ML18078B029

Annual Rept 1978.

ML18078B029
Person / Time
Site:	Salem
Issue date:	12/31/1978
From:	PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:
Shared Package
ML18078B026	List: ML18078B025 ML18078B027 ML18078B028 ML18078B029 ML19282B822
References
NUDOCS 7903160232
Download: ML18078B029 (36)

Text

L..r' _____

ANNUAL REPORT 1978 7 90 3 16 OA3~ J

r LOOKING TO THE FUTURE Philadelphia Electric Company will celebrate its lOOth anniversary in 1981 with pride in its record as a reliable veteran and confidence in its still youthful ability to meet the future.

Congratulations are already in order for the first class performance shown this year by PE's most modern production units, the nuclear power station at Peach Bottom. Other indications of the Company's farsighted planning and purpose are its work with solar energy in space and water heating and its concern for the development of electric vehicles - private automobiles and mass transit vehicles - that will be both commercially viable and energy efficient. PE's readiness for new uses for electric power is by now taken for granted.

Every day a new entertainment device, a new computer, a new medical machine or a new industrial process is plugged into our system with faith in the Company's ability to provide it with the power it needs to make it go.

An almost fully electric world li es ahead of us.

Philadelphia Electric is on the job helping it to come into being even while it continues to protect our present world from the chill of winter, the heat of summer and the darkness of night.

Toda u's electric reh icles: ready to roll i Ap11roachi11a th e future with an enerm;-liternte population.

Limerick Genernting Station*.~ nuclea1* mzils under construction: A 11ower source to bridae th e aap bet1cee11 the fossil .fuels of today and th e ;!Isl Century.

Marriaae u*ith a futur e: so /ar-a.~s is t e d heal pump.

RETURN TO REACTOR DOCKET FILES FINANCIAL 1978 1977 Percent Change HIGHLIGHTS Operating Revenue . .. ....... $1,456,758,000 $1,394, 762,000 4.4%

Operating Expenses .... ..... $1,215,110,000 $1,172,599,000 3.6%

Operating Income .. .... ..... $ 241,648,000 $ 222,163,000 8.8%

Earnings for Common Stock $ 141,349,000 $ 132,734,000 6.5%

Earnings per Common Share . $ 1.87 $1.87 Cash Dividends Paid per Common Share ........ ... $ 1.80 $1.76 2.3%

Average Common Shares Outstanding .............. 75,391,000 70,844,000 6.5%

Construction Expenditures . . . $ 411,716,000 $ 399,112,000 3.2%

Total Assets .. .. . .. ..... ... . $4,850,625,000 $4,54 7,997,000 6.7%

WHERE THE Operating Revenues: .... . .... . ... . .. . .. . 96¢ WHERE THE Compensation to Investors INCOME INCOME for Use of Their Funds . ..... ...... 20¢ Electric ........ .... . . ... . .. . ..... 80¢ DOLLAR CAME DOLLAR Interest . .. .. . .. . . .. . .. . . . .. . ... 8¢ Gas .............. . . ... ..... . ..... 13¢ Preferred Stock Dividends ...... 3¢ FROM WENT Common Dividends ............. 9¢ Steam ....... . .... . ..... . . . . .. . .. . 3¢ Fuel ........... . ..... . .......... . . 37¢ Taxes . .. ......... ....... .. .. ..... 13¢ Materials, etc. . . . . . . . . . . . . . . . . . . . . . 9¢ Depreciation . . . . . . . . . . . . . . . . . . . . . . . 8¢ Other ............................. 1¢ Wages & Benefits ................. 12¢ Other Income .... .. .................. . . H TO RE *CTOR on C ET FU.ES C'O~TENTS 1 Financial Highlights 10 Customer Affairs 3 Letter to Shareholders 11 Business Outlook 4 Elect1;c Rate Case 13 Management Changes 5 Customer Growth & Reserve Capacity 15 Financial Section 6 Ice Storm 18 Financial Statements 9 Nuclear Performance 22 Notes to Financial Statements 9 Gas Operations 27 Report of Auditors 1

Limer ic k Ge nerating Stat ion.

TO OUR SHAREHOLDERS

• Reduced Company employm ent by 311 to 94 16 people principally t hrou g h an early retirement 1978 turned out to be a little better than we thought it would. Our significant accomplishments program.

during the year were that we:

• Received about 4% more natural gas from our pipeline suppliers.

• Earned $1.87 per share.

• Began to receive gas from our own wells in the

• Received final approval for an electric rate gu If states as a r esult of our exploration program.

increase of $78.9 million .

• Reope ned gas sales to reside nt ial custom er s and

• Paid $1.80 per share in dividend s.

made plans to reope n them to co mmercial and

• Continued to deliver electric se rvice with a industrial customers in 1979.

99.99% reliability.

• Gene rated and transmitted substantial amounts

• Spent $4 12 million on construction. of power to utilities hard hi t by a national coal

• Operated our nu clear units at Peach Bottom at miners' strik e.

better than 75% capacity factor, a near record

• Recove red quickly from massive outages caused performance for the industry. by a major ice stor m and dispatched crews to

• Resc heduled the se rvice dates for the two assist in storm resto ration on Long Island , New Limerick nuclear units from 1983-1985 to 1985- York.

1987 which enabled us to reduce co nstruction A most important reason for our progr ess in 1978 expe nditures by $250 million for the years was the performance of our people. They continue to 1979-1981. be our g reatest asset.

• Held expe nses to a 3.6% increase through The rest of this report describes in more detail continued tight cost controls, while revenue ou r activ ities during t he year, what we were up increased 4.4%. agai nst, and how we responded.

• Realigned top management. We are gratefu I for the support a nd co nfidence of

• Held two regional shareholder information our shareholders, and we look forward to the future meetings in addition to our annual meeting. with co nfidence.

February 26, 1979 Chairman of the Board Executive Vice President President and Ch ief Executive Officer

The year 1978 was a year of progress f or the Com- of the Salem unit being in service but not in the pany. Rate increases necessary to recover higher rate base. However, the recent rate increase costs, to improve earnings and to continue attracting corrected this situation for the second half of new capital were obtained. Cost control programs the year.

were successf ully continued and f inancing needs were

• Operating expenses wer e up only 3.6 percent met. Planning and construction to meet future needs over 1977 due mainly to higher electric output, continued. higher gas fuel costs and increased depre-In 1978 PE's basic strengths withstood the impact ciation , which were offset by the savings of a sluggish local economy, continuing inflation, from increased nuclear generation. The Peach high interest rates and regulatory delay in granting Bottom nuclear plant achieved a more than 75 a vitally needed rate increase. Despi te these mount- percent capacity factor - a good performance ing difficulties, the Company was able to earn $1. 87 in the industry.

per share in 1978, the same as the previous year The dividend was increased in mid-1977 and a although average shares outstanding increased by 6.5 full $1.80 dividend was paid in 1978. PE has paid percent. its regular common stock dividend since 1902.

Earnings Forty-one percent of dividend s paid on common During the second half of the year, 12 months stock during 1978 represents a return of capital for earnings per share were reported at levels below federal income tax purposes, and , therefore, is not the dividend rate. This was due to delay in the rate taxable as ordinary dividend income.

relief to reflect the investment cost of the Salem No.

In 1978, operating revenue was $1.5 billion or 4.4 1 nuclear generating unit even though the unit was percent over the previous year due to higher elec-in operation. The Pennsylvania Public Utility Com-tric, gas and steam sales and rate increases. Elec-mission (PUC) rendered its final decision on tric sales were one percent higher than last year and December 28, 1978 on the $116 million electric rate gas sales were up one percent. This sluggish growth request, originally filed in August 1977. The Com-is indicative of the economic problems of the region.

pany was granted an increase of $78.9 million per The Company is adjusting to a slower growth rate year to cover the capital and operating costs of by reducing its construction program and gearing Salem and other cost increases. The increase is ret-operations to these reduced levels , while at the same roactive to July 4, 1978, and will be billed during time, an area development program is working to 1979. Financial results for calendar year 1978 hold existing customers and to attract new business include the estimated retroactive effects of the to the area.

PUC's final order and are subject to possible change since the PUC order, entered February 5, 1979, is Electric Rate Case subject to appeal. Management continues to have as an objective the The $78.9 million rate increase is offset by the establishment of prices for Company utility services fuel savings from Salem No. 1, estimated to that are equitable both to the rate payers and the approach $55 million per year, which are automati- shareholders. The Company will continue to employ cally passed on to customers through lower fuel all cost cutting efficiencies as long as they do not adjustment charges. result in a reduction in the service reliability our PE achieved total earnings of $141 million in customers desire and expect. Such policies should 1978, highest in the Company's 97-year history and enable the Company to keep th e price of its product 6.5 percent over 1977. Several important factors at levels that are reasonable when compared to contributed to the results: alternative energy sources and to general inflation ,

• The electric rate order added $21 million and will also earn a fair return for shareholder s on to 1978 earnings. their investment.

• During the first quarter of 1978, sales to other To secure such a return , on August 5, 1977 the utilities durin g the coal strike aided earnings by Company fil ed for a $116 million electric rate

$8 million. increase to provide for the cost associated with the

• The new electric Energy Clause, which became $600 million of additional plant installed since the effective July 1, has had a beneficial effect on completion of prior rate proceedings, and also to earnings by recovering the actual cost of all fuels , reimburse the Company for the inflationary including nuclear fuel and interchange energy. increases in other expense categories.

• Earnings were penalized in the first half of the The PUC granted an interim $12 million increase year by approximately 26<r per share as a result which became effecti ve on March 3, 1978, but the 4

remainder of the $116 million request was sus- growth without concern for blackouts or brownouts.

pended to July 4, 1978, the maximum suspension The continued sluggish growth in the economy of period allowed under the Law. the eastern seaboard and conservation by customers Hearings were concluded during June 1978, and has caused the Company to reduce the estimated the Administrative Law Judge in mid-November rate of growth of electric kilowatt-hour sales and of issued a recommendation for a $73 million increase. kilowatt peak load to about 3 percent annually. Due The Company, in its exceptions to that proposed to the reduced growth rate, the two Limerick order, argued that the total increase was required nuclear generating units have been rescheduled to to guarantee the future quality of service and that go in service in 1985 and 1987. The rescheduling of allowable 1977 expenses should not be denied by Limerick enabled the Company to reduce total "after the fact" judgments. construction expenditures for the next three years On December 28, 1978 the PUC came to a final (1979-1981) from $1.65 billion to $1.40 billion, a decision which granted a $78.9 million increase reduction of $250 million. At the end of 1978, the retroactive to July 4, 1978. Limerick Station was approximately 42 percent complete.

Customer Growth and Reserve Capacity In 1978, $412 million was spent on the Company's In the late 60's, because of rapid load growth, the construction program. Although expenditures for fear of "blackouts" was prevalent. Long lead times nuclear generating capacity accounted for about were needed to plan and build nuclear units which two-thirds of the construction dollar, the Company were the most economic source of energy available.

continues to provide additions and improvements to Capacity planning to meet this anticipated load the transmission and distribution systems. The growth was prudently initiated, and in fact was Company is dedicated, as in the past, to provide its encouraged by the Public Utility Commission in customers with quality service at a high level of 1968. The Commission told the industry at that time reliability.

to plan for a 10 percent per year load growth. How-ever, the Company could not justify this high rate of The construction program also includes expend-growth and planned on the basis of approximately a itures for uranium and gas exploration. Future 7 percent increase in yearly peak. sources of energy have been strengthened this year as the Company obtained uranium commitments To meet this expected growth in customers' usage to supply its nuclear units into the early 1990's. In of electricity, the Company embarked on the largest addition, gas supplies have become more plentiful.

expansion program in its history. From 1970 to 1978, $2 billion was invested in new facilities which Coal Strike more than doubled plant investment.

The oil embargo of 1973-74 caused a significant The impact of the national strike by coal miners and unpredicted change in world-wide economic during the opening three months of 1978 was borne growth and demand for energy which immediately largely by the Company's Electric Production affected customers' usage. As fuel prices soared, Department and the Purchasing and General Ser-electric bills increased rapidly and customer conser- vices Department. Coal supplies for the Eddystone vation also became significant. As early as 1974 the Units 1 and 2 and Cromby Unit 1 had been stock-Company realized that the lower load growth being piled through the autumn in anticipation of the experienced was not temporary in nature and the miners' strike. When the threat became reality the capacity planned would not be needed when origi- Company had a stockpile good for 100 days of coal-nally scheduled. However, the high cost of oil made fired generation for the three units.

it economic to complete construction of the Peach The availability of nuclear units at Peach Bottom Bottom and Salem nuclear units. The two Peach and Salem, and the operation of oil-fired units, Bottom units went into service in 1974 and the first enabled the Company to operate during the coal Salem unit in 1977. The second unit is scheduled for strike without curtailments.

completion in 1979. Long range plans to build two As the strike went on, Philadelphia Electric, nuclear units at Fulton were cancelled. normally a purchaser of economic coal-fired power The availability of nuclear capacity has many from the Pennsylvania-New Jersey-Maryland Inter-advantages for customers. It produces substantial connection (PJM), supplied energy to the Intercon-fuel cost savings and reduces dependence on nection. On January 10, with coal piles frozen solid imported oil. Today, the Company has the ability to on neighboring power systems, PE and PJM both serve existing customers with greater reliability set new winter peaks on a day of 50 MPH winds and has the ability to accommodate new customer and near zero temperatures. PE's participation in 5

the PJM Interconnection and PJM's contributions in transferring power to other systems hard-hit by the coal strike are credited with helping avert indus-trial shutdowns and large scale layoffs in areas normally dependent upon coal-fired electricity.

During the coal strike, yeoman duty was per-formed by the Peach Bottom nuclear units. Unit No.

3 had been scheduled for refueling early in March ,

but the demands for power made by the coal strike delayed the shutdown. Both Peach Bottom units stayed on through the duration of the strike, hus-banding available coal supplies and averting the need for hundreds of thousands of barrels of imported low sulphur oil that would have been needed to avert strike-caused power outages.

Nuclear power proved itself again. Without it, the early months of 1978 might have been a grim time for the Northeast.

Ice Storm The ice storm that struck Southeastern Pennsyl-vania on the weekend of January 13-15, 1978 caused service interruptions to more than 180,000 PE customers. Twenty years had passed since "Snow-drop" - the wet, clinging snow of March 1958 -

which caused massive, extended power outages.

Although many emergency situations had occurred in the past two decades, the limited damage of the 1978 storm was a demonstration of the effectiveness of t he Company's distribution line reinforcement work.

With many scattered outages reported , the crisis quickly became a question of manpower allo-cation. Twenty-two hundred operating employees were on duty, working sixteen hour schedules. With travel hampered by the icy road conditions, our employees were spending as much time clearing roads of fallen limbs as they did actually restoring power. On January 15, neighboring utilities sent 24 crews to augment our field forces. By Monday, January 16, virtually all service was restored.

The same storm had caused near di saster condi-tions on Long Island , New York. On January 16, Philadelphia Electric was able to send 35 crews with 100 linemen to aid Long Island Lighting Company restore service to its customers.

Winter didn't end with the ice storm of mid-J anuary. Blizzard conditions came later in the month without causing any major outages, but the number of underground cable failures rose rapidly. Frozen ground , and unusually large accumulations of water in underground equipment PE's diversified power generation as.~isted other uti lities con- enclosures, hampered restoration work on the front ed with strike emptied coal cars. underground circuits. Adding to the difficulty of 6

underground restoration was the problem of River. Fourteen miles above th e Company's Cono-locating manhole covers under deep snow and heavy wingo Dam, and in between the hydroelectric dams ice. The storm demonstrated how swiftly the Com- of two neighboring utilities, an ice jam formed and pany was able to respond, despite severe weather grew. Reaching ten miles in length and as deep as conditions, to restore service to customers. 45 feet, the ice threatened not only the Conowingo On January 10, 1978, the near zero temperatures Dam but also the transmission towers in mid-river had a significant impact on electric and gas use. A linking the Muddy Run Pumped Storage Plant to new winter electric system peak of 4,627 ,000 kilo- the PE system. For two months the ice buildup was watts was set, and on the same date, gas sendout monitored around the clock and preparations were was 404 million cubic feet , the Company's third made so that if the boxcar-sized pieces of ice began highest on record. moving, the PE transmission lines would be brought down without disrupting the transmission Susquehanna Ice Jam network. Loss of the Jines could have meant a shut-down of Muddy Run for as long as six months. In Throughout February and March , some measure late March the suspense broke as a benign and of the Company's attention was directed to watching gradual thaw sent the ice down river without dam-winter developments on the Lower Susquehanna age to the PE towers or dam.

PE linemen, along with other fie ld and s11pporl per sonnel. succes.~fu lly f ought la st 1l'i11 ter"s serer e ice storm an d th en boarded trucks lo help 16th restoration 011 storm-struck L ong fa/ and.

7

Nuclear Performance the 6,000 residential gas customers lost through The role of nuclear power during the coal strike demolition and abandonment since 1972. Gas supply and throughout 1978 illustrated beyond any reason- forecasts have subsequently improved to the point able doubt the wisdom of the Company's long jour- that the Company in January of 1979 asked the ney into nuclear technology. Commission to approve the resumption of gas sales to new customers of all classes.

For nuclear power and for Philadelphia Electric Company the results of 1978 are in, and they are In addition to favorable forecasts from the pipe-conclusive. The fuel savings to PE customers since line suppliers of natural gas, the Company's partici-the 1974 service dates of the two Peach Bottom pation in joint venture drilling in the Southwest has nuclear units now exceed $415 million. The PE share of the capital cost of the plant was $346 mil-lion. Nuclear generation fights inflation by reducing the use of higher priced fossil fuels. These facts satisfy the promises made for nuclear power many years ago.

The Company's operations at Peach Bottom set another enviable mark in 1978. These two units achieved 75.3 percent of maximum possible output for the year.

"This record is consistent with our belief that as we gained operating and maintenance experience, Peach Bottom would realize its expected capacity factors," said Shields L. Daltroff, Vice President, Electric Production.

Moreover, both units were shu t down during the year for refueling. The refueling of the two Peach Bottom units was completed in 50 and 40 days respectively, although the national average time required is more than 80 days.

With a complete year of the Salem nuclear unit No. 1 in service and full capacity operations at Peach Bottom, the Company's nuclear generation reached 26 percent of output during 1978. Public Service Electric and Gas of New Jersey expects the second Salem unit to come on line this year. The Company's share in the new No. 2 unit is 42 percent.

During 1978, additional supplies of uranium were placed und er contract. Philadelphia El ectric now has its full nuclear fuel requirements under firm contract into the early 1990's.

Gas Operations For Gas Operations, 1978 marked the turnaround in a six-year pattern of zero to negative sales growths. Declining gas supply forecasts in 1972 had led the Pennsylvania Public Utility Commission to order a ban on new or additional gas sales. How-ever, th e PUC rul es did permit th e one-to-one re-placement of r es idential gas customers lost through demolitions or abandonments.With improve-ments in gas supplies, the Company notified Concern with obtaining sufficient na tural gas supplies resu lt ed in the PUC in April 1978 of its intention to replace Compa1111 participation in succe.~sful drilling 1'entures.

9

resulted in deliveries of approximately one million cubic feet of natural gas per day. Gas Operations' first joint venture drilling in the Appalachians in Randolph County, West Virginia, began in December, 1978 with the promise of more wells to be drilled in that area. Through 1978 the Company has participated in the drilling of 144 natural gas wells. The record to date is 42 productive wells, 102 dry holes, and 20 drillings still in progress. The ratio of successful wells to dry holes is considered about normal in the gas production industry.

Increased underground storage capacities and the daily delivery of nine million cubic feet of refinery gas from the Sun Oil Company also added to the Company's ability to handle new gas sales.

Installations for first new gas customers since 1972 PUC prohibi tion. Customer Affairs and Conservation Conservation was the subject of more than 200 talks g iven by the Speakers' Bureau during 1978, and more than 50,000 booklets containing conserva-tion hints were di stributed to customers on request.

In addition , approximately four million bill enclo-sures on energy conservation were mailed with cus-tomers' monthly bills. These enclosures provide useful information to customers on the efficient use of energy.

Throughout the year, Corporate Communications Department coordinated PE participation in a number of community projects concerned with energy problems and the effect of conservation.

Energy Education Week was celebrated with spe-Customer communication is a multi-!aceted activity.

cial presentations and exhibits throughout the PE servi ce area. Similar activity saluted Sun Week and Save Energy Day. More than 33 energy workshops were conducted for about 800 area teachers, and a series of Youth Debates on Energy was sponsor ed.

Commercial Operations held seminars for appliance dealers, realtors, heating and air condi-tionin g contractors, in add ition to an annual seminar for builders and architects - all of which stressed the use of energy-efficient equipment and the value of proper insulation in buildings.

Customers Service Many years ago, the Company was a pioneer in the development of a Customers Service Depart-ment designed to offer a sympathetic ear to cus-tomer inquiries regarding service, billing problems Automated equipment facilitates the handling of more than two and other matters. Thousands of letters have been million telephone calls annually from our customers. received commending departmental representatives 10

for their consideration and helpfulness. The Com-pany is proud of its fine reputation in this depart-ment and intends to maintain it.

Representatives of the department are given a thorough, thirteen-week training program that includes proper telephone technique and the obtain-ing and appropriate use of information from cus-tomers' files. After training, the employees have a firm knowledge of their role, and the ability to determine quickly each customer's problem and its solution.

To facilitate the answering of inquiries, an elec-tronic telephone monitoring system was introduced.

Its most useful function is to permit forecasting of manpower requirements, so management can act in advance rather than react to changing traffic Penn 's Landing sparks Delaware rive1jront development and patterns. becomes major Philadelphia tourist attraction.

A Brightening Business Outlook Major portents of economic growth are clearly visible in the developments now moving forward in the City of Philadelphia. In 1978, work began on the center city tunnel that will link the commuter lines of the former Penn Central and Reading railroads.

This project will not only expedite commuter travel and ease automobile traffic, but attract more shoppers to its downtown areas, such as the Gallery, center city's super-shopping center.

Important elements of Franklin Town , "A City Within a City," are under construction. These include the new Franklin Plaza Convention Hotel Huge Prndential business complex typifies exploding commercial and a new office building for the world headquar- development in PE's suburban service area.

ters of SmithKline Corporation and other tenants.

Renaissance of Penn's Landing on the Delaware River continues; additional meeting rooms and exhibit areas have been added to the Civic Center; the old Bellevue-Stratford Hotel is being refur-bished to reopen as the Fairmont; construction has begun for a high-speed rail line to connect center city and the railroads with Philadelphia Interna-tional Airport; and the establishment of a free-trade zone is about to reach fruition.

Indications of renewed economic growth are also evident in the suburban counties adjoining the City of Philadelphia. The Company's Area Development Department participated in commercial and indus-trial development projects which involved 12,500 jobs within our suburban service area. A total of 97 suburban industrial parks are supplied by Company lines. Franklin Plaza complex is under construction in central Philadelphia.

11

Other Regulatory Items change energy. The new Gas Cost Rate will reflect Company interaction with regulatory agencies the annual cost of gas to the Company, and will was not restricted to rate filings. Both the gas and remain constant over a twelve month period , thus the electric fuel adjustment charges were modern- avoiding the month-to-month fluctuations that ized and improved during the year. Public Utility appeared on gas bills previously. Both the electric Commission approval was received to implement an and gas clauses have a built-in feature which will Electric Energy Charge that is based on the actual insure that the Company will neither overcollect cost of all fuels including nuclear fuel and inter- nor undercollect actual costs.

The contradictory government policies on envi-ronmental conditions and coal utilization became apparent in November when the Federal Environ-mental Protection Agency (EPA) issued a notice of violation for the Company's coal-fired generating units at the Eddystone and Cromby Stations. The Federal Clean Air Act amendments of 1977 limited the duration of an EPA consent order that permit-ted operation of the plants while the Company was constructing and testing an innovative and techni-cally complex pollution control system. The EPA concluded that the consent order expired in August 1978. Whereas, PE contended that it extended to July 1, 1979. Unable to reach agreement and unwill-ing to operate in violation of the law, the Company shut the units down on December 16.

Court action by the Company was successful in establishing the July 1, 1979 deadline and in bring-ing the coal-fired units back on line within two weeks. The Company is continuing negotiations with EPA on a new consent decree which would extend the operation of the units beyond July 1, 1979 until the new pollution control system is operative. But unresolved is the obvious conflict and confusion between EPA air standards and a Federal energy policy that calls for increasing coal-fired electric generation. Over 300 million gallons of low sulphur oil would be needed annually to replace the coal used at Eddystone and Cromby. The Company has already spent $32 million on a magnesium oxide scrubber system, and is committed to an additional

$120 million on the Eddystone project, depending on successful conclusion of the testing program. Other-wise, an alternate scrubber technology will be considered.

Regional Shareholder Meetings On an experimental basis, management held two regional meetings for shareholders in September, which were attended by more than 1,000 owners of PE stock. Quite informal, the sessions were regarded as highly successful , with questions cover-Skilled work f orce and moder n equipment make possible "same ing virtually all phases of Company operations.

dau " procp.~si11 g and deposit of customers' pa11menls. Management found the meetings to be useful exten-12

sions of the annual shareholders' meeting and looks While not a part of any wage or benefit package, forward to a continuation of this activity during the training and equipment of PE employees is 1979. designed to assist every employee to do the best pos-Management Changes sible job under the best and safest possible conditions.

Company management underwent changes in 1978. While the Chairmanship was retained by Robert F. Gilkeson, the title of Chief Executive Officer passed to President J. L. Everett.

John H. Austin, Jr., was elected Executive Vice President and was succeeded by Joseph F. Paquette, Jr., as Vice President of Finance and Accounting.

John L. Hankins, Vice President, Electric Pro-duction retired after nearly 39 years of service, and was succeeded by Shields L. Daltroff.

With the retirement of T. S. Fetter as Secretary of the Company, Lucy S. Binder was elected Secre-tary. Alfred M. Newill retired as Assistant Treas-urer. William M. Lennox and J . Robert Causton were elected Assistant Treasurers during 1978.

Employees A personnel program attracting wide attention is the "employee assistance program." The program, developed by the Company's medical department in 1971, provides counseling on a confidential basis for employees with alcoholism, drug abuse or other problems. The program has been particularly suc-cessful in reaching employees with alcohol abuse problems and the current recovery rate after in-patient treatment is almost 90 percent. In 1978, 43 employees received in-patient treatment for alco-holism at local rehabilitation centers bringing the total of those who had in-patient treatment to 167 since 1971. The dollar savings to the Company in reducing lost time and increasing productivity and other factors is approximately $900,000 per year, but the real success of the program lies in keeping many long-term, well-trained employees who might otherwise be lost to the Company. Philadelphia Electric Company is one of the pioneers in establish-ing an effective program which has been set up as a "model" by many other corporations.

The initial phase of an in-depth development pro-gram for management/supervisory employees was completed in 1978. Since May 1976, 1,830 members of the Company's management team have under-gone training to improve and upgrade managerial skills. The second phase of the program has already begun, and the exposure to new concepts of manage-ment will encourage fresh approaches to job per-PE expands the use of "hot stick " techniques lo pe1:fon11 lire lin e formance by supervisory employees. H'ork on .'34 .000 110/t distribution circuits.

13

PE celebrates anniversaries for two stations in 1978 1978 was the Golden Anniversary for Conowingo Hydroelectric Plant located on the lower Susquehanna River at Conowingo, Maryland. On March 1, 1928, Conowingo was placed in operation with the delivery of power at 220,000 volts to Plymouth Meeting Substation. The 252,000 kilowatt capacity of the station was increased to 512,000 kilowatts in 1964. In 1978 the dam was also upgraded structurally to present day design standards through a post-tension anchoring process that ran 538 steel tendon cables 70 feet into the foundation rock of the dam.

In September, more than 1,100 guests helped celebrate the 75th Anniversary of the Company's Schuylkill Generating Station located on the Schuyl-kill River in South Philadelphia. Throughout these years, the equipment and facilities at the station have been continually rebuilt and modernized. At Schuylkill Station, Philadelphia Electric Company has been utilizing "cogeneration" since 1950. Today "cogeneration" is a popular word among energy experts, and means using the waste heat in exhaust steam from electric turbine generators for other purposes. At Schuylkill, steam created to drive tur-bine generators has been fed into the Company's center city steam heating system for over 25 years.

14

Financial Section 1978 FI NANC ING PROGRAM Di v id e nd R e inv es tm e nt and Emp loyee Sto c k Inte rn a ll y ge n e r ated fund s provid e d about 47 Purcha se Plan s . Of th ese s hares 1. 4 milli on s hares pe rce nt of our 1978 co n stl' u ction ex pe nditures of we r e bought by th e 35,600 s hare h old ers that pa r-

$4 12 million w it h the ba la n ce su ppli ed by ex t e rnal ti cipate in o ur Divid e nd Re inves tm e nt and Stock financin g so urces. Purcha se Plan . Th e plan e xpe ri e n ced a 35 pe r ce nt Our 1978 fina n cin g program co n s ist e d of the sale in c r ease in parti cipation durin g th e yea r wh ich of Bond s, Pre fe rre d Stock, B a nk Not es, and Com- de mon st rates a strn n g ex press io n of co nfid e n ce in mon Stock through th e Divid e nd Re invest me n t the future of t h e Co mpany. Ov e r 21 5,000 s h ares and Empl oyee Stock Purcha se Pl a n s . we r e so ld t o e mpl oyee s h a re h old ers throug h th e In March 1978, $100 milli on of First a nd Re fund- Empl oyee Stock Purc ha se Plan , wh ich enab les in g Mortg age B o nd s du e 2008 were so ld with a e mpl oyees t o purch ase stoc k at market pri ces. A co upon rate of 9 1/s pe r ce nt. In May, 500,000 shares total of239,000 s hares were iss u e d at m a rke t pri ce~

of$100 par value 8.75 percent Preferred Stock were for th e individual acco unt s of p artic ip at in g sold private ly to in stituti o nal investo rs. e mpl oyees und e r the Company's Tax Red u ction In 1978, arrangements we r e co mpleted to borrow Act Stock Owners hip Plan (TRASOP).

$100 million by use of7 year t e rm bank loa n s . Under this arrangem e nt, $50 milli on of Bank Notes were 1979 FINANCING PROGRAM iss u e d with the remainin g $50 million available for Co nstruction s pe nding, in clu d in g the acqu is iti on u se in 1979. of nucl ea r fu e l, is ex pected t o be $4 12 milli on in A public sale of additiona l s hares of co mmon 1979, th e sa m e as 1978. Our pre limin a ry fin a n cing stoc k origina ll y plann ed for th e Fall of 1978 was plan s for 1979 co n s ist of the public sa le of 4 milli o n postpo n ed to 1979 du e to th e un certain ties caused s hares of Co mmon Stoc k and the sale of $100 mil li on by the de lay in rece iving a final order on our e lect ri c in d ebt . The remaind e r ofour n ee ds will be prov ide d rate case. by inte rnal sources , t e rm bank loa n s , and th e During 1978, a tota l of 1. 9 milli o n s hares of Co m- Divid en d Re investme n t a nd Emp loyee Stoc k Pur-mon Stock w e r e issued for $33 million through our chase Plan s .

Total Spending Construction Spending and Sources of Financing Millions of Dollars

$5 00 --

$4 00

$3 00

$200

$100 1973 1974 1975 1976 1977 1978 1979 Estimated Funds provided from: D New financings - Internal Sources Despite infl ation, the Co mpa n y's constrnction ex pe nditures h ave been 1*educed from $500 million in 1973 to $4 12 million in 1978. In ternal so u rces of co nst rn cti on fund s, which a re prim a ril y de preciation, defe rred taxes and investm e nt tax c1*ed its, have increased from $94 mi llion in 1973 to apprnxi mately $200 mi llion. Th e increa se in inte rnal fund s e n ables t he Co mpany to reduce ne w finan cings wh ich ho lds down our ca r rying* ch a rges and prnvides ou r custo me rs wit h fac ilities at a lowe r cost.

Ou r ab ility to finance abo ut 50 pe rce nt of co nst ruct ion expe nditures from inte rn a l so urces d e monstrates th e s trong*

financ ia l pos iti on of Philad elphi a E lectric Co mpany.

15

MANAGEMENT'S DISCUSSION AND ANALYSIS OF THE CONSOLIDATED STATEMENTS OF INCOME Common Stock Earnings million in 1977 over 1976 and $14.7 million in 1978 Earnings for Common Stock increased from $126 over 1977 principally reflect the recovery of higher million in 1976 to $133 million in 1977 and to $141 fuel costs. Sales of gas, excluding the effect in 1977 million in 1978. Because of the sale of additional of a change from bi-monthly to monthly meter read-shares of common stock, the average number of in g and billing, decreased 2. 7 percent in 1977 as shares outstanding increased by 8 percent in 1977 compared with 1976 due to curtailm ents by the and 6.5 percent in 1978. Earnings per share de- Company's pipeline suppliers, but increased 4.3 creased from $1.91 in 1976 to $1.87 in 1977 and re- percent in 1978 over 1977 due to increased sales to mained at $1.87 in 1978. large industrial and commercial customers.

In 1977, earnings were penalized by approxi-mately 20" per share as a result of the Salem Unit 1 Fuel and Energy Interchange Expense being placed in service on June 30, 1977, with the Fuel and energy interchange expense decreased resultant discontinuance of Allowance for Funds $1.4 million in 1978 from 1977 as nuclear generation Used During Construction (AFUDC) and the ac- increased significantly which replaced higher crual of related depreciation charges, while the priced interchange purchases. The higher nuclear unit was not reflected in rate base. A non-recuning generation is the result of improved performance in revenue increase from the conversion of residential nuclear units and the add iti on of Salem Un it 1 in and sma ll commercial customers from bi-monthly 1977. In 1977 an increase of $94 .6 million over 1976 to monthly meter reading and billing added 11" per was due to higher fuel prices and decreased coal share to 1977 earnings. generation.

Energy sales to other utilities during the coal strike in the first quarter added approximate ly 11" Other Operation and Maintenance Expenses per share to 1978 earnings. Our 1978 earnings were Other operation and maintenance expenses have reduced by appl'Oximately 26" per share as a result increased in 1978 and 1977 due to gl'Owth in utility of Salem Unit 1 being in service but not in rate base plant and inflationary pressures . Operation and until July 4, 1978. The 1978 earnings reflect approx- maintenance expenses have increased in each imately 28" per sha r e as a result of the retroactive period due to Salem Unit 1 being placed in comme r-application of the electric rate increase and cial operation on June 30, 1977.

changes in accounting practices to conform with the rate making pl'Ocess used by the Pennsylvania Depreciation Public Utility Commission (PUC) in its order In creases in depreciation in 1978 and 1977 reflect adopted December 28, 1978 and entered February major additions to new plant in service. Beginning 5, 1979. The order is subject to appeal until March 7, July 1, 1977, depreciation charges increased by ap-1979. In addition, earnings increased 6" per share proximately $950,000 per month as a result of as a result of the $12 million e lectric rate in crease Salem Unit 1 being placed in commercial operation which became effective in March 1978. on June 30, 1977.

Operating Revenue Taxes on Income Electric-Electric operating revenue in creases The Company's total in come tax ob li gation (Fed -

of $152.9 million in 1977 over 1976 and $46. 7 million eral and state) was $73 million for 1978 and $72 in 1978 over 1977 principally reflect higher rates. million for 1977. Of this obligation, $61 million in Included in the 1978 revenues is $34.6 million of 1978 and $57 million in 1977 represents our Federal recoupment i*evenue which the Company is author- income tax obligation.

ized to coll ect as a result of the PUC rate decision As shown in the calculation below, the income tax on December 28, 1978, allowing an annual e lectric rate is applied to the Company's income after de-rate increase of $78.9 million, which was retroac- ducting certain allowable expenses. And, as tax tive to July 4, 1978. laws allow, an investment tax credit is applied Sales of electricity excluding the effect in 1977 of which reduces the Federal income tax obligation.

a change from bi-monthly to monthly meter read- For accounting purposes, the current investment ing and billing, increased 2.2 percent in 1977 over tax credit is deferred and amortized over the life of 1976, and 2.0 percent in 1978 over 1977. the facilities as a current credit to Federal in come Gas-Gas operating revenue in creases of $16.0 taxes charged.

16

1978 1977 on preferred stock hav e in c r eased substantially in (Mi llions) (Millions) r ece nt yea r s because of higher costs of money a nd Operating Reve nue $1,457 $1,395 the sale of additional issues of debt and prefened Less: stoc k to help finan ce the Co mpan y's const ru ct ion Operating program.

Expenses $1,116 $1,075 Interest Expense Common Stock Dividends 179 164 The 1978 co mmon stoc k dividends paid were $1.80 Other Deductions 28 1,323 32 1,271 per share as co mpare d to $1.76 in 1977, and $1.64 in Taxable Inco me 134 124 1976. Quarte rly dividends were in cr eased from $.4 1 In come Taxes pe r s hare to $.45 per s hare beginning the eco nd on above at 48% quarter of 1977.

statutor y rate 64 59 Amo1tization of In vestment Tax Credit (3) (2)

Federal In come Tax $ 61 $ 57 Because of tax laws a ll owing for the n o rmali za-tion of th e tax deferrals resulting from acce lerated depreciation, th e c urrent tax obligation is reduced.

However, this ob li gation will eventuall y be paid by the Company in the future. Th e investment tax cred its and tax defenals we1*e provided by Con -

gress to stimulate the economy and in crease em-ployment.

The Company's obli gation for state income taxes was $12 million for 1978 and $15 million for 1977.

Through defened tax p1*ocedures (see Note 2 of Notes to Financial Stateme nt s), the Company's cu rrent obligat ion for state in co me taxes was re-duced by $5 million in 1978 and $7 million in 1977.

Investment tax credits and deferred taxes a r e part of the internall y ge n erated funds that provide a substantial portion of funds for the construction prngram.

Taxes Other Than Income T axes, other than in come taxes, hav e escalated primari ly due to in creases in revenue, which is sub-ject to a g r oss receipts tax.

Allowance for Funds Used During Construction Th e in crease in AFUDC for 1978 over 1977 and 1977over1976 r es ulted from a hi g h er cost of capital for construction, a lth ough AFUDC was reduced beginn in g August 1, 1977 by apprnximate ly $2 mil-lion per month due to the commercial ope r ation of Salem Unit 1.

Interes t Charges and Preferred Stock Dividends Inte r est c harges on long-term debt and dividends 17

CONSOLIDATED STATEMENTS OF INCOME Philadelphi a Electi;c Co mpa ny and Subsidia i*y Companies For the Year Ended December 31 1978 1977 (Th ousands of Doll ars)

Operating Electric . ...... ...... ........... .... .... ... .............. . $1,224,404 $1,177,689 Revenue Gas ............ .... .... . . ... .... . ... . ... ... ...... ... .. .. . 189,522 174,818 Steam 42,832 42,255 Total Operating Revenue 1,456,758 1,394,762 Operating Fuel and Energy Interchange . ... . . ...... ....... ... ..... . . 573,905 575,272 Expenses Other Operation Expense ....... ..... . ....... ....... ..... . . 220,543 201,231 Maintenance ......... ... ......... ... . ................ ... . 109,407 99,398 Depreciation . .................... ..... .......... .... ..... . 116,527 107,761 Taxes on Inco1ne . . ........... ..... ....................... . 98,896 97,267 Taxes, Other than Income .... .. ............ . ...... . .. .. .. . 95,832 91,670 Total Operating Expenses 1,2 15,110 1,172,599 Operating Income 241,648 222,163 Other Allowance for Other Funds Used During Construction ... .. . 37,617 36,230 Income Income Tax Credits, net .. .... ..... ..... ..... .... ...... .. . . 26,355 25,282 Other, net .... . .... .. ....... ........ . ....... ...... .... ... . 4,605 3,544 Total Other Income 68,577 65,056 Income Before Interest Charges 310,225 287,219 Interest Interest on Long-Term Debt .............................. . 176,290 161,055 Charges Interest on Short-Term Debt ............................. . 2,454 2,573 Allowance for Borrowed Funds Used During Construction .. . (53,380) (49,848)

Net Interest Charges 125,364 113,780 Net Income ........ . .... .. . .... ... . .... .. . . . .. .. . ...... ... .. . ... ..... . .. . 184,861 173,439 Preferred Stock Dividends .. . .. ... . .................... . ..... ..... ... .. . . . 43,512 40,705 Earnings Applicable to Common Stock .. .. ..... .. ... ... ............... ... . . $ 141,349 $ 132,734 Shares of Common Stock-Average (Thousands) ........................... . . . 75,391 70,844 Earnings Per Average Share (Dollars) ..................................... . $1.87 $1.87 Dividends Per Share (Dollars) .... .. ................... . .................. . $1.80 $1.76

. 'ee notes and schedules to financial s tate ments.

18

CONSOLIDATED STATEMENTS OF RETAINED EARNINGS Philadelphi a Electri c Company a nd Su bsidia ry Compa nies For the Year Ended December 31 1978 1977 (Th ou sand s of Dolla r s)

Balance January 1 ...... .. . .. . ...... . ... . .. . .... . ........ . $328,699 $321,190 Net Income (from page 18) ... .. ... .. ... ... ...... . ..... . . .. . 184,861 173,439 513,560 494,629 Cash Dividends Declared Preferred Stock .. ...... . .. . . . ... . . ... ... . . ..... . . . .. . .. . 43,877 40,712 Con1mon Stock . .. ... .. .... . . .. .. ... . ...... .. .... .... ... . 1:35,687 124,893 Expenses of Capital Stock Issues . ... ... ..... . .. .. .... . . .. . . 347 325 179,9 11 165,930 Balance, December 31 $333,649 $328,699 See notes a nd schedu les to fin a ncial s tate me n ts.

CONSOLIDATED STATEMENTS OF CHANGES IN FINANCIAL POSITIO.'.'J Philadelphi a Elect1ic Compa ny a nd Su b idia ry Compa nies Source Net Income ... .. . ... .... .. .... .. . . ... .. ..... .... .... . . . .. . $184,86 1 $173,439 of Funds Charges (Credits) Not Affecting Funds Depreciation . . . . . . .... ... ...... .. .. .. . .. ... ......... . . 11 6,527 107,761 Deferred Income Taxes, net . .. .. .... .... . . ... ... . . ... . 39,340 37,237 Investment Tax Credits, net ... . . ... . .. . ..... ... ... .. . . 31,7 17 26,488 Allowance for Other Funds Used During Construction .. . (37,617) (36,230)

Total from Operations 334,828 308,695 Sale of Long-Tenn Debt . . . . ...... .. ... . .... . ..... . ... .. . . .. .. . . 150,000 173,500 Preferred Stock .. . ... ... ... ........ .. .. .. .... . . . . ... ... . 50,000 Com1non Stock . ... . .... . .... .. ... ... ... .. .. ... ......... . 32,975 103,917 I ncrease in Short-Term Debt 1,344 7,649 Total $569, 14 7 $593,761 Use of Additions to Utility Plant . .. ......... . . . ........ . ..... . ... . $405,606 $393,134 Funds Allowance for Other Funds Used During Construction (Deduction) .. .. ..... . ..... .. .. .... . . . .. . ...... . . . . .. ... . (37,617) (36,230)

Dividends on Preferred and Common Stock . ....... . ... .. .. . 179,564 165,605 Retirement of Long-Term Debt .. .. ... .. . ... .... ... ... .... . 31,422 38,945 Increase (Decrease) in Other Items of Working Capital . ... . . (13,345) 23,433 Other, net .. . .. . .. .. ... . ... . . .. . .. . . ........ . .. . .. . .... .. . 3,517 8,874 Total $569,14 7 $593,761 See not e s and sc h edules to fin a ncial sta t e m e nts .

19

CONSOLIDATED BALANCE SHEETS Philadelphia Elect1; c Company and Subsidiary Companies December 31 ASSETS 1978 1977 (Thousands of Dolla r s)

Utility Plant, In Service at orig inal cost Electric ............................................... . $3,580,178 $3,485,102 Gas ....... .. ......... ... . ........ . . ...... . .. .. .... .... . 289,954 282,123 Steam ............ .. . ...... ........... ....... ... . ..... . 52,434 52,177 Common, used in all services . ...... .... .. .. . .. .. ..... . . 117,639 118,570 4,040,205 3,937,972 Less: Accumulated Depreciation ... . .... .... .. . ... .. . 1,053,284 955,301 Net Utility Plant in Service . .. ............ . . .... . ..... . 2,986,921 2,982,671 Construction Work in Progress ......... . ........ .... . ... . 1,345,931 1,094,157 Nuclear Fuel, at amortized cost . .... .......... . ......... . 116,320 89,019 4,44 9,172 4,165,847 Nonutility Property a nd Othe r In vestments ... .... .............. .. . .. ...... . 29,963 27 ,43 1 C urrent Cash and Temporary Investments ...... ................ .. . 38,644 30,771 Assets Accounts Receivable Custon1ers . .. ........ ...... .... .......... ............. . 151,718 163,254 Other .. ........ . . . ... ...... ... ............. . . .... ...... . 71,812 20,761 Deferred Fuel Expense ........ ... ....... ... ........ .... . 4,227 23,008 Materials and Supplies, at average cost Fuel (coal, oil and gas) .................................. . 60,535 69,811 Operating and Construction .......... . .................. . :32, 769 32,424 Prepayn1ents ......... ... .... . .. . ...... .. ..... . ... . ...... . 4,270 3,796 363,975 343,825 De ferre d De bits 7,5 15 10,894 Tota l $4,850,625 $4,547,997 Sl'l' note:-: and :-;ehedule:-- to tinaneial :-;tatt'tnl'nt:-;.

20

LIABILITIES Dece mber 31 1978 1977 (Th ou sand s of Dolla r s)

Capitalization Common Shareholders' Equity Common Stock-See Schedule, Page 27 ........ . . . ....... . $1,139,659 $1,106,684 Other Paid-In Capital . . ............. . ................. . . 1,968 1,819 Retained Earnings ... ............... .. .. ... ............ . 333,649 328,699 1,475,276 1,437,202 Preferred Stock-See Schedule, Page 27 ................... . 583,372 534,268 Long-Term Debt-See Schedule, P age 26 .......... . ....... . 2,173,226 2,078,273 4,231 ,8 74 4,049,743 Current Short-Term Debt Liabilities Bank Loans ..... ... ..... .. . .. ....... .... .......... . ... . 4,650 2,200 Commercial Paper ..................................... . 11,569 12,675 Current Maturities of Long-Term Debt ......... ........ ... . 52,934 28,653 Accounts Payable ... ... .. ... . ... . ............ .. . . .... . ... . 106,864 82,193 Taxes Accrued ... ......................... . .................. . 23,881 24,480 Deferred .................. . ......................... . . . 20,650 12,217 Interest Accrued ...................... .. . . ............... . 50,958 48,597 Dividends Declared .... ..................... . . . . .. .. . .... . 13,409 10,174 Other . . ................... . ......... .. ........ . ......... . 7,977 4,150 292,892 225,339 Deferred Accumulated Deferred Income Taxes ....... . ... . .. . ... . ... . 177,286 146,378 Credits Accumulated Deferred Investment Tax Cr edits . ........... . 138,421 110,709 Oth er .. .. .... .. ..... . .. . ... ....... ..... ..... ............ . 10,152 15,828 325,859 272,915 Total $4,850,625 $4,547,997 See notes and sc hedules to financial statements.

21

NOTES TO FINANCIAL STATEMENTS All owa nce for F un ds Use d Du r in g Co nst ru ctio n

l. Significant Accounting Policies: (AFUOC): AFUDC is defined in th e applicable regula-General: All utility subsidiary companies of Philadel- tory system of accounts as "the n et cost for th e period of phia Electric Company are wholly-owned and are in- construction of borrowed fund s u sed for construction cluded in the consolidated financial statements. Non- purposes and a re asonable rate on other fund s when so utility subsidiaries, which are not significant, are in- used." AFUDC is r ecorded as a charge to construction cluded in investments and accounted for by the equity work in progress (CWIP) and the equivalent credits are method. The accounts are maintained in accordance to "Interest Charges" for the cost of borrowed funds, with the uniform system of accounts prescribed excluding the related income tax benefits, and to by the regulatory authorities having jurisdiction. "Other Income" for the cost of other funds. For income Revenues: Revenues are recorded in the accounts upon tax purposes, AFUDC is not included in taxable income billing to the customer. Rate increases are billed from nor is the depreciation of capitalized AFUDC a tax dates authorized or permitted to become effective by deductible expense. The rate used for capitalizing regulatory authorities. (See Note 2 for explanation of AFUDC, which averaged 7.2% in 1978, is computed recording the recent electric rate increase prior to bill- under a new method prescribed by the regulatory au-ing.) Due to the use of cycle billing there is an amount of thorities which provides for its application to the CWIP unbilled revenue at the end of any period. See Common base including prior AFUDC and is compounded semi-Stock Earnings in "Management's Discussion and annually. The AFUDC in 1978 amounts to approxi-Analysis of the Consolidated Statements of Income" for mately the same under the new method as the amount effect of the non-recurring benefit to earnings per aver- which would have been accrued under the previous age share for 1977 as a result of a change from bi- method utilizing a higher average rate (8.65% in 1977) monthly to monthly meter reading and billing. applied to the CWIP base, excluding prior AFUDC, and Fue l Expenses: For financial reporting purposes the without compounding. The rates are "net after-tax Company defers that portion of fuel expense which is rates" whereby the current income tax reductions aris-recoverable under energy adjustment clauses until it is ing from interest charges associated with debt used to subsequently billed. For income tax purposes, fuel ex- finance construction, $28,346,000 in 1978 and pense is considered an expense when incurred. $26,237,000 in 1977, were allocated from "Operating Ex-Nuclear fuel costs are calculated at a zero net sal- pense" to "Other Income."

vage value (assuming reprocessing facilities will be Retire ment Plan: The Company has a non -contributory available for spent fuel as needed) and charged to fuel trusteed retirement plan applicable to all regular em-expense on the basis of the number of units of thermal ployees. Pension costs include normal cost for the year energy produced as they relate to the estimated total and amortization of unfunded prior service costs, if any, thermal units to be produced over the approximate over a twenty year period. Approximately 77% of such four-year life of the fuel. If such reprocessing facilities costs are charged to operating expense and 23%, as-are not available, the Company would incur additional sociated with construction labor, to the cost of new costs to dispose of spent fuel. The Company cannot utility plant.

estimate these costs but it believes that any such addi- Gas Exploration and Developme nt Costs: The Company tional costs would be recoverable through adjustments has invested in several joint ventures for exploring and of rates charged to its customers. drilling for gas. In accordance with the accounting Depreciation: For financial reporting purposes, de- practice prescribed by the Federal Energy Regulatory preciation is provided over the estimated service lives of Commission these costs are capitalized under the full the plant on a straight-line basis. No provision is pres- cost method. Such costs will be charged to operations ently provided for the potential decommissioning cost of commensurate with the use of gas arising from these the nuclear plants. The Company cannot estimate ventures. At December 31, 1978, investments included these costs but it believes that any such additional capitalized costs of $14,496,000.

costs, which may be significant, would be recoverable 2. Rate Matters :

through adjustments of rates charged to its customers. On December 28, 1978, the Pennsylvania Public Util-The annual depreciation provisions, expressed as a per- ity Commission (PUC) authorized the Company to in-cent of average depreciable utility plant in service, were crease its rates for electric service, retroactive to July 4, approximately 2.99% for 1978 and 1977. 1978, in order to realize additional annual revenue of Income Taxes: Deferred income taxes are provided for $78,900,000, including the $11,900,000 interim increase differences between book and taxable income to the which went into effect on March 3, 1978. Electric extent permitted by the regulatory authorities for recoupment revenue of $34,571,000 applicable to the rate-making purposes. (See Note 3.) period July 4, 1978 to December 31, 1978 has been re-Investmen t tax credits, other than credits resulting flected in the consolidated financial statements.

from contributions to the Tax Reduction Act Stock In its order the PUC, for rate making purposes, disal-Ownership Plan for employees which do not affect in- lowed t he n ormalization of state income tax deferrals come, are deferred and amortized by credits to income associated with the use of accelerated depreciation for over the estimated useful life of the related utility plant. tax purposes and in conformance therewith, beginning 22

July 1, 1978, such state income tax benefits ($3,614,000) 1978 1977 have been flowed through to income. (Thou sand s of Dollars)

The retroactive effect of the aforementioned rate Net income ................. . $184,861 $173,439 order increased net income by $21,119,000 and earnings Total income tax provisions per share by $.28 for 1978. 72,541 71,985 In come before income taxes 257,402 245,424

3. Taxes on Income: Deduct-allowances for 1978 1977 funds used during Included in operating (Thou sa nd s of Dollars) construction (non-taxable) (90,997) (86,078) expenses:

Adjusted income before Current income taxes income taxes .... . ......... . $166,405 $159,346 Federal .... .... ...... .. . . $15,710 $ 21,413 State .. ... ... ....... . ... . 12,129 12,129 Income taxes on above at Total ........ . ... .. ... . Federal statutory rate 27,839 33,542 (48%) .... .. ..... ... . .. .... . $79,874 $ 76,486 Deferred income taxes, Increase (decrease) due to:

net Excess of tax depreciation Federal ... ... . . ......... . 34,484 29,778 over book depreciation State .......... .. ....... . 4,856* 7,459 not normalized ........ . ... . (2,2 10) (4,702)

Total . .... . .......... . . 39,340 37,237 State income tax, net of Investment tax credits, Federal income tax benefit 6,146 7,556 net Taxes and pension costs Federal ..... . ........... . 31,717 26,488 capita li zed but expensed Total for tax purposes . ....... . .. . (5,4 07) (4,602)

Federal .. ...... ... .... . . . 81,911 77,679 Amortization of investment State ................... . 16,985 19,588 tax credits previously Total ... .. ... ..... . . .. . $98,896 $ 97,267 deferred ..... ............. . (3,401) (2,183)

Included in other income: Other, net ............ . .... . . (2,461) (570)

Current income taxes Total income tax provisions $72,541 $ 71,985 Federal .... . ...... . . ... . . (2 1, 189) (20,225) Provision for income taxes State ....... .. .......... . (5,166) ( 5,057) as a percent of:

Total . . .......... . .... . $(26,355) $(25,282) Income before income taxes 28.2'fr 29.39(

Total income tax Adjusted income before provisions: income taxes . . . . . . . . . . . . . . . 43.6'fr 45.2 o/c Federal .... . ...... . ..... . 60,722 57,454 State .. ........ . . .. .. .. . . 11,819 14,531 Provisions for deferred income taxes consist of the Total $72,541 $ 71,985 following tax effects of timing differences between tax and book income:

• See ote 2.

1978 1977 (Thou sa nd s of Doll a r s)

Investment tax credits consist of (a) the basic credits allowable at the Federal statutory rate (10%) plus (b) an Depreciation . .... ... .. . . .... . $32,849 $37,492 add itional (1 W fo) $4,005,000 in 1978 and $3,708,000 in Recoupment revenue *. . ...... . 18,462 1977 allowed the Company to offset Federal income Deferred fuel expense ..... . . . (10,029) 1,687 taxes providing such amounts are passed on to the Other ......... . ............ . (1,942) (1,942) e mployees of the Company in the form of Philadelphia $39,340 $37,237 Electric Company common stock. Such additional cred-its have no effect on n et income.

For Federal inco me tax purposes the 1978 invest- 4. Taxes, Other t han Income:

ment tax credits will reduce current Federal income 1978 1977 taxes payable by $23,343,000, and result in a claim for (Thous and s of Doll a rs) refund of prior year's Federal income taxes of Gross receipts ... ... ......... . $62, 115 $59,545

$11,775,000 which is reflected in other accounts receiv-able. Capital stock ... .. ........... . 15, 102 13,002 The aforementioned income tax provisions differ Realty .................... .. . 6,873 9,467 from amounts computed by applying the Federal Other, principally statutory tax rate to adj usted income before income socia l security ......... . ... . 11 ,742 9,656 taxes for the following reasons: $95,832 $91,670 23

5. Short-Term Debt: ~nows of no developments which would preclude such The average short-term borrowings during 1978 issuance.

aggregated $20,356,000 at an average rate of 10.55% The Price-Anderson Act places a "Limit of Liability" and during 1977 aggregated $33,595,000 at an average of $560,000,000 on each nuclear plant facility for public rate of 7.66% . The maximum short-term borrowings liability claims that could arise from a nuclear incident.

outstanding were $60,484,000 in 1978 and $94,326,000 in The Company and its co-owners of the Peach Bottom 1977. The average rate of interest on short-te1*m bor- and Salem Stations have insured for this exposure by rowings at December 31, 1978 was 11.31 % for bank purchasing private insurance in the maximum avail-loans and 10.20% for commercial paper. As of December able amount of $140,000,000 and the remainder is pro-31, 1978 the Company had informal lines of credit with vided by indemnity agreements with the Nuclear Reg-banks aggregating $214,875,000. The Company gen- ulatory Commission (NRC); however, since August erally does not have formal compensating balance ar- 1977, the indemnity by the NRC has decreased and in rangements with these banks. The Company maintains the event of a nuclear incident, the Company to the deposits with banks for working funds for normal oper- extent of its ownership participation, could be assessed ations. $5,000,000 per incident for each reactor owned

6. Retirement Plan Costs: (maximum $10,000,000 per reactor in a year).

Retirement plan costs, which are funded as accrued, For damage to the nuclear plant facilities which aggregated $21,396,000 in 1978 and $18,708,000 in 1977. could arise from an incident at the Peach Bottom Sta-During 1978 an early retirement amendment to the tion, the Company and its co-owners have private in-plan, was in effect until June 30, 1978, and the resulting surance up to $220,000,000; for the Salem Station, the early retirements had the effect of increasing prior Company through the operator of the Station is a service cost of the plan by approximately $17,000,000. member of Nuclear Mutual Limited (NML) which pro-The Company intends to amortize this increase in prior vides for coverage up to $175,000,000. In the event of a service cost over a ten-year period by making supple- loss at any plant insured by NML, the Company may be mental annual contributions of approximately subject to a maximum of fourteen times its annual

$2,400,000, which includes interest, beginning in 1979. premium (currently not material for any one incident).

Based on the most recent available actuarial report as The Company is a self-insurer, to the extent of its own-of January 1, 1978, (not including the effect of early ership interests, for any property loss in excess of the retirement) the actuarially computed vested benefits aforementioned amounts.

were substantially equivalent to the value of the plan The Company's proportionate share of a commit-assets. ment to purchase nuclear fuel for the Peach Bottom

7. Jointly-Owned Electric Utility Plants: Station as of December 31, 1978 was $67,891,000. An The Company's ownership interests in jointly-owned independent fuel company has been authorized to ac-electric utility plants, excluding nuclear fuel, at De- quire and own up to a maximum of $150,000,000 of cember 31, 1978 were as follows: nuclear fuel at any one time and has contracted to sell Electric Participating Company's Share of the energy therefrom to the Company, as the operator Utility Plant Interest Utility Plant, Net of the Station.

Peach Bottom 42.49% $307,525,000 The minimum rental commitments under all non-Salem 42.59% $642,500,000 cancelable agreements aggregated $168,699,000 at De-Keystone 20.99% $ 33,567,000 cember 31, 1978. Annual rental commitments are esti-Conemaugh 20.72% $ 45,103,000 mated to be $26,078,000 fOl' 1979; $22,867,000 for 1980;

$23,719,000 for 1981; $20,716,000 foi* 1982 and $6,771,000 The Company's participating interests are financed for 1983. Rentals charged to operating expenses were with Company funds and when placed in service all $36,232,000 in 1978 and $26,470,000 in 1977.

open~tions are accounted for as if such participating Certain leases, including the nuclear fuel contract, interests were wholly-owned facilities. meet the criteria of a capital lease as defined by State-

8. Commitments and Contingent Liabilities: ment No. 13 of the Financial Accounting Standards The Company has incurred substantial commit- Board, but are not accounted for as such in accordance ments in connection with its construction program. with the rate making process. If such leases were Construction expenditures are estimated to be capitalized, the amounts thereof would not have a

$412,000,000 for 1979 and $1,579,000,000 for 1980-1982. material effect on assets, liabilities, or related expenses.

The nuclear plant facilities under construction require Actions have been filed in the U.S. District Comt numerous permits and licenses culminating in an again st the Com pan.v with respect to alleged discri mi-operating license for a facility. The Company cannot be nation in its employment or promotion practices. Coun-assured that such operating licenses will be issued at sel fo1* the Company is of the opinion that th e Company completion of the facilities; to date, management has meritorious defenses to these suits.

24

9. Replacement Cost Information (Unaudited): re present additional eq uity for the Com pany's co mmon Inflation has res ulted in replace ment costs of utility sha re holde r s. Re placeme nt cost of utility plant is the plant in service that a re significantly g re ater than the Co mpany's es ti mate of the cul'!"ent cost to replace ex ist-record ed original cost. The current replacement cost ing plant with similar plant of most rece nt design.

of the gross utility plant in service at December 31, This re placement cost information shou ld not be 1978 and 1977, is estimated at $9.5 billion and $8.8 billion used to evaluate th e effect of inflation upon the Co m-which compares to recorded cost of $4.0 billion a nd $3.9 pany's finan cia l position and res ults of operations, as billion, respectively. re po1ted.

The estimated replace ment cost of utility plant, de- In co mplian ce with re p01ting req uire me nts addi-termined by applying indices to recorded cost , does not tional replacement cost in formation is disclosed in the necessai1ly reflect the current value of these assets, nor Company's annual repo1t to the Sec ui1ties and Ex-does the excess of replacement cost over recorded cost change Co mmission on F orm 10-K.

10. Segment Information:

1978 1977 Elect11c Gas Steam Total Electi1 c Gas Steam Total

('('l wu:-;and:-; of D oll ar:->) ( T hou:-;and~ of I >nllar:-o)

Operating reve nue ... .. $1,224,404 $189,522 $42,832 $ 1,456,758 $1,177,689 $174,818 $42,255 $1,394,762 Operating expenses, excluding depreciation 896,339 162,983 39,261 1,098,583 881,168 145,713 37,957 1,064,838 Depreciation . . . . . . . . . . . 106,253 8,618 1,656 116,527 97,916 8,243 1,602 107,761 Total operating expen ses . . . . . . . . . . . . . 1,002,592 171,601 .t0,917 1,215, l l 0 979,084 153,956 39,559 1,172,599 Operating inco me .... .. $ 221,812 $ 17,921 $ 1,915 $ 241,648 $ 198,605 $ 20,862 $ 2,696 $ 222,163 Utility plant additions ... ... .. .... $ 395,271 $ 10,010 $ 325 $ 405,606 $ 382,992 $ 8,941 $ 1,201 $ 393,134 December 31 :

Allocable assets:

Net utility plant(*) ... $4,167,122 $250,466 $31,584 $4,449,172 $3,883,906 $248,054 $33,887 $4,165,847 Materials and supplies 78,452 14,456 396 93,304 90,056 11,990 189 102,235

$4,245,574 $264,922 $31,980 4,542,476 $3,973,962 $260,044 $34,076 4,268,082 Nonallocable assets 308,149 279,915 Total assets ........ . . $4,850,625 $4,547,997

(*) In clu des con s tru cti on wo rk in prog ress a nd all ocated com mon ut ilit,- prope rty.

11. quarterly Data:

The q uaiterly data shown below is unaudited but in the opinion of the Company includes a ll adjustments (consisting of normal recun1ng accruals) necessary for a fair presentation of such amounts.

Earnings Earnings Average Per Applicable Shares Average Quarter Operating Net to Common Outstanding Sh are Ended Revenue Income Stock (Thousands) (Dollars)

(Thousands of Dollars) 1978 1977 1978 1977 1978 1977 1978 1977 1978 1977 Mar 31 $402,012 $365,822 $55,625 $49,559 $45,473 $39,379 74,661 69,336 $.61 $.57 Jun 30 326,100 318,772 29,455 39,683 18,586 29,503 75,084 69,676 .25 .42 Sep 30 384,275 380,356 57,581 50,168 46,336 39,990 75,697 70,112 .61 .57 Dec 31 344,371 329,812 42,200 34,029 30,954 23,862 76,102 74,206 .41 .32 The data for the quarter e nded Se ptember 30, 1978 has bee n restated from that previously re po1ted to include the effects of a retroactive rnte increase, which increased operating revenue by $17,378,000, n et income and earnings applicable to common stock by $10,472,000 and earnings per average sh are by $.14. (See Note 2).

25

SCHEDULE OF LONG-TERM DEBT-DECEMBER :H, 1978 Philadelphia Electric Company First a nd Refunding Mortgage Bonds (A):

Amount (Thousands Series Due of Dollars) 11% 1980 ......... . ... . ... .. .. .. .. . ... . .. .. .. . .... . $ 125,000 2% % 1981 ....... . ..... ........ . . .. .. .. . ....... .... . 30,000 3 ;4%

1 1982 ... . ........ . .... . .......... . ... .. . . ..... . 35,000 31/go/o 1983 .. . .. ....... .... . .. . ... .. ................ . 20,000 31/go/o 1985 ..... ... ..... . ....... . .. . .... .. . ... ..... . . 50,000 43/so/o 1986 ... .. ...... .. ... . . ... . ................. .. . 50,000 4%% 1987 ..... ..... .. .... . .. . . . . ...... . . . ... .. .. .. . 40,000 3%% 1988 .... . ...... . ... . . ... ......... . .. ... ...... . 40,000 5% 1989 ......... . ..... . ........ .... ..... .. ... . . . . 50,000 1

6 /2% 1993 . .. ..... . ... .. . . .. .. . . .. ....... . ... .. .. .. . 60,000 4 /2%

1 1994 ..... .... .... . ... .. ...... .. ... . .......... . 50,000 9% 1995 ..... .. .. .. .. . ..... . ........... .. .. . ..... . 72,000 81;4 % 1996 . .. ......... . . ....... . ... . ........... . ... . 80,000 1

6 /so/o 1997 .. . .. ... . . . . ... . .. . .... . ...... ... . . ...... . 75,000 7 /2%

1 1998 .. . ......... .. . ... . ...... .. ..... ... ... .. . . 100,000 71/2 % 1999 ....... .. ... . .... .. .... . ......... . ....... . 100,000 7%% 2000 ..... .. ... . ..... . .. ...... .. ... .. .. . ..... . . 73,240 11% 2000 . . ..... . ... . . .. . . . ........ . ....... .. ..... . 80,000 115/so/o 2000 . .. .......... .. .. .. ... ... . ........... .. .. . 65,000 73/so/o 2001 .. .. ........ .. .. . ... .. .......... . .. .. .... . 80,000 9%% 2002 .. .... . .. ... .. . . ... ..... ........ . ..... .. . . 100,000 8%% 2003 (Sold 1977) . .. ... . ............ . . ......... . 75,000 8 /2%

1 2004 ............. .. . .................. . .... . . . 125,000 91/s o/o 2006 ........... . . ... . .... .... . ....... . .. ..... . 100,000 6% 2007 (Sold 1977) .............................. . 23,500 8%% 2007 (Sold 1977) . . ..... .. . . . ....... . ....... . .. . 75,000 91/g o/o 2008 (Sold 1978) . . . . . .... . .. . . .. .......... .... . 100,000 Total First and Refunding Mortgage Bonds ........... . .. .. ..... .... . 1,873,740 Notes Payable-Banks ... (B) 1979-85 ($50,000 sold 1978) .... . ... . 175,000 Pollution Control Note .. . . 5.5% 1979-97 ...... .. .............. . .. . 35,000 Debentures . . ..... . .. . ... 12%% 1981 ................... .. .... . 100,000 Debentures .... . . .... .. .. 4.85% 1986 . . .... ......... ...... ... . . 26,294 Unamortized Debt Discount and Premium, Net ............ . ... ........ . (5,571)

Total Philadelphia Electric Company ... .. ..... .. ... ................. . 2,204,463 Philadelphia Electric Power Company-a subsidiary:

Sinking Fund Debentures 41/2 % 1995 ....... .... ... . .......... . 21,791 Unamortized Debt Discount .. ..... .. . . ... .. ..................... .. ... . (94)

Total Long-Term Debt (Annual interest .

requirements $184,545,000) .. . ... . .. . ... . ...... . .................. . 2,226,160 Current Maturities included in Cu rrent Liabilities (C) ........... .. ... . (52,934)

Long-Term Debt included in Capitalization . . ......... . ........ . .. . . . . $2,173,226 (A) Utility plant is subject to t h e lien of the Company's mortgage.

(B) At interest rates ranging from prime rate to 112% of prime rate.

(C) Long-term debt maturities in the period 1979-1983 are as fo llows: 1979-$52,934,000; 1980-$130,791,000; 1981-$140,30Q,OOO; 1982-$70,300,000; and 1983-$55,300,000.

26

SCHEDULE OF CAPITAL STOCK-DECE:VIHER :H. 1978 Number of Sh a res Amount (Thousands Authorized Outstanding of Dollars)

Common Stock-no par (A) .. ....... ........... . .. . ............... . 100,000,000 76,512,685 $1,139,659 Preferred Stock ($100 par) cumulative: Current Redemption Series (without ma ndatory Price (B) redemption requirements):

9.50% .... . ... . .... . . ... . ... . $109.50 750,000 750,000 $ 75,000 8.75o/o .. .. ..... . ....... .... . . 110.00 650,000 650,000 65,000 7.85% .... ...... . . ..... . ... . . 107.00 500,000 500,000 50,000 7.80% . ................. . ... . 105.50 750,000 750,000 75,000 7.75% . ............ . . . ...... . 105.50 200,000 200,000 20,000 4.68% . . ... . ...... .. . . ..... . . 104.00 150,000 150,000 15,000 4.4 % ... ....... . . . . . .... .. .. . 112.50 274,720 274,720 27,472 4.3% . ...... . ............. . . . 102.00 150,000 150,000 15,000 3.8% . . . ... ... . .... . .. . ..... . 106.00 300,000 300,000 30,000 Series (with mandatory redemption requ irements):

9.52% ...................... . 109.52 500,000 500,000(C) 50,000 8.75% (Sold 1978) ......... .. . . 108.75 500,000 500,000(D) 50,000 7.325 % .... .. ...... . . . ...... . 105.86 750,000 750,000(E) 75,000 7% ******************* * ****** 107.00 400,000 359,000(F) 35,900 U ncl assified ... ........... .. . . 4,125,280 Total Preferred Stock .... . 10,000,000 5,833,720 $583,372 (A) At Dece mber 31, 1978 there were 2,152,392 shares rese rved for issu a nce und er stock purch ase plans. Com mon Stock issued in 1978 and 1977 was as foll ows:

Dividend Employee Tax Reduction Act Public Reinvestme nt Purchase Stock Ownership Sales Plan Plan Plan Total 1978-Shares 1,433,489 215,198 239,481 1,888,168 Proceeds $24,852,000 $3,871,000 $4,252,000 $ 32,975,000 1977-Shares 4,000,000 882,793 179,618 255,541 5,317,952 Proceeds $78,340,000 $17,159,000 $3,483,000 $4,935,000 $103,917,000 (B) Redeemable at t he option of th e Company, at the indicated dollar amounts per share, plus accrued divid e nds.

(C) 20,000 shares to be redeemed annually at $100 per sha r e commencing May 1, 1981.

(D) 33,300 shares to be redeemed annually at $100 per sh are commencing May 1, 1984.

(E) 30,000 shares to be redeemed annually at $100 per sh are commencing May 1, 1979.

(F) 8,000 shares are being redeemed annually at $100 per share. The Company purchased 8,960 sha res in 1978 and 8,040 sh ares in 1977 for this purpose and at December 31, 1978 had appli ed 1,000 shares to future redemption r equire-ments. The excess of the aggTegate par value of such shares over the aggregate purchase price is reflected in Other Paid-In Capita l ($149,000 in 1978 and $106,000 in 1977).

REPORT OF AUDITORS To Shareholders and the Board of Directors Philadelphia Electric Company Philadelphia, Pennsylvania We have examined the consol idated bal a nce sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1978 and 1977, and the related consolidated statements of income, retai ned e a rnings, a nd chang*es in financial position fo1* the years then e nded. Our examinations were made in accor dance with ge ne rally a cce pted auditing standards a nd, acco rdingly, included s uch test s of th e acco unting reco rd s and s uch oth e r a uditing* prncedures as we considered necessary in th e circum stan ces.

In our opinion, the consolidated finan cial state me nts 1*eferred to above present faidy th e finan cial position of Philadel-phia Electric Company and Subsidiary Companies as of Dece mbe r 31, 1978 and 1977, and th e results of th eir ope rati ons and the changes in their finan cia l position for th e yea rs th e n e nd ed, in conformity with g*en e rally a cce pted accounting*

pr;nciples applied on a con sist e nt basis.

1900 Three Girard Plaza Philadelphia, Penn sylva ni a February 9, 1979 COO PERS & LYBIU.:\T D 27

FINANCIAL STATISTICS 1978 1977 1976 1975 1974 1973 1968 Summary of Earnings (Millions of doll ars)

Operating Revenue (for details see pages 30 and 31) ....... . .... . ...... . $1,456.8 $1,394.8 $1,224.1 $1,134.8 $1,011.7 $766.6 $405.2 Operating Expenses Fuel and Energy Interch ange .. .. . . . 573.9 575.3 480.7 457.8 439.2 260.3 102.4 Labor . ........ . .... .. . . ........ .. . . 195.0 179.2 161.9 152.2 134.0 125.6 86.3 Other Materials, Supplies and Services .... . ....... . ... .. .. . .... . 135.0 121.4 88.9 72.6 73.4 65.5 29.3 Total Operation and Maintenance 903.9 875.9 731.5 682.6 646.6 451.4 218.0 Depreciation . . .... . ... . .. . . . ..... . . 116.5 107.8 98.0 91.2 77.8 64.3 45.4 Taxes . ... . . . . . . . .. . ....... . ....... . 194.7 188.9 183.2 163.9 134.3 102.5 49.6 Total Operating Expenses ..... . . 1,215. l 1,172.6 1,012.7 937.7 858.7 618.2 313.0 Operating Income ... ... . ............ . 24 1.7 222.2 211.4 197.1 153.0 148.4 92.2 Other Income Allowance for Other Fu nds Used During Construction ....... . .... . . 37.6 36.2 30.1 23.3 25.3 28.1 1.0 Income Tax Credits, net .... . ....... . 26.3 25.3 24.2 22.3 25.5 3.4 4.9 Other, net ..... . ...... . ........ . .. . . 4.6 3.5 2.6 2.0 0.3 2.7 0.6 Total Other Income ..... . ..... . . 68.5 65.0 56.9 47.6 51.1 34.2 6.5 Income Before Interest Charges .... . 3 10.2 287.2 268.3 244.7 204.1 182.6 98.7 Interest Charges Interest on Long-Term Debt .. . .... . 176.3 161.0 147.6 136.5 106.3 84.8 33.6 Interest on Short-Term Debt . ...... . 2.5 2.6 3.6 7.9 14.2 5.5 2.6 Allowance for Borrowed Funds Used During Construction ........ . (53.4) (49.8) (4 7.5) (43.6) (45.5) (30.6) (3.1)

Net Interest Charges . . .... . ... . 125.4 113.8 103.7 100.8 75.0 59.7 33.1 Net Income .. .... . ....... . ...... . .... . 184.8 173.4 164.6 143.9 129.1 122.9 65.6 P referred Stock Dividends . . .......... . 43.5 40.7 39.0 36.0 33.7 27.6 3.7 Earnings Applicable to Common Stock .. 141.3 132.7 125.6 107.9 95.4 95.3 61.9 Dividends on Common Stock . ......... . 135.7 124.9 107.7 95.4 86.4 78.4 47.6 Earnings Retai ned ................... . $ 5.6 $ 7.8 $ 17.9 $ 12.5 $ 9.0 $ 16.9 $ 14.3 Earnings per Average Share (dollars) .. . $1.87 $1.87 $1.91 $1.86 $1.81 $1.99 $2.13 Dividends Paid per Share (dollars) $1.80 $1.76 $1.64 $1.64 $1.64 $1.64 $1.60 Common Stock Equity (Per Share) ..... . $19.28 $19.26 $19.13 $19.05 $20.21 $20.22 $18.95 Shares of Common Stock-Average (Mi llions) .................. . 75.4 70.8 65.6 58.1 52.7 47.8 29.0 See page 16 for Discussion and Analysis of the Consolidated Statements of Income.

\fYSE-Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1978 1977 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price . . . . . . . . $17% $18-Vs $19 $19% $20 1/<i $211,4 $203/s $185/s Low Price . . . . . . . . . $15 $17Vs $16-Vs $183/s $19Vs $185/s $18 1/2 $17 1/s Earnings . . . . . . . . . . 41" 61" 25" 61< 32" 57" 42c 57" Dividends . . . . . . . . . 45' 45" 45c 45c 45' 45" 45" 41<

28

FINANC IAL STATISTI CS Summary of Financial Condition-December ;31 (Millions of dollars) 1978 1977 1976 1975 1974 1973 1968 Assets Utility Plant, at Original Cost .. . ...... . . . . .. . ... .. $5,502.5 $5,121.1 $4,747.2 $4,445.6 $4,123.9 $3,672.1 $1,951.2 Less: Accumulated Depreciation . ............ 1,053.3 955.3 860.3 775.8 717.8 665.4 491.4 Total Utility Plant ... .. . 4,449.2 4,165.8 3,886.9 3,669.8 3,406.1 3,006.7 1,459.8 Nonutility Property a nd Other Investments .. ... .. 30.0 27.4 13.2 12.3 12.7 11.5 4.0 Current Assets Cash and Te mporary Investments ..... . ..... 38.6 30.8 23.8 17.4 16.0 16.2 15.4 Accounts Receivable ...... 223.5 184.0 168.0 139.8 111.9 87.8 41.3 Deferred Fuel Expense ... 4.2 23.0 19.9 17.9 21.7 Materials and Supplies . . . 93.3 102.3* 88.3 88.0 72.5 40.2 26.0 Other .. .................. 4.3 3.8 2.6 2.5 21.1 3.8 1.9 Deferred Debits ... . . . ...... 7.5 10.9 14.7 13.8 6.0 9.9 5.2 Total Assets . ..... . .... $4,850.6 $4,548.0 $4,217.4 $3,961.5 $3,668.0 $3,176.1 $1,553.6 Liabilities Common Stock .. .. . . . ...... $1,139.7 $1,106.7 $1,002.8 $ 916.6 $ 782.9 $ 771.8 $ 298.3 Other Paid-In Capital . . ..... 2.0 1.8 1.7 1.5 1.3 1.3 1.2 Retained Earnings ... .. .... 333.6 328. 7 321.2 304.7 293.7 286.2 227.4 Common Shareholders' Equity ..... . ......... 1,475.3 1,437.2 1,325.7 1,222.8 1,077.9 1,059.3 526.9 Preferred Stock . .. . . . . .... . 583.4 534.2 535.1 485.9 486.4 412.0 87.5 Long-Term Debt ...... . .... 2,173.2 2,078.3 1,936.4 1,776.9 1,597.7 1,319.1 778.7 Total Capitalization ..... 4,231.9 4,049.7 3,797.2 3,485.6 3,162.0 2,790.4 1,393.1 Current Liabilities Short-Term Debt ...... ... 16.2 14.9 7.2 108.0 177.9 147.7 61.0 Current Maturities Of Long-Term Debt ... ... . 52.9 28.7 36.9 60.9 91.9 67.3 15.6 Accounts P ayable a nd Dividends Declared .... . 120.3 92.4 83.9 80.1 78.8 67.4 28.0 Taxes Accrued and Deferred . . . ... . .. ...... 44.5 36.7 30.7 44.2 28.0 18.1 7.2 Interest Accrued .... ... .. 51.0 48.6 43.2 37.8 30.5 21.9 8.6 Other ..... .......... .. .. . 7.9 4.1 4.6 3.5 3.8 5.5 3.0 Deferred Credits ........... 325.9 272.9 213.7 141.4 95.1 57.8 37.1 Total Liabilities .. . ... $4,850.6 $4,548.0 $4,217.4 $3,961.5 $3,668.0 $3,176.1 $1,553.6 29

OPERATING STATISTICS 1978 1977 1976 1975 1974 1973 1968 ELECTRIC OPERATIONS Output (millions of kilowatt-hours)

Steam ............................. 13,160 11,468 13,385 12,814 16,649 18,536 17,865 Nuclear .................. .. ........ 7,769 4,596 4,937 4,387 1,745 176 124 Hydraulic ............. . . .. .... ..... 1,700 1,997 2,065 2,275 1,938 2,132 1,586 Pumped Storage Output ....... ... . . 1,109 1,223 1,062 1,275 1,075 1,318 1,429 Pumped Storage Input .............. (l,606) (1,761) (1,506) (1,785) (1,515) (1,876) (1,971)

Purchase and Net Interchange ...... 6,651 9,759 7,666 7,363 5,300 7,094 2,917 Internal Combustion ................ 704 847 792 914 1,200 688 126 Other .......... ........ ............ 716 36 1,016 27 33 Total Electric Output .......... .. . 29,487 28,845 28,437 27,243 27,408 28,095 22,109 Sales (mi llions of kilowatt-hours)

Residential ......................... 7,875 8,110 7,585 7,424 7,159 7,493 5,330 Small Commercial and Industrial ... . 2,888 2,825 2,755 2,624 2,558 2,663 2,256 Large Commercial and Industrial .... 15,302 14,912 14,662 14,060 14,622 14,953 11,961 All Other . .... ... ... ......... .. ..... 1,329 1,350 1,271 1,227 1,217 1,192 1,075 Total Electric Sales .... .... . .. .. .. 27,394 27,197 26,273 25,335 25,556 26,301 20,622 Number of Customers, December 31 Residential ....................... .. 1,158,853 1,148,171 1,137,544 1,120,981 1,113,036 1,103,163 1,034,393 Small Commercial and Industrial .... 115,945 115,883 115,422 114,896 117,237 118,009 136,917 Large Commercial and Industrial .... 5,780 5,772 5,747 5,719 5,724 5,663 5,204 All Other ........................... 2,413 2,381 2,345 2,305 2,248 2,207 2,009 Total Electric Customers .......... 1,282,991 1,272,207 1,261,058 1,243,901 1,238,245 1,229,042 1,178,523 Operating Revenue (millions of dollars)

Residential ......................... $ 430.8 $ 427.6 $ 373.2 $ 364.7 $ 314.4 $ 254.4 $ 121.3 Small Commercial and Indu strial .... 176.5 168.4 149.3 138.9 122.0 97.5 56.5 Large Commercial and Industrial .... 544.0 513.4 442.9 418.3 388.1 257.5 126.2 All Other ...................... .. ... 73.1 68.3 59.4 56.5 49.0 37.4 21.9 Total Electric Revenue ........ . ... $1,224.4 $1,177.7 $1,024.8 $ 978.4 $ 873.5 $ 646.8 $ 325.9 Operating Income Before Income Taxes (millions of dollars) .... ... . . ...... .. . $ :309.7 $ 284.1 $ 273.8 $ 261.5 $ 196.5 $ 170.1 $ 106.2 Average Use per Residential Customer (kilowatt-hours) ..................... 6,833 7,097 6,710 6,645 6,460 6,829 5,187 Electric Peak Load, Net Hourly Demand (thous. kw) .......... ..... .. 5,667 5,888 5,346 5,530 5,431 5,760 4,375 Net Electric Generating Capacity-Summer Rating (thous. kw) ......... 7,727 8,198 7,742 7,186 7,808 6,650 5,111 Cost of Fuel per Million Btu ..... ...... $1.29 $1.40 $1.24 $1.23 $1.42 $0.71 $0.32 Btu per Net Kilowatt-hour Generated .... .... ....... ........... 10,773 10,882 10,529 10,523 10,676 10,523 10,867 30

OPER:\TI.\'G STATISTICS 1978 1977 1976 1975 1974 1973 1968 GAS OPERATIONS Sales (millions of cubic feet)

Residential ...................... . .. 2,316 2,394 2,342 2,334 2,281 2,317 2,341 House Heating ....... . ............. 24,974 26,335 24,540 20,817 23,793 24,125 22,447 Comme rcial and Industrial .......... 32,784 31,017 33,390 30,012 35,913 37,868 36,711 All other ............. . . ............ 94 86 89 74 79 90 72 Total Gas Sales ................. 60,168 59,832 60,361 53,237 62,066 64,400 61,571 Number of Customers, December 31 Residential ...... . ........ .. . .... .. . 87,7 15 88,775 89,459 90,117 90,870 91,682 97,971 Hou se Heating .......... .. . ..... . . . 163,469 162,978 162,993 162,914 163,093 163,096 140,792 Commercial and Industrial .......... 19,207 19,422 19,669 19,874 20,276 20,518 21,078 Total Gas Cu stomers ............ 270,391 271,175 272,121 272,905 274,239 275,296 259,841 Operating Revenue (millions of dollars)

Residential ....................... .. $ 9.9 $ 9.6 $ 8.7 $ 8.1 $ 7.1 $ 6.7 $ 5.7 House Heating ..... . ............... 86.6 84. 1 73.3 54.8 55.4 51.3 38.0 Commercial and Industrial ... . ...... 92.2 80.4 76.1 54.5 45.7 42.0 26.1 All other .............. . ............ 0.2 0.2 0.2 0.1 0.1 0.1 0.1 Subtotal ....................... $188.9 $174.3 $158.3 $117.5 $108.3 $100.1 $ 69.9 Other Revenue ..................... 0.6 0.5 0.6 0.5 0.6 0.4 0.3 Total Gas Revenue ..... . ....... $189.5 $174.8 $158.9 $118.0 $108.9 $100.5 $ 70.2 Operating Income Before Income Taxes (million s of dollars) ... ............... $ 28.0 $ 30.9 $ 34.4 $ 19.6 $ 26.9 $ 22.8 $ 19.3 STEAM OPERATIONS Sales (millions of pounds) . . .......... 7,:336 7,165 7,735 7,117 7,600 7,762 7,578 Number of Customers, December 31 660 670 679 689 710 723 1,180 Total Steam Revenue (millions of dollars) ........................... $ 42.8 $ 42.3 $ 40.5 $ 38.5 $ 29.3 $ 19.4 $ 9.1 Operating Inco me Before Income Taxes (mi llions of dollars) ......... $ 2.8 $ 4.5 $ 3.8 $ 2.3 $ (3.2) $ 0.7 $ 0.6 FISC.\L .\(;E:\'TS FOR STOCl\S . \~D HO~DS PHrLADELPHIA ELECTRI C COMPANY-Preferred and Common Stocks Registra1*s Transfer Agents GIRARD BANK PHILADELPHIA ELECTRIC COMPANY One Ginwd Plaza, Philadelphia, Pa. 19101 :2:301 Market Street, Philadelphia, Pa. 19101 CHE:VII CAL BANK MORGAN GUARANTY TRUST CO. of N.Y.

20 Pine Street, New York, N.Y. 10015 :30 West Broadway, New York, N.Y. 10015 PHILADELPHIA ELECTRIC COMPANY-Fi rst and Refunding Mortgage Bonds Trnstee New York Agent THE FIDELITY BANK MORGAN GUARANTY TRUST CO. of N.Y.

Broad & Walnut Streets, Philadelphia, Pa. 19109 2:3 Wall Street, New York, N.Y. 10015 PHILADELPHIA ELECTRIC COMPANY-Sinking Fund Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Subsidiary)-Debentures Trustee New York Agent THE PHILADELPHIA NATIONAL BANK IRVING TRUST COMPANY Broad & Chestnut Streets, Philadelphia, Pa. 19101 One Wall Street, New York, .Y. 10015 All Philadelphia Electric Company securities, except the Sinking Fund Debentures and those series of First a nd Refunding Mortgage Bonds and Preferred Stock which were sold privately to Institutiona l investors, are listed on the Philadelphia Stock Exchange and the New York Stock Exchange. Philadelphia Electric Power Company Debentures are listed on the Philadelphia Stock Exchange.

31

DIRECTORS

• Gustave G. Amsterdam William S. Fishman Paul R. Kaiser Chairman of the Board and Chairman and Chief Executive Officer Chairman of the Board and Chief Chief Executive Officer ARA Services, Inc. Executive Officer Bankers Securities Corporation (Service Management) Tasty Baking Company (Merchandising and Real Estate) (Diversified Manufacturing)

• Robert F. Gilkeson

• John H. Austin, Jr. Chairman of the Board Joseph C. Ladd Executive Vice President of the Company President, Fidelity Mutual of the Company Life Insurance Company

• William W. Hagerty William T. Coleman, Jr., Esq. President, Drexel University *Joseph J. McLaughlin Senior Partner of the law firm President, Beneficial Mutual of O'Melveny & Myers Robert D. Harrison Savings Bank Vice Chairman

• James L. Everett John Wanamaker, Philadelphia, Inc.

President and Chief Executive Officer (Merchandising) *Member of Executive Committee of the Company OFFICERS Robert F. Gilkeson Shields L. Dal troff Joseph F. Paquette, Jr.

Chairman of the Board Vice President Vice President Electric Production Finance and Accounting James L. Everett President and Chief Charles L. Fritz Lucy S. Binder Executive Officer Vice President Secretary Personnel and Industrial John H. Austin, Jr. Relations Morton W. Rimerman Executive Vice President Treasurer Martin F. Gavet Wayne C. Astley Vice President James D. Lynch Vice President Gas Operations Assistant Secretary General Administration William L. Maruchi J. Robert Causton Edward G. Bauer, Jr. Vice President Assistant Treasurer Vice President and Electric Transmission George G. Eppright General Counsel and Distribution Assistant Treasurer Vincent S. Boyer William B. Morlok Vice President William M. Lennox Vice President Assistant Treasurer Engineering and Research Commercial Operations Clifford Brenner Joseph W. Ruff Clair V. Myers Assistant Treasurer Vice President Vice President Corporate Communications Purchasing and General Services GENERAL OFFICE 2301 Market Street, P.O. Box 8699, Philadelphia, Pennsylvania 19101 ANNUAL MEETING The annual meeting of the shareholders of the Company will be held on April 4, 1979, at eleven a.m. in the Peale Ballroom, Holiday Inn, 18th and Market Streets, Philadephia, Pennsylvania.

Shareholders of record at the close of business February 26 are entitled to vote at this meeting.

Notice of the meeting, proxy statement and proxy will be mailed under separate cover. Prompt return of the proxies will be appreciated.

FORM 10-K A copy of the Company's report for 1978 filed with the Securities and Exchange Commission on Form 10-K will be provided to shareholders upon written request to Philadelphia Electric Company, 2301 Market Street, P.O. Box 8699, Philadelphia, PA 19101, Attn: Financial Division.

32

COMP ANY PROFILE iaries covers 2,475 square miles. Electric service Philadelphia Electric Company is an operating util- is supplied in an area of 2,340 square miles with a ity which provides electric, gas and steam service in population of about 3,900,000, including 1,950,000 in southeastern Pennsylvania. Two subsidiaries own , the City of Philadelphia. Approximately 95 percent and a third subsidiary operates, the Conowingo of the electric service area and 60 percent of Hydroelectric Project, and one distribution subsid- kilowatt-hour sales are in the suburbs around Phila-iary provides electric service in two counties in delphia and in northeastern Maryland, and 5 per-northeastern Maryland. cent of the service area and 40 percent of such sales are in the City of Philadelphia. Natural gas service The total area served by the Company and subsid- is supplied to a population of 1,800,000 in a 1,475 square mile area of southeastern Pennsylvania adjacent to Philadelphia. Steam service is supplied in the central and west Philadelphia areas.

• PA Legend Electric Generating Station Coal-fired

• Electri c and Gas Servi ce

• Electri c Service only II Oil-fired

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- NOTICE -

THE ATTACHED FILES ARE OFFICIAL RECORDS OF THE DIVISION OF DOCUMENT CONTROL. THEY HAVE BEEN CHARGED TO YOU FOR A LIMITED TIME PERIOD AND BULK RATE PHILADELPHIA ELEC'I MUST BE RETURNED TO THE RECORDS FACILITY 2301 Market Street U.S. POSTAGE BRANCH 016. PLEASE DO NOT SEND DOCUMENTS P.O. Box 8699 PAID CHARGED OUT THROUGH THE MAIL. REMOVAL OF ANY Philadelphia, PA 19101 PAGE(S) FROM DOCUMENT FOR REPRODUCTION MUST Philadelphia, PA BE REFERRED TO FILE PERSONNEL.

Permit No. 378 RECORDS FACILITY BRANCH