ML18092B468

Philadelphia Electric Co,1986 Annual Rept.

ML18092B468
Person / Time
Site:	Salem, Hope Creek, Limerick, 05000000
Issue date:	12/31/1986
From:	Joseph Austin, Everett J PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:
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ML18092B463	List: ML18092B462 ML18092B465 ML18092B466 ML18092B468 ML18092B469
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NUDOCS 8703200022
Download: ML18092B468 (48)

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DEADLINE RETURN DAT Ef)ato~Z of DOlll

~DWtEilll RECORDS FACILITY BRANCH

Philadelphia Electric Company Annual Report 1986 Financial H ighlights 1986 1985 %Change Operating Revenue $3,090,869,000 52 ,94 5, 175,000 5%

Operating Expenses $2,525,859,000 S2 ,532 ,670 ,000 Taxes Charged to Operations $521 ,557,000 S44 0 ,862 ,000 18%

Operating Income $565,010,000 S4 l 2,505 ,000 37%

Earnings Applicable to Common Stock $475,359,000 S4 34 ,724 ,000 9%

Earnings per Average Common Share $2.60 S2 .56 2%

Cash Dividends Paid per Common Share $2.20 S2.20 Average Shares of Common Stock Outstanding 183,140,767 169,784 ,47 1 8%

Constmction Expenditures $966,500,000 S864 ,700 ,000 12%

Tota l Assets $10, 7 48,020,000 Sl0 ,011,845 ,000 7%

Contents 0 Letter to Shareholders 2 Report of 1986 Operations 5 Management's Discussion and Anal ysis of Financial Condition and Results of Operations 21 Consolidated Financial Statements 23 Notes to Financial Statements 28 Report of Independent Certified Public Accountants 38 Sec urities, Financial and Operating Statistics 39 Shareholder Information 44 Offi cers and Directors 45 EARNINGS AND CONSTRUCTION DIVIDENDS PER SHARE EXPENDITURES Million - - - -- -- - -

Dollar.; 3 .00 Dollar.; 1200 2.50

- 1000 2.00- 800 l.50 600 1.00

-:so >- f-- - f--

82 83 84 85 86 82 83 84 85 86

-- Earnings Per Share Dividends External Sources Internal Sources

To Our Shareholders customers' December 1986 electric Corporate Commi tments and deal bills were lower than those for with current critical issues, each year December 1985 , due to reduced we establish specific goals at both the fuel costs. corporate and departmental levels.

0 Limerick Unit o . 2 construction This annual report presents our new proceeded ahead of schedule , and Mission Statement, the Corporate 1986 expenditures were within the Commitments and specific Critical planned expenditures of the Issues which chart the course that our construction cost cap of 5 3 .197 Company has set. This report 's billion. photography depicts several aspects of 0 The exce llent performance of our our Corporate Commitments.

We are pleased to report that 1986 was nuclear plants resulted in As we look ahead to 1987 and a year of great progress for Philadelphia approximately $400 million of fuel beyond , we w ill be addressing these Electric Company. Highlights for the savings for 1986. key Critical Issues; they are ( 1) year included the following : 0 Earnings per share amounted to completing Limerick Unit No. 2 on S2.60 , an increase of four cents per time and within budget; (2) ac hieving 0 Limerick Unit No . 1 was placed into share from a year ago . standards of excellence in our nuclear commercial operation on February I , 0 Electric sales were up 3% compared operatio ns; (3) operating and 1986. For its eleven months of with last year, reflecting more maintaining our base-load generation commercial operation during 1986, customers, an improved residenti al capacity to achieve a high level of the unit performed flawlessly, housing market and favorable weather performance; (4) adapting to achievi ng a capacity factor of 81 %. On in 1986 . Gas sold and transported changing competitive forces within January 26, 1987, Unit No. 1 set a new declined due almost entirely to the our industry; and (5) achieving public world record for performance of a reduction in gas transported for others. recognition as a caring, responsive and large power reactor during its first fuel 0 Rates for natural gas were reduced efficient organization .

cycle , after operating continuously for by approximately S47 million, We continue to appreciate the 198 days until the unit was removed reflecting prudent purchases of gas support of our investors and pledge from seivice for minor repairs. from suppliers and reductions in our every effort to achieve our 0 The Company was authorized an pipeline suppliers' rates. Corporate Commitments for the ann ual electric rate increase of S351 O The Pennsylvania Supreme Court genuine benefit of our investors, our million , the largest in the Company's denied requests for an appeal of the customers and our fellow employees.

history, as we p laced S3.8 bi llion of decision of the Commonwealth Court, Limerick Unit No . 1 and associated affirming an order of the Court of common plant into seivice. Common Pleas of Bucks County which 0 To moderate the impact of the directed the completion of the Point James L. Everett Limerick rate increase on customers , Pleasant Project. This decision clears Chairman of the Board the Company will phase in the the way for construction to resume and Chief Executive Officer

~~?r increase over a three-year period in in 1987 .

equal amounts of 4 .8% per year. 0 The Company sold its steam heat Despite the increase , typical system for S30 million inJanuary 1987.

John H . Austin , Jr.

For many years, Phi lade! phia President Electric Company has had both a and Chief Operating Officer formal Mission Statement and Corporate Commitments. During 1986, we reexamined and modified them to better reflect current circumstances. To help achieve our

James L. Everett John H. Austin , Jr.

1986 f INANCIAL REVIEW EARNINGS RISE Earnings per share of common stock in 1986 amounted to S2.60, a 2%

increase from the S2.56 earned in 1985 , while the average number of shares outstanding increased 8% to 183 million shares. Total common stock earnings amounted to S475 million , up S4 I million or 9% from a year ago.

The improvement in per share Richard G. Webster (left},

Commitment to earn ings resulted from increased Construction Division, and e lectric base rates and improved Raymond F. Holman (right), Vice our Customers electric sales. Earnings for I 986 were President, General PE is committed to reduced approximately seven cents Administration, review the providing safe, reliable progress of construction on the per share as a result of a S26 million Merrill Creek Reservoir near and economical utility Pennsylvania Public Utility Phillipsburg, New jersey. They are Commission (PUC) disallowance for standing on the foundation for service to our fuel and other costs, while the the central core of the customers. We will be comparable disallowance reduced embankment dam which will be responsive to their I985 earnings by 23 cents per share. constructed in 1987.

Full financial statements and needs and courteous in notes begin on page 23 . Information low levels during the year, PE all our public contacts. on sales, revenue, expenses and continued to repurchase its customers can be found on pages 2 I , outstanding high interest rate bond 22, 23 , 42 and 43. issues and to refinance those issues at the existing lower rates. A total of Gas Operations personnel inspect NEW FINANCINGS COMPLETED S46.9 million of the I 7Ys% mortgage the liquified natural gas (LNG) The Company raised over SI. I billion bonds due 2011 were called for vaporizers and storage tank at the in new capital in 1986 to provide for redemption on July I. This completed West Conshohocken Gas Plant.

construction , debt retirements and the retirement of the entire SI 2 5 During periods of heavy demand other needs, as summarized in the million issue , which began with a in the winter, the vaporizers are used to convert the LNG to table on page 6 . tender offer in November I985 .

natural gas to supplement regular Since interest rates remained at Likewise, S48 .9 million of the I8}:1%

pipeline supplies. mortgage bonds due 2009 were redeemed on September I 5, completing the retirement of this Sl25 million issue, also begun with a November I985 tender offer.

Through a November I 986 tender offer, the Company repurchased S76.9 million of its S100 million of 15'}8%

mortgage bonds due 2010. This repurchase and early retirement, as well as the two calls discussed above, enabled PE to reduce annual interest payments by approximately SI8 million.

LIMERICK CREDIT AGREEMENT REPAID During 1986 , the Company repaid in advance of maturity the entire SSSO million balance under the Limerick Credit Agreement . This revolving credit/ term loan agreement with a group of 26 banks was used to finance the costs associated with completing Limerick Unit o. 1 and common plant. By using the Limerick Credit Agreement from 1984 to 1986 and refinancing at favorable rates, the Workmen guide the steam dryer Company was able to realize assembly for Limerick Unit No. 2 as it is lowered into the reactor 1986 MAJOR FINANCINGS substantial interest savings. Annual vessel. This 40-ton, stainless steel Millions interest costs wou ld have been Mon th of Dollars approximately S30 million more had assembly is about 19 feet high and 20 feet in diameter. The dryer Feb . Debentures - 1OM!% Series long-term debt been sold at that time removes moisture from the steam due 1996 100.0 to finance Limerick.

before the steam is fed into the Mar. Sinking Fund Debentures -

turbines to generate electricity.

l 1% Seriesdue 2011 350 .0 LIMERICK UNIT NO. I RATE INCREASE May Debentures - 9.85% GRANTED Private Placement On June 26 , the PUC adopted , by a due 1993 25 0 two-to-one vote , a final order granting May Sin king Fund Debentures - the Company an annual net increase in 10 .05% Private Placement revenue of S351 million. The order due 1998 62.0 reflects an overall rate of return of May Common Stock -

12.26% and a return on equity of 3,000,000 Shares

@ 517 .79 53.4 14 .75 %. The increase will be phased

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in over a three-year period in equal June Pollution Control Bonds -

8'Ys% due 2016 34 .o steps of approximately 4 .8% per year, followed by a three-year period for Sept. Preferred Stock - 9. 50%,

1986 Series; 750 ,000 recovery, without interest, of delayed shares@ S 100 75.0 billings under the phase-in plan.

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Oct. Mortgage Bonds - 1014% A major issue in the proceeding Seri es due 2016 150.0 involved determining the additional

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Oct. Mortgage Bonds - 8 ¥<% capital costs which were incurred as a Seri es due 1994 100.0 result of construction delays in 1976 Jan . Common Stock Purchase and 1978. The Commission asserted Dec. Plans: Dividend Rei nvestment, Employee, PAYSOP-5,399,000 Shares; Average Price of

$21.07 113 .8 Common Stock continuous offerings: 3 ,000 ,000 Shares; Average Price of

$21.28 638 Total Sl ,127.0

CONSTRUCTION INVESTMENTS MADE The Company invested S967 million in new plant and equipment in 1986 ,

including S189 million of carrying charges equivalent to the allowance for funds used during construction.

Expenditures for 1987 are estimated at Sl.2 billion , including S527 million for Limerick Unit No . 2.

that it had previously determined that STEAM SYSTEM SOLD the delay decisions were imprudent. On January 30, 1987, the Company sold The Company argued that the its steam heat system to Philadelphia Commission had made no such Thermal Corporation for S30 million.

determination and that, in any event , The sale price is approximately equal to due to financial constraints and the net book value of the facilities being changes in the regulation and scope of sold. Philadelphia Thermal acquired all the Limerick project over the of the production and distribution assets construction period , no adjustment of the system which supplies steam to was warranted . Nevertheless, the 4 50 customers in center city Commission concluded that there Philadelphia and areas of West should be a rate base reduction of Phi ladelphia through thirty-three S369 million for these delays. This miles of mains. The system has resulted in a reduction of S80 million experienced declining sales over the in annual revenue which will not be past 13 years.

recovered from customers. The Philadelphia Thermal is a wholly Company has filed an appeal of this owned subsidiary of Catalyst Thermal decision with the Commonwealth Energy Corporation which owns and The Pennsylvania-New jersey-Court of Pennsylvania. operates steam heat systems in Maryland (P}M) Interconnection The PUC rejected various excess Baltimore, St. Louis and Youngstown, provides electric service reliability capacity contentions made by opposing Ohio. Catalyst Thermal is a subsidiary at the lowest possible cost for its parties and found that Limerick Unit of Catalyst Energy Development eleven member companies, including PE. James F. McLaughlin No . 1 is needed to help meet the Corporation which has diversified (standing) and Alfred A.

Company's capacity requirements. holdings of over S1. 2 billion in the Gambone (seated) monitor The Commission followed precedent energy field. electric transmission in the PJM and denied the current recovery in control room.

revenue of the 50% of the common plant facilities associated with Limerick Unit No. 2. Although these facilities are in service today, the associated revenue cannot be recovered until Limerick Unit No. 2 is placed in service in 1990.

Nevertheless, carrying charges equivalent to the allowance for funds used during construction are being accrued on 50% of the common plant facilities .

LIMERICK UPDATES LIMERICK HAS SUCCESSFUL FIRST YEAR In 1986 , Limerick Generating Station ,

the Company's new state-of-the-art nuclear facility, continued to provide an exemplary demonstration of nuclear power as a safe , reliable and economical source of energy.

Commercial operation of Limerick Unit No. 1 began on February 1.

The unit's performance set a world A PE securities prospectus is record for a large power reactor during checked while on press by Joseph its first fuel cycle. After returning from D. O'Loughlin (left), Financial a brief outage on July 13 , the plant ran Unit No. 2, which was approximately Division, and Robert}. McNamee continuously for 198 days until a late 4 9% complete on a man-hour basis. (right), financial printer.

January 1987 shutdown for minor repairs. POINT PLEASANT PROGRESSES Unit No . 2 construction is One component of the planned proceeding on schedule and supplemental cooling water system for Commitment to expenditures continue to be within Limerick is the Point Pleasant Water our Investors the planned levels associated with the Project, which will divert allocated PE is committed to be construction cost cap of S3 .197 water from the Delaware River to the billion . As of December 31 , the Schuylkill River. Construction has a financially strong Company had invested S1.3 billion in been suspended since 1984 , when it institution, /,ooking at was approximately 30% complete. The the long term and Point Pleasant Project has been the avoiding slwrt-term subject of substantial opposition from Financial management visits the various groups , causing extensive expedients. We will Philadelphia Stock Exchange and the PE trading specialist. (Left to litigation and the suspension of continually evaluate right) Donald M. Stanton, trading construction. In MayandJune , the financing alternatives specialist, chats with Morton W. Supreme Court of Pennsylvania denied Rimerman, Vice President, requests for an appeal of the decision to attract funds at Finance and Accounting; Donald P.

of the Commonwealth Court, advantageous rates, Scott, Treasurer; and Richard G.

Gilmore, Senior Vice President, affirming an order of the Court of while providing Finance. Common Pleas of Bucks County which protection against directed the completion of the Point Pleasant Project. In October, a special unreasonable business master was appointed to oversee risks.

implementation of the Court of Common Pleas Order. Construction is expected to resume in 1987, with completion expected in 1988.

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Commitment to the Delaware River for certain our Employees PE is noted for its excellent generating units , including Limerick.

PE is committed to employee training programs. The Merrill Creek reservoir, when Linemen-in-training work at the comp leted , will be filled with water maintaining a highly 25-foot level with energized pumped from the Delaware during skilled and dedicated conductors mid-way through the times of high flow. Then, during low- workforce, six-week line school program.

flow or drought conditions , this stored commensurately water will be released to the Delaware to replace the water being evaporated compensated. We will Sufficient interim supplemental in the operation of the owners' power provide opportunities cooling water for 1986 was obtained plants. The project is expected to cost and incentives for for Limerick Unit o . 1. The Company $217 million , of which the Company's has filed with the Delaware River Basin share is S96 million . employees to work Commission (DRBC) for its 1987 productively to their supplemental cooling water needs , EXTENDING SERVICES, full potential, in pending the availability of the water to CAPACITY AND CAPABILITIES be supplied from Point Pleasant.

accord with the AREA DEVELOPMENT CONTINUES Corporate Equal MERRILL CREEK CONSTRUCTION SUCCESSFULLY Opportunity and CONTINUES The economy of Southeastern Affirmative Action Construction work on the Merrill Pennsylvania is expanding, and PE Creek Project progressed well during continues to aggressively promote Policy.

1986 . The scheduled in-service date for this project is May 1988. Merrill Creek is a small tributary of the Delaware River which is being dammed to create a IS-billion-gallon Cardiopulmonary resuscitation reservoir near Phillipsburg, New (CPR) training has been given to Jersey, about SO mi les north of more than 9,000 Company Philadelphia. The project is jointly employees and has been effective owned by PE and six other electric in sustaining over 30 lives. PE utilities, all of which have been Coordinator of the First Aid/ CPR ordered by the DRBC to provide a Program, William W. Hand, Safety Division, observes Barbara water storage facility as a condition of M. Federici, Personnel their authorization to take water from Administration Division, practicing CPR.

economic development within its territory. Under the successful "We Know the Territory" theme used in radio and print advertising, the Company publicizes the many geographical and economical advantages offered by the Greater Philadelphia metropolitan area . Aided by the strength of the economy and the light-industry and service-based success of Company promotional economy has enabled the region programs , PE 's Area Development served by the Company to become a Department assisted 31 new firms to leader in health care , pharmaceutical locate in the region in 1986, thereby research , information processing and creating 2,200 new jobs. Also, PE business services. The local economy participated in successful efforts to was bolstered even further in the retain and expand 59 existing firms fourth quarter of 1986 by Eastman involving 8 ,600 jobs. Kodak's decision to locate its new Prospects for the area remain Pharmaceutical Division Headquarters promising. The number of jobs here is in Chester County. Initial employment at an all-time high, and unemployment of 300 to 500 people is expected, has fallen to its lowest level in recent with full employment to reach years. Retail sales growth is among the approximately 2,200 within ten years .

highest in the nation. Commercial and residential development has reached EDDYSTONE REHABILITATION record levels. In downtown PROCEEDS Philadelphia alone , over 10 million After 26 years of reliable service, square feet of new and rehabilitated Eddystone Generating Station's Unit A tuition refund program for the office space is planned or under o. 1 received a new lease on life in successful completion of an construction. 1986. Major equipment replacements approved course of study is offered to all employees. Drexel The transition from a heavy were undertaken as part of a University students Lesley L. manufacturing-based economy to a rehabilitation program designed to Andres and Lawrence L. allow the Company to extend the life Middleton, both of Electric of Unit No. 1 into the 21st century.

Production, are program Similar work had already been participants. Nearly 600 other PE employees aetended many completed on Unit No . 2. With different colleges and universities completion of the rehabilitation , these as part of the program in 1986. low-cost , coal-fired units remain available for base-load capacity.

TRAINING EXPANDED During 1986 , all the Company's nuclear operation and maintenance training programs received accreditation from the National Academy for Nuclear Training of the Institute of Nuclear Power O perati ons.

Exce llence in nuclear training is a key element in achieving the highest standards of operating nuclear plant safety and re liability.

The Company's Peach Botto m Atomic Power Station became an earl y A nine-week splicing school branch of the Academy w hen the PJM INTERCONNECTI O N training program teaches station's first five train ing programs CUTS COSTS employees the proper lead splicing rece ived accreditation in 1985 . In 1986 , PE customers saved 530 techniques for underground Limerick Generating Station p ersonne l million in energy costs, thanks to the urban electrical lines. Splicer-in-worked in conjunction w ith Peach Pennsylvania-New Jersey-Maryland training Leroy Leighty, Transmission and Distribution, Bottom personnel to develop five (PJM) Interconnection . Whi le less than pours molten solder lead to join additi onal training programs at Peach in previous years (due to lower oil sleeve to lead jacket cable while Botto m and ten programs at Limeri ck , p rices and much lower p urchases as instructor Bruce W Bortz w hich resulted in Limerick 's entry into the result of the operati on of Limerick looks on.

the Academy. With the accreditation of Unit No. 1) , the annual savings all twenty training programs, the remained substantial.

Company became o ne of the first The PJM Interconnection , the multiple-site utilities to attai n full world 's fi rst integrated power pool ,

member status in the Academy. was created in 1927 con necting three Recognizing the need for a larger utili ties, including PE . The present trai ning faci lity for Maintenance PJM stmcture was established in 1965 Di vision personnel , the Company has as a jo int enterprise of 11 investor-conve rted its retired Barbadoes owned utilities , w hich forma lly agreed Pfl fire training school in West Generating Stati on near Norristown to to operate as a single system to ac hieve Conshohocken has received the Barbadoes Maintenance Training the significant benefits to be reali zed community-wide recognition for Center. By putting the new training through provi ding re liable service at its safe fire fighting instruction, particularly for fires involving center into operation in 1986 , the the lowest possible cost. Using the electricity and gas, and has helped Company moved closer to its goa l of latest comp uter tec hnology, a staff of numerous fire companies with having 775 trained maintenance PE employees operates the control their training.

craftsmen by 1990. Nuclear power center in Valley Forge , Pennsylvania, plant maintenance projects also have been incorporated in the Barbadoes training. Such projects allow trainees to work in a simulated radiation area.

PE's Maintenance Division craft programs were reviewed extensively by the Institute of uclear Power Operations and given fo rmal acc reditati on.

Commitment to Public Communication PE will be open and constantly monitoring PJM and surrounding systems and dispatching The production of che corporate forthright in power generation and transmission. annual report is one of che our communication Costs are reduced by sharing reserves Company~ many major with our customers, and coordinating maintenance. Energy communications efforts. Designer needed to serve the joint system load is George Coan (right), assisted by shareholders, James H. Miller (left}, Financial produced by combining the most employees and all Division, reviews photographs.

economical sources available from any others involved with of the interconnected utilities .

our business. We will GAS RATES REDUCED under more favorable market seek and respectfully During 1986, the Company reduced conditions and reductions in pipeline consider constructive gas rates by S46.6 million for 318 ,000 suppliers' rates in 1986.

public input gas customers in Bucks, Chester, concerning our Delaware and Montgomery Counties. COST REDUCTION MEASURES For a residential gas home heating REVIEWED steuxirdship in customer, this reduction caused a The Company always has sought to constructing and 7. 7% decrease in a typical annual bill , control costs whi le continuing to operating the facilities from S912 to S842. This decrease was provide reliable , quality service to primarily due to the Company's ability customers. During the year, a review necessary to providing to make prudent purchases of gas from was made of major cost reduction safe, reliable and producers and pipeline suppliers actions PE initiated between 1980 and economical utility 1986. This review indicates that the service. Company saved customers S1. 2 billion during this period. Actions taken should result in continuing ann ual savings of approximately S193 The Limerick Information Center million.

hoses many visitors. This fiber-opcics display panel wich Over the 1980-1986 period , fuel-accompanying soundtrack related savings in the Company's explains che basics of boiling electric, gas and steam businesses wacer reaccor operations co cwo amounted to approximately $778 Reading School District teachers, million or 65% of the total SI.2 billion Nancee Ryan and Michael Herzfeld.

Predictive maintenance will allow plant operators to recognize potential problems and estimate in advance when repairs wi ll be required . This system wi ll e liminate unnecessary maintenance and increase plant ava ilability by decreasing the number Electrical safety is emphasized in of reactive or forced outages. It also the "Reddy and Eddy Show," savings. The largest item in this w ill provide guidance to operators on which travels to area elementary category was 8602 million saved as a stresses to plant components.

schools. Edward L. Dick result of two-party, e lectric energy During the past year, the demonstrates electrical principles to student David}. Gea as Robert purchase agreements between PE and Company demonstrated once again Brown, the voice and animator of compani es to the west with low-cost , that it is at the forefront of Reddy Kilowatt, observes. coa l-fired power. technological progress in the e lectric Innovative methods of financing industry. For example , oil-cooled the Company's capital projects , transformers at Peach Bottom, which including Limerick Generating Station , ordinaril y must be de-energized for have achieved savings approac hing cleaning, were cleaned with a robotic Sl9 5 million . Various innovative arm be ing developed and tested by the productivity improvements and cost Company in conjunction with EPRI .

saving measures account for the When perfected , the robotic arm wi ll remaining 822 1 mill ion of savings. provide a means to work safely on The savings figures include over 82.2 energized , high-voltage equipment.

mil lion from employee suggestions that were submitted through the SAFETY IMPROVEMENTS REALIZED Company's Employee Suggestion Throughout 1986, the Company System . continued to reduce work-related accidents through an effective safety RESEARCH AND TECHNOLOGY ADVANCED In 1986, the Electric Power Research Institute (EPRI) awarded a $IO million contract to PE to develop an on-line diagnostic monitoring center for power plants . The program will involve a predictive maintenance diagnostic center and a techno logy transfer center for the utility industry, both to be located at Eddystone Station.

Currently, plant maintenance is either reacti ve (repairs ar.e made as parts fail) or planned (a prescribed course of work is followed whether or not repairs are immediately needed).

program. In the past 24 months, lost-time accidents have been reduced by over 55%. This exceptional improvement has been realized because of a program of increased safety awareness, new and improved training programs, employee interest and management involvement at A series of radio and television messages addresses the topics of all levels.

service reliability, electrical safety, home energy audits and REACHING CUSTOMERS AND customer assistance programs.

COMMUNITY MARKETING HELPS BOOST CUSTOMER BASE inside and outside the Company. This Marketing programs in 1986 focused program assists applicants, employees, on providing information to customers customers and vendors.

on the efficient use of energy. For Numerous programs have been example, working with the heat pump designed to help minorities and industry, a media program targeted women become better qualified as residential customers for conversion to applicants for employment. As a result, electric heat pumps from oil heat. the Company's minority work force Similarly, conversion to high- has grown from 4% in 1969 to nearly efficiency gas heating was promoted to 15% presently. PE also has created customers along existing gas mains. In programs to help high school students all market segments, PE continues to improve their skills, so that they may aid consumers to make energy be able to meet employment purchases that complement their standards. One such program is PREP lifestyles or satisfy their business (Program Resulting in Employment needs. Possibilities). PE has either created James L. Everett, Chairman, More than 16,000 new living programs or joined existing programs responds to a question at a units were connected in 1986. In the in order to increase the availability of Philadelphia Securities Association residential market, electric space minority and women engineering Luncheon. The Company heating was installed in 67% of these graduates. These programs include communicates with many varied units, with efficient heat pumps PEEP (Pre-Engineering Exposure groups throughout the year as part of its Investor Relations accounting for 92% of these new units. Program) , PRIME (Philadelphia Program.

Another 22% will utilize gas heat. As a Regional Introduction of Minorities to result, 89% of new living units in the Engineering) and the High School Company's service territory will be using PE's clean and efficient energy products.

MINORITY OPPORTUNITIES ENHANCED PE 's Affirmative Action Program is designed to enhance the participation of minorities and women in areas

Academies Program (Academy of Applied Electrical Science).

PE continues to expand its support of minority businesses in the Philadelphia region through its materials and services procurement activities. The Minority Business Development Program has been recognized and is enthusiastically supported by PE and the whole local john H. Austin, Jr., President, also business community. Contracts serves as a community volunteer.

awarded to minority businesses have the Company's efforts to renew and He is President of the United Way of Southeastern Pennsylvania.

increased tenfold since the present strengthen its strong tradition of program was formally adopted in late service to the people of the Delaware 1982. Valley. It was designed as a personalized program to assist that PE CARES BENEFITS MANY segment of the customer population During 1986, the PE Cares program which , because of age or infirmity, Commitment to again served many area residents. PE may have difficulty coping with the Good Citizenship Cares was established by Philadelphia complexities of today's world. To date, PE will be a Electric Company in 1981 as part of more than 26,000 customers have responsible corporate been helped by PE Cares. This enthusiastic response has convinced citizen by contributing PE to continue this effort. Among the to the common good many services provided to the PE Cares both in our service members are help in establishing special payment arrangements, area and in the nation.

including the change of due dates to coincide with receipt of Social Earl K. Parker (left) and H. B.

Winitsky (right), both of Purchasing Department, accept the "Most Visible In-House Program " award from the Minority Input Committee of the New Penn-Del Regional Minority Purchasing Council.

Security or retirement checks and budget billing. The PE Cares representatives also can arrange for third-party notification of all matters pertaining to a customer's account, provide programs concerning safety and conservation and help direct the PE Cares participants to governmental and private assistance programs, as appropriate.

the Company achieved a nearly perfect AUTOMATED PROGRAMS IMPROVE record of reliable service with a SERVICE service availability index of 99 .989%.

The Company continued to improve Another part of the Customer its Customer Communication System Communication System is the Field in 1986. An important component of Order Dispatch System which allows tills overall system is the Trouble gas service calls to be electronically Management System, which sets transmitted from the call-taking areas priorities for scheduled work to the dispatch office. This greatly electronically and allows the status of enhances safety, since it assures each job to be automatically updated prompt handling of gas emergencies.

daily. During a storm, this system helps Finally, the third Customer to assign the correct work force and Communication System component, equipment so that service can be the Service Applications Management restored as quickly and efficiently as System, permits efficient tracking of possible. This results in shorter new construction so that electric and interruptions for customers and gas service and installation of meters enables PE to maintain its high may be provided efficiently and standard of service reliability. In 1986 , promptly.

These modern systems give the Company the means to offer customers Amanda L. Coleman, Public even better, more reliable service than Affairs, serves on numerous in the past. With these systems, community and civic commiccees, employees can utilize more efficient including the new Pennsylvania work methods and cut time-Convention Center Authority.

She is pictured next to a model of consuming paper work.

the planned center.

Management's Discussion and Analysis of Financial Condition and Results of Operations General In December 1985, the Financial Accounting Total revenue increased in 1986 over 1985 as a result of Standards Board issued Statement No. 87, Employer's electric rate increases and higher electric sales. See Accounting For Pensions. This statement becomes "Electric Operating Revenue" below. *effective in 1987. Statement No. 87 prescribes a method Operation and maintenance expenses decreased in for determining periodic pension cost which differs 1986 compared with 1985 as a result of lower fuel significantly from the method utilized by the Company in expense. The lower fuel expense was primarily due to the 1986 and prior years. Historically the Company has used excellent performance of the Company's nuclear units. the same method for determining periodic pension cost In accordance with the Declaratory Order issued as used for funding the pension plan. Beginning in 1987, by th,e Pennsylvania Public Utility Commission (PUC) on the method prescribed by Statement No. 87 for measuring September 28, 1984, the Company deferred all operating periodic pension cost will differ from the method utilized costs, carrying charges on investment, fuel savings and for funding purposes. Accordingly, in 1987 and income taxes associated with Limerick Unit No. 1 and subsequent years, contributions to the pension plan might 50% of common plant from February 1, 1986, the date of differ from periodic pension cost recorded in the commercial operation, untilJune 27, 1986, the date the financial statements. The Company has determined that plant was included in rates. The combination of this pension cost for 1987, determined in accordance with Declaratory Order and theJune 27, 1986 rate order, Statement No. 87, will be approximately $10 million less which permits continued accrual of an amount equivalent than 1986 pension cost.

to Allowance for Funds Used During Construction In December 1986, the Financial Accounting (AFUDC) on the remaining 50% of common plant, Standards Board issued Statement No. 90, Regulated contributed approximately $221 million to 1986 Enterprises - Accounting/or Abandonments and common stock earnings. Disallowances ofPlant Costs. The Company is required OnJune 27, 1986, the PUC modified the to adopt this statement by 1988. One of the provisions of Company's Energy Cost Rate (ECR) so that only 80% of Statement No. 90 requires the Company to recognize as a the difference between actual electric energy costs and loss regulatory disallowances related to plant investment.

the amount billed to the customers is subject to after-the- Previously such amounts were included in the costs of the.

fact reconciliation for over/under collections. plant and depreciated over the plant's life. This Statement On October 1, 1986, gas rates were reduced by may require the Company to record a loss equal to the approximately $47 million. This change was due $368.9 million of Limerick Unit No. 1 cost excluded from primarily to lower fuel costs. rate base by the PUC in its order of June 27, 1986. The Periodic rate relief may be required in the future Company may apply the provisions of this Statement to offset increases in operating costs or carrying charges cumulatively in the year of adoption or it may in order to prevent any adverse effects on future net retroactively restate previously issued financial income, earnings per average common share and the statements. It should be noted that the Company has filed Company's ability to raise funds. a petition for review of the PUC's June 27, 1986 order The Tax Reform Act of 1986 (Act) introduces with the Commonwealth Court of Pennsylvania substantial changes to the corporate tax structure concerning the PUC's Limerick rate base disallowance.

beginningJanuary 1, 1987. The rules under which Although Statement No. 90 would have significantly corporations compute their taxable income have been affected 1986 results of operations if applied in 1986 (see significantly changed. Some of the changes affecting the Note 2 to the Consolidated Financial Statements), the Company are changes in the corporate tax rate, Company believes that, should its aforementioned depreciation rates and repeal of the investment tax credit petition for review be denied, adoption of Statement No.

(ITC). The Company is currently in the process of 90 will not significantly affect the Company's future reviewing the specific impacts of this Act on its future tax financing plans or its ability to pay dividends.

liabilities, liquidity and financing plans. In the long run, the Act may increase the Company's cost of doing Electric Operating Revenue business. ITC and deferred income taxes have provided Increased electric revenue in 1986over1985 is significant sources of capital. Although the Company will attributable to higher base rates and increased sales.

be entitled to certain ITCs after January 1, 1987 because Kilowatthour sales of electricity to retail customers of carryovers from prior years and portions of its increased 3 percent in 1986over1985. The increases of construction program qualifying under transition rules, electric revenue in 1985 and 1984 over the previous the benefits of that ITC will be reduced. Repeal of ITC corresponding periods are primarily attributable to higher (other than prior year carryovers and qualified transition. base rates.

property) and reductions in deferred income taxes resulting from reduced corporate tax rates will increase Electric Revenue Millions of Dollars the Company's external financing requirements. Although Increase/ (Decrease) '86vs. '85 '85 vs. '84 '84vs. '83 the corporate income tax rates are reduced, these Rate Increases s 185.0 s 141.4 s 140.0 reductions are offset by the repeal of the ITC, imposition Fuel Related Revenue (39.4) (2.8) 104.0 Sales and Other 37.6 (58.1) 83.8 of the Alternative Minimum Tax and other changes which will increase the Company's cash tax payments. Total s 183.2 s 80.5 S327.8

Gas Operating Revenue tax credits, net, included in other income decreased as a Lower gas revenue in 1986 compared with 1985 is result of lower allowance for borrowed funds used during attributable to decreases in large commercial and construction. Income taxes charged to operations industrial sales, gas transported for others and lower fuel- decreased in 1985 compared with 1984 as a result of related revenue resulting from reductions in the price of lower operating income and increased in 1984 compared gas purchased from suppliers. Gas revenue decreased in with 1983 as a result of higher operating income. Income 1985 compared with 1984 due to a decrease in sales and tax credits, net, included in other income, increased in lower fuel-related revenue resulting from reductions in 1985 and 1984 over the previous corresponding periods the price of gas purchased from suppliers. Gas revenue as a result of higher allowance for borrowed funds used increased in 1984over1983 due to higher rates and during construction.

increased sales.

Other Taxes Fuel and Energy Interchange Expense Other taxes decreased slightly in 1986 versus 1985 For accounting purposes, fuel and energy interchange due to lower capital stock and realty taxes. In 1985 and costs are deferred until billed as fuel adjustment revenue. 1984 other taxes increased due to higher capital stock and See "General" above, regarding after-the-fact realty taxes, and higher realty and gross receipts taxes, reconciliation for over/under collection. In 1986, gross respectively.

fuel and energy interchange costs were $281 million lower than in 1985 due primarily to the excellent Allowance for Funds Used During Construction performance of the Company's nuclear units. Fuel and The decrease in AFUDC in 1986 compared with 1985 is a energy interchange costs deferred in previous years and result of the commercial operation of Limerick Unit No. 1.

charged to expense in 1986 amounted to $189 million. In The increases inAFUDC in 1985and1984 resulted from 1985, gross fuel and energy interchange costs were $212 increases in construction work in progress.

million lower than in 1984 due primarily to the excellent performance of the Salem Nuclear Station. Fuel and Interest Charges energy interchange costs deferred in previous years and Interest charges on debt increased in each of the last three charged to expense in 1985 amounted to $135 million, years due to additional debt outstanding. The ratio of resulting in net fuel and energy interchange expense earnings to mortgage interest, which is one measure of remaining essentially the same in 1985 as in 1984. In the Company's ability to issue additional mortgage bonds, 1984, gross fuel and energy interchange costs were was 2.82 times, 1.98 times and 2.55 times, at year end, for essentially the same as in 1983; however, electric fuel 1986, 1985 and 1984 respectively.

costs deferred were lower by $104.2 million, resulting in a net increase in fuel and energy interchange expense Capital Expenditures and Changes in compared with 1983. Financial Position The Company is carrying on a construction program Other Operating and Maintenance Expenses which is estimated to require expenditures of 1986 non-fuel operating and maintenance expenses approximately $1.2 billion in 1987 and $3.3 billion from increased over 1985 primarily as a result of the 1988 to 1990. A majority of these expenditures relate to commercial operation of Limerick Unit No. 1. Other the construction of the Company's second 1055-mW operating and maintenance expenses increased in 1985 nuclear generating unit at Limerick. Successful and 1984 over the previous corresponding periods due to completion of this program is dependent on the inflation, growth in utility plant and increased costs Company's ability to obtain external financing, primarily associated with the Company's nuclear generating units through debt arrangements and sales of equity securities and with operating the new flue gas scrubbing systems at which are subject to market conditions and to meeting the Company's two wholly owned, coal-burning stations. certain earnings tests. The program also is subject to the licensing requirements of the Nuclear Regulatory Depreciation Commission, to other regulatory approvals in connection Increases in depreciation in each of the last three years with the planned supplemental cooling water system for reflect additions to plant in service. The 1986 increase in Limerick, to financing approvals by the PUC and to depreciation over 1985 is primarily attributable to changes due to litigation.

Limerick Unit No. 1 being placed in service. Interim financing of the construction program is provided by commercial paper borrowing and short- and Income Taxes intermediate-term bank loans, which also are dependent Income taxes charged to operations increased in 1986 on the Company's financial position. _

over 1985 as a result of higher operating income. Incom~ _

---

~- ~

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income For the Year Ended December 31 1986 19ss* 19s4*

(Thousands ofDollars)

Operating Revenues Electric $2,699,365 $2,516,191 $2,435,731 Gas 391,504 428,984 462,966 Total Operating Revenues 3,090,869 2,945,175 2,898,697 Operating Expenses Fuel and Energy Interchange 889,277 1,097,731 1,069,849 Other Operating Expenses 618,257 548,609 510,726 Maintenance 274,200 262,419 242,675 Depreciation 222,568 183,049 176,433 Income Taxes 288,930 199,900 242,854 Other Taxes 232,627 240,962 206,339 Total Operating Expenses 2,525,859 2,532,670 2,448,876 Operating Income 565,010 412,505 449,821 Other Income and Deductions Allowance for Other Funds Used During Construction 76,821 176,310 134,485 Limerick Carrying Charges 188,679 Income Tax Credits, Net 102,462 133,415 116,423 Other, Net 2,462 (3,464) 239 Total Other Income and Deductions 370,424 306,261 251,147 Income Before Interest Charges 935,434 718,766 700,968 <2>

Interest Charges Long-Term Debt 458,885 435,373 402,475 Short-Term Debt 12,512 17,721 30,912 Allowance for Borrowed Funds Used During Construction (101,617) (257,181) (220,370)

Net Interest Charges 369,780 195,913 213,017 Income from Continuing Operations 565,654 522,853 487,951 Income from Discontinued Steam Operations 1,916 2,448 4,438 Estimated Loss on Disposal of Discontinued Steam Operations (1,250)

Net Income 566,320 525,301 492,389 Preferred Stock Dividends 90,961 90,577 82,682 Earnings Applicable to Common Stock $ 475,359 $ 434,724 $ 409,707 Average Shares of Common Stock Outstanding (Thousands) 183,141 169,784 151,804 Income from Continuing Operations Per Average Common Share (Dollars) $2.59 $2.55 $2.67 Earnings Per Average Common Share (Dollars) $2.60 $2.56 $2.70 Dividends Per Common Share (Dollars) $2.20 $2.20 $2.20

• Reclassifiedfor comparative purposes.

See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS December 31 1986 1985.

(Thousands ofDollars)

Utility Plant, at original cost Electric $ 8,875,150 $ 4,982,099 Gas 506,021 474,599 Steam 54,176 54,138 Common, used in all services 128,733 132,323 9,564,080 5,643,159 Less: Accumulated Depreciation 2,014,710 1,824,420 Net Utility Plant in Service 7,549,370 3,818,739 Construction Work in Progress 1,652,615 4,929,093 Leased Property, net 281,346 338,141 Net Utility Plant 9,483,331 9,085,973 Current Assets Cash and Temporary Cash Investments 90,716 188, 785 Accounts Receivable Customers 345,432 348,233 Other 30,174 22,687 Inventories, at average cost Fossil Fuel 54,517 63,594 Materials and Supplies 75,219 60,152 Deferred Income Taxes - Energy Costs 44,842 (51,814)

Compensated Absences 50,800 46,370 0 Other 27,681 25,402 Total Current Assets 719,381 703,409 Deferred Debits and Other Assets Unrecovered Revenue 112,472 Deferred Limerick Costs and Carrying Charges 195,617 Investments 89,702 87,670 Loss on Reacquired Debt 76,783 48,589 Other 70,734 86,204 Total Deferred Debits and Other Assets 545,308 222,463 Total $10,748,020 $10,0ll,845

'Reclassified for comparative purposes.

See notes to financial statements.

CAPITALIZATION AND LIABILITIFS December 31 1986 1985' (Thousands ofDollars)

Capitalli:ation Common Shareholders' Equity Common Stock $ 2,832,967 $ 2,601,989 Other Paid-In Capital 7,787 7,331 Retained Earnings 653,127 583,728 3,493,881 3,193,048 Preferred Stock Without Mandatory Redemption 572,472 572,472 With Mandatory Redemption 374,956 318,309 Long-Term Debt 4,286,792 4,309,131 Total Capitalli:ation 8,728,101 8,392,960 Current Liabilities Notes Payable, Bank 1,000 Long-Term Debt Due Within One Year 108,570 80,800 Capital Lease Obligations Due Within One Year 69,379 76,326 Accounts Payable 182,498 144,407 Taxes Accrued 86,187 58,509 Deferred Energy Costs 88,215 (101,655)

Interest Accrued 90,701 93,008 Dividends Payable 39,607 40,698 Compensated Absences 50,800 46,370 <8>

Other 29,153 25,583 Total Current Liabilities 745,110 465,046 Deferred Credits and Other Liabilities Capital Lease Obligations 211,966 261,815 Deferred Income Taxes 694,990 502,621 Unamortized Investment Tax Credits 320,107 302,409 Other 47,746 86,994 Total Deferred Credits and Other Liabilities 1,274,809 1,153,839 Total $10,748,020 $10,011,845

Philadelphia Electric Company and Subsidiary Companies ConsoUdated Statements of Changes In Cash Flows For the Years Ended December 31 1986 1985 1984 (Thousands ofDollars)

Cash Flow From Operations Income from Continuing Operations $565,654 $522,853 $487,951 Non-Cash Items Included in Income Depreciation and Amortization 285,204 183,049 176,433 Nuclear Fuel Disposal Costs 5,601 13,201 Deferred Income Taxes 133,419 66,553 78,550 Investment Tax Credits, Net 29,041 3,582 49,941 Allowance for Other Funds Used During Construction (76,821) (176,310) (134,485)

Increase In Deferred Limerick Costs and Carrying Charges (179,592)

Increase in Unrecovered Revenue (112,472)

Amortization of Leased Property 65,600 60,900 39,100 Limerick Precommercial Fuel Cost 16,448 45,301 Change In:

Deferred Energy Costs 189,870 128,240 (80,649)

Other Current Assets and Liabilities 39,869 45,395 (41,043)

Other Deferred Debits and Credits (17,707) 6,948 (16,112)

Net Cash Flow From Continuing Operations 938,513 892,112 572,887 Net Cash Flow From Discontinued Operations 3,468 4,105 3,992 Net Cash Flow From Operations 941,981 896,217 576,879 Cash Flow From Financing Issuance of Common Stock 230,978 241,041 250,445 Issuance of Preferred Stock 75,000 100,000 Retirement of Preferred Stock Including Change in Other Paid-in

<8> Capital Dividends on Preferred and Common Stock (17,897)

(494,916)

(7,322)

(464,003)

(7,757)

(418,098)

Change in Dividends Payable (1,091) (3,098) 16,585 Expenses of Issuing Preferred and Common Stock (2,005) (870) (3,955)

Issuance of Long-Term Debt, Including Capital Lease Obligations 869,471 732,364 317,337 Capital Lease Obligations (48,471) (46,364) (58,637)

Retirement of Long-Term Debt (260,829) (274,391) (12,183)

Premium on Retirement of Long-Term Debt (28,930) (45,450)

Net Borrowings Under Revolving Credit Agreements (550,000) 150,000 200,000 Change in Short-Term Debt (1,000) (259,000) (7,500)

Capital Lease Payments (65,600) (60,900) (39,100)

Change in Escrow Funds 2,872 74,775 (80,125)

Transfer from Investments 19,656 Payment of Other Obligations (37,719) (61,843)

Net Cash Flow From Financing (330,137) (25,061) 276,668 Cash Flow From Investing Increase in Utility Plant, Including Leased Property (771,998) (829,814) (1,084,414)

Leased Property 48,471 46,364 58,637 Allowance for Other Funds Used During Construction 76,821 176,310 134,485 Cost of Property Retired and Cost of Removal (86,332) (86,866) (44,014)

Transfer (to)/from Deferred Debits 25,157 (11,923)

Sale of Magnesium Oxide Facilities 55,92.8 Increase (Decrease) in Other Investments (2,032) (6,799) (1,082)

Net Cash Flow From Investing (709,913) (712,728) (880,460)

Net Change in Cash Flow $(98,069) $158,428 $(26,913)

See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes in Common Stockholders' Equity and Preferred Stock Other Common Stock Paid-In Retained Preferred Stock Shares Amount Capital Earnings Shares Amount (All amounts in thousands)

Balance,Januaryl, 1984 142,811 $2,110,503 $5,856 $452,964 8,073 $807,335 Net Income 492,389 Cash Dividends Declared Preferred Stock (at specified annual rates) (83,820)

Common Stock ($2.20 per share) (334,278)

Expenses of Capital Stock Issues (3,955)

Issuance of Stock  ; "

Public Sales 11,613 144,548 1,000 100,000 Employee Stock Ownership Plans 914 10,563 Dividend Reinvestment and Stock Purchase Plan 6,965 95,334 Redemptions 871 (86) (8,628)

Balance, December 31, 1984 162,303 2,360,948 6,727 523,300 8,987 898,707 Net Income 525,301 Cash Dividends Declared Preferred Stock -~

(at specified annual rates) (90,524)

Common Stock ($2.20 per share) (373,479)

Expenses of Capital Stock Issues (870)

Issuance of Stock Public Sales 7,387 115,008 Employee Stock Ownership Plans 873 15,294 Dividend Reinvestment and 0 Stock Purchase Plan 7,117 110,739 Redemptions 604 (79) (7,926)

Balance, December 31, 1985 177,680 2,601,989 7,331 583,728 8,908 890,781 Net Income 566,320 Cash Dividends Declared Preferred Stock (at specified annual rates) (91,393)

Common Stock ($2.20 per share) (403,523)

Expenses of Capital Stock Issues (2,005)

Issuance of Stock Public Sales 6,000 117,216 750 75,000 Employee Stock Ownership Plans 625 13,215 Dividend Reinvestment and Stock Purchase Plan 4,774 100,547 Redemptions 456 (184) (18,353)

Balance, December 31, 1986 189,079 $2,832,967 $7,787 $653,127 9,474 $947,428 See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements

1. Significant Accounting Policies for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable General through adjustments of rates charged to its customers.

All utility subsidiary companies of Philadelphia Electric Annual depreciation provisions, expressed as a percent of Company are wholly owned and are included in the average depreciable utility plant in service, were consolidated financial statements. Nonutility subsidiaries approximately 2.95% in 1986, 3.35% in 1985 and 3.29%

are included in investments and accounted for on the in 1984.

equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having Income Taxes jurisdiction, principally the Federal Energy Regulatory Deferred income taxes are provided for differences Commission (FERC) and the Pennsylvania Public Utility between book and taxable income to the extent permitted Commission (PUC). for rate-making purposes. Investment tax credits, other than credits resulting from contributions to employee Revenues stock ownership plans, which do not affect income, are Revenues are generally recorded in the accounts upon deferred and amortized to income over the estimated billing to the customer. Rate increases are billed from useful life of the related utility plant.

dates authorized or permitted to become effective by the regulatory authorities. Allowance for Funds Used During Construction Pursuant to a rate phase-in plan approved by the (AFUDC)

PUC in its electric rate order of]une 27, 1986, the AFUDC is a non-cash item which is defined in the Company is recording revenue equal to the full amount of Uniform Systems of Accounts as "the net cost for the the rate increase approved, based on kilowatthours billed period of construction of borrowed funds used for to customers. Amounts included in revenue which will construction purposes and a reasonable rate on other not be billed to customers within one year are classified as funds when so used!' AFUDC is recorded as a charge to Unrecovered Revenue in the accompanying balance sheet Construction Work In Progress, and the equivalent credits (see Note 2). are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income" for the remainder as the Fuel Adjustment Clauses allowance for other funds. The rate used for capitalizing Each of the Company's classes of service is subject to fuel AFUDC, which averaged 9.55% in 1986, 9.50% in 1985, adjustment clauses designed to recover or refund the and 9.40% in 1984, is computed under a method differences between actual costs of fuel, energy prescribed by the regulatory authorities. The rate is a "net interchange, purchased power, and gas, and the amounts after-tax rate" and the current income tax reductions of such costs included in base rates. Differences between applicable to the interest charges capitalized are recorded the amounts billed to customers and the actual costs in "Other Income:' AFUDC is not included in taxable recoverable are deferred and recovered or refunded in income and the depreciation of capitalized AFUDC is not future periods by means of prospective adjustments to tax deductible.

rates. Generally such rates are adjusted annually.

In its June 27, 1986 electric rate order, the PUC Limerick Carrying Charges modified the electric energy clause to allow the recovery Under the Uniform System of Accounts prescribed by the of only 80% of the difference between actual energy costs FERC, accrual of AFUDC ceases at the time utility plant and the amounts billed to customers. If the Company under construction is placed in service and 100% of recovers more than actual energy costs, 80% of the excess common plant of a two-unit plant is deemed to be in is refundable to customers (see Note 2). service with the first unit. However, the PUC permits only 50% of the common plant to be included in rate base Nuclear Fuel when the first unit is placed in service.

Nuclear fuel is capitalized and charged to fuel expense on Because of the difficulty in synchronizing the the unit of production method. Estimated costs of nuclear recovery of Limerick Unit No. 1's cost through rates with fuel disposal are charged to fuel expense as the related its commencement of commercial operations, the PUC fuel is burned. allowed the Company to record a carrying charge equivalent to AFUDC on the unit and common plant until Depreciation they were included in rate base on June 27, 1986. In For financial reporting purposes, depreciation is provided addition the PUC is permitting the Company to record a over the estimated service lives of the plant on the similar carrying charge on the 50% of common plant straight-line method and, for tax purposes, generally, over which was deemed to be associated with Unit No. 2 and shortedives on accelerated-methodS: Tlie estimatecf was not included in rate base-un<iffiliCJune27, 1986 decommissioning costs of operating nuclear generating electric rate order. Such carrying charges are recorded as a plants, totaling approximately $287,801,000 as of charge to Deferred Debits and as a credit to Other December 31, 1986, are being charged to operations as Income.

permitted for rate-making purposes. The amounts charged are deposited in an escrow account and invested

Gas Exploration and Development Joint Ventures Deferred Limerick Costs and Carrying Charges, the The Company has invested in several joint ventures for Company had deferred a total of $155.2 million exploring and drilling for natural gas. Costs are associated with the Declaratory Order.

capitalized under the full cost method and charged to operations commensurate with production. Prospective Accounting Change In December 1986, the Financial Accounting Standards Gains and Losses on Reacquired Debt Board issued its Statement No. 90, Regulated Enterprises Gains and losses on reacquired debt are deferred and - Accounting for Abandonments and Disallowances of amortized to interest expense over the period permitted Plant Costs, which requires any disallowed costs of for rate-making purposes. recently completed plants to be recognized as a loss. The Company is required to adopt this Statement by 1988.

2. Limerick Generating Station The provisions of the Statement may be applied cumulatively in the year of adoption or may be applied General retroactively by restating previously issued financial The Company's Limerick Unit No. 1 commenced statements. If the Company chooses to apply the commercial operation on February 1, 1986. Construction provisions of Statement No. 90 by retroactive restatement of the second of the two nuclear units at Limerick in the year of adoption and the PUC's disallowance of resumed in February 1986, following a suspension of $368.9 million of Limerick Unit No. 1 costs from rate approximately 2 years. Unit No. 2 is scheduled to be base is not reversed, $368.9 million would be written off completed in late 1990. At December 31, 1986, Unit as of 1986. This write-off would reduce 1986 income No. 2 was approximately 49 percent complete based on from continuing operations and net income, as reported, estimated man-hours needed to complete the Unit. As by $249 million and the related per share amounts by of December 31, 1986, the Company had invested $1.36. At December 31, 1986, net utility plant in service, approximately Sl.9 billion in Unit No. 2, including 50% deferred income taxes and retained earnings would be of common plant. reduced by $364.2 million, $115.2 million and $249.0 million, respectively. After giving effect to the write-off, Limerick Unit No. 1 Rate Proceedings 1986 proforma results of operations and related per share On September 27, 1985, the Company filed with the PUC amounts would be as follows:

for a phased-in electric rate increase designed to yield

$671 million annually, net of fuel savings, to recover the Proforma costs associated with Limerick Unit No. 1 and 100% of As Reported Assuming Retroactive common plant. By order entered June 27, 19,86, the PUC Restatement approved an increase of approximately $ 3 51 million (Millions ofDollars, Except Per Share Amounts) annually, net of fuel savings. The PUC authorized a rate of Income from return on common equity of 14.75%. The increase is Continuing Operations . . . S565.7 S316.7 being phased-in over three years in equal steps, followed Net Income . . . . . . . . . . . . . . . S566.3 S317.3 Per Share Amounts:

by a three-year recovery period, without interest, of Income from Continuing amounts recoverable under the phase-in plan. In Operations ............. . S2.59 $1.23 accordance with its prior practice, the PUC excluded Net Income .............. . $2.60 $1.24 50% of common plant from rate base at this time, but permitted continued accrual of an amount equivalent to Limerick Unit No. 2 Cost Cap AFUDC on the excluded 50%. Accordingly, the Company On December 23, 1985, following a PUC investigation, is accruing a carrying charge equivalent to AFUDC on this the Company filed its response with the PUC accepting investment. The increase also reflects an exclusion from the conditions of the cost containment and operating the Company's rate base of $368.9 million due to alleged incentive plans set forth in the PUC's December 5, 198 5 imprudent construction delays in 1976 and 1978. As order, which concluded that the Company,could indicated below the Company has appealed this complete the construction of Limerick Unit No. 2 exclusion. The PUC rejected allegations by various parties conditioned upon the acceptance by the Company of that Limerick Unit No. 1 represents excess capacity. For a such cost containment and operating incentive plans, description of the effects of the June 27, 1986 electric including a maximum net rate base allowance for Unit rate order on the Company's accounting policies, see No. 2 (exclusive of common plant) of a prudent Note l. investment of $ 3 .197 billion. This order has been In accordance with the Declaratory Order issued appealed by various parties. Under Statement No. 90 by the PUC on September 28, 1984, the Company described above, if the Company estimates the total cost deferred all operating costs, carrying charges on to complete Unit No. 2, includingAFUDC, would exceed investment, fuel savings and associated income tax effects the $3.197 billion cap, an immediate charge to expense of Limerick Unit No. 1 and 50% of common plant from would be recognized for the excess. The Company February 1, 1986, the date of commercial operation, until estimates the cost of Limerick Unit No. 2 will not exceed the plant was included in rates onJune 27, 1986. The the $3.197 billion cap.

recovery of these costs will be addressed by the PUC in a subsequent electric rate case. Of the $195.6 million of

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued Excess Capacity Standards Court by the Company appealing the exclusion of $ 368. 9 On July 10, 1986, the Governor of Pennsylvania signed million from rate base and by a group of the Company's into law legislation amending numerous provisions of the commercial and small industrial customers on the issue of Pennsylvania Public Utility Code. Among the provisions excess capacity and on various rate design and cost of of the legislation which affect rate regulations, one service issues.

provision imposes standards on the PUC in determining whether new generating capacity is excess capacity. This Supplemental Cooling Water provision requires a disallowance from rates of any The unavailability of sufficient supplemental cooling portion of new capacity which is determined to be excess water would limit or prohibit operation of Limerick Unit capacity. The provisions relating to excess capacity are No. 1 and Unit No. 2 (when in operation) during certain applicable to rate cases "pending before the Commission~' months of the year. The Delaware River Basin Commission On]une 27, 1986, the Office of Consumer Advocate (DRBC) has approved various Company requests for (OCA) filed a Petition for Reconsideration which sought modification of restrictions on the use of the Schuylkill amendment of the PUC's order enteredJune 27, River for Limerick cooling water (which restrictions 1986 with respect to the finding that Limerick Unit create the need for supplemental cooling water for No. 1 was not excess capacity. Additional Petitions for Limerick), a reallocation of cooling water to Limerick Reconsideration on excess capacity and other issues were from other power plants on the Schuylkill River and the filed by certain other parties onJuly 1, 1986, July 7, 1986, use of water from an upstream municipal reservoir. The July 11, 1986 and July 15, 1986. OnJuly 10, 1986 the DRBC's approvals were effective through December 31, OCA filed a Supplemental Petition for Reconsideration 1986, and the Company has filed similar requests with the which alleged that the Limerick Unit No. 1 rate case was DRBC for its 1987 supplemental cooling water needs.

pending at the time the legislation was enacted and One component of the planned supplemental sought application of the excess capacity provisions of cooling water system for Limerick is the Point Pleasant the legislation to the Limerick Unit No. 1 rate case. On Project. The Point Pleasant Project has been the subject of July 16, 1986, a group of the Company's industrial substantial opposition from various groups, including the customers filed a Supplemental Petition for majority of the Commissioners of Bucks County, and the Reconsideration joining the OCA's Supplemental Petition NeshaminyWater Resources Authority (NWRA). Petitions for Reconsideration. By orders entered July 25, 1986, the for Allowance of Appeal were filed with the Supreme

<§> PUC denied all Petitions for Reconsideration and Court of Pennsylvania by the Commissioners of Bucks Supplemental Petitions for Reconsideration. The PUC County, NWRA, and a taxpayer in Bucks County from the held that the legislation did not apply to the Limerick Unit decision of the Commonwealth Court of Pennsylvania, No. 1 rate case. Furthermore, the PUC held that, even if affirming the decision of the Court of Common Pleas of the legislation did apply, Limerick Unit No. 1 did not Bucks County ordering the completion of the Point constitute excess capacity under the standards imposed Pleasant Project. On May 8, 1986, the Supreme Court of by the legislation. On July 25, 1986, the OCAfiled a Pennsylvania denied the Petition for Allowance of Appeal Petition for Review with the Commonwealth Court of filed by NWRA. OnJune 23, 1986, the Supreme Court of Pennsylvania (Commonwealth Court) of the PUC'sJune Pennsylvania denied the remaining two Petitions for 2 7, 1986 electric rate order on the issue of excess Allowance of Appeal. Construction of the Point Pleasant capacity and on a particular rate base issue regarding Project has not yet resumed. The Court has appointed a whether certain utility plant was used and useful. On July special master to oversee the implementation of the court 28, 1986, PetitionsforReviewofthe PUC'sJune 27, 1986 order that the project be completed.

electric rate order were filed with the Commonwealth

3. Sale of Steam Operations On June 30, 1986, the Company signed an agreement for the sale of its steam operations. The sale was completed on January 30, 1987. The Company recorded an estimated loss on disposal of $1,250,000, which includes $1,000,000 in income tax expense associated with timing differences for which deferred taxes, in accordance with the rate-making treatment, had not been provided.

Operating results of the steam operations for 1986, 1985 and 1984 are reported separately as discontinued operations in the accompanying financial statements and are summarized below. Income from Discontinued Operations includes a $1.0 million loss for the period fromJuly 1, 1986 to December 31, 1986.

1986 1985 1984 (Thousands ofDollars)

Steam Revenues $51,067 $68,529 $82,320 Operating Expenses, Excluding Depreciation and Taxes (45,692) (61,680) (71,570)

Depreciation (1,923) (1,916) (1,893)

Income and Other Taxes (1,536) (2,485) (4,419)

Income from Discontinued Operations $ 1,916 $ 2,448 $ 4,438

4. Common Stock At December 31, 1986, and 1985, Common Stock without outstanding. At December 31, 1986, there were par value, consisted of 240,000,000 shares authorized 19,795,818 shares reserved for issuance under stock and 189,078,606and177,679,977 shares, respectively, purchase plans.

5. Preferred Stock At December 31, 1986, and 1985, Preferred Stock, $100 par, cumulative, 10,000,000 shares authorized:

Shares Amount Current Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1986 1985 1986 1985 (Thousands ofDollars)

Series (without mandatory redemption) 14.15%(c) $114.15 2-1-90 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) 113.35 2-1-89 750,000 750,000 75,000 75,000 12.80% (c) 112.80 5-1-88 750,000 750,000 75,000 75,000 9.50% 103.50 750,000 750,000 75,000 75,000 8.75% 101.00 650,000 650,000 65,000 65,000 7.85% 103.00 500,000 500,000 50,000 50,000 7.80% 103.00 750,000 750,000 75,000 75,000 7.75% 101.00 200,000 200,000 20,000 20,000 4.68% 104.00 150,000 150,000 15,000 15,000 4.4% 112.50 274,720 274,720 27,472 27,472 4.3% 102.00 150,000 150,000 15,000 15,000 3.8% 106.00 300,000 300,000 30,000 30,000 5,724,720 5,724,720 572,472 572,472 Series (with mandatory redemption) (d) 0 17.125% $117.13 5-1-87 300,000 300,000 30,000 30,000 15.25% 110.00 5-1-90 450,000 500,000 45,000 50,000 14.625% (e) 5-1-90 500,000 500,000 50,000 50,000 10% 103.33 5-1-90 176,000 220,000 17,600 22,000 9.52% 103.00 375,360 393,690 37,536 39,369 9.50% 1986 Series 109.50 11-1-91 750,000 75,000

8. 75% 1978 Series 104.63 5-1-88 400,100 433,400 40,010 43,340 7.325% 103.51 510,000 540,000 51,000 54,000 7% 101.00 288,100 296,000 28,810 29,600 3,749,560 3,183,090 374,956 318,309 Total Preferred Stock 9,474,280 8,907,810 $947,428 $890,781 (a) Redeemable, at the option of the Company, at the evidenced by Depositary Receipts, each representing indicated dollar amounts per share, plus accrued 1/10 of a share of Preferred Stock.

dividends. ( d) Sinking Fund requirements (par value) in the period (b) Prior to the date specified, none of the shares of each 1987-1991 are as follows: 1987-$14,766,000; series indicated may be redeemed through refunding at an 1988-$16,740,000; 1989-$17,530,000; interest cost or dividend rate which is less than the 1990-$27,530,000; 1991-$23,130,000.

dividend rate of such series. (e) Not redeemable prior to May 1, 1990.

( c) Ownership of these series of Preferred Stock is

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued

6. Long-Term Debt At December 31 Series Due 1986 1985 (Thousands ofDollars)

First and Refunding Mortgage Bonds (a) 4%% 1986 $ 50,000 4%% 1987 $ 40,000 40,000 3%%-14% 1988 52,500 52,500 5%-14% 1989 62,500 62,500 14% 1990 11,000 11,000 14% 1991 11,000 11,000 4Y2%-151;4% 1992-1996 748,633 650,725 6~%-11%% 1997-2001 530,939 535,184 8Y2%-12Y2% 2002-2006 500,000 500,000 6%-18%% 2007-2011 221,591 394,273 8"Vs%-18% 2012-2016 882,379 698,379 Total First and Refunding Mortgage Bonds 3,060,542 3,005,561 Notes Payable - Banks (b) 1987-1992 225,000 225,000 Notes Payable - Other 17% 1987 10,000 20,000 Revolving Credit and Term Loan Agreements (c) 550,000 Pollution Control Notes 5Y2%-13% 1997-2013 272,420 272,685 Debentures 4.85% 1986 20,800 Debentures 14~% 1990 50,000 50,000 Debentures 9.85%-14%% 1993-2011 787,000 250,000

<§> Sinking Fund Debentures - Philadelphia Electric Power Company, a Subsidiary 4Y2% 1995 14,580 15,325 Unamortized Debt Discount and Premium, Net (24,180) (19,440)

Total Long-Term Debt 4,395,362 4,389,931 Due Within One Year (d) 108,570 80,800 Long-Term Debt included in Capitalization (e) $4,286,792 $4,309,131 (a) Utility plant is subject to the lien of the ~ompany's Limerick Unit No. 1. In 1986 the Company repaid the mortgage. InJuly 1986,the Company called $46,904,000 $550 million of borrowings, thereby terminating the princip<1.l amount ofl 7%% series due 2011 and in agreement. The Company also has a $400 million September 1986, called $48,869,000 principal amount Revolving Credit and Term Loan Agreement with a group of 18%% series due 2009. A portion of the proceeds from of banks which expires in 1987. There is an annual the Company's November 1986 sale of $150,000,000 commitment fee of%% on the unused amount. There principal amount of 101;4% series due 2016 and were no borrowings under this agreement during the year.

$100, 000, 000 principal amount of 8%% series due 1994 (d) Long-term debt maturities in the period 1988-1991 was used to repurchase $76,909,000 principal amount of are as follows: 1988-$91,689,000; 1989-$78,863,000; 15%% series due 2010. Premiums on the repurchases of 1990-$77,850,000; and 1991-$77,850,000.

$30,878,322 were charged to loss on reacquired debt. ( e) The annualized interest on long-term debt at (b) At various interest rates. December 31, 1986, was $443.8 million of which (c) At December 31, 1985, the Company had a $550 $304.4 million was associated with mortgage bonds and million revolving credit and term loan agreement with a $139.4 million was associated with other long-term debt.

group of banks which provided financing to complete

7. Short-Term Debt 1986 1985 1984 (Thousands ofDollars)

Average Short-Term Borrowings $ 233 $127,392 $166,713 Average Interest Rates, Computed on Daily Basis 9.51% 6.38% 9.88%

Maximum Short-Term Borrowings Outstanding $1,000 $360,000 $302,500 Average Interest Rates on Short-Term Borrowings at December 31:

Bank Loans 9.50% 9.95%

Pollution Control Notes 6.44%

At December 31, 1986, the Company had no short-term million. The Company generally does not have formal debt outstanding under formal and informal lines of compensating balance arrangements with these banks.

credit with banks aggregating approximately $ 368

8. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned utility plant at December 31, 1986 were as follows:

Production Plants Transmission Plant Peach Merrill Creek Bottom Salem Keystone Conemaugh Reservoir Operator Philadelphia Public Service Pennsylvania Pennsylvania Jersey Central Various Electric Electric and Electric Electric Power& Companies Company Gas Company Company Company Light Company Participating Interest 42.49% 42.59% 20.99% 20.72% 44.24% 21%to43%

Company's share of: (Thousands ofDollars)

Utility Plant $515,149 $914,589 $67,028 $64,457 $68,456 Accumulated Depreciation 134,065 170,460 24,824 25,205 15,985 Construction Work In Progress 22,707 25,948 2,004 6,008 $38,718 <§>

The Company's participating interests are financed with operations are accounted for as if such participating Company funds and, when placed in service, all interests were wholly owned facilities.

9. Income Taxes 1986 1985 1984 (Thousands ofDollars)

Included in Continuing Operations:

Federal Current $ 96,562 $105,165 $ 91,769 Deferred 132,238 60,061 51,747 Investment Tax Credits, Net 29,041 3,582 49,941 State Current 29,908 24,600 22,594 Deferred 1,181 6,492 26,803 Included in Other Income and Deductions:

Federal (83,631) (109,580) (93,818)

State (18,831) (23,835) (22,605)

Total $186,468 $ 66,485 $126,431 Investment tax credits (ITC) and income tax credits Approximately $227 million of additional ITC resulting from contributions to employee stock generated from 1983 through 1986 has not been utilized ownership plans reduced Federal income taxes currently due to limitations based on taxable income. These credits payable by $43 million in 1986, $12 million in 1985 and which expire between 1998 and 2001 maybe used to

$58 million in 1984. Under the Tax Reform Act of 1986, reduce Federal income taxes in future years; however, ITC has been repealed effective January 1, 1986 with the approximately $219 million of these ITC carryovers may exception of transition property. The Company believes be reduced by l 7Yz% in 1987 and by an additional l 7Yz%

that Limerick Unit No. 2 qualifies as transition property in 1988 under the provisions of the Tax Reform Act of eligible for ITC.

• 1986.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued For a number of years the Company has used which deferred taxes were not recorded was accelerated depreciation for income tax purposes and approximately $730 million at December 31, 1986. Since straight line depreciation for financial reporting the Company expects to charge customers for taxes when purposes. Deferred taxes were recorded only on those the timing differences reverse, the tax effect of such timing differences recognized for rate-making. The timing differences is not recorded currently.

cumulative net amount of such timing differences for Provisions for deferred income taxes on continuing operations consist of the tax effects of the following timing differences:

1986 1985 1984 (Thousands ofDollars)

Depreciation arid Amortization $127,278 $ 34,297 $ 33,814 Nuclear Waste Disposal Costs (5,932) (7,355)

Deferred Energy Costs (95,383) (65,393) 43,761 Precommercial Operation of Limerick Unit No. 1 10,210 97,867 Deferred Limerick Costs 11,004 Loss on Reacquired Debt 14,305 24,592 Unrecovered Revenue 55,040 Other 10,965 (18,878) 8,330 Total $133,419 $ 66,553 $ 78,550 The total income tax provisions on continuing operations differ from amounts computed by applying the Federal statutory tax rate to income and adjusted income before income taxes for the following reasons:

Income From Continuing Operations $565,654 $522,853 $487,951 Total Income Tax Provisions 186,468 66,485 126,431

Income Before Income Taxes 752,122 589,338 614,382 Deduct: Allowance for Funds Used During Construction (non-taxable) 178,438 433,491 354,855 Limerick Carrying Charges (non-taxable) 188,679 Adjusted Income Before Income Taxes $385,005 $155,847 $259,527 Income Taxes on Above at Federal Statutory Rate of 46% 177,102 71,689 119,382 Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized 19,230 7,062 6,975 State Income Taxes, Net of Federal Income Tax Benefits 6,620 3,919 14,467 Amortization of Investment Tax Credits (13,468) (8,250) (7,738)

Other, Net (3,016) (7,935) (6,655)

Total income tax provisions $186,468 $ 66,485 $126,431 Provision for Income Taxes as a Percent of:

Income Before Income Taxes 24.8% 11.3% 20.6%

Adjusted Income Before Income Taxes 48.4% 42.7% 48.7%

10. Taxes, Other Than Income 1986 1985 1984 (Thousands ofDollars)

Gross Receipts $132,468 $128,346 $122,881 Capital Stock 25,511 28,091 13,160 Realty 49,110 62,222 47,923 Other 25,538 22,303 22,375 Total $232,627 $240,962 $206,339

11. Investments At December 31 1986 1985 (Thousands ofDollars)

Gas Exploration and Development Joint Ventures $38,299 $44,743 Real Estate Developments and Other Ventures 17,088 15,433 Nonutility Property 13,477 13,931 Escrow Deposits for Decommissioning Nuclear Plants 20,278 12,563 Other Deposits 560 1,000 Total $89,702 $87,670 In 1986 the Company's investment in gas exploration and development joint ventures exceeded the full cost limitation ceiling by $7.2 million, which was charged to expense.

12.Leases Leased property included in Utility Plant at December 31 1986 1985 (Thousands ofDollars)

Nuclear Fuel $484,536 $445,699 Electric Plant 10,953 48,342 Common Plant 156 3,116 Gross Leased Property 495,645 497,157 Accumulated Amortization (214,299} (159,016)

Net Leased Property $281,346 $338,141 The nuclear fuel obligation is amortized as the fuel is burned. Amortization of leased property totaled $65.6 million, <§>

$60.9 million, and $39.l million for the years ended December 31, 1986, 1985 and 1984, respectively. Other operating expenses include interest on capital lease obligations of $16.4 million, $18.2 million and $22.0 million in 1986, 1985 and 1984, respectively. During 1986, $40.0 million of electric plant held under capital lease was retired and the lease terminated. Minimum future lease payments as of December 31, 1986, are:

Year Ending December 31 Capital Leases Operating Leases Total (Thousands ofDollars) 1987 $ 89,396 $ 33,856 $123,252 1988 78, 151 31, 170 109,321 1989 71,629 31,477 103,106 1990 48,418 30,596 79,014 1991 30,522 29,801 60,323 Remaining years 13,185 97,407 110,592 Total Minimum Future Lease Payments $331,301 $254,307 $585,608 Imputed Interest (rates ranging from 6.5% to 17%) (49,955)

Present Value of Net Minimum Future Lease Payments $281,346 Rental expense under operating leases totaled $54.0 million, $43.9 million, and $29.2 million, in 1986, 1985 and 1984, respectively.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued

13. Segment Information - Continuing Operations 1986 1985 1984 (Thousands ofDollars)

Electric Operations Operating Revenues $ 2,699,365 $ 2,516,191 $2,435,731 Operating Expenses, excluding depreciation 1,966,004 1,974,222 1,858,505 Depreciation 206,701 168,208 162,959 Operating Income $ 526,660 $ 373,761 $ 414,267 Utility Plant Additions $ 753,232 $ 793,195 $1,022,496 Gas Operations Operating Revenues $ 391,504 $ 428,984 $ 462,966 Operating Expenses, excluding depreciation 337,287 375,399 413,938 Depreciation 15,867 14,841 13,474 Operating Income $ 38,350 $ 38,744 $ 35,554 Utility Plant Additions $ 35,053 $ 32,896 $ 30,613 Identifiable Assets (')

Electric $ 8,811,304 $ 8,885,738 $8,412,532 Gas 416,824 407,375 405,958 Nonallocable Assets 1,519,892 718,732 737,239 Total Assets $10,748,020 SI0,011,845 $9,555,729

'Includes Utility Plant less accumulated depreciation, inventories and allocated common utility property.

14. Commitments and Contingencies available, $1.2 billion for each station. Under the terms of The Company has incurred substantial commitments in the various insurance agreements, the Company could be connection with its construction program. Construction assessed up to $ 34 mi.Ilion for losses incurred at any expenditures are estimated to be $1.2 billion for 1987 plants insured by the insurance companies. The Company and $3.3 billion for 1988-1990. These estimates are is a member of an industry mutual insurance company reviewed and revised periodically to reflect changes in which provides replacement power cost insurance in the economic conditions, revised load forecasts and other event of a major outage at a nuclear station. The premium appropriate factors. Facilities under construction and to for this coverage is subject to an assessment for adverse be constructed, particularly Limerick Generating Station loss experience. The Company's maximum share of any and associated facilities, will require permits and licenses assessment is $16 million.

which the Company has no assurance will be granted. On March 29, 1985, the PUC adjusted the The Price-Anderson Act places a "Limit of Company's February 28, 1985, Energy Cost Rate (ECR)

Liability" of $695 million for claims that could arise from filing to exclude S45 million of incurred fuel expense an incident involving any licensed nuclear facility in the from ECR recovery pending an investigation into outages nation. All nuclear utilities, including the Company, have experienced at Peach Bottom Unit No. 2 and Salem Unit covered this exposure through a combination of private No. 1 in 1984. On February 28, 1986, the Company made insurance and mandatory participation in a secondary its annual filing with the PUC for a revision in the ECR financial protection pool. In the event of a nuclear which requested a decrease. On March 20, 1986, the PUC incident, the Company could be assessed up to $13.5 approved the Company's request to lower the ECR, million per incident, involving any licensed nuclear effective April 1, 1986, and the PUC permitted the facility in the nation, with a maximum amount of $27 Companytorecover $35.25 millionofthe S45 million million in any one year. The current Price-Anderson fuel costs which the PUC had previously excluded from legislation expires in 1987. Bills to amend the Price- recovery. The remaining $ 9. 7 5 million was written off in Anderson Act, including proposals to substantially modify the quarter ending March 31, 1986.

or eliminate the limitation on liability provisions, have OnJanuary 25, 1985, the PUC adopted an order been introduced in Congress. granting the Company a net increase in annual revenues The Company maintains property insurance, of $49 million reflecting the inclusion of Salem Unit No. 2 including radiation contamination coverage, for loss or in rates. The Company agreed to guarantee $116 million damage to its nuclear facilities. Although it is impossible of fuel savings from Salem Unit No. 2 for the period from to determine the total amount of the loss that may result February 1, 1985 to March 31, 1986. Due primarily to a from an occurrence at these facilities, the Company combination of lower than anticipated fuel prices and maintains the maximum amount of insurance presently

lower than anticipated generation from Salem Unit No. 2, The Company's indemnification obligation also includes the the energy savings associated with the unit were less than payment of interest, at prime rates, on the indemnification the amount that the Company had guaranteed. As a result, amount and all associated costs of contesting an Internal the Company wrote off $16 million of fuel expenses in Revenue Service challenge. The Company has been the quarter ended March 31, 1986. advised that the Internal Revenue Service has asserted, in In December 1981, the Company sold the federal auditing the purchaser, that the sale was invalid. Although income tax benefits associated with Unit No. 2 of the the purchaser has protested the Internal Revenue Service Salem Generating Station for $53,743,000 in a safe claims, the Company has no assurance that the protest harbor lease transaction. Under the sale agreement, the will be successful. If the Internal Revenue Service claims Company agreed to indemnify the purchaser against the against the purchaser are upheld, compliance with the loss of the tax benefits resulting from any Internal indemnification provisions of the agreement could result Revenue Service claims which render the sale invalid. in a significant charge to income.

15. Quarterly Data (Unaudited)

The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts.

Operating Revenues Operating Income Net Income Quarter Ended 1986 1985 1986 1985 1986 1985 (Thousands ofDollars)

March 31 $868,635 $815,886 $124,446 $123,810 $166,261 $151, 166 June 30 675,109 669,319 92,179 97,763 128,213 118,859 September 30 803,667 746,388 183,081 94,962 168,705 124,163 December 31 743,458 713,582 165,304 95,970 103,141 131,113 Earnings Applicable Average Shares to Common Stock Outstanding Earnings Per Average Share Quarter Ended 1986 1985 1986 1985 1986 1985 w (Thousands ofDollars) (Thousands) (Dollars)

March 31 $143,699 $128,422 177,843 162,859 $.81 $.79 June 30 105,964 96,212 181,378 168,723 .58 .57 September 30 146,441 101,569 185,171 171,993 .79 .59 December 31 79,255 108,521 188,037 175,401 .42 .62 1986 first quarter results include charges of approximately 1985 third quarter results include a charge of

$13.l million (net ofrelated incomes taxes) resulting approximately $ 34. 7 million (net of related income from PUC's denial of recovery of approximately $9. 75 taxes) resulting from the PUC's denial of recovery of million of replacement power costs and $16 million of approximately $73.0 million of energy costs.

unrecovered fuel expenses guaranteed (see note 14).

Operating Revenues and Operating Income for 1985 and the first three quarters of 1986 differ from the amounts previously reported due to the reclassification to discontinued operations of revenues and expenses associated with the sale ofsteam operations, as follows:

Operating Revenues Operating Income Quarter Ended 1986 1985 1986 1985 (Thousands ofDollars)

March 31 $25,981 $36,413 $2,865 $3,082 June 30 10,106 14,200 51 390 September 30 3,161 4,516 (1,948) (1,722)

December 31 13,400 698

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued

16. Retirement Benefits assets available for benefits may be misleading. The plan is The Company and its subsidiaries have noncontributory of a long-term nature and is funded on a basis consistent trusteed retirement plans applicable to all regular with this concept. The actuarial value of accumulated employees. Pension costs include normal cost for the year plan benefits is, essentially, a hypothetical plan and amortization of unfunded prior service costs over ten termination calculation which does not take into account to twenty years. Approximately 83 % of such costs were future salaries or future service. Net assets, which are charged to operating expenses and the remainder, measured at fair value at January 1, are subject to associated with construction labor, to the cost of new fluctuations in the securities markets and, therefore, may utility plant. Retirement plan costs, which are funded as not be indicative of the plan's long-term funded status.

accrued, were $42,500,000, $46,700,000, and In December 1985, the Financial Accounting

$42,000,000, in 1986, 1985 and 1984, respectively. Standards Board issued Statement of Financial Accounting Pension plan data as of the dates of the most recent Standards No. 87, Employer's Accounting for Pensions.

actuarial valuations is as follows: This Statement supersedes existing accounting principles January 1 for defined benefit pension plans and becomes applicable 1986 1985 to the Company in 1987. The Company believes adoption Actuarial present value of accumulated (Thousands ofDollars) of Statement No. 87 will not have a material impact on its plan benefits financial statements.

Assumed rate of return 7.5% 7.0% In addition to providing pension benefits, the Vested $580,815 $512,639 Company provides certain health care and life insurance Nonvested 7,127 60,990 benefits for retired employees. Substantially all of the

$587,942 $573,629 Company's employees may become eligible for these Net assets available for benefits $854,917 $645,726 benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for Changes in plan provisions, effective January 1, active employees are provided by an insurance company 1986, increased the actuarial present value of whose premiums are based on the benefits paid during accumulated plan benefits by approximately $30.6 the year. The Company recognizes the cost of providing million while the change in actuarial assumptions these benefits by charging the annual insurance premiums decreased the present value by $79.1 million. The to expense. The cost of providing those benefits for actuarial methods and the accounting policies are the approximately 3,400 retirees during the years 1986, 1985 same as those used to determine pension expense for the and 1984 is not separable from the cost of providing prior year. benefits for approximately 10,000 active employees for The preceding tabular disclosures are required the same period. Total premiums amounted to $31.6 under applicable accounting principles. However, the million, $29.3 million, and $26.6 million, for 1986, Company is of the opinion that comparing the actuarial 1985 and 1984, respectively.

present value of accumulated plan benefits with the net Report of Independent Certified Public Accountants To the Shareholders and Board of Directors Philadelphia Electric Company We have examined the consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the related consolidated statements of income, changes in common stockholders' equity and preferred stock, and changes in cash flows for each of the three years in the period ended December 31, 1986. Our examinations were made in accordance with generally accepted auditing standards and, accordingly, included such tests of the accounting records and such other auditing procedures as we considered necessary in the circumstances.

In our opinion, the financial statements referred to above present fairly the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1986 and 1985, and the consolidated results of their operations and changes in their financial position for each of the three years in the period ended December 31, 1986, in conformity with generally accepted accounting principles applied on a consistent basis.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 2, 1987

Philadelphia Electric Company and Subsidiary Companies Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Preferred Stock Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps, Inc. 9 3/80 IO 3/80 11 2/83 Fitch Investors Service BBB 9/82 BBB- 9/82 BB+ 9/82 Moody's Investors Service Baa3 1/83 Bal 1/83 bal 1/83 Standard & Poor's Corporation BBB- 9/82 BB + 9/82 BB+ 7/86 NYSE - Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1986 1985 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price $24 1/s $25 1/s $203/s $201/2 Sl7% Sl6% SI6Y8 Sl6%

Low Price $21 5/8 $19718 $171/8 $167/s SI4 $14 Sl3"Ve SI4Y.!

Earnings 42¢ 79¢ 58¢ SH 62<r 59<r 57<r 79<r Dividends 55¢ 55¢ 55¢ 55¢ 55<r 55<r 55<r 55<r RETURN ON AVERAGE RATIO OF EARNINGS COMMON STOCK TO MORTGAGE EQUITY INTEREST Percent 18 limes Covered 3 .00 15 2.50 12 2.00 9 1.50 6 1.00

.50 82 83 84 85 86 82 83 84 85 86

Philadelphia Electric Company and Subsidiary Compani es Financial Statistics Summary ofF.arnings (Millions ofDollars)

For the Year Ended 1986 1985 1984 1983 1982 1981 1976 Operating Revenues (for details see pages 42 and 43) $3,090.9 $2,945.2 $2,898.7 $2,524.9 $2,571.5 $2,358.5 $1 ,183 .6 Operating Expenses Fuel and Energy Interchange 889.3 1,097.8 1,069.9 939 .5 1,079 .0 1,134 .9 454.1 labor 417.2 370.8 339.6 311.2 285 .4 251.3 161.9 Other Materials, Supplies and Services 475.2 440.1 413.8 342 .3 307.4 248.4 80 .6 Total Operation and Maintenance 1,781.7 1,908.7 1,823.3 1,593.0 1,671.8 1,634.6 696.6 Depreciation 222.6 183.0 176.4 163 .4 142.1 128.6 96.5 Taxes 521.6 440 .9 449.l 376.8 370 .8 273.9 181.5 Total Operating Expenses 2,525.9 2,532.6 2,448 .8 2,133 .2 2, 184.7 2,037.1 974.6 Operating Income 565.0 412.6 449 .9 391.7 386.8 321.4 209 .0 Other Income and Deductions Allowance for Other Funds Used During Construction 76.8 176.3 134. 5 108.1 65.7 65 .0 30.1 Limerick Carrying Charges 188.7 Income Tax Credits, net 102.5 133.4 116.4 8 7.9 75.8 63 .2 24.2 Other, net 2.4 (3.5) 0 .2 (3.1) (0.7) 2.5 2.6 Total Other Income and Deductions 370.4 306.2 251.1 192 .9 140.8 130.7 56 .9 Income Before Interest Charges 935.4 718.8 70 1.0 584.6 527.6 452. 1 265 .9 Interest Charges Long-Term Debt 458.9 43 5.4 402.5 330.2 308.9 266 .7 147.6

<§> Short-Term Debt 12.5 17.7 30.9 35.2 32 .0 33 .2 3.6 Allowance for Borrowed Funds Used During Construction (101.6) (257 .2) (220.4) (167 .9) (147.6) (123 .8) (47 .5)

Net Interest Charges 369.8 195 .9 213.0 197. 5 193 .3 176. 1 103 .7 Income From Continuing Operations 565.6 522 .9 488 .0 387.1 334.3 276 .0 162 .2 Income From Discontinued Operations 1.9 2 .4 4.4 2.0 1.9 1.6 2 .4 Estimated Loss on Disposal of Discontinued Operations (1.2)

Net Income 566.3 525 .3 49 2.4 389.1 336.2 277.6 164.6 Preferred Stock Dividends 90.9 90.6 82.7 67.4 57.6 53 .8 39.0 F.arnings Applicable to Common Stock 475.4 434.7 409.7 321.7 278 .6 223 .8 125 .6 Dividends on Common Stock 403.5 373.5 334.3 283 .6 240.5 189.5 107.7 F.arnings Retained $ 71.9 $ 61.2 $ 75.4 $ 38.1 s 38.1 $ 34 .3 $ 17.9 Income From Continuing Operations Per Average Common Share $ 2.59 s 2.55 s 2.67 $ 2.39 s 2.38 s 2.23 s 1.88 F.arnings Per Average Common Share (Dollars) $ 2.60 $ 2.56 $ 2.70 s 2.40 s 2.39 $ 2.2 5 $ 1.91 Dividends per Common Share (Dollars) $ 2.20 s 2.20 s 2.20 $ 2 .12 s 2.06 $ 1.90 $ 1.64 Common Stock Equity (Per Share) $ 18.47 $ 17.97 $ 17.81 $ 17 .99 s 17.93 $ 18.10 s 19.13 Average Shares of Common Stock Outstanding (Millions) 183.1 169.8 151 .8 133 .9 116.5 99 .6 65.6

SUMMARY

OF FINANCIAL CONDffiON (Millions ofDollars)

December 31 1986 1985 1984 1983 1982 1981 1976 Assets Utility Plant, at original cost $11,216.7 $10,572.2 $9,834.1 $8,864 .2 $7,905.7 $7,044.7 $4,747.2 Less: Accumulated Depreciation 2,014.7 1,824.4 1,726.3 1,592.0 1,450.1 1,330.6 860 .3 Leased Property, Net 281.3 338.1 352 .1 364 .0 299.l 270.0 91.6 Net Utility Plant 9,483.3 9,085 .9 8 ,4 59.9 7,636.2 6 ,7 54.7 5,984.1 3,978 .5 Current Assets Cash and Temporary Cash Investments 90.7 188.8 30.4 57 .2 50 .0 30.7 23 .8 Accounts Receivable 375.6 370.9 384.2 338.6 342.2 342 .4 168.0 Inventories 129.7 123.7 150.5 131.1 143.0 132 .2 88.3 Deferred Income Taxes - Energy Costs 44.8 (51.8) (117.7) (76.5) 43.3 17.0 (10.5)

Other 78.6 71.8 137.0 52.3 40.2 35.l 20 .8 Deferred Debits and Other Assets Unrecovered Revenue 112.5 Deferred Limerick Costs and Carrying Charges 195.6 Investments 89.7 87.7 80 .9 99 .4 91.4 77.8 13.2 Loss on Reacquired Debt 76.8 48.6 Other 70.7 86.2 82 .9 80.4 24 .9 31.5 14 .7 Total $10,748.0 $10,011.8 $9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296.8 Capitalization and Liabilities Common Stock $ 2,833.0 $ 2,602 .0 $2,361.0 $2,110.5 $1,826.2 $1,572 .4 $1,002.8 Other Paid-In Capital 7.8 7.3 6.7 5.9 4.6 3.9 1.7 Retained Earnings 653.1 583.7 523.3 452 .9 423.6 387.2 321.2 Common Shareholders' Equity 3,493.9 3,193.0 2,891.0 2,569.3 2,254.4 1,963.5 1,325.7 0 Preferred Stock:

Without Mandatory Redemption 572.5 572 .5 572.5 522.5 372.5 372.5 372.5 With Mandatory Redemption 374.9 318.3 326.2 284 .9 292 .3 266.9 162.6 Long-Term Debt 4,286.8 4,309.2 3,778.0 3,381.8 3,028.5 2,74 5.7 1,936.4 Total Capitalization 8,728.1 8,393.0 7,567.7 6,7 58.5 5,947 .7 5,348.6 3,797.2 Current Liabilities Short-Term Debt 1.0 260.0 267.5 64 .7 54.2 7.2 Long-Term Debt Due Within One Year 108.6 80.8 50.4 21.3 36.1 36.9 Lease Obligations Due Within One Year 69.4 76.3 68 .3 61.5 32.5 53.9 10.6 Accounts and Dividends Payable 222.1 185.l 200.l 179.9 188.5 188.9 83.9 Taxes Accrued 86.1 58.5 40.3 25 .8 65.9 68.4 20 .2 Deferred Energy Costs 88.2 (101.7) (229.9) (149.3) 85.4 31.3 (19.9)

Interest Accrued 90.7 93.0 91.1 91.8 99 .8 82.3 43.2 Other 80.0 72.0 127.2 54.1 24.7 18.l 4.6 Deferred Credits and Other Liabilities Capital Lease Obligations 212.0 261.8 283.8 302.5 266.6 216 .1 81.0 Deferred Income Taxes 695.0 502.6 373.3 346.5 290.5 273 .5 110.8 Unamortized Investment Tax Credits 320.1 302.4 299.4 249.7 296.0 204.0 88.0 Other 47.7 87.0 76.4 130.2 106.1 75.4 33 .1 Total $10,748.0 $10,011.8 $9,208.1 $8,318.7 $7,489.7 $6,650.8 $4,296 .8

Philadelphia Electric Company and Subsidiary Companies Operating Statistics ELECTRIC OPERATIONS 1986 1985 1984 1983 1982 1981 1976 Output ( Millions ofKilowatthours)

Steam 7,864 9,4 55 11 ,085 10,4 57 8,598 9 ,931 13 ,385 Nuclear 17,125 8 ,3 59 6,462 5,520 10,743 7,464 4,937 Hydraulic 1,848 1,484 2,085 1,739 1,581 1,397 2,065 Pumped Storage Output 1,176 1,235 1,100 979 1,126 1,101 1,062 Pumped Storage Input (1,661) (1 ,7 54) (1 ,579) (1,427) (1,665) (1,624) (1,506)

Purchase and Net Interchange 4,258 10,252 11 ,975 12,181 11,120 11 ,173 7,666 Internal Combustion 269 178 425 491 178 283 792 Other 382 1,254 528 36 Total Electric Output 31,261 30,463 31 ,553 29,940 31,681 30,253 28,4 37 Sales ( Millions ofKilowatthours)

Residential 8,900 8 ,440 8,515 8 ,467 7 ,877 8 ,014 7,585 Small Commercial and Industrial 4,022 3,731 3,543 3,284 3,142 3,115 2,755 large Commercial and Industrial 15,068 14,920 14,881 14,478 14,178 14,916 14,662 All Other 993 1,044 1,061 1,003 1,012 1,005 1,271 Service Territory 28,983 28,135 28,000 27,232 26,209 27,050 26 ,273 Jersey Central Power and Light (Salem Unit No. 2) 1,395 346 3,352 1,218 Total Electric Sales 28,983 28,135 29 ,395 27,578 29,561 28,268 26,273 Number of Customers, December 31 Residential 1,263,465 1,245 ,481 1,230,883 1,217 ,635 1,206,944 1,200,238 1, 137,544 Small Commercial and Industrial 127,797 124,7 19 121 ,676 119,292 118,407 117,016 115 ,422 large Commercial and Industrial 4,668 4,881 5,100 5,437 5,616 5,790 5,747

<> All Other 763 773 751 751 762 746 2,345 Total Electric Customers 1,396,693 1,375 ,854 1,358,4 10 1,343 ,115 1,331 ,729 1,323,790 1,261 ,058 Operating Revenues (Millions ofDollars)

Residential $1,023.6 $923 .9 $854.9 $744 .0 S694.4 s643 .7 $373.2 Small Commercial and Industrial 437.0 388.7 360.2 316.6 310.6 285.9 149.3 large Commercial and Industrial 1,103.3 1,061.8 1,008.5 877 .4 922.3 917.1 442.9 All Other 135.5 141.8 145 .1 139.4 118.3 109.5 59.4 Service Territory 2,699.4 2,516.2 2,368.7 2,077 .4 2,045.6 1,956.2 1,024 .8 Jersey Central Power & Light (Salem Unit No. 2) 67.0 30.5 135.4 45 .9 Total Electric Revenues $2,699.4 $2 ,516.2 $2 ,435 .7 $2,107.9 $2 ,181.0 $2,002 .1 Sl ,024 .8 Operating Expenses (Millions ofDollars)

Operating expenses excluding depreciation $1,966.0 Sl ,974.2 $1 ,858.5 Sl,592.0 $1 ,688.4 S1,586.5 $750 .2 Depreciation 206.7 168.2 163.0 150.9 130.2 117.3 88.0 Total Operating Expenses $2,172.7 $2 ,142 .4 S2 ,021.5 Sl,742.9 Sl ,818.6 Sl ,703 .8 S838.2 Electric Operating Income (Millions ofDollars) $ 526.7 s 373 .8 s 414.2 s 365.0 s 362.4 s 298.3 $186.6 Average Use per Residential Customer (kilowatthours)

Without Electric Heating 6,177 6,034 6,160 6,319 5,875 6,022 6,298 With Electric Heating 16,661 15,923 17,293 16,523 16,813 18,054 22 ,154 Total 7,097 6,820 6,960 6 ,990 6,544 6,699 6,710 Electric Peak Load, Demand (thousands of kws) 6,134 6 ,034 5,925 5,879 5,691 5,731 5,346 Net Electric Generating Capacity -

Year End Summer rating (thousands of kws) 7,870 7,599 7,765 7,974 8,006 8,006 7,742 Cost of Fuel per Million Btu $1.18 Sl .72 $2.22 $2 .25 Sl.57 $2.10 Sl.24 Btu per Net Kilowatthour Generated 10,844 10,843 10,920 10,906 10,918 10,930 10,529

GAS OPERATIONS 1986 1985 1984 1983 1982 1981 1976 Sales (Millions of Cubic Feet)

Residential 1,856 1,810 1,941 2,168 2,442 2,446 2,34 2 House Heating 25,731 23 ,227 25 ,4 29 22 ,981 24 ,237 24,675 24 ,540 Commercial and Industrial 33,834 36,254 41, 145 39 ,043 41,660 45,670 33,390 All Other 578 1,209 1,282 672 422 127 89 Total Gas Sales 61,999 62,500 69,797 64 ,864 68,761 72,918 60,361 Gas Transported for Customers 3,907 10,262 3,794 789 Total Gas Sales & Transported 65,906 72 ,762 73,591 65,653 68,761 72 ,918 60 ,361 Number of Customers, December 31 Residential 68,590 69,632 70,794 72,501 76,638 78,426 89,459 House Heating 225,010 217,840 211,984 206,443 198,910 193,038 162,993 Commercial and Industrial 24,884 24 ,234 23,442 22 ,810 22 ,324 21,578 19,669 Total Gas Customers 318,484 311,706 306,220 301 ,754 297,872 293,042 272,121 Operating Revenues (Millions ofDollars)

Residential $ 18.0 $ 18.7 s 19.0 s 19.1 s 18.1 s 15.4 s 8 .7 House Heating 189.8 185.4 191.7 165 .8 147.1 128.5 73.3 Commercial and Industrial 177.7 214.1 243 .7 227 .3 221.1 209.7 76.1 All Other 2.0 5.2 5.6 3.0 1.8 0.5 0.2 Subtotal $387.5 $423.4 $460.0 $415 .2 $388.1 $354.1 $158.3 Other Revenues (including Transported for Customers) 4.0 5.5 3.0 1.8 2 .3 2.3 0.6 Total Gas Revenues $391.5 $428.9 $463.0 $417.0 $390.4 $356.4 $158.9 Operating Expenses (Millions of Dollars)

Operating expenses excluding

<E>

depreciation $337.3 $375.4 S413.9 $377.6 S354.l $322.0 s128.1 Depreciation 15.9 14.8 13.5 12.7 11.9 11.3 8 .4 Total Operating Expenses $353.2 $390.2 $427.4 $390 .3 $366.0 $333.3 S136.5 Gas Operating Income (Millions ofDollars) $ 38.3 $ 38.7 s 35.6 $ 26.7 $ 24.4 $ 23.1 s 22 .4 ELECTRIC SALES GAS SALES (including Salem Unit & TRANSPORTED fllo. 2)

Billions of Billionsof - - - - - - -

kilowanhours 30 Cubic Fee1 90 75 60 30 15 82 83 84 85 86 82 83 84 85 86

- Salem Uni1No. 2 Sales

Philadelphia Electric Company and Subsidiary Companies Shareholder Information Stock Exchange Listings Annual Meeting Most PE Securities are listed on the New York Stock The Annual Meeting of the Shareholders of the Company Exchange and the Philadelphia Stock Exchange. will be held on April 8 , 1987, at 10:30 A.M. at the Philadelphia Electric Power Company Debentures are Pennsylvania Hall Auditorium, Philadelphia Civic Center, listed on the Philadelphia Stock Exchange. 34th Street & Civic Center Boulevard, Philadelphia, PA.

Common stock shareholders of record at the close of Dividends business on February 27, 1987, are entitled to vote at this The Company has paid dividends on its common stock meeting.

continually since 1902 . The Board of Directors normally Notice of the meeting, proxy statement, and proxy will be considers common stock dividends for payment in March, mailed under separate cover. Prompt return of the proxies June , September and December. will be appreciated.

The Company estimates that the $2.20 per share dividend paid to common shareholders in 1986 is fully taxable as FormlO-K dividend income for Federal income tax purposes. Form 10-K, the annual report filed with the Securities and Exchange Commission, is available, without charge, to Dividend Reinvestment and Stock Purchase Plan shareholders upon written request to Philadelphia Shareholders may use their dividends to purchase Electric Company, 2301 Market Street, PO. Box 8699 ,

additional shares of common stock through the Philadelphia, PA 19101 , Attn: Financial Division, S21-1.

Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric pays all brokerage and service Shareholders fees . Customers of the Company who are not shareholders The Company has 294 ,715 shareholders of record of may enroll in the plan by making a one-time purchase of common stock, an 11% increase in 5 years.

common stock directly from the Company. All shareholders have the opportunity to invest additional Transfer Agents and Registrars funds in common stock of the Company, whether or not PHILADELPHIA ELECI'RIC COMPANY - Preferred and they have their dividends reinvested - also with all fees Common Stocks borne by the Company.

Registrars: Mellon Bank (East) N.A.

Over 34 % of the Company's common shareholders were Four Mellon Bank Center participants. In 1986, they invested more than $100 Philadelphia, PA 19102 million through the Plan, including cash payments.

Information concerning this Plan may be obtained from Morgan Shareholder Services Trust Co.

D. P Scott, Treasurer, Philadelphia Electric Company, 30WBroadway,NY,NY10015 2301 Market Street, PO. Box 8699 , Philadelphia, PA Transfer 19101.

Agents: Philadelphia Electric Company 2301 Market St., Phila. , PA 19101 Comments Welcomed The Company always is pleased to answer questions and Morgan Shareholder Services Trust Co.

provide information. Please address your comments to 30WBroadway,NY,NY10015 Mrs. L. S. Binder, Secretary, Philadelphia Electric PHILADELPHIA ELECI'RIC COMPANY - First and Company, 2301 Market Street, PO. Box 8699, Refunding Mortgage Bonds Philadelphia, PA 19101. Trustee: Fidelity Bank, National Association Inquiries relating to shareholder accounting records , Broad & Walnut Sts. , Phila., PA 19109 stock transfer and change of address should be directed to New York Philadelphia Electric Company, 2301 Market Street, PO.

Agent: Morgan Guaranty Trust Co. of NY, Box 8699, Philadelphia, PA 19101 , Attn: Stock Transfer 30WBroadway, NY,NY10015 Section, S6-4 .

PHILADELPHIA ELECI'RIC COMPANY - Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Toll-Free Telephone Line Subsidiary) - Debentures Toll-free telephone lines are available to the Company's Trustee: The Philadelphia National Bank, shareholders for inquiries concerning their stock Broad & Chestnut Sts. , Phila. , PA 19101 ownership. When calling from outside of Pennsylvania, call 1-800-223-7326 . From within Pennsylvania, call New York 1-800-242-7326. Local Philadelphia calls should be made Agent: Irving Trust Co., One Wall Street, to 841-5795 . NY, NY 10015 General Office: 2301 Market Street, PO. Box 8699 , Phila.,

PA 19101. (215) 841-4000 .

Directors Officers Officers

'John H. Austin , Jr. James L. Everett Lucy S. Binde r President and Chief Operating Officer Chairman of the Board and Chief Secretary of the Company Executive Officer Donald P Scott William T. Coleman , Jr. , Esqu ire Joh n H. Austin , Jr. Treasurer Senior Partner of the law firm of President and Chief Operating Officer O'Melveny & Myers James D. Lync h Richard G. Gi lmore Assistant Secretary M. Walter D'Alessio Senior Vice President, Finance and President and Chief Executive O.fficei; Chief Financial Officer ]. Robert Causton Latimer & Buck, Inc. (Mortgage Assistant Treasurer Banking and Real Estate John S. Kemper Development) Senior Vice President, Engineering and Jon A. Katherine Production Assistant Treasurer

'James L. Eve rett Chairman of the Board and Chief Edward G. Bauer, Jr. William M. Lennox.Jr.

Executive Officer of the Company Vice President and General Counsel Assistant Treasurer Clifford Brenner William S. Gaither Management Changes:

Vice President, Corporate President, Drexel University On April 28 , 1986 , the Fi nance and Communications Accounting Department was realigned as

'Robert F. Gilkeson fo llows:

Charles L. Fritz Chairman of the Executive Committee Ri chard G. Gil more was elected Senior Vice President, Personnel and of the Company Vice President, Fi nance and Chief Industrial Relations Financial Officer Ric hard G . Gilmore Joseph W. Gallagher Morton W. Ri merman was elected Vice Senior Vice President, Finance and Vice President, Nuclear Operations Pres ident, Finance and Accounti ng Chief Financial Officei* of the Company Raymond C. Wi lliams was elected Vice Raymond F. Holman President, Rates Vice President, General

'Robe rt D. Harrison Administration Donald P Scott was elected Treasurer Vice Chairman, john Wanamaker, Joseph F. Paq uette , Jr. tendered his Philadelphia ( Merchandising) S. Joseph Kowalski resignation as Vice President , Finance Vice President, Engineering and and Accounting, effective Apri l 30 ,

Paul R. Kaiser Research 1986 .

Chairman Emeritus, Tasty Baking Company ( Diversified Kenneth G. Lawrence On May 23 , 1986 , Albert G. Mikalauskas Manufacturing) Vice President, Commercial was elected Vice Presi dent, Transmission Operations and Distribution, succeeding Thomas W.

'Joseph C. Ladd Coppock, who ret ired Ju ly 1, 1986 .

Chairman and Chief Executive Officer, Albert G. Mika lauskas O n Nove mber 24 , 1986 , the Engineering Fidelity Mutual Life Insurance Vice President, Electric Transmission and Research and Electric Production Company and Distribution Departments were realigned as fo llows:

Phi lip G. Mulligan John S. Kemper was elected Senior Vice Ed ithe]. Levit, M.D.

Vice President, Gas Operations Pres ident, Engi neering and Production President Emeritus and Vice Chairman of the Board, National Joseph W. Gallagher was elected Vice Board of Medical Examiners A. Lewis Parry, Jr. President, Nuclear Operations Vice President, Purchasing and S.Joseph Kowa lski was elected Vice

'Joseph ]. McLaughlin General Services President, Engineering and Research President and Chief Executive Officer, Alvin ). Weigand was elected Vice Beneficial Mutual Savings Bank Morton W. Rimerman Vice President, Finance and President, Electric Production Director Change: Accounting Vincent S. Boyer, Senior Vice President, William S. Fishman's term expi red Nuclear Power, and Shields L. Daltroff, March 31 , 1986 Alvin]. Weigand Vice President, Electric Produ ction, Vice President, Electric Production reti red March 1, 1987 .

• Member of the Executive Committee O n November 24 , 1986 , Kenneth G.

Raymond C. Wi llia.ms Lawrence was elected Vice President, Vice President, Rates Commerc ial Operations, succeed ing William B. Morl ok, w ho retired February 1, 1987 .

Philadelphia Electric Company BULK RATE 230 1 Market Street U.S. POSTAGE PAID PO Box 8699 Philadelphia PA Philadelphia PA 1910 1 Permit No. 378