintains a system of accordance with generally accepted internal accounting controls designed to auditing standards and includes such provide reasonable, but not absolute, procedures believed by them to be assurance that assets are safeguarded and sufficient to provide reasonable assurance that transactions and events are executed that the financial statements are not in accordance with management's materially misleading and do not contain authorization and are recorded properly to material errors. permit preparation of financial statements The Board of Directors, acting through in accordance with generally accepted its Audit Committee, oversees accounting principles. The concept of management's responsibilities in the reasonable assurance recognizes that the preparation of the financial statements. In cost of a system of internal accounting performing this function, the Audit controls should not exceed the benefits Committee, which is composed of directors derived and that there are inherent who are not employees of the Company, limitations in the effectiveness of any meets periodically with management, the system of internal accounting controls. internal auditors and the independent Fundamental to the control system is the certified public accountants to review the selection and training of qualified work of each. Deloitte Haskins & Sells and personnel, an organizational structure the internal auditors have free access to that provides appropriate segregation of the Audit Committee and to the Board of duties and the utilization of written Directors, without management present, policies and procedures. In addition, the to discuss internal accounting control, Company maintains an internal auditing auditing and financial reporting matters. 4 Statement of Income 1987 1986 1985 (Thousands of Dollars) Operating Revenues (Note 2) $ 2,088,759 - $ 2,188,925 $ 1,976,502 Operating Expenses Net cost of energy Fuel 640,461 641,740 756,295 Power purchases. 101,552 90,379 164,968 Interchange power sales. ~866,556) ~(289,422 ~587,618) 375,457 442,697 338,645 Wages and employee benefits . 277,486 280,936 259,670 Other operating costs. 298,021 277,286 272,147 Depreciation (Note 14) . 169,792 155,073 141,912 Income taxes(Note 5) . 287,790 282,712 243,160 Taxes, other than income . 150,638 160,896 170,405 Deferred Susquehanna energy savings net of operating expenses (Note 3) . 29,075 1,504,179 1,599,600 1,450,014 Operating Income 584,580 589,325 526,488 Other Income and (Deductions) Allowance for equity funds used during construction (Note 6) . 8,473 (1,443) (51,490) Deferred Susquehanna capital costs (Note 8) .. 31,742 Income tax credits (Note 5) 5,570 6,959 80,764 Other net . (6,188) (2,709) (7,670) 2,855 2,807 53,346 Income Before Interest Charges .. 587,435 592,132 579,834 Interest Charges Long-term debt . 271,827 290,783 284,538 Short-term debt and other . 21,935 14,036 26,872 Allowance for bor rowed funds used during construction (Note 6) . ~8,788) 12,795 22,189 284,974 292,024 289,221 Net Income 802,461 300,108 290,613 Dividends on Preferred and Preference Stock .. 54,426 69,057 91,286 Earnings Applicable to Common Stock ..... $ 248,085 $ 231,051 $ 199,327 Earnings Per Share of Common Stock (a) .. 8.82 $ 3.10 $ 2.68 Average Number of Shares Outstanding (thousands) .. 74,644 74,513 74,513 Dividends Declared Per Share of Common Stock .. $ 2.68 $ 2.58 $ 2.56 (a) Based on average number of shares outstanding. See accompanying Schedules and Notes to Financial Statements. 25 at December 51 Assets 1987 1986 (Thousands of Dollars) UtilityPlant Plant in service at original cost ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ $ 7,862,661 $ 7,072,142 Less accumulated depreciation (Note 14) 1,392,661 1,256,304 5,970,000 5,815,838 Construction work in progress at cost . 141,960 224,426 Nuclear fuel owned and leased net of amortization (Note 8) 334,315 378,432 Other leased property ~ ~ net of amortization (Note 8) ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 82,445 78,433 6,528,720 6,497,129 Investments Associated companies at equity 42,806 22,538 Receivable from litigation settlement 9,700 Nonutility property and other at cost or less ~ 28,205 17,065 70,511 49,303 Current Assets Cash 5,116 4,049 Special deposit for purchase of nuclear fuel 8,485 8,550 Accounts receivable (less reserve: 1987, $ 8,051; 1986, $ 7,262) Customers ~ 173,801 165,844 Interchange power sales ~ 29,248 29,501 Other 7,906 9,407 Unbilled revenues 68,478 90,484 Fuel (coal and oil) at average cost 141,158 189,674 Materials and supplies at average cost. 38,096 28,647 Common stock held for dividend reinvestment plan ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ at cost (Note 7) 9,898 10,816 Other ~ 21,028 19,601 498,189 506,573 Deferred Debits Utilityplant carrying charges net of amortization (Note 13) ~ 28,237 28,605 Unamortized debt expense and reacquired debt costs ~ ~ ~ ~ ~ ~ ~ ~ ~ 87,735 23,346 Other ~ 36,168 34,116 102,135 86,067 87,194,555 $ 7,139,072 26 See accompanying Schedules and 1Votes to Financial Statements. Liabilities 1987 1986 (T/~ousands of Dollars) Capitalization Common equity Common stock $ 1,825,525 $ 1,307,267 Capital stock expense .. (12,987) '14,155) Earnings reinvested... 657,388 622,537 1,969,971 1,915,649 Preferred and preference stock With sinking fund requirements..... 495,590 475,239 Without sinking fund requirements. 281,875 231,375 Long-term debt . 2,514,056 2,732,223 5,210,992 5,354,486 Current Liabilities Commercial paper ..................... 168,000 112,000 Long-term debt due within one year . 20,710 46,568 Capital lease obligations due within one year (Note 8).... ~.... .. ~ 88,522 74,360 Accounts payable 105,450 101,205 Taxes accrued 39,877 65,606 Interest accrued ..... .. ~ ~ .................................. ~ 69,622 78,425 Dividends payable. 64,286 61,063 Energy revenues to be refunded 42,827 Other . 73,799 71,044 667,093 605,271 Deferred Credits and Other Noncurrent Liabilities Deferred investment tax credits (Note 5) . 218,638 190,797 Deferred income taxes (Notes 5 and 15) 728,678 601,911 Capital lease obligations (Note 8) . 825,862 329,438 Other . 58,297 57,169 1,816,470 1,179,315 Commitments and Contingent Liabilities (Note 16) . ~.... $ 7,194,555 $ 7,139,072 See accompany& tg ScAedules and Notes to Financial Statements. 27 \ Statement of Changes in Financial position 1987 1986 1985 Source of Funds (Thousands of Dollars) From operations Net income $ 302,461 $ 300,108 $ 290,613 Charges (credits) to income not involving working capital Depreciation ~ 169,792 155,073 141,912 Amortization of property under capital leases ~ ~ 87,516 71,380 77,850 Noncurrent deferred income taxes and investment tax credits net ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 144,598 205,064 133,103 Allowance for funds used during construction. (12,261) (11,352) 29,301 Other ~ ~ (1,525) ~922 (5,406) 690,581 719,351 667,373 Outside financing Common stock 18,258 Preferred stock 150,000 100,000 First mortgage bonds 500,000 180,000 Short-term debt net increase (decrease) ~ ~ ~ 56,000 16,500 (9,300) 224,258 616,500 170,700 Capital lease obligations 96,808 81,595 79,533 Working capital ~ ~ decrease (excluding debt and capital lease obligations) (a) ~ 35,902 $ 1,047,549 $ 1,417,446 $ 917,606 Application of Funds Construction expenditures ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 249,653 $ 275,761 $ 199,851 Additions to nuclear fuel owned and leased ~ ~ ~ ~ ~ 40,014 65,282 74,344 Additions to other leased property 20,000 14,146 20,418 Allowance for funds used during construction ~ ~ ~12,261) ~11,352) 29,301 297,406 343,837 323,914 Securities retired Preferred and preference stock 129,649 315,771 47,017 First mortgage bonds 247,240 323,470 76,534 Secured term notes ~ 100,000 376,889 639,241 223,551 Reduction in capital lease obligations ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 91,222 74,327 84,530 Dividends on preferred, preference and common stock 254,429 261,298 282,036 Premium on redemption of preference stock. ~ ~ ~ ~ 9,264 27,283 Premium on retirement of long-term debt ~ ~ 14,160 17,540 Working capital ~ ~ ~ ~ ~ increase (excluding debt and capital lease obligations) (a) 72,510 14,927 Other net ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 4,179 ~13,590) ~11,352 $ 1,047,549 $ 1,417,446 $ 917,606 (a) Changes in components of working capital (excluding debt and capital lease obligations) Cash $ 1,067 $ (566) $ (1,839) Accounts receivable. 6,198 (1,048) 48,234 Unbilled and refundable revenues . (69,338) 91,753 70,594 Fuel (coal and oil) 1,479 (14,898) (43,289) Accounts payable and accrued taxes ~ ~ ~ ~ ~ ~ ~ 21,984 5,145 (20,053) Other-net 2,708 (7,876) (38,720) Net increase (decrease). $ (35,902) $ 72,510 $ 14,927 28 See accompanying Schedules and Notes to Financial Statements. ~ ~ Sc:heclLIle 4( of Taxes 1987 1986 1985 (Thousands of Dollars) Income Tax Expense (Note 5) Included in operating expenses Provision Federal . $ 65,635 $ 37,713 $ 78,648 State 22,922 27,728 23,458 88,557 65,441 102,106 Deferred Federal .. 118,879 130,576 107,954 State .. 6,338 5,092 ~(2,308 119,717 135,668 105,646 Investment tax credit, net Federal....... 29,516 81,603 35,408 287,790 282,712 243,160 Included in other income and deductions Provision (credit) Federal .. (5,313) (67,005) State ............ ~1,646 ~13,759 ~7,620) (6,959) (80,764) Deferred Federal 1,668 State . 387 2,050 ~5,570) (6,959) (80,764) Total income tax expense Federal 204,010 244,579 155,005 State 28,210 31,174 7,391 $ 282,220 $ 275,753 $ 162,396 Detail of deferred taxes in operating expenses Tax depreciation... ~.... ~ $ 106,601 $ 129,838 $ 130,237 Reacquired debt costs 5,801 9,557 State utility realty tax .. ~ 2,549 (3,033) (13,291) Deferred Susquehanna energy savings net of operating expenses . (15,811) Other . 4,766 694 4,511 $ 119,717 $ 135,668 $ 105,646 Reconciliation of Income Tax Expense Indicated federal income tax on pre-tax income at statutory tax rate (1987: 39.95%; 1986-1985: 46%) ........ $ 213,605 $ 264,896 $ 208,384 Increase (decrease) due to: State income taxes 18,680 19,078 (1,566) Depreciation differences not normalized .. 10,258 8,987 12,290 AFUDC (Note 6)... (1,888) (5,222) 13,478 Utilization of loss carryforward.......... (52,604) Deferred Susquehanna capital costs...... (14,601) Other . ~8,935) 11,986 ~2,985 18,615 10,857 (45,988) Total income tax expense $ 282,220 $ 275,758 $ 162,396 Effective income tax rate .. 48.4% 47.9% 35.8% Taxes, Other Than Income State gross receipts. $ 88,149 $ 79,209 $ 73,549 State utility realty... 26,502 41,467 56,407 State capital stock 21,827 22,789 23,557 Social security and other.............. 19,155 17,431 16,892 $ 150,633 $ 160,896 $ 170,405 See accompanying Notes to Financial Statements. 29 Schedule of Capital at December 51 Shares Outstanding Outstanding Shares 1987 1986 1987 Authorized (Thousands of Dollars) Preferred Stock $ 100 par, cumulative (a) 4i/2% $ 53,019 $ 53,019 530,189 629,936 Series. 528,846 415,446 5,283,456 10,000,000 581,365 $ 468,465 Preference Stock no par, cumulative (a) ~ ~ ~ $ 145,600 $ 238,149 1,456,000 5,000,000 Common Stock no par(a) .......... $ 1,328,653 $ 1,307,267 74,972,822 85,000,000 Employee Subscriptions (employee stock ownership plan) ~ ~ 1,872 $ 1,825,525 $ 1,307,267 Details of Preferred and Preference Stock (b) Optional Sinking Fund Redemption Provisions(c) Shares Price Per Shares to be Outstanding Outstanding Share Redeemed Redemption 1987 1986 1987 1987 Annually Period (Thousands of Dollars) With Sinking Fund Requirements Series Preferred 6.875% (d)........ $ 50,000 500,000 $ 106.88 100,000 1993-1997 7.00% (d) ~ ~ ~ ~ ~ ~ ~ ~ ~ 100,000 $ 100,000 1,000,000 107.00 200,000 1998-1997 7.375% (d)........ 50,000 500,000 107.38 25,000 1993-2012 7.40%... ~ ~ ~ ~ ~ ~ ~ ~ ~ 25,600 27,200 256,000 103.26 16,000 1988-2003 7.75% . . . . . ~ ~ ~ ~ ~ ~ ~ 12,000 24,000 120,000 100.00 120,000 1988 7.82% (d) ~ ~ ~ ~ ~ ~ ~ ~ ~ 50,000 500,000 107.82 100,000 1993-1997 8.00%............ 87,500 40,000 875,000 104.00 25,000 1988-2002 8.00%, Second ~ ~ ~ ~ 4,000 6,000 40,000 100.89 20,000 1988-1989 8.25%............ 20,000 30,000 200,000 100.92 100,000 1988-1989 8.75% (d) ~ ~ ~ ~ ~ ~ ~ ~ ~ 51,000 54,000 510,000 110.00 30,000 1988-2004 9.24% (d)......... 49,890 55,890 498,900 108.00 30,000 1988-2005 11.00%, Adjustable (e) (f) .......... 15,000 15,000 150,000 125.00 30,000 1989-1993 Preference $ 8.625 (f) ~ ~ ~ ~ ~ ~ ~ ~ 30,600 40,800 306,000 None 102,000 1988-1990 $ 11.00 (g) ~ ~ ~ ~ ~ ~ ~ ~ 32,849 $ 11.60 (h) ~ ~ ~ ~ ~ ~ ~ ~ 50,000 $ 495,590 $ 475,239 Without Sinking Fund Requirements 4~/2% Preferred ..... $ 53,019 $ 53,019 530,189 $ 110.00 Series Preferred 8.35% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 4,178 4,178 41,783 103.50 4.40%............ 22,878 22,878 228,773 102.00 4.60%............ 6,300 6,300 63,000 103.00 8.60% ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 22 287 22,237 222,370 104.00 9.00%......... . ~ ~ 7,763 7,763 77,630 104.00 Preference $ 8.00 ............ 35,000 35,000 350,000 101.00 $ 8.40 ............ 40,000 40,000 400,000 101.00 40,000 40,000 400,000 101.00 $ 281,875 $ 231,375 30 Se. accompanying Notes to Financial Statements. Increases (Decreases) in Capital Stock (Thousands of Dollars) 1987 1986 1985 Shares Amount Shares Amount Shares Amount Common Stock issued under employee stock ownership plan .......... 459,525 $ 16,887 Series Preferred Stock 6.875% ................. 500,000 50,000 7.00% . 1,000,000 $ 100,000 7.375% 500,000 50,000 7.40% . (16,000) (1,600) (16,000) (1,600) (16,000 $ (1,600 7.75/o........ 7.50%. 7.82%.............. (120,000) 500,000 (12,000) 50,000 (120,000) (12,000) (150,000 (120,000 15,000 12,000 8.00%................... (25,000 (2,500 25,000 (2,500 (25,000 Second............ 8.25%........ 8.00%, 8.75%................... (20,000 (100,000 (2,000 (10,000 20,000 (100,000 (2,000 (10,000 (20,000 (100,000 2,000 (10,000 9.24/o......... 10.75% (30,000 (60,000 (3,000 (6,000 30,000 30,000 265,000 (3,000 (3,000 26,500 (30,000 (650 (3,000 (65 11.00% 260,000 26,000 11.25% 150,000 15,000 14.00% . 340,000 84,000 Preference Stock $ 8.625 (102,000) (10,200) $ 11.00 (50,000) (5,000) (4,210) (421) $ 11.60 $ 13.00 149,705 14,971 (4,317) (432) $ 13.00, Second ........... 500,000 50,000 $ 13.68 .... 500,000 50,000 $ 15.00 500,000 50,000 Decreases in Preferred and Preference Stocks represent: (i) the redemption of stock pursuant to sinking fund requirements, (ii) shares redeemed pursuant to optional redemption provisions, or (iii) shares reacquired through market purchases and subsequently cancelled (used to meet sinking fund requirements). (a) Each share of preferred, preference and common stock entitles the holder to one vote on any question presented to any shareowners'eeting. (b) The involuntary liquidation price of the preferred and preference stock is $ 100 per share, and the optional voluntary liquidation price is the optional redemption price per share in effect, except for the 4~/2% Preferred and the $ 8.625 Series Preference Stocks which are $ 100 per share (plus in each case any unpaid dividends). Liquidation payments on preferred stock have priority to such payments on the preference stock. (c) The aggregate amount of sinking fund redemption requirements through 1992 are (thousands of dollars): 1988, $ 43,190; 1989, $ 35,300; 1990, $ 23,300; 1991, $ 13,100; 1992, $ 13,100. (d) On certain sinking fund redemption dates, additional shares may be redeemed up to the number of shares required to be redeemed annually. (e) Effective April 1, 1988, the dividend rate is subject to a one-time adjustment pursuant to a formula based on the then current prime rate. (f) Because certain federal income tax benefits have been lost to corporate holders of these stocks, the Company may be required to make indemnity payments sufficient to provide the holders with an agreed upon effective yield after federal income taxes. At December 31, 1987, the Company estimates that future indemnity payments would not exceed $ 4.8 million, most of which would be payable only after the stock is redeemed or is sold by the holders. (g) The Company redeemed all of the outstanding Stock on August 7, 1987 at the optional redemption price of $ 105.50 per share which included $ 1.10 per share representing an amount equal to the accrued dividends from July 1, 1987. (h) The Company redeemed all of the outstanding Stock on February 18, 1987 at the optional redemption price of $ 115.52 per share which included $ 1.52 per share representing an amount equal to the accrued dividends from January 1, 1987. See accompanying Notes to Financial Statements. at December 51 Outstanding 1987 1986 Maturity(b) (Thousands of Dollars) First Mortgage Bonds (a) 16'/2% $ 36,000 August 1, 1987 16'/% 10,400 September 1, 1987 16'/2% 10,100 10,100 August 19881, 16'/2% 10,400 10,400 September 1, 1988 12'/s% 10,000 10,000 February 1, 1989 16~/2% 7,000 7,000 August 1, 1989 16'/2% 10,400 10,400 September 1, 1989 12~/e% 10,000 10,000 February 1, 1990 16'/2% 8,500 8,500 August 1, 1990 16'/2% 10,400 10,400 September 1, 1990 12'/s% 10,000 10,000 February 1, 1991 16'/% 10,400 10,400 September 1, 1991 4s/% 80,000 30,000 December 1, 1991 12'/s% 10,000 10,000 February 1, 1992 16'/s% (c) 100,000 April 1, 1992 4s/% to 13)/2% 850,000 350,000 1993-1997 7% to 9% 265,000 265,000 1998-2002 7~/2% to 9s/4% 635,000 635,000 2003-2007 13i/4% (d) 100,000 2008-2012 9% to 13/s% . 750,000 750,000 2013-2017 First Mortgage Pollution Control Bonds (a) 5/s% Series A . 20,060 20,900 (e) 7/s% to 8/s% Series C. 20,000 20,000 (e) ll~/4% to 11~/s% Series D 70,000 70,000 (e) 10s/s% Series E 37,750 37,750 March 1, 2014 10/s% Series F>> 115,500 115,500 September 1, 2014 9/s% Series G . 55,000 55,000 July 1, 2015 2,455,510 2,702,750 Other Long-Term Debt Secured term notes (a) (f) . 100,000 100,000 March 31, 1991 Miscellaneous promissory notes ~ ~ ~ ~ 496 668 1988-1995 2,556,006 2,803,418 Unamortized(discount) andpremium net... ~21,240) (24,622) 2,584,766 2,778,791 Less amount due within one year ~ ~ ~ 20,710 46,568 $ 2,514,056 $ 2,732,223 (a) Substantially all utility plant is subject to the lien of the Company's first mortgage. Certain utility plant is also subject to the lien of a second mortgage issued as security for term notes. (b) Aggregate long-term debt maturities through 1992 are (thousands of dollars): 1988, $ 20,710; 1989, $ 28,414; 1990, $ 29,839; 1991, $ 151,339; 1992, $ 10,939. Maximum sinking fund requirements aggregate $ 32.6 million through 1992 and may be met with property additions or retirement of bonds. (c) In March 1987, the Company redeemed $ 100 million principal amount of First Mortgage Bonds, 16~/2% Series due 1992. (d) In September 1987, the Company redeemed $ 100 million principal amount of First Mortgage Bonds, 131/4% Series due 2012. (e) Bonds mature annually as follows (thousands of dollars): (i) Series A on May 1, 1988, $ 60; 1989-2002, $ 900; 2003, $ 7,400 (ii) Series C on April 1, 2000, $ 4,000; 2006-2009, $ 2,000; 2010, $ 8,000 (iii) Series D on November 1 2002, $ 15,000; 2012, $ 55,000. ~ (f) Variable interest rate. 32 See accompanying Notes to Financial Statements. .Statement of Earnings Reinvesteci 1987 1986 1985 (Thousands of Dollars) Balance, January 1 $ 622,587 $ 615,102 $ 606,525 Add Net Income .... 302,461 300,108 290,613 924,998 915,210 897,138 Deduct Cash dividends declared Preferred stock at required annual rates...... 40,868 41,470 44,537 Preference stock at required annual rates..... 14,058 27,587 46,749 Common stock per share: 1987, $ 2.68; 1986, $ 2.58; 1985, $ 2.56 200,003 192,241 190,750 Costs associated with the redemption of preferred and preference stock ................ 18,186 31,875 267,615 292,678 282,036 Balance, December 31 $ 657,888 $ 622,537 $ 615,102 Notes to Einancial Statements

1. Summary of Significant Accounting Policies Accounting Records UtilityPlant and Depreciation Accounting records are maintained in Additions to utility plant and accordance with the Uniform System of replacement of units of property are Accounts prescribed by the Federal capitalized at cost. The cost of units of Energy Regulatory Commission (FERC) property retired or replaced is removed and adopted by the Pennsylvania Public from utility plant accounts and charged to UtilityCommission (PUC). accumulated depreciation. Expenditures Affiliated Companies for maintenance and repairs of property Investments in unconsolidated and the cost of replacing items determined to be less than units of property are subsidiaries (all wholly owned) and in Safe Harbor Water Power Corporation (of charged to operating expense.

which the Company owns one-third of the F<or financial statement purposes, outstanding capital stock representing depreciation is being provided over the one-half of the voting securities) are estimated useful lives of property and is recorded using the equity method of computed using a modified straight line accounting. Unconsolidated subsidiaries method for the nuclear-fueled operate in the United States and are Susquehanna Steam E<lectric Station and engaged in coal mining, holding coal the straight line method for all other reserves, oil pipeline operations and real property. These methods are also used for estate investment. All unconsolidated rate-making purposes. The modified subsidiaries considered in the aggregate straight line method provides for an would not constitute a "significant increasing amount of annual depreciation subsidiary" as that term is defined by the for the Susquehanna station until the year Securities and Exchange Commission. 2000, at which time the plant's net In October 1987, the F<inancial undepreciated cost will be depreciated in Accounting Standards Board (FASB) equal annual amounts over the plant's issued Statement of Financial Accounting remaining life. Provisions for Standards (SF<AS) 94, ConsoHdation of All depreciation, as a percent of average Majority-owned Subsidiaries. In depreciable property, approximated 2.4% accordance with the provisions of SF<AS in 1987 and 2.2% in 1986 and 1985. 94, the Company in 1988 will prepare The method of depreciation for the consolidated financial statements which Susquehanna station is considered to be a include majority-owned subsidiaries. The rate phase-in plan under accounting rules most significant effect on the Company's adopted by the FASB in 1987. The financial statements will be the addition of Company intends to request regulatory subsidiary assets and liabilities approval in 1988 to change its method of (approximately $ 268 million at December depreciating the Susquehanna station. 31, 1987) on the balance sheet. (See Note 14.) Nuclear Decommissioning and customers are billed an estimated amount Fuel Disposal for fuel and other energy costs. Any An annual provision for decommis- difference between the actual and sioning costs of the Susquehanna station, estimated amount for such costs is equal to the amount allowed for rate- collected from or refunded to customers in making purposes, is charged to operating a subsequent period. Revenues applicable expense. Such amounts are invested in a to ECR billings are recorded at the level of trust fund which can be used only for actual energy costs and the difference is future decommissioning costs. recorded as payable to or receivable from The U.S. Department of Energy (DOE) customers. is responsible for the permanent storage Effective January 1, 1987, the Company and disposal of spent nuclear fuel removed began to apply an Income Tax Adjustment from nuclear reactors. The Company (ITA) credit to PUC customers'ills to currently pays DOE a fee for future reflect the reduction in income tax disposal services and recovers such costs expense due to the Tax Reform Act of in customer rates. 1986 (Tax Act). Any difference between the ITA credited to customers and the Premium on Reacquired Company's actual change in income tax Long-Term Debt expense due to the Tax Act is also As provided in the Uniform System of collected from or refunded to customers Accounts, the premium paid and expenses in a subsequent period. The Company incurred to redeem long-term debt are records any such difference as payable to deferred and amortized over the life of the or receivable from customers. new debt issue or the remaining life of the retired debt when the redemption is not Income Taxes financed by a new issue. The Company and its subsidiaries file a consolidated federal income tax return. Allowance for Funds Income taxes are allocated to the Used During Construction individual companies based on their As provided in the Uniform System of respective taxable income or loss and Accounts, the cost of funds used to finance investment and payroll-based tax credits. construction projects is capitalized as part Income taxes applicable to the Company of construction cost. The components of are allocated to operating expenses and allowance for funds used during other income and deductions on the construction (AFUDC) shown on the Statement of Income. Statement of Income under other income Deferred income taxes are recorded for and deductions and interest charges are timing differences between book and non-cash items equal to the cost of funds taxable iricome to the extent they are capitalized during the period. permitted in rate determinations by AFUDC serves to offset on the regulatory agencies. The principal item Statement of Income the interest charges for which deferred taxes is not currently on debt and dividends on preferred and recorded is the difference between tax preference stock incurred to finance depreciation and book depreciation related construction. In addition, a return on to property placed in service prior to 1981. common equity used to finance Investment and payroll-based tax construction is imputed. (See Note 6.) credits result in a reduction of federal income taxes payable. The investment tax Capital Leases credits are deferred when utilized and Capital leased property is recorded at amortized over the average lives of the the present value of future lease payments related property. The Tax Act repealed and is amortized so that the total of the investment tax credit effective interest on the lease obligation and December 31, 1985, except for tax credits amortization of the leased property equals applicable to transition property, and the rental expense allowed for rate- repealed the payroll-based tax credit for making purposes. (See Note 8.) years after 1986. (See Note 5.) Revenues In December 1987, the FASB issued Revenues are recorded based on the new accounting rules that will affect amounts of electricity delivered to deferred income taxes recorded by the customers through the end of each Company. (See Note 15.) accounting period. This includes amounts Pension Plan customers will be billed for electricity The Company has a noncontributory delivered from the time meters were last pension plan covering substantially all read to the end of the respective period. employees. Company funding is based The Company's PUC tariffs contain an upon actuarially determined computations Energy Cost Rate (ECR) under which that take into account the amount deduct- ible for income tax pur poses and the periodic pension cost which differ from rr'finimum contribution required under the those previously used by the Company. Employee Retirement Income Security (See Note 11.) Act of 1974. Effective January 1, 1987, the Company Reclassification determined its pension cost in accordance Certain amounts from prior year with provisions of SFAS 87, financial statements have been reclassified for Pensions. This statement Employers'ccounting to conform to the current year prescribes procedures to determine presentation.

2. Rate Matters of a decrease in the maximum federal In December 1986, the PUC approved corporate income tax rate from a blended the Company's request to reduce its retail 39.95% in 1987 to 34% in 1988 under the rates by approximately $ 32 million Tax Act; (2) a $ 25.8 million increase in the effective January 1, 1987. This reduction ECR reflecting the net effect of antici-reflected the net effect of: (1) a $ 47 million pated increases in energy costs and (3) a decrease which was put in place through $ 2.2 million increase in the STAS. The the ITA to reflect lower income tax Lehigh Valley Power Committee has filed expense resulting from the Tax Act; (2) a a complaint with the PUC against the

$ 26 million decrease because of changes in ECR component of the filing. The Company the State Tax Adjustment Surcharge has filed a motion to dismiss the com-(STAS) and (3) a $ 41 million increase in plaint. The Company cannot predict the costs to be recovered through the ECR. ultimate outcome of this matter. Following a complaint filed by the In April 1985, the PUC granted $ 121 Office of Consumer Advocate generally million of the $ 380 million net rate challenging these rate changes, the increase requested by the Company to Company and other parties to the reflect the operation of Unit 2 at the proceeding entered into settlement Susquehanna station and other increased agreements which have been approved by costs of doing business. A return on the the PUC. The agreements require the common equity investment in Unit 2 was Company to refund to customers in 1988 denied based on the PUC's conclusion that approximately $ 17 million related to tax the Company temporarily had too much issues and approximately $ 0.5 million generating capacity. This adjustment related to ECR issues. Accrual of these reduced requested revenues by about $ 161 refunds adversely affected 1987 earnings million. The PUC order indicated that the by about 10 cents per share of common equity disallowance would continue until stock. the Company can show that Unit 2's net In December 1987, the PUC approved economic benefits exceed its net cost or the Company's request to reduce its retail that its capacity is necessary for system rates by approximately $ 37.5 million reliability. effective January 1, 1988. This reduction The FERC permitted a $ 5.7 million reflects the net effect of: (1) a $ 65 million increase in rates for resale customers decrease in the ITA, primarily as a result effective January 1986.

3. Deferral of Susquehanna the effective dates of the rate increases Operating and Carrying Costs reflecting operation of the units. The de-In accordance with orders of the PUC, ferred costs plus related deferred income the Company deferred certain operating taxes totaled $ 89.2 million at December and capital costs, net of energy savings, 31, 1987. The Company expects to ultimate-associated with Units 1 and 2 at the ly recover this amount in rates charged to Susquehanna station. The costs deferred customers. Such recovery will be subject were incurred from the date the units to PUC review and approval. No return is were placed in commercial operation until being accrued on the deferred costs.
4. Sales of Generating Capacity Electric Company (Atlantic) with 125,000 and Energy kilowatts of capacity and energy from the The Company provides Atlantic City Susquehanna station and Jersey Central

Power and Light Company (JCP&L) with and Electric Company (BG&E) will 945,000 kilowatts of the Company's total purchase 125,000 kilowatts of the generating capacity and energy. Sales to Company's share of capacity and related Atlantic began in 1983 and expire in 1991, energy from the Susquehanna station. when another agreement provides Atlantic Sales to BG&E will commence following with 125,000 kilowatts of capacity and the expiration of the agreement with energy from the Company's coal-fired Atlantic and will continue through May stations until the year 2000. Sales to 2001. The agreement with BG&E must be JCP&L began in 1985 and continue approved by the FERC. through 1995, with the amount then The agreements with Atlantic, JCP&L declining uniformly each year until the and BG&E provide that sales are to be end of the agreement in 1999. made at a price equal to the Company's In January 1988, the Company entered cost of providing service, which includes a into an agreement which provides that return on the Company's investment in beginning in October 1991 Baltimore Gas generating capacity.

5. Income Taxes future years. The carryforward period for The Tax Act contains numerous the unused credits at December 31, 1987 provisions that affected the Company in expires in the years 1997 to 2002. The 1987. Major provisions include a reduction amount of unused investment tax credits in the corporate income tax rate, repeal of is subject to change, pending the enactment the investment and payroll-based tax of a technical corrections act by Congress.

credits, a limitation of the amount of Taxable income for 1985 was sufficient investment tax credits the Company can for the Company to utilize a tax loss currently utilize due to the alternative carryforward of approximately $ 100 minimum tax and a reduction of the million so that the current provision for amount of investment tax credits the income tax expense in 1985 was reduced Company can carry forward to reduce by approximately $ 58 million to reflect the future federal taxes payable. The utilization of such carryforwards. The Company is also required to capitalize for reduction in the current provision for tax purposes certain items such as income taxes was offset on the Statement interest, pension cost and payroll taxes of Income by an equal decrease in associated with construction costs which AFUDC. (See Note 6.) formerly were deductible when incurred. The Company has not recorded deferred Total federal income tax expense was income taxes for certain timing differ-reduced in 1987 and is expected to be ences in accordance with PUC rate further reduced in 1988 as a result of the treatment. The cumulative net amount of Tax Act. The net reduction in tax expense such timing differences for which deferred due to the Tax Act is passed through to income taxes have not been recorded PUC customers by application of the ITA. approximated $ 634 million at December The Company estimates that, after 31, 1987. The Company would expect to giving effect to reductions required by the recover through electric revenues the Tax Act, approximately $ 141 million of taxes when due in future years. investment and $ 16 million of payroll- See Note 15 for information concerning based tax credits will be available to a new accounting statement for income reduce income tax liabilities in 1988 and taxes.

6. Allowance for Funds Used Accordingly, effective January 1, 1987, the During Construction Company stopped reducing AFUDC by Through 1986, AFUDC was recorded on any tax savings and began recording de-an after-tax basis with the equity ferred income taxes for the tax effectof any component reduced by the income tax difference between the amount of construc-savings realized due to the tax deducti- tion interest capitalized through AFUDC bility of construction-related interest. The and that capitalized for tax purposes.

tax savings related to the deductibility of Taxable income for 1985 was sufficient construction interest was included in to permit the Company to utilize a tax loss income tax credits under other income and carryforward that existed at the end of deductions on the Statement of Income. 1984. The loss carryforward was due in Under the Tax Act, most construction part to the large amount of construction interest is no longer deductible. interest incurred in prior years. As a 36 result, the income tax reduction'reflected AFUDC for 1985 was reduced by about iiT AFUDC in the tax loss years was $ 58 million representing the tax effect of limited to the tax applicable to prior year construction interest included construction interest determined to be in the loss carryforward. usable as a tax deduction. Accordingly,

7. Stock Held For Dividend Common Stock which were acquired in Reinvestment Plan the open market for distribution to partici-At December 31, 1987, the Company pants in the Dividend Reinvestment Plan.

temporarily held 298,803 shares of

8. Leases Property under capital leases consists of the following (thousands of dollars):

December 31 1987 1986 Nuclear fuel, net of accumulated amortization 1987, $ 148,106; 1986, $ 106,030 ................................ $ 326,940 $ 325,365 Vehicles, oil storage tanks and other property, net of accumulated amortization 1987, $ 54,259; 1986, $ 52,119 82,445 78,433 Net property under capital leases . 8409,385 $ 403,798 Nuclear fuel lease payments, which are five years ending 1992, such payments charged to expense as the fuel is used for would decrease over the period from $ 22.0 the generation of electricity, were (millions million per year to $ 11.5 million per year. of dollars): 1987, $ 86.7; 1986, $ 68.0 and Interest on capital lease obligations was 1985, $ 78.5. Future nuclear fuel lease recorded as operating expenses on the payments will be based on the quantity of Statement of Income in the following electricity produced by the Susquehanna amounts (thousands of dollars): 1987, units. The maximum amount of unamor- $ 18,639; 1986, $ 15,889 and 1985, $ 18,256. tized nuclear fuel leasable under current Generally, capital leases contain arrangements is $ 350 million. renewal options and obligate the Company Future minimum lease payments under to pay maintenance, insurance and other capital leases in effect at December 31, related costs. The Company also has 1987 (excluding nuclear fuel) would entered into various operating leases aggregate $ 109.5 million, including $ 27.0 which are not material with respect to the million of imputed interest. During the Company's financial position.

9. Affiliated Company Transactions mining companies in 1987 at prices equal The principal transactions with to the cost of mining. The cost of coal affiliated companies involve the purchase purchased is included in the energy costs of electricity from Safe Harbor Water collected from customers. The cost of Power Corporation, the purchase of coal, affiliated coal (particularly coal from the the payment of interest and other costs Greenwich mines) has generally been related to coal reserves and the payment higher than the cost of coal purchased for oil transportation by pipeline. Costs from other sources.

related to these transactions with affiliates All the coal mined at the Greenwich aggregated (millions of dollars): 1987, mines is delivered to the Company's $ 231.2; 1986, $ 218.5 and 1985, $ 271.0. Montour generating station and presently Under equity accounting, the operations accounts for about 40% to 50% of the coal of affiliated companies resulted in after- delivered to Montour. The PUC has tax charges against the Company's net adopted a standard against which the cost income of (millions of dollars): 1987, $ 3.4; of all coal delivered to Montour will be 1986, $ 0.8 and 1985, $ 2.6. measured over a two-year trial period At December 31, 1987, the Company which began April 1, 1986. The standard had guaranteed $ 207.2 million of the is determined monthly based on the cost of obligations of affiliated companies. coal purchased by other Pennsylvania The Company purchased approximately electric utilities. At the end of the trial $ 209 million of coal from its affiliated period, the net amount of any costs in excess of, or less than, the standard for the investments in coal and facilities will be two years will be determined. Unless the recovered and that coal will be produced '. standard is continued beyond the trial at prices that will be recovered in electric period, the net amount of any costs in rates. However, the Company cannot excess of the standard will be returned to predict what future action may be taken PUC customers through the Company's by the PUC or whether future events or 1989-1990 energy cost rate. Data as to the circumstances could substantially alter standard is available for the period April the current mining plans. Adverse action 1, 1986 through August 31, 1987. For this by the PUC or adverse changes in the period, the cost of coal delivered to mining plans could result in material Montour has been less than the standard. charges against the Company's earnings. Plans have been adopted which will At December 31, 1987, the capital result in phasing out mining operations of investment by affiliated companies in coal-affiliated companies by the early 1990s. mining operations amounted to about $ 81 The Company expects that over this period million.

10. Credit Arrangements rates would be based upon certificate of The Company issues commercial paper deposit rates, Eurodollar deposit rates or and, from time to time, borrows from the prime rate.

banks to provide short-term funds The Company also maintains lines of required for general corporate purposes. credit aggregating $ 32 million with vari-Revolving credit arrangements are ous banks in return for the maintenance maintained with a group of banks of compensating balances or the payment principally as a back-up for the Company's of commitment fees. Bank borrowings commercial paper. The banks have generally bear interest at rates negotiated committed to lend the Company up to $ 200 at the time of the borrowing. million on a revolving basis in return for There were no borrowings outstanding the payment of commitment fees. Any at the end of 1987 under these credit loans made under these credit arrange- arrangements. Commitment fees incurred ments would mature on June 30, 1990 and, were (millions of dollars): 1987, $ 0.5; 1986, at the option of the Company, interest $ 0.5 and 1985, $ 1.6.

11. Pension Plan and Other million, respectively. Of these amounts, Postemployment Benefits $ 10.9 million in 1987, $ 18.7 million in 1986 The Company has a noncontributory and $ 18.9 million in 1985 were charged to defined benefit pension plan covering operating expenses, and the balance was substantially all employees. Benefits are charged to construction and other based upon a participant's earnings and accounts. The decline in 1987 pension cost length of participation in the plan, subject was principally attributable to adoption of to meeting certain minimum requirements. the new accounting statement.

Effective January 1, 1987, the Company The weighted average discount rate and adopted the provisions of SFAS 87, rate of increase in future compensation Z<mytoyers'Accounting for Pensions. used in determining the actuarial present Under this statement, net periodic pension value of the projected benefit obligation cost is determined using the projected unit were 7.5% and 6.4%, respectively. The credit method, whereas pension cost for expected long-term rate of return on plan prior years was determined using a assets was 7.0%. Plan assets consist different actuarial method. primarily of common stocks, government Pension costs for 1987, 1986 and 1985 and corporate bonds and temporary cash were $ 17.4 million, $ 29.1 million and $ 27.3 investments. The components of net pension cost for 1987 include (thousands of dollars): Service cost-benefits earned during the period. $ 23,588 Interest cost on projected benefit obligation 27,443 Actual return on plan assets (21,365) Net amortization and deferral (12,217) Net periodic pension cost 3 17.449 'he funded status of the plan at December 31, 1987 was (thousands of dollars): Ftair value of plan assets . $ 509,500 Actuarial present value of benefit obligations: Vested benefits . 244,991 Nonvested benefits . 10.716 Accumulated benefit obligation 255,707 Effect of projected future compensation 132,533 Projected benefit obligation 388,240 Plan assets in excess of projected benefit obligation ........ ~ 121,260 Unrecognized transition asset (being amortized over 23 years) ................ (99,434) Unrecognized net gain (21,826) Accrued pension cost at December 31, 1987 .... None Substantially all of the Company's for retired employees is generally recog-employees will become eligible for certain nized as expense when premiums are paid health care and life insurance benefits and were approximately (millions of dol-upon retirement. The cost of these benefits lars): 1987, $ 2.6; 1986, $ 3.5 and 1985, $ 2.0. Jointly Owned Facilities 12. At December 31, 1987, the Company owned undivided interests in the following facilities (millions of dollars): Merrill Generating Stations Creek Susquehanna Keystone Conemaugh Reservoir* Ownership Interest ............. 90.00% 12.34% 11.39% 8.37% UtilityPlant in Service ......... $ 3,839 $ 40 $ 42 Accumulated Depreciation...... 139 16 15 Construction Work in Progress................... 31 3 1 $ 18

  • Ownership interest is through a wholly owned subsidiary.

Each participant in these facilities associated with the stations is reflected on provides its own financing with the the Statement of Income. The Merrill Company advancing money to its subsi- Creek Reservoir will provide water during diary for the Merrill Creek Reservoir. The periods of low river flow to replace water Company receives a portion of the total from the Delaware River used by the output of the generating stations equal to Company and other utilities in the its percentage ownership. The Company's production of electricity. share of fuel and other operating costs

15. UtilityPlant Carrying Charges Susquehanna and Martins Creek In December 1986, the Company in generating stations. The amount is being accordance with a FERC order amortized to expense over the remaining reclassified from utility plant to deferred life of the stations. During 1987, debits $ 28.6 million of net carrying charge approximately $ 0.4 million was amortized accruals recorded on certain facilities for to expense.
14. Rate Phase-in Plan including the requirement that such costs In August 1987, the FASB issued SFAS are recovered within 10 years of the date 92, Regulated Enterprises Accounting for the deferrals began. Otherwise, the Phase-in Plans, which established new deferred costs must be charged to expense accounting rules for rate phase-in plans in the period incurred. The currently used associated with a major newly constructed modified straight line method of generating plant. Under SFAS 92, a depreciating the Susquehanna station is utility may capitalize on its balance sheet considered to be a rate phase-in plan that the costs deferred under a rate phase-in does not meet the 10-year recovery period plan if the plan meets specific criteria established in SFAS 92 to permit 39

capitalization of deferred costs. The is required to avoid making material amount of depreciation charged to charges against earnings for the customers during the first 10 years of difference between straight line and Susquehanna's life using the modified modified straight line depreciation of straight line method of depreciation is Susquehanna. substantially less than the amount As of December 31, 1987, cumulative customers would have been charged using depreciation of Susquehanna was lower by straight line depreciation. $ 207 million using the modified straight SFAS 92 is effective in 1988, but its. line method rather than the straight line application may be delayed if a utility method. For 1987, 1986 and 1985, the seeks to amend its rate phase-in plan to charge for modified straight line comply with the new accounting rules. depreciation was $ 52 million, $ 55 million The Company intends to request in 1988 and $ 55 million, respectively, less than appropriate regulatory approval to comply straight line depreciation. with the new FASB rules. Such approval

15. Accounting for Income Taxes tax reserves will be offset by a In December 1987, the FASB issued corresponding asset representing the SFAS 96, Acconnting for Income Taxes, future revenue expected to be provided which established new accounting rules through the ratemaking process.

that will change the manner in which Because the Tax Act lowered the income tax expense is determined for maximum corporate federal income tax accounting purposes. Prior accounting rate from 46%%d to 34%, most entities when rules utilized a deferred method while adopting SFAS 96 will be required to SFAS 96 utilizes a liability method under adjust their deferred income tax reserves which deferred tax liabilities are recorded to reflect the lower tax rate. However, the and adjusted for the effect of a change in Tax Act essentially prohibits utilities from tax law or rates. The new rules must be adjusting, to the 34%%d tax rate, deferred tax adopted by 1989. reserves related to depreciation. As a It is expected that SFAS 96 will require result, when the Company adopts SFAS the Company to record additional deferred 96, no substantial reduction in existing tax reserves for tax benefits previously deferred income tax reserves is expected flowed through to customers and for other because of the lower tax rate. temporary tax differences. The increased

16. Commitments and Contingent Company could be assessed at December Liabilities 31, 1987 was about $ 15 million.

The Company's construction In October 1987, the Nuclear expenditures are estimated to aggregate Regulatory Commission (NRC) amended $ 280 million in 1988, $ 288 million in 1989 its regulations to require that nuclear and $ 277 million in 1990, including power plant licensees obtain property AFUDC. See the section entitled Capital damage insurance coverage of not less Expenditure Requirements on page 21 for than $ 1.06 billion. The NRC regulations additional information. further provide that any proceeds of this The Company is a member of certain insurance must be segregated and be used, insurance programs which provide first, to place and maintain the reactor in coverage for property damage to a safe and stable condition and, second, to members'uclear generating plants. complete required decontamination Facilities at the Susquehanna station are operations before any insurance proceeds insured against property damage losses up would be made available to the Company to $ 1.5 billion under these programs. The or the trustee under the mortgage. The Company is also a member of an insurance Company must incorporate such require-program which provides insurance ments in its on-site property damage coverage for the cost of replacement power insurance policies for the Susquehanna during prolonged outages of nuclear units station before October 5, 1988. The caused by certain specified conditions. Company is unable to predict what effect Under the property and replacement the amended regulations may have at the power insurance programs, the Company time insurance proceeds would be paid. could be assessed retrospective premiums The Company's public liability for in the event the insurers'osses exceed claims resulting from a nuclear incident is their reserves. The maximum amount the currently limited to $ 720 million under 40 (t ~ provisions of the Price-Anderson, Act. The redeemed at $ 100 per share $ 87.7 million Company is protected against this of Preferred Stock representing all potential liability by a combination of outstanding shares of the 10.75%, 11.00%, commercial insurance and an industry 11.25% and 14.00% Series Preferred Stock. assessment program. In the event of a Several complaints have been filed in the nuclear incident at any of the facilities United States District Court for the owned by others and covered by the Price- Southern District of New York by holders Anderson Act, the Company could be of shares of the 10.75%, 11.00% and 14.00% assessed up to $ 10 million per incident, Series requesting a declaratory judgment but not more than $ 20 million in a that the Company's redemption of those calendar year in the event more than one three series breached the Company's incident is experienced. contractual obligations to the plaintiffs The Price-Anderson Act expired on and that (a) the Company is liable to pay August 1, 1987. However, such expiration plaintiffs amounts equal to the redemption does not affect the current public liability premiums of $ 3.59 per share with respect limitation for the Company's Susquehanna to the 10.75% Series, $ 25 per share with station. The United States House of respect to the 11.00% Series and $ 20 per Representatives has passed legislation share with respect to the 14.00% Series, renewing the Price-Anderson Act and and (b) in the alternative the redemption increasing the public liability limit to $ 7 be rescinded and plaintiffs be awarded billion. Under the legislation passed by the damages in amounts to be ascertained. House of Representatives, the Company The Company believes that it was entitled could be assessed up to $ 126 million per to call the Preferred Stock for redemption incident. The United States Senate is at a price of $ 100 per share but cannot considering similar legislation. The predict the outcome of the court Company is unable to predict what action proceedings. Congress will ultimately take regarding See Note 9 for information about the the Price-Anderson Act. Company's guarantee of affiliated In December 1986, the Company companies'bligations.

17. Quarterly Financial, Common Stock Price and Dividend Data (Unaudited)

For the Quarters Ended March 31 June 30 Sept. 30 Dec. 31 (Thousands of Dollars, Except Per Share Amounts) 1987 Operating revenues.................... $ 550,280 $ 484,354 $ 500,082 $ 554,043 Operating income .. 162,520 136,497 140,396 146,167 Net income. 91,434 64,661 69,576 76,790 Earnings applicable to common stock... 78,467 60,210 56,383 62,975 Earnings per common share (a) ........ 1.05 0.67 0.76 0.84 Dividends declared per common share (b).................... 0.67 0.67 0.67 0.67 Price per common share (c) High. 41s/e 39e/e 37s/s 37~/s Low 36s/e 34 33'/s 28s/e 1986 Operating revenues..................... $ 696,087 $ 618,614 $ 528,650 $ 546,674 Operating income .. 167,334 131,499 143,201 147,291 Net income......... 95,161 60,621 67,531 76,905 Earnings applicable to common stock..... 74,830 43,676 51,260 61,386 Earnings per common share (a) .......... 1.00 0.58 0.69 0.82 Dividends declared per common share (b)...................... 0.64 0.64 0.65 Price per common share (c) High. 33'/e 34 43e/e 40i/e Low 27s/e 31'/e 33/s 36 (a) The quarterly amounts may not equal annual earnings per share due to changes in the number of common shares outstanding during the year or rounding. (b) The Company has paid quarterly cash dividends on its common stock in every year since 1946. The dividends paid per share in 1987 and 1986 were $ 2.66 and $ 2.57, respectively. The most recent regular quarterly dividend paid by the Company was 67 cents per share (equivalent to $ 2.68 per annum) paid January 1, 1988. Future dividends will be dependent upon future earnings, financial requirements and other factors. (c) The Company's common stock is listed on the New York and Philadelphia Stock Exchanges. Selected Financial and Operating Data 1987 1986 1985 1984 1983 Income Items thousands Operating revenues . $ 2,088,759 $ 2,188,925 $ 1,976,502 $ 1,562,782 $ 1,248,397 Operating income. 584,580 589,325 526,488 406,958 289,930 Allowance for funds used during construction. 12,261 11,352 (29,301) 168,938 251,548 Net income . 302,461 300,108 290,613 318,903 296,011 Earnings applicable to common stock..... 248,035 231,051 199,327 226,758 210,173 Balance Sheet Items thousands (a) Net utility plant in service ......... ..... $ 5,970,000 $ 5,815,838 $ 5,776,687 $ 3,860,960 $ 3,847,301 Construction work in progress...... 141,960 224,426 161,684 2,020,839 1,730,228 Total assets . 7,194,555 7,139,072 6,965,639 6,910,783 6,418,509 Long-term debt . 2,534,766 2,778,791 2,604,936 2,604,506 2,387,249 Preferred and preference stock With sinking fund requirements ....... 495,590 475,239 691,010 738,027 714,830 Without sinking fund requirements..... 231,375 231,375 231,375 231,375 231,375 Common equity . 1,969,971 1,915,649 1,905,700 1,896,987 1,767,949 Short-term debt 168,000 112,000 95,500 104,800 190,000 Total capital provided by investors ....... 5,399,702 5,513,054 5,528,521 5,575,695 5,291,403 Financial Ratios Return on average common equity  % .... 12.78 12.11 10.42 12.30 12.29 Embedded cost rates (a) Long-term debt  %. 10.32 10.56 11.24 11.12 10.98 Preferred and preference stock  % ..... 7.77 8.33 10.02 9.94 9.66 Times interest earned before income taxes ....................... 2.71 2.80 2.37 2.35 2.29 Ratio of earnings to fixed charges-total enterprise basis (b) 2.54 2.59 2.19 2.06 2.04 Depreciation as % of average depreciable property ................. 2.4 2.2 2.2 2.5 2.7 Common Stock Data Number of shares outstanding thousands Year-end 74,972 74,513 74,513 74,513 70,335 Average . 74,644 74,513 74,513 72,767 68,642 Earnings per share $ 3.32 $ 3.10 $ 2.68 $ 3.12 $ 3.06 Dividends declared per share ~........... $ 2.68 $ 2.58 $ 2.56 $ 2.48 $ 2.40 Book value per share (a) ................ $ 26.26 $ 25.71 $ 25.58 $ 25.46 $ 25.12 Market price per share (a) .............. 33 $ 36 N $ 28~/i $ 25Ye $ 20~/e Dividend payout rate  %................ 81 83 96 80 79 Dividend yield  % (c) . 7.37 7.30 9.81 11.00 10.48 Price earnings ratio (c) ................. 10.95 11.39 9.76 7.24 7.48 Fuel Cost Data Cost per kwh generated-cents Coal-fired steam stations.............. 1.63 1.67 1.78 1.75 1.68 Nuclear steam station (d) ............. 0.56 0.58 0.61 0.54 0.66 Oil-fired steam station................ 3.23 2.96 5.02 5.31 5.23 Combustion turbines and diesels (oil).... 6.51 7.81 9.31 9.82 10.21 Average . 1.46 1.57 1.81 1.98 2.15 Cost of fossil fuel received at steam stations Coal per ton $ 39.30 $ 40.17 $ 42.00 $ 42.75 $ 39.37 Residual oil per barrel .............. $ 18.51 $ 16.83 $ 28.42 $ 31.32 $ 29.79 Employees (a) . 8,301 8,339 8,433 8,386 8,160 (a) Year-end. (b) Computed using earnings and fixed charges of the Company and all of its affiliated companies. Fixed charges consist of interest on short- and long-term debt, other interest charges, interest on capital lease obligations and the estimated interest component of other rentals. (c) Based on average of month-end market prices. (d) The Company's first nuclear unit was placed in commercial operation on June 8, 1983 and the second unit on February 12, 1985. (e) The winter peaks shown were reached early in the subsequent year. 5 1987 1986 1985 1984 1983 Sales Data Electric customers (a) . 1,097,518 1,073,146 1,055,546 1,039,381 1,026,144 Average annual residential kwh use........ 9,565 9,344 9,034 9,282 9,051 Electric energy sales billed millions of kwh Residential . 9,157 8,771 8,354 8,454 8,138 Commercial . 7,457 7,159 6,728 6,527 6,119 Industrial .. 8,438 7,986 7,907 8,117 7,623 Other 1,285 1,170 1,082 1,043 968 System sales 26,337 25,086 24,071 24,141 22,848 Contractual sales to other utilities........ 5,868 5,339 4,048 357 209 Total electric energy sales billed ....... 32,205 30,425 28,119 24,498 23,057 Sources of energy sold millions of kwh Generated Coal-fired steam stations.............. 26,465 25,151 26,237 26,695 26,885 Nuclear steam station (d) ............. 13,285 10,151 11,534 6,295 4,509 Oil-fired steam station ~.... ~.......... 4,095 5,453 4,316 4,121 5,581 Combustion turbines and diesels (oil) ... 28 17 18 32 45 Hydroelectric stations................ 689 739 612 747 700 44,562 41,511 42,717 37,890 37,720 Power purchases 2,707 2,032 3,716 3,765 3,880 Interchange power sales ~.......... (13,015) (11,281) (16,235) (15,377) (16,405) Company use, line losses and other .. (2,049) (1,837) (2,079) (1,780) (2,138) Total electric energy sales billed .. 32,205 30,425 28,119 24,498 23,057 Electric Revenue Data By class of service thousands Residential .. $ 737,066 $ 714,753 $ 634,669 $ 591,922 $ 529,911 Commercial . 572,623 557,216 492,686 441,651 386,617 Industrial 492,491 473,488 438,427 411,533 367,950 Other energy sales 74,228 74,047 64,223 59,526 47,275 System sales 1,876,408 1,819,504 1,630,005 1,504,632 1,331,753 Contractual sales to other utilities... 275,339 292,044 232,598 31,809 18,494 Total from energy sales billed .... 2,151,747 2,111,548 1,862,603 1,536,441 1,350,247 Unbilled revenues, net ........ (84,888) 52,344 78,545 (9,725) (119,539) Other operating revenues.......... 21,900 25,033 30,059 29,960 12,972 Total electric operating revenues ....... $ 2,088,759 $ 2,188,925 $ 1,971,207 $ 1,556,676 $ 1,243,680 Average price per kwh billed-cents Residential 8.05 8.15 7.60 7.00 6.51 Commercial . 7.68 7.78 7.32 6.77 6.32 Industrial 5.84 5.93 5.55 5.07 4.83 Total for ultimate customers ~.... 7.23 7.34 6.85 6.30 5.91 Total for all customers..... . ~... ~ 6.68 6.94 6.62 6.27 5.86 Total for system sales ...... ~.... 7.12 7.25 6.77 6.23 5.83 Generation Data Generating capability thousands of kw (a) .. 7,499 7,519 7,513 7,484 7,494 Winter peak demand thousands of kw (e)... 5,591 5,154 4,981 5,519 4,869 Generation by fuel source-% Coal 59.4 60.6 61.4 70.4 71.3 Nuclear (d) 29.8 24.4 27.0 16.6 11.9 Oil 9.3 13.2 10.2 11.0 14.9 Hydroelectric 1.5 1.8 1.4 2.0 1.9 Steam station availability  % Coal-fired . 83.3 78.8 78.6 75.2 78.8 Nuclear (d) 80.4 61.7 70.7 66.7 67.7 Oil-fired 84.7 84.7 87.2 68.0 75.8 Steam station utilization  % Coal-fired .. 72.9 69.3 72.3 73.3 74.0 Nuclear (d) . 80.5 61.3 70.5 65.7 67.5 Oil-fired 28.5 38.0 30.0 28.6 38.8 43 Officers Dir'ectors ROBERT K. CAMPBELL, Chairman of the Board, CLIFFORD L. ALEXANDERJR., President and Chief Executive Officer Washington, D.C. MERLIN F. HERTZOG, Executive Vice President- President, Alexander ck Associates Inc. Corporate Services Consultants to business, government and industry JOHN T. KAUFFMAN,Executive Vice President- ROSWELL BRAYTON SR., Woolrich Operations Chairman of the Board, 1Voolrich Inc. ilfanufacturer of garments for outdoor activities CHARLES E. RUSSOLI, Executive Vice President- JEFFREY J. BURDGE, Camp Hill Financial Chairman of the Board, Harsco Corporation. BRUCE D. KENYON, Senior Vice President-Nuclear 1lfanufacturer of processed and fabricated metals LEON L. NONEMAKER, Senior Vice President- ROBERT K. CAMPBELL, Allentown Division Operations Chairinan of the Board, President and Chief Executive Officer EDGAR L. DESSEN, Hazleton Physician-Radiologist EDWARD DONLEY, Allentown JOHN R. BIGGAR, Vice President-Finance Chairinan, Executive Committee, Air Products and GENNARO D. CALIENDO, Vice President Chemicals Inc. i'ifanufacturer ofinduslrial and and General Counsel commercial gases and chemicals JOHN M. CHAPPELEAR, Vice President-Inavstments REV. DANIELG. GAMBET, O.S.F.S., and Pensions Center Valley THOMAS M. CRIMMINS JR., Vice President- President, Allentown College of S4 Francis de Sales Pou:er Production MERLIN F. HERTZOG, Allentown ROBERT S. GOMBOS, Vice President- Executive Vice President-Corporate Services Human Resource 4 Development FRANCES R. HESSELBEIN, New York City CHARLES J. GREEN, Vice President- National Executive Director, Girl Scouts of the IIS.A. Harrisburg Division HARRY A. JENSEN, Lancaster WILLIAMF. HECHT, Vice President- Director and former Chief Executive Officer, Armstrong iifarketing ck Customer Services 1VorldIndustriesInc. Manufacturerofinteriorfurnishings and specialty products RONALD E. HILL, Vice President and Comptroller JOHN T. KAUFFMAN,Allentown HAROLD W. KEISER, Vice President- Executive Vice President-Operations Nuclear Operations HAROLD S. MOHLER, Hershey JOHN P. KIERZKOWSKI, Vice President Former Chairinan of the Board, Hershey Foods and Treasurer Corporation. Diversified manufacturer offood products CARL R. MAIO, Vice President-Lehigh Division RALPH W. RICHARDSON JR., State College GRAYSON E. MCNAIR, VicePresident-System Pou:er Consultant, agricultural and environmental sciences EDWARD M. NAGEL, Vice President and Secretary NORMAN ROBERTSON, Pittsburgh HERBERT D. NASH JR., Vice President- Senior Vice President and Chief Economisf, Central Division Me((on Bank, N.A. CLAIR W. NOLL, Vice President- CHARLES E. RUSSOLI, Allentown Procurement dc Computer Services Executive Vice President-Finaiicial JOHN E. ROTH, Vice President-Northern Division DAVIDL. TRESSLER, Scranton Chairinan of the Board and Chief Executive Officer, JOHN H. SAEGER, Vice President- Norlheastern Bank of Pennsylvania Susquehanna Division EDWIN H. SEIDLER, Vice President-Engineering P. Construction-System Power d'c Engineering BRENT S. SHUNK, Vice President-Lancaster Division JEAN A. SMOLICK, Assistant Secretary PAULINE L. VETOVITZ,Assistant Secretary Executive Committee: Robert K. Campbell, chairman; Edgar HELEN J. WOLFER, Assislant Secretary L. Desscn, Harry A. Jensen and Norman Robertson. and Assistant Treasurer Audit Commluec: David L. Tressier. chairman; Clifford L Alexander Jr.. Roswell Brayton Sr., Rev. Daniel G. Gambet, Harold S. hiohler and Ralph W. Richardson Jr. Corporate Responsibility Committee: Frances R. Hesselbein, chairman: Jeffrey J. Burdge, Edgar L. Dessen, Rev. Daniel G. Gambet, lfarold 8. Mohler and David L. Tressler. ihfanaxcmcnt Development and Compensation Committee: Corporate ihlanagemcnt Commhtcc: Robert K. Campbell. Roswell Brayton Sr. chairman: Clifford L. Alexander Jr. ~ chairman: ilferlin F. Hertzog, John T. Kauffman. Charles E. Edgar L. Dessen, Edward Donley and Norman Robertson. Russoli, Bruce D. Kenyon, Leon L. Nonemaker, Gennaro D. Nominating Committee: Ralph IV. Richardson Jr. chairman; ~ Caliendo, and Edward F. Reis, Director-Corporate Planning, Jeffrey J. Burdge, Edward Donley, Frances R. Hesselbein and serving as the committee's executive secretary. Harry A. Jensen. Form10-K and PPSL PROFILE The company's annual report filed with the Securities and Exchange Commission on Form 10-K willbe available mid-March. Each year the company publishes the PPlhL Profile, a 10-year statistical review, containing in-depth information about the company. The 1977-1987 Profile will be available in May. A shareowner may obtain a copy of thcsc publications, at no cost, by writing to Pennsylvania Power 4 Light Company, Two North Ninth Street, Allentown, PA 18101, Attention: Mr. George I. Kline, Manager-Investor Services. Bayard of Directors Alexander 8rayton Burdge Dcssen Donley Gambet Hesselbein Jensen (i >, \ / Mohler Richardson Robertson Tressler Corporate Management Committee ~ -,~ I%I Cess Reis Nonemaker Hertzog Campbell Kauffman Russoli Kenyon Caliendo ~gpss, Pennsylvania Power & Light Company Two North Ninth Street ~ Allentown, PA 18101 ~ 215 I 7705151 Securities Listed Fiscal Agents On Exchanges TRANSFER AGENTS FOR PREFERRED, NEW YORK STOCK EXCHANGE PREFERENCE AND COMMON STOCK Morgan Shareholder Services Trust Company 4'%referred Stock (Code: PPLPRB) 30 West Broadway 4.40% Series Preferred Stock Code: PPLPRA) New York, New York 10007-2192 8.60% Series Preferred Stock Code: PPLPRG) 9.24% Series Preferred Stock Code: PPLPRM) Pennsylvania Power & Light Company Preference Stock, $ 8.00 Series Code: PPLPRJ) Manager-Investor Services Preference Stock, $ 8.40 Series Code: PPLPRH) Two North Ninth Street Preference Stock, $ 8.70 Series Code: PPLPRI) Allentown, Pennsylvania 18101 Common Stock (Code: PPL) REGISTRARS FOR PREFERRED, PREFERENCE AND COMMON STOCK Morgan Shareholder Services Trust Company 30 West Broadway New York, New York 10007-2192 PHILADELPHIASTOCK EXCHANGE Pennsylvania Power & Light Company 4I//,,% Preferred Stock Manager-Investor Services 3.35% Series Preferred Stock Two North Ninth Street 4.40% Series Preferred Stock Allentown, Pennsylvania 18101 4.60% Series Preferred Stock 8.60% Series Preferred Stock DIVIDENDDISBURSING OFFICE AND 9% Series Preferred Stock DIVIDENDREINVESTMENT PLAN AGENT 9.24% Series Preferred Stock Pennsylvania Power & Light Company Preference Stock, $ 8.00 Series Vice President and Treasurer Preference Stock, $ 8.40 Series Two North Ninth Street Preference Stock, $ 8.70 Series Allentown, Pennsylvania 18101 Common Stock LITHO IM U.S.

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