ML18093A741

Atlantic Energy 1987 Annual Rept

ML18093A741
Person / Time
Site:	Salem, Hope Creek, 05000000
Issue date:	12/31/1987
From:	Feehan J ATLANTIC CITY ELECTRIC CO.
To:
Shared Package
ML18093A737	List: ML18093A736 ML18093A738 ML18093A739 ML18093A740 ML18093A741
References
NUDOCS 8803210513
Download: ML18093A741 (48)

Text

VIRGIN/A

AVENUE, ST. CHARL PLACE

About the Cover:

The game board on our cover is perhaps one of the most recognized in the world.

What some may not realize is that its designer featured the streets and businesses found in Atlantic City. So, the square with the light bulb has special meaning for us.

Atlantic City Electric Company and its predecessors have been a part of the progress of southern New Jersey for more than 100 years. That progress has meant growth and change, and the Electric Company has derived its success from the ability to manage them.

Progress and change continue.

Regulatory and competitive trends can be expected to alter the monopoly status of electric utilities over the coming years.

The Atlantic Energy holding com-pany system, with Atlantic City Electric Company as its cornerstone, was estab-lished in November 1987. This new business structure provides additional ways to manage the changes affecting utilities, serve customers and benefit shareholders.

Notice of Annual Meeting The 1988 Annual Meeting of Share-holders will be held on Wednesday, April 27, 1988 at the Quail Hill Inn, Smithville, New Jersey. A Notice of Annual Meeting will be mailed in March to those shareholders entitled to vote.

Contents Letter to Shareholders 2

The Year in Review 4

Viewpoints 7

Regional Sampler 7

Service Territory Map 16 Customers At-A-Glance 17 Financial Information 18 Investor Information 39 Statistical Review 1987-1983 40 Corporate Officers 41' Board of Directors 4~

Director Committees 42

.~i Corporate Address 1199 Black Horse Pike Pleasantville, New Jersey 08232 (609) 645-4500

~:

(-

• • i.

1:

• ~

I I

• i Philadelphia Electric Company Annual Report 198 7 1986 1986 Financial Highlights 1987 As Reported %Change As Restated*

Operating Revenues

$3, 181,464,000

$3,090,869,000 3%

$3,090,869,000 Operating Expenses

$2,464,381,000

$2,525,859,000 (2%)

$2,516,356,000 Taxes Charged to Operations

$499,653,000

$521,557,000 (4%)

$516,982,000 Operating Income

$717,083,000

$565,0 I 0,000 27%

$57 4,513,000 Earnings Applicable to Common Stock

$448,240,000

$475,359,000 (6%)

$185,576,000 Earnings per Average Common Share

$2.33

$2.60 (10%)

$1.01 Cash Dividends Paid per Common Share

$2.20

$2.20

$2.20 Average Shares of Common Stock Outstanding 192,489,330 183,140,767 5%

183, 140, 767 Construction Expenditures

$1,037,500,000

$966,500,000 7%

$966,500,000 Total Assets

$11,209,736,000 $I 0, 7 48,020,000 4% $I 0, I 70,320,000

• Restated for the effects of adoption of SFAS 90 and SFAS 92 (See note 3 of Notes to Financial Statements)

Contents Letter to Shareholders Report of 1987 Operations Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Financial Statements Notes to Financial Statements Report of Independent Certified Public Accountants Financial and Operating Statistics Shareholder Information Officers and Directors EARNINGS AND DIVIDENDS PER SHARE Dollars

.so LOO I.SO 87 86 8S 84 83 Earnings Per Share Earnings Per Share Restated Dividends 2.00 2.SO 3.00 Million Dollars CONSTRUCTION EXPENDITURES 200 400 External Sources r::::::::J Internal Sources 600 800

%Change 3%

(2%)

(3%)

25%

142%

• 131%

5%

7%

10%

2 4

21 23 28 39 40 44 45

!000 1200

TO OUR SHAREHOLDERS The year 198 7 was perhaps more challenging than any other year in the history of your Company.

There were some negatives, one of which -

the Peach Bottom shutdown -

was especially serious. But there were also a number of positives that combined to produce an overall better performance than certain widely publicized events would have suggested.

Peach Bottom Shutdown On March 31, 1987, the Nuclear Regulatory Commission (NRC) ordered a shutdown of Peach Bottom Atomic Power Station, citing inattentiveness and other inappropriate behavior by control room operators while on duty as well as other violations.

Our corrective efforts have been unprecedented in their scope and reflect a total corporate commitment to restore operational excellence and management effectiveness and accountability. Since March 31, the Company has left no stone unturned in addressing the concerns raised by the NRC. These efforts are described in detail beginning on page 10.

Management changes were made at the plant, including the appointment of a new plant management team. A new, vertically integrated nuclear organization, headed by a senior vice president, with corporate vice presidents located at each nuclear plant site, has been created. In addition, a nuclear committee of the Board of Directors has been established.

We are committed to fix the problem, fix it right and keep it fixed.

Limerick Project During 1987, performance at our other nuclear plant, Limerick, continued on an excellent level.

At mid-year, Unit No. 1 received the highest marks in eight often areas rated by the NRC in its Systematic Assessment of Licensee Performance*

(SALP) report, with the remaining two areas receiving the second highest rating with improvement noted.

Construction at Limerick Unit No. 2 continued ahead of schedule with expenditures within budget, consistent with the Pennsylvania Public Utility Commission's mandated construction cost cap of $3.2 billion. Unit No. 2 received a SALP report late in the year that gave an overall excellent rating to our construction activities.

While progress was made on the supplemental cooling water system for Limerick, there are still challenges to the Point Pleasant Pumping Project, a key component of the planned water system.

Financial Results Earnings per share decreased to $2.33 from $2.60 as reported in 1986.

To comply with the requirements of the Financial Accounting Standards Board, the Company adopted Financial Accounting Standards Board Statements No. 90 and No. 92 retroactive to 1986, reducing 1986 net income and earnings applicable to common stock as reported by $290 million, or $1.59 per share. Restated 1986 common stock earnings per share are $1.01.

Record sales Electric sales in 1987 climbed 5% to 31 billion kilowatthours, a record level. Accounting for the increase were more customers from an improved residential housing market, strong commercial and industrial sales, and weather. Gas sales and gas transportation services were up 14% due to higher industrial consumption.

During the hot and humid weather experienced in our service area in July, customer demand for electricity reached record levels. A new peak load of 6,54 7 megawatts was set on July 24, surpassing by 7% the all-time record of 6, 134 megawatts set in July 1986. The record peak

equaled the Company's projected peak for the mid-l 990's, indicating an unexpected rate of economic growth in our service area.

Recent Developments Just as this report was being released for printing, two major events were announced. First, John H.

Austin, Jr. resigned as President, Chief Operating Officer and Director, effective March 1, 1988. The Board of Directors asked James L. Everett to assume the additional duties of President and Chief Operating Officer. These and other related director and management changes are detailed on the inside back cover of this report. Second, we made public a letter from the Institute of Nuclear Power Operations, a nuclear industry group, that was highly critical of the Company in preventing and resolving Peach Bottom problems and the lack of adequate corporate accountability. Please refer to note 2 of the Notes to Financial Statements, page 28, for further discussion of this matter.

Dedicated Employees At Philadelphia Electric Company, our people continue to be our most valuable resource. With John H. Austin, fr.

James L. Everett their skill and commitment, we will rise to today's challenges and assure a better tomorrow. In recognition of the fine efforts of over 11,000 dedicated employees, this report's photography features representative members from each department.

To an even greater extent this year than before, we thank our shareholders for their support and extend special appreciation for standing by the Company during our Peach Bottom problems. We renew our pledge to give our every effort toward making your investment a sound and rewarding one.

James L. Everett Chairman of the Board and Chief Executive Officer Jza.*w John H. Austin, Jr.

President and Chief Operating Officer February 8, 1988

1987 FINANCIAL

SUMMARY

Earnings Decline In 1987, earnings per share were $2.33, down from $2.60 earnings per share as originally reported for I 986. The average number of shares outstanding increased by 5% to 192 million shares. Earnings applicable to common stock were $448 million, a decrease of$27 million or 6% as reported from the previous year.

The decline in earnings resulted primarily because of the Pennsylvania Public Utility Commission's disallowance in its June 1986 rate order of i_nvestment relating to Limerick Unit No. 1 as well as other rate and accounting treatment (16 cents per share) and the

.replacement power costs since March 31, associated with the Nuclear Regulatory Commission's shutdown of the Peach Bottom Atomic Power Station, which were not recovered from customers (16 cents per share). The earnings decline was partially offset by the positive effects of higher electric sales.

The Company has adopted Financial Accounting Standards Board (FASB) Statements No. 90 and No. 92 retroactive to 1986 to comply with FASB.:equirements. The combined effects of adopting these statements reduced 1986 net income, earnings applicable to common stock and retained earnings as reported by $290 million, or $1.59 per share.

Statement No. 90 required the Company to write off $369 million of Limerick Unit No. 1 costs which the Public Utility Commission disallowed in its June 27, 1986 order. The Company continues to believe that the $369 million of costs were prudently incurred and has a petition for review of the order pending before the Commonwealth Court of Pennsylvania. The write-off was taken solely to comply with the requirements of Statement No. 90. See note 3 of George E Corse, Engineering and Production George F. Corse, Fuel Handler -

Eddystone Generating Station, Engineering and Production. Fourteen years of service. George represents the more than 1,750 employees of the Engineering and Production Department who perform all non-nuclear operating, maintenance and engineering activities for the Company.

Ann M. TUcker, Personnel and Industrial Relations Ann M. Tucker, Director -

Affirmative Action, Personnel and Industrial Relations.

Seventeen years of service. Ann is one of approximately 140 employees of the Personnel and Industrial Relations Department who work in the area of personnel, industrial relations and medical.

\\

Notes to Financial Statements, page 29.

Financial statements and notes begin on page 23. Information on sales, revenue, expenses and customers can be found on pages 21, 22, 23, 42and 43.

Sales at Record Levels Electric sales inmeased to a record 31 billion kilowatthours, a 5% increase over 1986. This was the largest annual percentage gain since 1973.

Virtually all categories of sales experienced increases, reflecting a favorable economic environment, additional residential and house-heating customers and hot summer weather.

Residential and house-heating sales were up 6%,

with nearly 17,000 new customers. The industrial sector contributed nearly one-half of the improvement, up 722 million kilowatthours over 1986.

While weather had a much less significant effect on gas operations, total gas sales rose 14% to 75 billion cubic feet, reflecting strong

15

Herbert H. Yan, General Administration -

PJM Herbert H. Yan, Engineer, General Administration. Fifteen years of service.

Herb represents the 120 employees who operate the Pennsylvania-New Jersey-Maryland (PJM) control center in Valley Forge, PA.

6 industrial sales and almost 7,000 more house-heating customers in 1987.

New Peak Demand Successfully Met Exceeding levels not anticipated until the mid-I 990's, the highest peak demand in the Company's history occurred on July 24, 198 7. At 6,547 megawatts, the demand exceeded the 1986 record-setting 6, 134 megawatts by 413 megawatts.

Although the region was experiencing severely hot weather at the time, correction for weather-related effects reveals that the increase also was attributable in large part to growth in the Philadelphia area. The Company's generating equipment proved to be exceptionally reliable in meeting the higher energy demand during this period.

Financing Continues During 1987, PE once again raised nearly $1 billion in capital to provide funds for its construction program, debt refundings and general corporate needs. The Company's major 1987 financings are summarized in the table on page 7.

In the early part of the year, when interest rates remained at relatively low levels, the Company continued the plan to refund outstanding high-interest-rate debt issues by refinancing at lower rates. Over the last three years, tender offers and debt calls have enabled the Company to reduce annual interest payments by approximately $23 million.

In December, the PUC gave approval for a new $700 million revolving credit/term loan agreement with a group of banks headed by Citibank. This eight-year credit facility will provide flexibility to meet capital requirements associated with the construction program, including completion of Limerick Unit No. 2, and for general corporate purposes. The Company made the first

borrowing of$150 million under the agreement in January 1988.

1987 Major Financings Month Millions of Dollars March Mortgage Bonds -

9-318%

Series due 2017

$250.0 June Preferred Stock-9.875%

650,000 shares@ $I 00 65.0 July Mortgage Bonds -

I I%

Series due 2016 125.0 Mortgage Bonds -

I 0%

Series due 1997 I 00.0 August Mortgage Bonds -

10-1/4% Private Placement due 2007 65.0 October Mortgage Bonds -

I I%

Series due 1997 I 00.0 Mortgage Bonds -

12-1/8% Series due 2016 100.0 Jan-Dec Common Stock Purchase Plans:

Dividend Reinvestment Plan & Employee Stock Ownership Plans 6,298,000 shares; Average price of $20.62 Common Stock Continuous Offering:

1,500,000 shares; Average price of $21. 62 Total 129.8 32.4

$967.2 Construction Spending Progresses Investments for new plant and equipment in 1987 amounted to $1.0 billion, with approximately

$4 75 million applied to Limerick Unit No. 2 construction. In 1988, the Company anticipates spending $1.2 billion for its construction program.

LIMERICK Unit No. I Sets World Record Limerick Unit No. I set a world record for performance of a large power reactor during its first fuel cycle by running continuously for 198 days until late January I 987. The unit was taken out of service for its first refueling on May 15 and was returned to service on August 31 :*As part of the normal refueling operation, 268 of the reactor's 764 fuel bundles were replaced. The next M. Dorothy Lyons, Corporate Secretary's Office M. Dorothy Lyons, Assistant Secretary of the Company. nventy-eight years of service. She is one of 32 employees in the corporate offices of the Company, including the executive offices and office of the corporate secretary.

Jose R. Cox, Corporate Communications Jose R. Cox, Community Affairs Representative, Corporate Communications.

Eight years of service. Approximately 90 employees in the Corporate Communicqtions Department, represented by jose, work together to provide information to and build energy awareness within the community refueling is scheduled for January 1989.

The second Systematic Assessment of Licensee Performance (SALP) report for Limerick Unit No. 1 issued in June (the first received during its operation) gave the Company top scores in eight often categories and indicated improvement in the vital area of security.

Construction Continues at Unit No. 2 Unit No. 2 construction continued ahead of schedule and expenditures remain within the Pennsylvania Public Utility Commission-mandated construction cost cap of $3.2 billion.

As of December 31, the Company had invested

$1.8 billion in Unit No. 2 construction. The cooperation of labor forces and the dedication of all parties concerned are reflected in the achievement of 75% completion of Unit No. 2 as of December 31, 1987.

The first SALP report for Unit No. 2 was issued in December and specifically addressed the construction management of the unit. The unit received high marks with top scores in seven of nine categories and second highest grades in the other two areas. This report covered a period of 19 months and involved 28 on-site Nuclear Regulatory Commission (NRC) inspections.

Water Supply Progresses Limerick Generating Station needs a supplemental supply of cooling water during periods of low water flow on the Schuylkill River.

One component of the supplemental cooling water system for Limerick is the Point Pleasant Pumping Project, which will withdraw water that has been allocated to the Company from the Delaware River for delivery to Limerick.

Bucks County's Neshaminy Water Resources Authority {NWRA) is responsible for the construction and operation of the Point Pleasant Pumping Project. Construction, which

Norbert E Gazda, Peach Bottom Atomic Power Station Norbert F. Gazda, Supervisor -

Radiological Engineering, Peach Bottom Atomic Power Station. IWenty-three years of service. All of the approximately 875 employees at Peach Bottom, including Norbert, have committed themselves to excellence in the engineering, operation and management at Peach Bottom.

had been stopped for over three years, was resumed in June 1987, only to be halted again three weeks later by the NWRA. Work was restarted in August but was stopped in October after the Pennsylvania Supreme Court reversed a lower court's order that construction continue. A Petition for Reconsideration was filed by the Company in the Supreme Court on October 9, 1987. On February 2, 1988, in response to the Company's Petition for Reconsideration, the Supreme Court ordered that construction on Point Pleasant should resume and stayed the order of the Pennsylvania Department of Environmental Resources prohibiting construction of the project under the permits.

A second component of the water system is the Company's Bradshaw Reservoir and pumping facility. Construction of this 25-million-gallon reservoir began in May 1987. The facility, located in Plumstead Township, Bucks County, is a necessary link between Point Pleasant and Limerick. Completion is expected in 1988.

The Pennsylvania Department of Environmental Resources is one of the regulatory agencies which has authority over the construction of the water system. The agency has issued permits authorizing construction of Point Pleasant and the Bradshaw Reservoir. The agency engaged an independent expert to perform a thorough evaluation of the planned supplemental cooling water system. In his final report submitted in December, the expert supported completion of the water system.

Until the water supply system is completed, PE will continue to request the Delaware River Basin Commission (DRBC) to provide interim supplemental cooling water on a temporary basis, so that Limerick Unit No. I may operate during times of low flow on the Schuylkill River. The DRBC has approved similar requests over the last several years.

I?

Merrill Creek Project Nears Completion Construction work on the IS-billion-gallon Merrill Creek Reservoir was finished in December. The filling of the reservoir with water pumped from the Delaware River started in February 1988. During low-flow periods or drought conditions, this stored water will be released to the Delaware to replace the water evaporated in the operation of the utility owners' power plants, including Limerick. PE and six other electric utilities share ownership.

This $217 million project, of which the Company's portion is $96 million, is near Phillipsburg, New Jersey, about so miles north of Philadelphia. The project's second phase calls for the construction of an education center and environmental preserve, which are scheduled for completion in 1989.

PEACH BOTIOM Plant Shut Down by NRC On March 31, the Nuclear Regulatory Commission ordered the shutdown of the Peach Bottom Atomic Power Station due to evidence of inattentiveness and other inappropriate behavior by control room operators while on duty and to prior NRC criticisms and penalty assessments.

The Company immediately began an investigation assisted by consultants, industry experts and a special committee of the Board of Directors. Selected licensed control room operating personnel went through a rigorous retraining process. New shift managers were appointed from experienced engineering personnel at the plant and special teams were assembled to assist personnel in upgrading plant operations and solving administrative problems.

On August 7, the Company submitted a comprehensive action plan to the NRC containing more than 27S specific tasks. Subsequently, the Kenton W. Keiser, Purchasing and General Services Kenton W. Keiser, Supervising Buyer -

Fuel Procurement, Purchasing and General Services. Th!enty years of service. More than 850 employees in the Purchasing and General Services Department contribute their skills in the areas of fuel procurement, purchasing, insurance, real estate, service operations, building management, office systems and communications, stores and transportation.

Francis McHale, Electric Transmission and Distribution Francis McHale, Lineman First Class, Electric Transmission and Distribution. Nineteen years of service. All 2,000 members of the Electric Transmission and Distribution Department work every day to prevent electric service interruptions to maintain the Company's outstanding record of reliable service.

NRC expressed criticism of the plan and deferred further review pending receipt of a plan revision.

Reorganization Enhances Strengths The Company submitted a revised plan to the NRC on November 25, incorporating a restructured corporate organization that strengthens both corporate and on-site nuclear management. A Senior Vice President-Nuclear will head a vertically integrated nuclear organization to include vice presidents of nuclear engineering and support services and vice presidents on site at both the Peach Bottom and the Limerick plants.

These proposed management and management systems changes were submitted asSection I of a Plan for Restart of Peach Bottom Atomic Power Station. On December 24, the NRC notified the Company that it may proceed with the new organization structure, subject to final NRC review of the effectiveness of the revised corporate structure.

Section II of the restart plan, which covers responses to issues and root causes specific to the plant site, is scheduled to be submitted to the NRC in February I 988.

Operator training, procedure upgrade and outage work on Unit No. 2 are nearing completion. With pipe replacement work on Unit No. 3 underway, the focus of activities at the Peach Bottom plant is shifting to completion of corrective and preventive maintenance work, improvement of plant material condition and system testing in preparation for start-up. Work continues on a maximum effort basis to prepare Peach Bottom for return to power operation.

Refueling at Peach Bottom Unit No. 2 After 144 days of continuous power operation, Unit No. 2 was shut down for its seventh refueling outage on March 13, 1987. This work had been scheduled previously and was not a result of the II

NRC shutdown order.

During the outage, approximately one-third of the nuclear fuel was replaced with new fuel to allow operation for another 18-month cycle. The work covered 4,800 specific tasks, including preventive maintenance items. Some 1,200 surveillance tests were performed to verify proper completion of work required and the operational readiness of the systems in the plant Seventy-five major modifications were made.

These included modifications to comply with NRC regulations to upgrade nuclear power plants to insure safe shutdown in the unlikely occurrence of a major fire.

Repiping Begins at Peach Bottom Unit No. 3 Unit No. 3 began a scheduled outage in October for replacement of the reactor recirculation system stainless steel piping. This outage is not related to the NRC shutdown order. Tiny cracking in stainless piping at welds is a generic problem in boiling water reactors built during the l 960's and l 970's. Installation of the new higher-grade stainless steel piping, which is resistant to cracking, will cost approximately $80 million.

Similar repiping was completed on Peach Bottom Unit No. 2 in 1985.

Nuclear Organization Moving to Chesterbrook The Company has leased over 190,000 square feet of space in the Chesterbrook Corporate Center along Route 202, adjacent to Valley Forge National Park. The space will be the headquarters of the Company's new nuclear organization and will house the nuclear management, engineering and support organization. The move will consolidate the Company's technical and management support of the Limerick and Peach Bottom plants and strengthen a corporate culture for excellence in the nuclear organization. More Samuel A. Brackeen, Finance and Accounting Samuel A. Brackeen, Assistant Manager-Data Processing, Finance and Accounting.

Nineteen years of service. Sam is one of about 550 employees in the Finance and Accounting Department who provide financial, accounting and information systems services.

than 950 employees will relocate to Chesterbrook, beginning in the summer of 1988.

OTHER HIGHLIGHTS PJM Provides Energy Savings The value of PE's membership in the Pennsylvania-New Jersey-Maryland Interconnection (PJM) was never more evident than during the exceptionally hot summer of 1987. In July and August, with the demand for power on the PE system at all-time record levels, both Peach Bottom units shut down and Limerick Unit No. I in its refueling outage, the Company purchased nearly 50% of its power requirements from other members of PJM or from systems outside PJM. These purchases minimized the operation of higher-cost, oil-fifed generating units on the Company's system. Over the entire year, power purchases from and sales to other utilities produced savings to PE customers of approximately $100 million.

New Gas Rates Granted On April I6, 1987, the Company filed with the Pennsylvania Public Utility Commission (PUC) for a gas rate increase of$16.9 million in annual revenue, to produce a return on common equity of 15.0%. On January 15, 1988, the Company was Gregory N. Dudkln, General Administration Gregory N. Dudkin, Administrative Analyst, General Administration. Eight years of service.

Greg represents the IO employees in Corporate Planning.

Patricia K. Cloran, Legal Patricia K. Cloran, Stenographer, Legal. Five years of service. Patricia represents the nearly 70 employees in the Legal Department and Claims Security Division.

14 granted an $8 million (3%) rate increase with a return on common equity of 13.15%.

On August 24, 198 7, the PUC issued an order permitting new, lower gas rates reflecting the lower projected cost of gas from our producers and pipeline suppliers for the period October I, 1987 to September 30, 1988. The savings result principally from the Company's ability to make prudent purchases of gas during the past year and the outlook for continued favorable market conditions for the months ahead.

The net impact of the base rate increase and the purchased gas cost decrease for a typical residential gas home heating customer is an 8%

reduction on a typical annual bill, from $808 to $746.

'IaX Reform Act of 1986 Brings Benefits to Customers In order to pass along to electric customers the benefits of reduced income taxes resulting from the Tax Reform Act of 1986 (TRA), the Company filed with the PUC a proposed Federal Tax Adjustment Credit (FTAC) in November 1986. This credit resulted in a $34.4 million reduction in electric revenue for 1987. Although the Company had requested that the FTAC become effective on January I, 1987, it was not until April 16, 1987, that the PUC approved the Company's estimated credit. The Company began applying the appropriate credit to customers' electric bills on May I, 1987. The estimated credit for 1987 will be reconciled with actual tax data on May I, 1988. A revised electric FTAC to pass on to electric customers anticipated 1988 savings of $85.9 million was approved by the PUC on December 3, 198 7. The benefits to gas customers of the TRA were included in new base rates effective January 16, 1988. Gas customers are receiving approximately $2.5 million in annual savings.

34 Kv Distribution System Enhancement Over the next ten years, the Company plans to implement a 34 thousand volt (Kv) distribution system for a large portion of outlying suburban areas. These areas are now primarily served by a combination of 4 Kv distribution circuits and direct connections to 34 Kv subtransmission lines.

During the ten-year conversion period, the 4 Kv distribution will be phased out and the 34 Kv connections will be converted to 34 Kv distribution circuits. This new system will improve the Company's ability to meet the growing load requirements of suburban areas, improve system reliability and reduce service interruptions.

A major feature of the new distribution system is the incorporation of remotely monitored and controlled switching devices that will isolate trouble areas. Through this remote monitoring capability, electric service dispatchers will be immediately informed of the circuit status and initiate prompt actions to restore service.

Natural Gas Market Enhanced In 1987, the Company continued pioneer work to develop a new market for natural gas service. PE began selling natural gas to a new natural gas vehicle (NGV) refueling station owned and operated by the Culligan Division of Funk Water Quality Company, which will use the fuel in its vehicle fleet. Culligan-Funk is the first customer in the Philadelphia area to install and operate its own NGV station. The only other local counterpart is at the Company's Plymouth Service Building, where a similar facility provides NGV refueling for part of the Company's fleet.

Compared to gasoline, natural gas fuel provides fuel economy, cuts maintenance costs and reduces air pollution.

Recreation Facilities Opened Opened on July I I, I 987, the Conowingo Craig H. West, Commercial Operations Craig H. West, Meter Reader; Commercial Operations. Thia years of service. Craig is one of over 2,000 employees who work in the areas of area development, technical services, customer operations and services, customer accounting and merchandising departments.

George W. Kaufmann, Gas Operations George W. Kaufmann, Senior Utilization Mechanic, Gas Operations. 1Wenty-seven years of service. The 880 employees in Gas Operations work together to ensure reliable service to our gas customers.

Swimming Pool represents the latest recreational facility provided for the public at the Conowingo Hydro-Electric Project. Located on a knoll overlooking the Susquehanna River and the Conowingo Dam, the pool was built by Philadelphia Electric Company and its subsidiary companies, The Susquehanna Power Company and Philadelphia Electric Power Company. This project is part of a continuing recreational enhancement program being developed as a condition of the Federal Energy Regulatory Commission license for the Conowingo Dam project. The swimming pool complex includes a 7,600-square-foot main swimming pool, 1,000-square-foot wading pool, tot play area, bathhouse, concession stand, two picnic areas and 235 parking spaces.

RESEARCH AND TECHNOLOGY ADVANCED Photovoltaic Research Underway The Company has established a solar photovoltaic test site to investigate various methods of integrating the electric power output of solar cells into the PE distribution system. Featuring the latest development in the field, these solar cells use an amorphous silicon thin film technology.

Located at the Pottstown-Limerick Airport in Limerick Township, the installation was the second in the country to utilize the newest technology in a test system.

Ground Penetrating Radar Tested Using ground penetrating radar, the Company is developing a method to pinpoint leaks in our gas pipeline system. This work is being performed under contract to the Gas Research Institute. The innovative radar system can "see" the dry soil around a gas leak and convey its precise location.

Conventional methods for leak location often produce inaccurate results. This new technology

Richard N. Rau, Rates Richard N. Rau, Staff Engineer, Rates. Thirty-four years of service. As members of PE's Rate Department, Dick and his 25 colleagues handle all rate-related business with the various public utility commissions.

has the potential to locate other leaking underground utilities, such as oil-filled electric cables. In the future, it may be possible to use radar on a routine basis to verify the integrity of all underground facilities on our system.

Cogeneration Project Initiated PE has installed and is monitoring the operation of a 22 kilowatt gas-fired internal combustion engine cogeneration system. Located at the Variety Club, a camp for handicapped people in Worcester, Pennsylvania, the unit will warm a swimming pool used for therapy while it_ also produces electricity. This is the first unit of its kind to be extensively tested in the United States under actual field conditions. PE intends to study closely the economics of such pre-engineered small-scale cogeneration systems in test situations.

SERVING CUSTOMERS AND COMMUNITY Area Development Continues Strong The Greater Philadelphia region continues to be a vital and vibrant area with remarkable economic activity. At the forefront of the region's economic development boosters is Philadelphia Electric Company's Area Development Department.

Utilizing the successful "We Know the Territory" theme, Area Development's radio and print advertising promotes the advantages and amenities of the Greater Philadelphia region.

During I 98 7, the Area Development Department successfully helped 88 companies 17

locate, expand or move within PE's service area. A total of 23 companies established new facilities, 14 established branch plants and 51 relocated within our territory. As a result, 3,658 new jobs were created and 8, 192 jobs were retained.

Downtown Philadelphia office activity remains strong. A significant number of major tenants moved into new quarters in 1987. For instance, IBM moved into regional headquarters in Commerce Square, Conrail occupied the first space in One Liberty Place and Blue Cross of Greater Philadelphia committed for occupancy at 1919 Market Street. Major office towers like Liberty Place, Linpro #1, 1\\vo Logan Square, Commerce Square II, Mellon Bank Center and the Bell Atlantic Tower will utilize an additional 90 megawatts or enough electricity to supply service to more than 30,000 homes.

During the year, an Employment and Economic Recovery Rider (E2R2) was approved for use by Conowingo Power Company, PE's Maryland subsidiary. This permits a rate reduc:tion to firms that invest in new facilities and/or add more employees. E2R2 was initiated in 1983 for the Company's Pennsylvania territory. To date, 221 customers are utilizing this very successful rate.

They have added about 18,000 jobs to their payrolls and made approximately $445 million in capital investments.

Pharmaceutical industry activity in the region continues to intensify, as companies add employees and invest capital in new facilities.

Wyeth Laboratories has announced consolidation with Ayerst Laboratories of New York. The combined organization will be located in the Philadelphia suburbs and is expected to have annual sales in excess of $2.1 billion. This consolidation is one of the latest in a series of pharmaceutical developments within the region, which is home to Centocor Inc., SmithKline Beckman Corp., Rorer Group Inc., Eastman Loretta E. Cuthbert, Nuclear Services Loretta E. Cuthbert, Nuclear Records Clerk, Nuclear Services. Seven years of service. She is one of approximately 350 employees of the Nuclear Services Department who provide support services to the Company's nuclear operations.

I Graham M. Leitch, Limerick Generating Station Pharmaceuticals and others. Clearly, Greater Philadelphia is becoming the pharmaceutical Graham M. Leitch, Vice President, Limerick Generating Station. Thirty-one years of service. He is one of approximately 1,000 employees who operate, as well as provide engineering and operating support for, Limerick.

capital of the nation, if not the world.

To serve the needs of businesses situated along the Route 202 high-tech corridor and their employees, two Greater Philadelphia universities are completing expansions. Penn State is relocating and expanding its Graduate Center at the Great Valley Corporate Center, the keystone of the high-tech corridor, and will sponsor an incubator facility for new businesses at this location. West Chester University has placed an adjunct facility in another business complex.

These are the first major university facilities to be located in corporate centers in the United States.

PE Receives National, State Awards Philadelphia Electric Company has been given national and state recognition as a good corporate citizen for the outstanding educational programs conducted at the Muddy Run Recreation Park in Lancaster County.

These programs were winners in the 1986 "Take Pride in America" national awards and "Take Pride in Pennsylvania" state awards. These awards' recognize individual, public and private groups that conduct "outstanding stewardship, action or awareness efforts on behalf of federal, state, local and/or Indian lands and resources:'

PE Improves Programs for Senior Citizens PE Cares is a corporate ptogratn designed to provide personal assistance to customers who have difficulty coping with the complexities of life, particularly those who are older or infirm.

Specially trained representatives give individual attention to PE Cares customers, providing help in paying monthly bills with special emphasis on their utility bills and obtaining financial assistance from government and private agencies.

In addition, PE Cares offers other 19

David A. Anders and Caren B. Anders, Nuclear Engineering bavid A. Anders, Project Engineer, Nuclear Engineering. Five years of service.

Caren B. Anders, Project Engineer, Nuclear Engineering. Five years of service. This husband and wife team is among the 300 employees of the Nuclear Engineering Department who provide engineering support to nuclear operations.

20 valuable benefits including special due date billing to coincide with social security payments; special billing if hospitalized; free weatherization included in our Tighten-Up Low-cost Weatherization Program (TLC); free commuter rail transit coupons; and property tax or rent rebate programs to qualified customers.

One of the most progressive approaches taken to enhance the PE Cares program in 1987 was the development of a weekly Company-sponsored two-hour radio talk show. Eacli program covers a topic of interest to senior citizens with expert guests booked for each program. In addition, a PE Cares representative is present to address listener call-in questions.

10th Anniversary Marked for "Youth Debates on Energy" "Youth Debates on Energy", a special program of the Company-sponsored Energy Education Advisory Council, celebrated its 10th anniversary in 1987. More than 17,000 students have participated in a variety of forums to debate energy topics, and they have acquired many skills to prepare them for roles in business, industry and government.

Additionally, thousands of teachers, administrators and community leaders have played an important part in helping PE fulfill the dual purpose of this undertaking. The first is to make young people aware of the energy problems confronting our nation. Because they must complete in-depth research to participate in program debates, these young people become better informed to make future decisions.

Secondly, the program is dedicated to helping participants develop the higher-order thinking skills and communication techniques required in exercising leadership. Further, attention received from adult professionals enhances participants' self-esteem.

Management's Discussion and Analysis of Financial Condition and Results of Operations General Earnings per share for 1987 were $2.33, a decrease of 27 cents from the originally reported 1986 earnings per share of $2.60.

The decline in earnings resulted primarily because of the Pennsylvania Public Utility Commission's disallowance in its June 1986 rate order of investment relating to Limerick Unit No. I as weII as other rate and accounting treatment ( 16 cents per share) and the replacement power costs since March 31, associated with the Nuclear Regulatory Commission's (NRC) shutdown of the Peach Bottom Atomic Power Station, which were not recovered from customers ( 16 cents per share). The earnings decline was partially offset by the positive effects of higher electric sales.

The Company has adopted Financial Accounting Standards Board Statement No. 90, "Regulated Enterprises -

Accounting for Abandonments and Disallowances of Plant Costs" and Statement No. 92, "Regulated Enterprises -

Accounting for Phase-in Plans" retroactive to 1986. The combined effects of adopting these statements reduced 1986 income from continuing operations and net income as reported by $289.8 million, the related per share amount by $1.59 and retained earnings by $289.8 million. See note 3 of Notes to Financial Statements, page 29.

Total revenue increased in 198 7 over 1986 primarily as a result of increased electric sales and the fuII-year effect of the electric rate increase of June 1986.

Non-fuel operating and maintenance expense increased in 1987 compared with 1986 primarily as the result of the commercial operation of Limerick Unit No. I. In accordance with the Declaratory Order issued by the Pennsylvania Public Utility Commission (PUC) on September 28, 1984, the Company deferred aII operating costs, carrying charges on investment, fuel savings and income taxes associated with Limerick Unit No. I and 50% of common plant from February I, 1986, the date of commercial operation, until June 27, 1986, the date the plant was included in rates.

On June 27, 1986, the PUC approved an electric rate increase of approximately $351 million annuaIIy. The increase is being phased-in over three years in equal steps followed by a three-year period for recovery, without interest, of revenue deferred under the phase-in plan. On June 27, 1987, the Company implemented the second phase of the plan increasing base rates by approximately $1 I 7 million.

In accordance with the PUC order dated June 27, 1986, the Company continues to accrue a carrying charge equivalent to aIIowance for funds used during construction (AFUDC) on the remaining 50% of Limerick common plant excluded from rate base by the order. In 1987, this accrual benefited common stock earnings by approximately $67 million.

On June 27, 1986, the PUC modified the Company's Energy Cost Rate (ECR) so that only 80% of the difference between the actual electric energy costs and the amount billed to customers is subject to after-the-fact reconciliation for over/

under collection. In 1987, the energy cost not subject to reconciliation reduced common stock earnings by approximately $5 million.

On October 1, 198 7, gas rates were reduced by approximately $34 million. This change was primarily due to the Company's reduced cost of gas from its pipeline suppliers.

On April 16, 1987, the Company filed a request with the PUC for an increase in gas base rates of$16.9 million or 4.5%,

primarily to recover higher non-fuel operating and maintenance expenses. On January 15, 1988, the PUC issued its final order in the case permitting the Company to increase its gas rates by

$7. 7 million or 2.8%. In addition, the Company was granted a one-year surcharge to recover $0.9 million or 0.3% for the prior effects of the Tux Reform Act of 1986.

As a result of the Tux Reform Act of 1986 that reduced federal income taxes, on May 1, 198 7 and continuing through December 31, 1987, the Company passed back to it.s electric customers $34.4 million through a Federal Tux Adjustment Credit (FTAC) for the year 1987. In 1988, the Company will pass back to its electric customers $85.9 million through a FTAC.

OnJune I, 1987, theCompanyfileditsannualEnergy Cost Rate Factor (ECRF) with the PUC proposing an 8.627 mill per kWh credit applicable to customers' electric service. On June 25, 1987, the PUC ordered an adjusted ECRF of a I 0.457 mill per kWh credit. The net effect of this action, at least temporarily, is to deny the recovery of approximately $52.4 million of energy costs. The Company has filed its response requesting the PUC to reverse its action. Hearings on this matter began in January 1988.

Effective January I, 198 7, the Company has adopted Financial Accounting Standards Board Statement No. 87, "Employer's Accounting for Pensions:* In 1987, pension cost was

$29 million, $13 million Jess than the 1986 pension cost. 1987 earnings were not materially affected by Statement No. 87. See note 4 of Notes to Financial Statements, page 31.

In addition, the Company is required to adopt Financial Accounting Standards Board Statement No. 96, .Accounting for Income Taxes" by 1989. See note I 7 of Notes to Financial Statements, page 39.

On March 31, 1987, the Company initiated the necessary action to comply with an NRC order suspending power operations at the Peach Bottom Atomic Power Station.

Restart of the plant is dependent upon submission to and approval by the NRC of a plan assuring safe operation and compliance with all requirements. The Company's current estimate of replacement power costs for Peach Bottom incurred solely and proximately as a result of the NRC shutdown is $5 million per month per unit. See note 2 of Notes to Financial Statements, page 28.

Electric Operating Revenue Increased electric revenue for 1987 and 1986 is attributable to higher base rates and increased sales. Kilowatthour sales of electricity to retail customers increased 5.4% in 1987 over 1986.

The increase in electric revenue in 1985 over 1984 is attributable to higher base rates.

Electric Revenue Jncrease/(Decrease)

Rate Increases FTAC Fuel Related Revenue Sales and Other Total Millions of Dollars

'87 vs. '86

'86 vs. '85

'85 vs. '84

$193.7

$185.0

$141.4 (34.4)

(149.0) 100.0

$110.3 (39.4) 37.6

$183.2 (2.8)

~)

$ 80.5 I 11:

Gas Operating Revenue Lower gas revenue in 1987 compared with 1986 is primarily attributable to a lower Purchased Gas Cost Rate resulting from reductions in the price of gas from suppliers. Gas revenue decreased in 1986 and I 985 compared with the previous year as a result of decreases in sales and lower fuel-related revenue resulting from reductions in the price of gas purchased from suppliers.

FUel and Energy Interchange Expense For accounting purposes, fuel and energy interchange costs are deferred until billed as fuel adjustment revenue. See note I of Notes to Financial Statements, page 28. In 1987, gross fuel and energy interchange costs were $98 million higher than in 1986 primarily due to the refueling outage at Limerick and the Peach Bottom shutdown. Fuel and energy interchange costs deferred in previous years reduced expense in 198 7 by $88 million.

In 1986, gross fuel and energy interchange costs were $281 million lower than in 1985 primarily due to the excellent performance of the Company's nuclear units. Fuel and energy interchange costs deferred in previous years and charged to expense in 1986 amounted to $189 million. In 1985, gross fuel and energy interchange costs were $212 million lower than in 1984 primarily due to the excellent performance of the Salem Generating Station. Fuel and energy interchange costs deferred in previous years and charged to expense in 1985 amounted to

$135 million resulting in net fuel and energy interchange expense remaining essentially the same in 1985 as in 1984.

Other Operating and Maintenance Expenses In 1987, non-fuel operating and maintenance expenses increased over 1986 primarily as the result of the full-year effect of the commercial operation of Limerick Unit No. I. The increase in non-fuel operating and maintenance expenses in 1986 over 1985 is also attributable to the commercial operation of Limerick Unit No. I. The increase in operating and maintenance expenses in 1985 over 1984 is due to inflation, growth in utility plant and increased costs associated with the Company's nuclear generating units and with operating the flue gas scrubbing systems at the Company's two wholly owned, coal-burning stations.

Depreciation Increases in depreciation in each of the last three years reflect additions to plant in service. The 1987 and 1986 increases in depreciation are primarily attributable to Limerick Unit No. I being placed into service.

Income TaXes As a result of the above-mentioned restatement, income taxes charged to operations and income tax credits, net, included in other income increased in 1987 compared with restated 1986 and restated 1986 decreased compared with 1985.

OtherTaXes Other taxes increased slightly in 1987 versus 1986 due to higher capital stock and gross receipts taxes. Other taxes decreased in 1986 versus 1985 due to lower capital stock and realty taxes.

In I 985 other taxes increased due to higher capital stock and realty taxes.

Allowance for FUnds Used During Construction (AFUDC)

The decreases in AFUDC in 1987 and 1986 are a result of the commercial operation of Limerick Unit No. I. AFUDC increased in 1985 as a result of increases in construction work in progress.

Interest Charges Interest charges on debt increased in each of the last three years due to additional debt outstanding. The ratio of earnings to mortgage interest, which is one measure of the Company's ability to issue mortgage bonds, for the calendar years 198 7, 1986 and 1985 was 2.83 times, 2.82 times (2.83 times after restatement) and 1.98 times, respectively. Under the Company's mortgage, additional mortgage bonds may not be issued on the basis of property additions or cash deposits unless earnings before income taxes and interest during 12 consecutive calendar months of the preceding 15 calendar months are at least two times the proforma annual interest on all mortgage bonds outstanding and applied for. In addition, as of December 31, 1987, the Company was entitled to issue approximately $874 million of mortgage bonds, without regard to the earnings test, against previously retired bonds.

capital Expenditures and Changes in Financial Position The Company is carrying on a construction program which is estimated to require expenditures of approximately $1.2 billion in 1988 and $2.5 billion from 1989 to 1991. A majority of these expenditures relate to the construction of the Company's second 1055-mW nuclear generating unit at Limerick. Successful completion of this program is dependent on the Company's ability to obtain external financing primarily through sales of debt and equity securities which are subject to market conditions and to meeting certain earnings tests. The program is also subject to the licensing requirements of the NRC, other regulatory approvals in connection with the planned supplemental cooling water system for Limerick, financing approvals by the PUC and changes due to litigation.

On December 18, 1987, the Company entered into an agreement with a group of 21 banks, with Citibank as agent, for a $700 million revolving credit/term loan agreement. The eight-year facility will supply the Company with revolving credit for up to five years, followed by a three-year amortizing term loan.

Proceeds will provide funds for the Company's construction program and general corporate purposes. An initial borrowing of$150 million was made on January 26, 1988.

Interim financing of the construction program is provided by commercial paper borrowing and short-and intermediate-term bank loans which are also dependent on the Company's financial position.

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Income Operating Revenues Electric Gas Total Operating Revenues Operating Expenses Fuel and Energy Interchange Other Operating Expenses Maintenance Depreciation Income Taxes Other Tuxes Total Operating Expenses Operating Income Other Income and Deductions Allowance for Other Funds Used Dunng Construction capitalized Limerick Costs Adjustment to Utility Plant Costs Credit (Charge) Related to Phase-In Plan Income Tux Credits, Net Other, Net Total Other Income and Deductions Income Before Interest Charges Interest Charges Long-Term Debt Short-Term Debt Allowance for Borrowed Funds Used During Construction Net Interest Charges Income from Continuing Operations Income from Discontinued Steam Operations Loss on Disposal of Discontinued Steam Operations Net Income Preferred Stock Dividends Earnings Applicable to Common Stock Average Shares of Common Stock Outstanding (Thousands)

Income from Continuing Operations Per Average Common Share (Dollars)

Earnings Per Average Common Share (Dollars)

Dividends Per Common Share (Dollars)

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

See notes to financial statements.

For the Years Ended December 31 1987 1986*

1985

$2,809,673 371,791 3,181,464 710,648 695,440 306,706 251,934 264,940 234,713 2,464,381 717,083 77,228 66,582 18,459 35,324 18,270 215,863 932,946 467,252 17,243 (92,155) 392,340 540,606 1,790 542,396 94,156

$ 448,240 192,489

$2.33

$2.33

$2.20 (Thousands of Dollars)

$2,699,365 391,504 3,090,869 889,277 6I8,257 274,200 217,640 284,355 232,627 2,516,356 574,513 76,821 172,926 (368,900)

(91,880) 279,709 2,462 71,138 645,651 458,885 12,512 (101,617) 369,780 275,871 1,916 (1,250) 276,537 90,961

$ 185,576 183,141

$1.01

$1.01

$2.20

$2,516, l 91 428,984 2,945,175 1,097,73 I 548,609 262,419 183,049 199,900 240,962 2,532,670 412,505 176,310 133,415 (3,464) 306,261 718,766 435,373 17,721 (257,181) 195,913 522,853 2,448 525,301 90,577

$ 434,724 169, 784

$2.55

$2.56

$2.20

Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS Utility Plant, at original cost Electric Gas Steam Common, used in all services Less: Accumulated Depreciation Nuclear Fuel, Net Construction Work in Progress Leased Property, Net Net Utility Plant Current Assets Cash and Temporary Cash Investments Accounts Receivable Customers Other Inventories, at average cost Fossil Fuel Materials and supplies Deferred Energy Costs Compensated Absences Other TOtal Current Assets Deferred Debits and Other Assets Unrecovered Revenue, Net Deferred Limerick Costs Investments Loss on Reacquired Debt Other TOtal Deferred Debits and Other Assets TOtal

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

See notes to financial statements.

December 31 1987 1986*

(Thousands of Dollars) 8,760,993 542,483 144,650 9,448,126 2,169,390 7,278,736 193,110 1,999,991 287,198 9,759,035 43,081 344,560 41,274 59,202 91,052 6,220 56,641 17,150 659,180 217,646 285,969 100,934 119,052 67,920 791,521

$ 8,506,250 506,021 54,176 128,733 9,195,180 2,005,675 7, 189,505 195,022 1,457,593 281,346 9, 123,466 90,716 345,432 30,174 54,517 75,219 (88,215) 50,800 27,681 586,324 20,592 202, 719 89,702 76, 783 70,734 460,530

$11,209,736

$I 0, I 70,320

CAPITAUZATION AND UABIUTIES Capitalization Common Shareholders' Equity Common Stock Other Paid-In Capital Retained Earnings Preferred Stock Without Mandatory Redemption With Mandatory Redemption Long-Term Debt Total Capitalization Current Liabilities Notes Payable, Bank Long-Term Debt Due Within One Year Capital Lease Obligations Due Within One Year Accounts Payable Tuxes Accrued Deferred Income Tuxes -

Energy Costs Interest Accrued Dividends Payable Compensated Absences Other Total Current Liabilities Deferred Credits and Other Liabilities Capital Lease Obligations Deferred Income Taxes Unamortized Investment Tux Credits Other Total Deferred Credits and Other Liabilities Total December 31 1987 1986*

(Thousands of Dollars)

$ 2,995,239 4,579 387,070 3,386,888 572,472 389,146 4,870,733 9,219,239 102,000 80,889 60,588 169,353 114,738 2,679 121,650 36,643 56,641 15,510 760,691 226,610 682,899 282,311 37,986 1,229,806

$11,209,736

$ 2,832,967 7,787 363,344 3,204,098 572,472 374,956 4,286,792 8,438,3I8 I08,570 69,379 I82,498 86,I87 (44,842) 90,701 39,607 50,800 29,I53 612,053 211,966 560,530 299,707 47,746 1,119,949

$I 0, 1 70,320 J 2s

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes In Financial Position cash Flow From Operations Income from Continuing Operations Non-Cash Items Included in Income Adjustment to Utility Plant Costs Depreciation and Amortization Nuclear Fuel Disposal Costs Deferred Income Taxes Investment Tax Credits, Net Allowance for Other Funds Used During Construction Increase In Deferred Limerick Costs Increase in Unrecovered Revenue Credit (Charge) Related to Phase-in Plan Amortization of Leased Property Limerick Precommercial Fuel Cost Change In:

Deferred Energy Costs Other Current Assets and Liabilities Other Deferred Debits and Credits Net Cash Flow From Continuing Operations Net Cash Flow From Discontinued Operations Net Cash Flow From Operations Cash Flow From Financing Issuance of Common Stock Issuance of Preferred Stock Retirement of Preferred Stock Including Change in Other Paid-in Capital Dividends on Preferred and Common Stock Change in Dividends Payable Expenses of Issuing Preferred and Common Stock Issuance of Long-Term Debt, Including Capital Lease Obligations Capital Lease Obligations Retirement of Long-Term Debt Premium on Retirement of Long-Term Debt Net Borrowings Under Revolving Credit Agreements Change in Short-Term Debt Capital Lease Payments Change in Escrow Funds Payment of Other Obligations Net Cash Flow From Financing Cash Flow From Investing Increase in Utility Plant, Including Leased Property Leased Property Allowance for Other Funds Used During Construction Cost of Property Retired and Cost of Removal Sale of Steam Plant Transfer (to)/from Deferred Debits Decrease in Other Investments Net Cash Flow From Investing Net Change in Cash Flow

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

See notes to _financial statements.

For the Years Ended December 31 1987 1986*

1985 (Thousands of Dollars)

$540,606

$275,871

$522,853 368,900 287,877 280,276 183,049 5,601 171,811 (26, 143) 66,553 (16,959) 8,641 3,582 (77,228)

(76,821)

(176,310)

(66,582)

(165,699)

(178,595)

(112,472)

(18,459) 91,880 49,700 65,600 60,900 16,448 45,301 (94,435) 189,870 128,240 2,036 39,869 45,395

( 11,769)

(17,707) 6,948 588,003 938,513 892,112 (253) 3,468 4,105 587,750 941,981 896,217 162,272 230,978 241,041 65,000 75,000 (54,018)

(17,897)

(7,322)

(517,353)

(494,916)

(464,003)

(2,964)

(1,091)

(3,098)

( 1,318)

(2,005)

(870) 795,095 869,471 732,364 (55,095)

(48,471)

(46,364)

(328,588)

(260,829)

(274,391)

(42,747)

(28,930)

(45,450) 150,000 (550,000) 150,000 102,000 (1,000)

(259,000)

(49,700)

(65,600)

(60,900) 10,459 2,872 74,775 (37,719)

(61,843) 233,043 (330,137)

(25,061)

(980,645)

(771,998)

(829,814) 55,095 48,471 46,364 77,228 76,821 176,310 (37,636)

(86,332)

(86,866) 28,762 25,157 (11,923)

(11,232)

(2,032)

(6,799)

(868,428)

(709,913)

(712,728)

$(47,635)

$(98,069)

$158,428

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, January 1, 1985 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 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 276,537 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 7,787 363,344 9,474 947,428 Net Income 542,396 Cash Dividends Declared Preferred Stock (at specified annual rates)

(94,068)

Common Stock ($2.20 per share)

(423,285)

Expenses of capital Stock Issues (1,317)

Issuance of Stock Public Sales 1,500 32,429 650 65,000 Employee Stock Ownership Plans 1,303 26,690 Dividend Reinvestment and Stock Purchase Plan 4,995 103,153 Redemptions (3,208)

(508)

(50,810)

Balance, December 31, 1987 196,877

$2,995,239

$4,579

$387,070 9,616

$961,618

• Restated forthe effects of adoption ofSFAS 90 and SFAS 92.

See notes to financial statements.

\\ 21

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements I. Significant Accounting Policies General All utility subsidiary companies of Philadelphia Electric Company are wholly owned and are included in the consolidated financial statements. Nonutility subsidiaries are included in investments and accounted for on the equity method. Accounting policies are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC).

Revenues Revenues are generally recorded in the accounts upon billing to the customer. Rate increases are billed from dates authorized or permitted to become effective by the regulatory authorities.

Pursuant to a rate phase-in plan approved by the PUC in its electric rate order of June 27, 1986, the Company is recording revenue equal to the full amount of the rate increase approved, based on kilowatthours billed to customers. Amounts included in revenue which will not be billed to customers within one year are classified as Unrecovered Revenue in the accompanying balance sheets (see note 3).

Fuel Adjustment Clauses The Company's retail electric service provided in Pennsylvania is subject to a fuel adjustment clause designed to recover or refund 80% of the differences between the actual costs of fuel, energy interchange and purchased power and the amount of such costs billed to customers. The gas service has a purchased gas adjustment clause designed to recover or refund the differences between the actual costs of gas sold and the amount of such costs included in rates. Differences between the amounts billed to customers and the costs recoverable are deferred and recovered or refunded in future periods by means of prospective adjustments to rates. Generally such rates are adjusted annually (see note 2).

Nuclear Fuel Nuclear fuel is capitalized and charged to fuel expense on the unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is consumed.

Depreciation and Decommissioning For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line method and, for tax purposes, generally over shorter lives on accelerated methods. Annual depreciation provisions, expressed as a percent of average depreciable utility plant in service, were approximately 2.84% in 1987, 2.95% in 1986 and 3.35% in 1985.

The estimated Company ownership portion of the nuclear-related costs for decommissioning, totaling approximately $287,801,000 as of December 31, 1987, is being charged to operations as permitted for rate-making purposes.

The amounts charged are deposited in an escrow account and invested for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable through adjustments of rates charged to its customers.

Income Tuxes Deferred income taxes are provided for differences between book and taxable income to the extent permitted for rate-making purposes. Investment tax credits, other than credits resulting from contributions to employee stock ownership plans, which do not affect income, are deferred and amortized to income over the estimated useful life of the related utility plant. Investment tax credits related to property not included in rate base are accounted for on the flow-through method.

Allowance for Funds Used During Construction (AFUDC)

AFUDC is a non-cash item which is defined in the Uniform System of Accounts as "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used:' AFUDC is recorded as a charge to Construction Work In Progress, and the equivalent credits are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income and Deductions" for the remainder as the allowance for other funds. The rate used for capitalizing AFUDC, which averaged 9.50% in I987, 9.55% in 1986, and 9.50% in 1985, is computed under a method prescribed by the regulatory authorities. The rate is a "net after-tax rate" and the current income tax reductions applicable to the interest charges capitalized are recorded in "Other Income and Deductions:' In addition, the PUC is permitting the Company to record a carrying charge equivalent to AFUDC on 50% of Limerick common plant which is deemed associated with Unit No. 2 and the equivalent credits are to Capitalized Limerick Costs. AFUDC and carrying charges on 50% of Limerick common plant are not included in taxable income and the depreciation of capitalized AFUDC is not tax deductible. Under the Tax Reform Act of I 986, AFUDC and carrying charges are considered tax preference items when computing a company's alternative minimum tax.

Gas Exploration and Development Joint Ventures The Company has invested in several joint ventures for exploring and drilling for natural gas. Costs are capitalized under the full-cost method and charged to operations commensurate with production.

Gains and Losses on Reacquired Debt Gains and losses on reacquired debt are deferred and amortized to interest expense over the period permitted for rate-making purposes.

2. Shutdown of Peach Bottom Station On March 31, 1987, a Nuclear Regulatory Commission (NRC) order required the Company to shut down the Peach Bottom Atomic Power Station (Peach Bottom). Peach Bottom consists of two nuclear generating units located in York county, Pennsylvania. These units were placed into commercial operation in 197 4 and are jointly owned by the Company, 42.49%; Public Service Electric and Gas Company, 42.49%;

Atlantic City Electric Company, 7.51%; and Delmarva Power and Light Company, 7.51 %. Under the ownership agreement, the Company, as operator of Peach Bottom, is reimbursed by the other owners for costs incurred in the operation of the facility in the same proportion as their respective ownership interests. At December 31, 1987, the Company's net investment in Peach Bottom was $425 million (see note 9).

On August 7, 1987, the Company submitted its Peach Bottom Commitment to Excellence Action Plan (Plan) in response to the NRC's requirement that, prior to being permitted to restart either unit at Peach Bottom, the Company provide to the Administrator of Region 1 for his approval a detailed, comprehensive plan and schedule to assure that the facility will safely operate and comply with all requirements, including station procedures. At a meeting held on September 14, 1987 before the NRC Commissioners, the Company summarized the contents of the Plan and the NRC staff provided critical comments based on its review of the Plan to date. The Commissioners expressed their dissatisfaction with the Plan as submitted, indicating, among other concerns, their disagreement with the Plan's emphasis on solutions to problems related to the plant and its personnel without adequate emphasis on solutions to problems related to corporate management responsibility.

On November 18 and 19, 1987, the Company filed with the NRC applications to amend its nuclear facility operating licenses (License Amendments) to reflect the proposed reorganizational changes, including on-site changes. On November 25, 1987, the Company submitted to the NRC the Corporate Action Section (Section I) of its Plan for Restart of Peach Bottom Atomic Power Station (Plan for Restart) detailing its nuclear reorganization. On December 18, 1987, the NRC issued a Temporary Waiver of Compliance notifying the Company that the NRC staff does not plan to initiate enforcement action related to deviations from the organizational structures currently described in the facilities' Technical Specifications pending completion of the licensing actions, and the Company may proceed with the implementation of the organizational structures. On December 24, 1987, the NRC notified the Company that, based upon its preliminary review of the Company's Plan for Restart and the Temporary Waiver of Compliance, the Company should proceed with implementing the Plan for Restart. The letter states that the NRC's conclusions regarding the Plan for Restart are preliminary until the NRC has assessed the effectiveness of the revised corporate structure and has completed action on the Company's proposed License Amendments.Section II of the Plan for Restart, which covers responses to issues and root causes specific to the plant site, is scheduled to be submitted in February 1988.

On November 20, 1987, the Commonwealth of Pennsylvania filed a petition with the NRC requesting a hearing before the NRC permits Peach Bottom to resume operations. On December 7, 1987, the Company filed a response to the petition opposing a request for a hearing. By letter dated January 13, 1988, the NRC notified the Commonwealth that it had rejected the petition. On January 22, 1988, the Commonwealth filed with the NRC a petition to intervene and requested a hearing regarding the Company's proposed License Amendments. On February 8, 1988, the Company filed its response opposing the petition.

On January 12, 1988, the Company received a letter from the President of the Institute of Nuclear Power Operations (INPO) on the subject of accountability for Peach Bottom problems. The INPO letter recaps "some of the history that led to and that continues to contribute to serious performance problems at Peach Bottom, and within the Philadelphia Electric Corporate organization... "The letter is highly critical of senior management with respect to its effectiveness in preventing and resolving Peach Bottom problems and the lack of adequate corporate accountability. The letter recommends (I) the development of a full report of an investigation completed by the Company on Peach Bottom control room operator behavior, (2) the modification of the Company's Peach Bottom restart plan so as to minimize the number of measures planned to strengthen assessment of nuclear station performance independent of line management and (3) major changes in the

• corporate culture, the acquisition of "sufficient outside talent to properly upgrade the PECO nuclear situation" and corporate accountability for "the unsatisfactory situation that has been allowed to develop over a period of years."

During 1987, the Company charged to expense replacement power costs of $58 million caused by the NRC's shutdown order. The Company cannot predict when the NRC will permit the Company to restart Peach Bottom. The Company does not believe that the plant costs of the Peach Bottom Units have been impaired as a result of this shutdown.

3. Limerick Generating Station General The Company's Limerick Unit No. I commenced commercial operation on February I, I 986. Construction of the second of the two nuclear units at Limerick resumed in February 1986, following a suspension of approximately two years. Unit No. 2 is scheduled to be completed in late 1990. At December 31, 1987, Unit No. 2 was approximately 75 percent complete based on estimated man-hours needed to complete the Unit. As of December 31, 1987, the Company had invested approximately

$5.27 billion in the Limerick Generating Station, consisting of

$2.23 billion in Unit No. 1, $1.75 billion in Unit No. 2 and $1.29 billion in common facilities.

On June 27, 1986, in connection with the Company's filing to recover the costs associated with Limerick Unit No. 1, the PUC approved an increase in electric rates of approximately

$351 million annually, and authorized a rate of return on common equity of 14. 7 5%. The increase is being phased in over three years in equal steps, followed by a three-year recovery period, without interest, of amounts recoverable under the phase-in plan. In accordance with its prior practice, the PUC excluded 50% of common plant from rate base, but permitted continued accrual of an amount equivalent to AFUDC on the excluded 50%. Accordingly, the Company is capitalizing a carrying charge equivalent to AFUDC on this investment, classified as Deferred Limerick Costs in the accompanying balance sheets. The increase also reflects an exclusion from the Company's rate base of $368. 9 million due to allegedly imprudent construction delays in 1976 and 1978. As indicated below, the Company has appealed this exclusion. The PUC rejected allegations by various parties that Limerick Unit No. 1 represents excess capacity.

On December 23, 1985, following a PUC investigation, the Company filed its response with the PUC accepting the conditions of the cost containment and operating incentive plans set forth in the PUC's December 5, 1985 order, which concluded that the Company could complete the construction of Limerick Unit No. 2 conditioned upon the acceptance by the Company of such cost containment and operating incentive plans, including a maximum net rate base allowance for Unit No. 2 (exclusive of common plant) of a prudent investment of

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements -

Continued

$3.197 billion. This order has been appealed to the Commonwealth Court of Pennsylvania. On December 16, 1987, oral arguments were held and the decision of the Court is pending.

Recovery of Costs Pending Regulatory Proceedings In accordance with the Declaratory Order issued by the PUC on September 28, 1984, the Company deferred all operating costs, carrying charges on investment, fuel savings and associated income tax effects of Limerick Unit No. 1 and 50% of common plant from February 1, 1986, the date of commercial operation, until the plant was included in rates on June 27, 1986. The recovery of these costs, which is not assured, will be addressed by the PUC in a subsequent electric rate case. Of the $286.0 million of Deferred Limerick Costs, the Company has deferred in accordance with the Declaratory Order a total of$137.2 million.

Under SFAS 90, discussed below, ifthe Company estimates the total cost to complete Unit No. 2, including AFUDC, would exceed the $3.197 billion cap, an immediate charge to expense would be recognized for the excess. The Company estimates the cost of Limerick Unit No. 2 will not exceed the $3.197 billion cap. In addition, recovery of amounts expended for construction of Limerick Unit No. 2 and Deferred Limerick Costs will be subject to the PUC's determination that such costs were prudently incurred. If the PUC disallows the recovery of certain costs from customers, an immediate charge to expense would be required under SFAS 90.

Application of Statements of Financial Accounting Standards No. 90 (SFAS 90) and No. 92 (SFAS 92)

As of December 31, 1987, the accounting standards applicable to regulated enterprises were retroactively applied by restating the financial statements of 1986 to reflect certain provisions of the June 27, 1986 order of the PUC, namely the disallowance of recovery of$368.9 million in Limerick Unit No. 1 plant costs and the non-recognition of return on unrecovered revenue under the Company's phase-in plan.

In December 1986, the Financial Accounting Standards Board issued SFAS 90, "Regulated Enterprises -

Accounting for Abandonments and Disallowances of Plant Costs:* SFAS 90 requires the recognition of a loss, for accounting purposes, and a reduction in the reported cost of the plant, when a portion of the cost of a completed plant is disallowed for rate-making purposes. The PU C's decision to disallow the recovery of $368. 9 million of investment in Limerick Unit No. 1 meets the criteria of a loss under SFAS 90. As a result of adopting SFAS 90, 1986 income from continuing operations and net income, as previously reported, were reduced by $244.6 million ($1.34 per share). This amount is comprised of utility plant costs of $364.0 million ($368.9 million net of 1986 depreciation charged to expense of $4.9 million) and Limerick capitalized costs of $15. 7 million, net of income tax credits of $135. l million. Income from continuing operations and net income for 1987 were increased

$3. 7 million ($.02 per share) as a result of reduced depreciation expense of $9.8 million net of income tax expense of $6.1 million. The Company continues to believe that the $368.9 million disallowed by the PUC was a prudent investment and has an appeal pending before the Commonwealth Court.

In August 1987, FASS issued SFAS 92, "Regulated Enterprises -Accounting For Phase-In Plans:* SFAS 92 requires the recognition ofa loss, for accounting purposes, when costs are deferred under a qualified phase-in plan, without interest on amounts recoverable during the phase-in period. Amounts recognized as a loss are returned to income throughout the period of the phase-in. SFAS 92 applies to unrecovered revenue resulting from the June 27, 1986 rate order. As a result of adopting SFAS 92, income from continuing operations and net income, as previously reported, were reduced by $45.2 million

($.25 per share). This amount is comprised of a loss on unrecovered revenue of $94.4 million net of tax benefits of

$46. 7 million and a return to income in 1986 of $2.5 million.

Income from continuing operations and net income for 1987 were increased $9.1 million ($.05 per share) due to a return to income of $18.5 million net of tax expense of $9.4 million.

Effects of Restatement:

(Millions of$ except EPS) 1987 1986 Amount EPS Amount EPS Net Income Before SFAS 90&SFAS92

$529.6

$2.26

$566.3

$2.60 Effect on Net Income of Application of SFAS 90 3.7

.02 (244.6)

(1.34)

Effect on Net Income of Application of SFAS 92 9.1

.05

~) ~

Net Income

$542.4

$2.33

$276.5

$1.01 Excess capacity Standards On July 10, 1986, the Governor of Pennsylvania signed into law legislation amending numerous provisions of the Pennsylvania Public utility Code. One provision of the legislation which affects rate regulation imposes standards on the PUC in determining whether new generating capacity is excess capacity. This provision requires a disallowance from rates of any portion of new capacity which is determined to be excess capacity. The provisions relating to excess capacity are applicable to rate cases "pending before the Commission:' The Office of Consumer Advocate ( OCA) and various other parties filed Petitions for Reconsideration and a Supplemental Petition for Reconsideration with respect to excess capacity and other issues related to the PUC's June 27, 1986 order. By orders entered July 25, 1986, the PUC denied all Petitions for Reconsideration and Supplemental Petitions for Reconsideration. The PUC held that the legislation did not apply to the Limerick Unit No. 1 rate case. Furthermore, the PUC held that, even if the legislation did apply, Limerick Unit No. 1 did not constitute excess capacity under the standards imposed by the legislation. On July 25, 1986, the OCA filed a Petition for Review with the Commonwealth Court of Pennsylvania (Commonwealth Court) of the PUC'sJune 27, 1986 electric rate order on the issue of excess capacity and on a particular rate base issue regarding whether certain utility plant was used and useful. On July 28, 1986, Petitions for Review of the PU C's June 27, 1986 electric rate order were filed with the Commonwealth Court by the Company appealing the exclusion of $368.9 million from rate base and by a group of the Company's commercial and small industrial customers on the issue of excess capacity and on various rate design and cost of service issues. The Company is awaiting a decision from the Commonwealth Court regarding the exclusion of $368.9 million from rate base and the applicability of excess capacity provisions to Limerick Unit No. 1. This excess capacity law will

be applicable to Limerick Unit No. 2, which, if found to be excess capacity upon becoming operational, could result in a partial or complete disallowance from rates of the applicable plant cost.

Supplemental Cooling Water The unavailability of sufficient supplemental cooling water would limit or prohibit operation of the Limerick Units during certain months of the year.

One component of the planned supplemental cooling water system for Limerick is the Point Pleasant Pumping Project. Point Pleasant has been the subject of substantial opposition from various groups. Construction of Point Pleasant has been halted at various times, most recently as a result of a decision by the Pennsylvania Department of Environmental Resources (POER) dated January 26, 1987, extended on December 30, 1987, suspending construction of certain components pending further study. The Supreme Court of Pennsylvania has ruled that the Company's appeal from the POER decision should initially be to the Environmental Hearing Board rather than to the courts but that construction may proceed during the appeal. A Petition for Reconsideration was filed by the Company in the Supreme Court on October 9, 1987.

On February 2, 1988, in response to the Company's Petition for Reconsideration, the Supreme Court ordered that construction on Point Pleasant may resume and stayed the order of the POER prohibiting construction of the project under the permits.

POER hired an expert to perform a thorough evaluation of the project. His final report, dated December 16, 1987, stated that the benefits to be derived from the project by both electric customers and public water users in the area are substantial; that the project's environmental benefits outweigh the environmental harms; that a joint effort as proposed by the Philadelphia Water Commissioner (the Philadelphia alternative) is not likely to be administratively functional; and, that no other alternatives appear to be worthy of consideration at this time.

The report recommends that the Secretary (of the POER) generally support completion of Point Pleasant in preference to the Philadelphia alternative that might provide water for both the region and the Company.

The Secretary of the POER has stated that he is committed to examine all of the issues, and is prepared to challenge the principals in an effort to reach a mutually satisfactory accommodation. A decision by the POER whether to grant a further extension of the permits is expected in February 1988. The Company cannot predict when construction of the Point Pleasant project component will resume or when the planned supplemental cooling water system will be completed.

In order to provide the necessary interim supplemental cooling water for the Company, the Delaware River Basin Commission (DRBC) has approved various Company requests for modification of restrictions on the use of the Schuylkill River for Limerick cooling water (which restrictions create the need for supplemental cooling water for Limerick), a reallocation of cooling water to Limerick from other power plants on the Schuylkill River and the use of water from an upstream municipal reservoir. The last DRBC approval was effective through December 31, 1987, and the Company has filed a similar request with the DRBC for its 1988 interim supplemental cooling water needs.

4. Retirement Benefits The Company and its subsidiaries have non-contributory trusteed retirement plans applicable to all regular employees.

The benefits are based primarily upon employees' years of service and average earnings prior to retirement. The Company's funding policy is to contribute at a minimum, amounts sufficient to meet ERISA requirements. Approximately 70% of pension costs were charged to operations and the remainder, associated with construction labor, to the cost of new utility plant.

In January 1987, the Company adopted Statement of Financial Accounting Standards No. 87 (SFAS 87), "Employers Accounting for Pensions:' Pension cost for prior years was not restated.

Pension cost was $29,458,000 in 1987, $42,500,000 in 1986 and $46, 700,000 in 1985. Pension costs for 1987 included the following components:

Service cost -

Benefits earned during the period Interest cost on projected benefit obligations Actual return on plan assets Amortization of transition asset Amortization and deferral Net pension cost Change in Net Periodic Pension Cost (Thousands) 1987

$26,970 80,588 (41,929)

( 4,539)

(31,632)

$29,458 The change in net periodic pension cost to $29,458,000 for 1987 from $42,500,000 for 1986 is accounted for as follows:

(a) change in number, characteristics and salary levels of participants and net actuarial gain (b) change in plan provisions (c) net change prior to SFAS 87 (d) changes to comply with SFAS 87 (e) change due to mid-year plan amendment (f) net change: (c) + (d) + (e)

(Thousands)

$ (I,492) 2,873 1,381 (24,972) 10,549

$(13,042)

The funded status of the plan at December 31, 1987 is summarized as follows:

Actuarial present value of accumulated plan benefit obligations:

Vested benefit obligation Accumulated benefit obligation Projected benefit obligation for services rendered to date Plan assets at fair value Funded Status Unrecognized transition asset Unrecognized prior service costs Unrecognized net gain Prepaid pension costs (Thousands) 1987

$ (641,713)

$ (650,146)

$( 1,044,612) 1,056,358 11,746

( 81,092) 115,276 45,930 Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements -

Continued Pension Plan data for the January 1, 1986 actuarial valuations are as follows:

(Thousands) 1986 Actuarial present value of accumulated plan benefits Assumed rate of return Vested Non-vested 7.5%

$580,815 7,127 In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for active employees are provided by an insurance company whose premiums are based on the benefits paid during the year. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing those benefits for approximately 3,800 retirees during the years 1987, 1986 and 1985 is not separable from the cost of providing benefits for approximately I 1,000 active employees for the same period.

Total premiums amounted to $30.0 million, $31.6 million and

$29.3 million for 1987, 1986 and 1985, respectively.

Net assets available for benefits

$587,942

$854,917 Plan assets consist principally of common stock, U.S.

government obligations and other fixed income instruments. In determining pension cost for 1987, the assumed long-term rate of return on assets was 7.5%.

The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 8.75% at December 31, 1987 and 7.5% at December 31, 1986. The rate of increase in future compensation levels ranged from 6% to 7% at December 31, 1987.

Prior service cost is amortized on a straight-line basis over the average remaining service period of employees expected to receive benefits under the plan.

6. Preferred Stock

5. Common Stock At December 31, 1987, and 1986, Common Stock without par value consisted of 240,000,000 shares authorized and 196,876,848 and 189,078,606 shares, respectively, outstanding.

At December 31, 1987, there were 13,526,039 shares reserved for issuance under stock purchase plans.

At December 31, 1987, and 1986, Preferred Stock, $100 par, cumulative, 15,000,000 shares authorized 1987 and 10,000,000 shares authorized 1986.

Shares Amount Current Redemption Refunding Restricted Outstanding Series (without mandatory redemption) 14.15% (c) 13.35% (c) 12.80% (c) 9.50%

8.75%

7.85%

7.80%

7.75%

4.68%

4.4%

4.3%

3.8%

Series (with mandatory redemption) (d) 17.125%

15.25%

14.625%

10%

9.875%

9.52%

9.50% I 986 Series 8.75% 1978 Series 7.325%

7%

Total Preferred Stock Price (a)

$114.15 I 13.35 I 12.80 103.50 101.00 101.00 I 01.00 I 01.00 104.00 I 12.50 102.00 106.00 I 10.00 (e) 102.22 109.88 103.00 109.50 104.12 103.22 101.00 Prior to (b) 2-1-90 2-1-89 5-1-88 5-1-90 (e) 5-1-90 8-1-92 11-1-91 5-1-88 1987 500,000 750,000 750,000 750,000 650,000 500,000 750,000 200,000 150,000 274,720 150,000 300,000 5,724,720 400,000 500,000 132,000 650,000 332,557 750,000 366,800 480,000 280,100 3,891,457 9,616,177 1986 1987 1986 (Thousands of Dollars) 500,000

$ 50,000

$ 50,000 750,000 75,000 75,000 750,000 75,000 75,000 750,000 75,000 75,000 650,000 65,000 65,000 500,000 50,000 50,000 750,000 75,000 75,000 200,000 20,000 20,000 150,000 15,000 15,000 274,720 27,472 27,472 150,000 15,000 15,000 300,000 30,000 30,000 5, 724,720 572,472 572,472 300,000 30,000 450,000 40,000 45,000 500,000 50,000 50,000 176,000 13,200 17,600 65,000 375,360 33,256 37,536 750,000 75,000 75,000 400, 100 36,680 40,010 510,000 48,000 51,000 288, 100 28,010 28,810 3,749,560

$389,146

$374,956 9,474,280

$961,618

$947,428

(a) Redeemable, at the option of the Company, at the indicated dollar amounts per share, plus accrued dividends.

(b) Prior to the date specified, none of the shares of each series indicated may be redeemed through refunding at an interest cost or dividend rate which is less than the dividend rate of such series.

(c) Ownership of these series of preferred stock is

7. Long-Term Debt First and Refunding Mortgage Bonds (a)

Total First and Refunding Mortgage Bonds Notes Payable -

Banks Notes Payable -

Other Revolving Credit and Term Loan Agreements Pollution Control Notes Debentures evidenced by depositary receipts, each representing 1/10 of a share of preferred stock.

(d) Sinking fund requirements (par value) in the period 1988-1992 are as follows: 1988-$10,740,000; 1989-$12,755,700; 1990-$26,030,000; 1991-$21,630,000; 1992-$25,380,000.

(e) Not redeemable prior to May 1, 1990.

At December 31 series Due 1987 1986 (Thousands of Dollars) 4%%

1987 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 13%%-14%

1992 136,000 136,000 4Yz%-15!4%

1993-1997 873,553 687,633 7%%-11%%

1998-2002 551,889 555,939 6%-12Yz%

2003-2007 563,500 498,500 9Ya%

2008-2012 100,000 160,470 8Ye%-133/s%

2013-2017 1,202,962 845,000 3,564,904 3,060,542 (b) 1988-1992 225,000 225,000 17%

1987 10,000 (c) 1991-1995 150,000 5Yz%-13%

1997-2013 269,620 272,420 14Ya%

1990 50,000 50,000 Debentures 9.85%-14%%

1993-2011 706,850 787,000 Sinking Fund Debentures -

Philadelphia Electric Power Company, a Subsidiary Unamortized Debt Discount and Premium, Net Total Long-Term Debt Due Within One Year ( d)

Long-Term Debt included in capitalization (e)

(a) Utility plant is subject to the lien of the Company's mortgage. Proceeds from the July 1987 sale of$125,000,000 principal amount of 11% series due 2016 and $100,000,000 principal amount of 10% series due 1997 were used in part to repurchase $117,038,000 principal amount of 13%% series due 2013 and $80, 150,000 principal amount of 14%% debentures due 2005. In April 1987, the Company called $37,379,000 principal amount of 18% series due 2012 and in October 1987, called $23,091,000 principal amount of 15%% series due 2010.

Premiums on the repurchases of $42, 7 4 7,390 were charged to loss on reacquired debt.

(b) At various interest rates.

(c) The Company has a $700 million revolving credit and term loan agreement with a group of banks which is designed to provide the financing for the construction program, including completion of Limerick Unit No. 2, and general corporate purposes. The revolving credit arrangement converts into a term loan in November 1992. The borrowings are due in six semi-annual installments with the first payment due 6 months after 4Yz%

1995 14,580 14,580 (29,332)

(24,180) 4,951,622 4,395,362 80,889 108,570

$4,870,733

$4,286,792 the conversion into the term loan. Interest on outstanding borrowings is based on specific formulas selected by the Company involving yields on several types of debt instruments.

There is an annual commitment fee of.3% on the unused amount. There were no borrowings under this agreement during the year.

The Company also has a $400 million revolving credit and term loan agreement with a group of banks which expires in 1991.

There is an annual commitment fee of%% on the unused amount. At December 31, 1987, $150 million was outstanding under this agreement.

( d) Long-term debt maturities in the period 1989-1992 are as follows: 1989-$77,650,000; 1990-$77,503,000; 1991-$77,850,000; 1992-$252,850,000.

(e) The annualized interest on long-term debt at December 31, 1987, was $495.1 million of which $351.2 million was associated with mortgage bonds and $143. 9 million was associated with other long-term debt.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements -

Continued

8. Short-Term Debt Average Short-Term Borrowings Average Interest Rates, Computed on Daily Basis Maximum Short-Term Borrowings Outstanding Average Interest Rates on Short-Term Bank Loans at December 31:

At December 31, 1987, the Company had borrowed $102 million under formal and informal lines of credit with banks aggregating approximately $261.9 million. The Company

9. Jointly Owned Electric Utility Plant 1987 1986 (Thousands of Dollars)

$ 233

$ 30,937 7.74%

$205,000 7.98%

9.5I%

$I,OOO generally does not have formal compensating balance arrangements with these banks.

1985

$I27,392 6.38%

$360,000 9.50%

The Company's ownership interests in jointly owned utility plant at December 31, 1987 were as follows:

Peach Bottom Salem Operator Philadelphia Public Service Electric Electric and Company Gas company Participating Interest 42.49%

42.59%

Company's share of:

Utility Plant

$538,342

$944,014 Accumulated Depreciation 152,748 198,956 Construction Work In Progress 39,6I2 17,320 The Company's participating interests are financed with Company funds and, when placed in service, all operations are IO. Income i:axes (Continuing Operations)

Included in Operating Income:

Federal Current Deferred Investment Tax Credits, Net State Current Deferred Included in Other Income and Deductions:

Federal Current Deferred Investment Tax Credits, Net State Current Deferred Total

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

Production Plants Transmission Plant Merrill Creek Keystone Conemaugh Reservoir Pennsylvania Pennsylvania C/PUtility Various Electric Electric Services Companies Company Company Company, Inc.

20.99%

20.72%

44.24%

21% to43%

(Thousands of Dollars)

$68,819

$73,951

$77,062 26,275 27,336 17,639 4,127 I,768

$93,236 accounted for as if such participating interests were wholly owned facilities.

1987 1986*

1985 (Thousands of Dollars)

$ 74,185

$1 I4,496

$105, 165 186,390 110,178 60,061 (16,960) 29,041 3,582 9,386 30, 134 24,600 11,939 506 6,492 1;845 (101,566)

(107,542)

(27,730)

(121,303)

(2,038)

(20,400)

(10,650)

(19,057)

(23,348) 1,211 (17,383)

(487)

$229,616

$4,646

$ 66,485

Investment tax credits (ITC) and income tax credits resulting from contributions to employee stock ownership plans reduced Federal income taxes currently payable by $20 million in I987,

$43 million in 1986 and $12 million in 1985. Under the Tax Reform Act of 1986, ITC has been repealed effective January I, 1986 with the exception of transition property. The Company believes that Limerick Unit No. 2 qualifies as transition property eligible for ITC.

Approximately $210 million of additional business credits generated from 1983 through 1987 have not been utilized due to limitations based on taxable income. These credits, which expire between 1998 and 2002, may be used to reduce Federal income taxes in future years; however, these credits were reduced by approximately $4 7 million in 1987 and may be reduced by a similar amount in 1988 under the provisions of the Tax Reform Act of 1986.

The Tax Reform Act of 1986 created a new Alternative Minimum Tax (AMT), calculated at a 20% rate on AMT taxable income which includes certain preferences and adjustments.

The Company's current tax liability for 1987 was determined under the AMT method resulting in an $83 million tax credit to be utilized in future years in which regular tax liability exceeds the AMT liability.

For a number of years the Company has used accelerated depreciation for income tax purposes and straight-line depreciation for financial reporting purposes. Deferred taxes were recorded only on those timing differences recognized for rate-making. The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately $600 million at December 31, 198 7. Since the Company expects to charge customers for taxes when the timing differences reverse, the tax effect of such timing differences is not recorded currently.

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

Depreciation and Amortization Nuclear Waste Disposal Costs Deferred Energy Costs Precommercial Operation of Limerick Unit No. 1 Deferred Limerick Costs Net Loss on Reacquired Debt Unrecovered Revenue Alternative Minimum Tax Adoption of SFAS 90 and SFAS 92 Other Total 1987

$ 93,075 45,566 16,668 77,583 (82,963) 23,533 (1,652)

$171,810 1986*

(Thousands of Dollars)

$127,278 (95,383) 10,210 11,004 14,305 55,040 (161,421) 10,965

$(28,002) 1985

$ 34,297 (5,932)

(65,393) 97,867 24,592 (21,403)

$ 64,028 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 Total Income Tax Provisions Income Before Income Taxes Deduct: Allowance for Funds Used During Construction Limerick Carrying Charges Adjusted Income Before Income Taxes Income Taxes on Above at Federal Statutory Rate of 39.95% in 1987 and 46% in 1 986 and 1985 Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized Adoption of SFAS 90 and SFAS 92 Unbilled Revenue State Income Taxes, Net of Federal Income Tax Benefits Amortization of Investment Tax Credits Other, Net Total income tax provisions Provision for Income Taxes as a Percent of:

Income Before Income Taxes Adjusted Income Before Income Taxes

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

$540,606 229,616 770,222 169,383 66,582

$534,257

$213,436 23,920 (9,784) 12,137 9,151 (13,586)

(5,658)

$229,616 29.8%

43.0%

$275,871

$522,853 4,646 66,485 280,517 589,338 178,438 433,491 172,926

$(70,847)

$155,847

$(32,590)

$71,689 19,230 7,062 27,870 6,620 3,919 (13,468)

(8,250)

(3,016)

(7,935) 4,646

$ 66,485 1.7%

11.3%

42.7%

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements -

Continued

11. TaXes, Other Than Income Gross Receipts Capital Stock Realty Payroll Other Total

12. Investments At December 31 Gas Exploration and Development Joint Ventures Real Estate Developments and Other Ventures Non-Utility Property Escrow Deposits for Decommissioning Nuclear Plants Other Deposits Total 13.Leases Leased property included in Utility Plant at December 31 Nuclear Fuel Electric Plant Common Plant Gross Leased Property Accumulated Amortization Net Leased Property 1987 1986 1985 (Thousands of Dollars)

$134,091

$132,468

$128,346 28,091 62,222 21,047 32,400 25,511 37,098 49, 110 25,978 23,594 5,146 1,944 1,256

$234,713

$232,627

$240,962 1987 1986 (Thousands of Dollars)

$ 37,158

$38,299 19,155 17,088 11,525 13,477 31,521 20,278 1,575 560

$100,934

$89,702 1987 1986 (Thousands of Dollars)

$500,733

$484,536 10,452 10,953 110 156 511,295 (224,097)

$287,198 495,645 (214,299)

$281,346 The nuclear fuel obligation is amortized as the fuel is consumed. Amortization of leased property totaled $49.7 million, $65.6 million and $60. 9 million for the years ended December 31, 1987, 1986 and 1985, respectively. Other operating expenses include interest on capital lease obligations of$14.0 million, $16.4 million and $18.2 million in 1987, 1986 and 1985, respectively. Minimum future lease payments as of December 31, 1987, are:

Year Ending December 31 1988 1989 1990 1991 1992 Remaining years Total Minimum Future Lease Payments Imputed Interest (rates ranging from 6.5% to I 7%)

Present Value of Net Minimum Future Lease Payments Capital Leases

$ 83,288 87,157 82,915 46,142 34,774 12,924

$347,200 (60,002)

$287, 198 Operating Leases (Thousands of Dollars)

$ 56,376 57,320 57,086 56,350 55,585 132,621

$415,338 Total

$139,664 144,477 140,001 102,492 90,359 145,545

$762,538 Rental expense under operating leases totaled $51.4 million, $54.0 million and $43.9 million in 1987, 1986 and I 985, respectively.

14. Segment Information -

Continuing Operations Electric Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Gas Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Identifiable Assets (**)

Electric Gas Nonallocable Assets Total Assets

• Restated for the effects of adoption of SFAS 90 and SFAS 92.

1987

$2,809,673 1,895,104 234,925

$ 679,644

$ 908,799

$ 371,791 317,343 17,009 37,439 44,328

$9,178,435 449,986 1,581,315

$11,209,736 1986*

(Thousands of Dollars)

$ 2,699,365 1,961,429 201,773 536, 163 753,232 391,504 337,287 I5,867 38,350 35,053

$ 8,341,559 416,824 1,411,937

$10, 1 70,320 1985

$ 2,516,191 1,974,222 168,208 373,761 793,195 428,984 375,399 14,841 38,744 32,896

$ 8,885,738 407,375 718,732

$10,011,845

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

The sale of the steam system was completed on January 30, 1987 and had no significant effect on 1987 earnings.

15. Quarterly Data (Unaudited)

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

Quarterly data have been restat.ed for the effects of adoption of SFAS 90 and SFAS 92.

Operating Revenues Operating Income Net Income Quarter Ended 1987 1986 1987 1986 1987 I986 (Thousands of Dollars)

March 3I

$869,463

$868,635

$215,721

$124,446

$172,010

$166,261 June 30 735,193 675,109 158,724 95,607 111,965

( 161,558)

September 30 839,268 803,667 191,258 186,692 144,823 166,408 December 31 737,540 743,458 151,380 167, 768 113,598 105,426 Earnings Applicable Average Shares to Common Stock Outstanding Earnings Per Average Share Quarter Ended 1987 I986 1987 1986 1987 1986 (Thousands of Dollars)

(Thousands)

(Dollars)

March 31

$148,124

$143,699 189,294 177,843

$.78

$.81 June 30 89,037 (183,807) 191,469 181,378

.47

( 1.01)

September 30 121,142 144,144 193,379 185,171

.63

.78 December 31 89,937 81,540 195,735 188,037

.46

.43

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements -

Continued The quarterly amounts previously reported, as adjusted for the effects of adoption of SFAS 90 and SFAS 92, are as follows:

Earnings Applicable Earnings Per Operating Income Net Income To Common Stock Average Share 1987 1986 1987 1986 1987 1986 1987 1986 (Thousands of Dollars)

(Dollars)

March 31

$214,778

$124,446

$169,500 Adjustment 943 2,510 March 31 Adjusted 215,721 124,446 172,010 June 30 157,782 92, 179 108,887 Adjustment 942 3,428 3,078 June 30 Adjusted 158,724 95,607 111,965 September 30 190,315 183,081 141,312 Adjustment 943 3,611 3,511 September 30 Adjusted 191,258 186,692 144,823 December 31 151,380 165,304 113,598 Adjustment 2,464 December 31 Adjusted

$151,380

$167,768

$113,598 1986 first quarter results include charges of approximately$ 13.1 million (net of related incomes taxes) resulting from the PUC's denial of recovery of approximately $9. 7 5 million of replacement power costs and $16 million of Salem Unit No. 2 fuel savings guaranteed to customers which were not realized.

1986 second quarter results include a charge to income of approximately $289.8 million resulting from the adoption of

16. Commitments and Contingencies The Company has incurred substantial commitments in connection with its construction program. Construction expenditures are estimated to be $1.2 billion for 1988 and $2.5 billion for 1989-1991. These estimates are reviewed and revised periodically to reflect changes in economic conditions, revised load forecasts and other appropriate factors. Facilities under construction and to be constructed, particularly Limerick Generating Station and associated facilities, will require permits and licenses which the Company has no assurance will be granted.

The current Price-Anderson Act places a "Limit of Liability" of $720 million for claims that could arise from an incident involving any licensed nuclear facility in the nation. All nuclear utilities, including the Company, have covered this exposure through a combination of private insurance and mandatory participation in a secondary financial protection pool. In the event of a nuclear incident the Company could be assessed up to $13.5 million per incident, involving any licensed nuclear facility in the nation, with a maximum amount of$27 million in any one year. The Price-Anderson Act expired in August 198 7. Bills to amend the Price-Anderson Act, including proposals to substantially modify or eliminate the limitation on liability provisions, have been introduced in Congress. The House of Representatives has passed a bill which significantly increases the limit of liability. No such bill has yet been approved by the Senate; however, Senate action is expected during 1988. In the interim, the Company is required to operate under the provisions of the expired Price-Anderson Act.

$166,261

$145,614

$143,699

$.77

$.81 2,510

.01 166,261 148,124 143,699

.78

.81 128,213 85,959 105,964

.45

.58 (289,771) 3,078 (289,771)

.02

( 1.59)

(161,558) 89,037 (183,807)

.47 (I.OJ) 168,705 117,631 146,441

.61

.79

( 2,297) 3,511

( 2,297)

.02

(.01) 166,408 121,142 144, 144

.63

.78 103,141 89,937 79,255

.46

.42 2,285 2,285

.01

$105,426

$89,937

$81,540

$.46

$.43 SFAS 90 and SFAS 92. 1987 second, third and fourth quarter results include charges to income of approximately $7.6 million,

$13.9 million and $10.5 million (net of related income taxes),

respectively, resulting from the charge to expense of replacement power costs caused by the NRC's shutdown of Peach Bottom.

The Company maintains property insurance, including contamination coverage, for loss or damage to its nuclear facilities. Although it is impossible to determine the total amount of the loss that may result from an occurrence at these facilities, the Company maintains the maximum amount of insurance presently available, $1.4 billion for each station.

Under the terms of the various insurance agreements, the Company could be assessed up to $34 million for losses incurred at any plants insured by the insurance companies.

The Company is a member of an industry mutual insurance company which provides replacement power cost insurance in the event of a major outage at a nuclear station.

The premium for this coverage is subject to an assessment for adverse loss experience. The Company's maximum share of any assessment is $16 million.

The Company is subject to assessments under its directors' and officers' liability and general liability insurance policies. The maximum 1987 insurance premium assessments under these policies could be approximately $7. I million.

In April 1987, a shareholder commenced a derivative law suit, purportedly on behalf of the Company, against John H.

Austin, Jr., James L. Everett, and Joseph W. Gallagher, the then President and Chief Operating Officer, Chairman of the Board and Chief Executive Officer, and Vice President, Nuclear Operations, respectively, of the Company. The complaint alleges that the defendants committed mismanagement and acted recklessly, negligently, in violation of the Pennsylvania Directors' Liability Act and in breach of their fiduciary duty to the Company and its shareholders in connection with the events

underlying the NRC-mandated shutdown of Peach Bottom. The complaint seeks an award of damages to the Company; an award of costs to the plaintiff, including fees of attorneys and experts; and an order requiring the Company to "institute and enforce an adequate safety and monitoring program" at Peach Bottom. 1\\No additional derivative law suits were commenced (in October and November 1987, respectively) by three other shareholders, purportedly on behalf of the Company, against the same three defendants. The complaints in these actions contain similar allegations and seek the same relief as the first complaint, as well as the voiding of an amendment to the Company's By-Laws, adopted at the 1987 Annual Meeting of Shareholders, which limited the liability of the Company's directors for monetary damages and expanded the Company's indemnification of directors, officers and other persons. The Company has filed preliminary objections to the three complaints, seeking their dismissal.

Also, in April 1987, another shareholder, by his attorneys, demanded that the Board of Directors cause the Company to commence legal action to recover damages against those officers and directors who were responsible for the conditions which resulted in the NRC-mandated shutdown of Peach Bottom. The Board of Directors has created a Special Committee of three independent directors to investigate this

17. Accounting Under Statement of Financial Accounting Standards No. 96 (SFAS 96)

In December 1987, the Financial Accounting Standards Board issued SFAS 96, l\\ccounting for Income Taxes", which requires an asset and liability approach for financial accounting and reporting for income taxes. The Company is required to adopt demand and the allegations contained in the three complaints mentioned above, and to report its findings and recommendations to the entire Board of Directors for determination whether the prosecution of the demand and the maintenance of the lawsuits are in the best interests of the Company and its shareholders. The Special Committee's investigation is ongoing.

In December 1981, the Company sold the federal income tax benefits associated with Unit No. 2 of the Salem Generating Station for $53. 7 million in a safe harbor lease transaction.

Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of the tax benefits resulting from any Internal Revenue Service (IRS) claims which render the sale invalid. The Company's indemnification obligation also includes the payment of interest, at prime rates, on the indemnification amount and all associated costs of contesting an IRS challenge.

The Company has been advised that the IRS has asserted, in auditing the purchaser, that the sale was invalid. Although the purchaser has protested the IRS claims, the Company has no assurance that the protest will be successsful. If the IRS claims against the purchaser are upheld, compliance with the indemnification provisions of the agreement could result in a significant charge to income.

this statement by 1989. The provisions of the statement may be applied cumulatively in the year of adoption or may be applied retroactively by restating previously issued financial statements.

The effect of adoption of this statement on the Company's financial statements has not been determined.

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, 198 7 and 1986, and the related consolidated statements of income, changes in common stockholders' equity and preferred stock, and changes in financial position for each of the three years in the period ended December 31, 198 7. 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, 1987 and 1986, 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, 1987, in conformity with generally accepted accounting principles applied on a consistent basis after restatement for the changes, with which we concur, in the methods of accounting for the disallowance of plant costs and the phase-in plan, as described in note 3 to the consolidated financial statements.

2400 Eleven Penn Center Philadelphia, Pennsylvania February 8, 1988

Philadelphia Electric Company and Subsidiary Companies Financial Statistics

SUMMARY

OF EARNINGS (Mil/ions of Dollars)

For the Year Ended 1987 Operating Revenues (for details see pages 42 and 43)

$3,181.5 Operating Expenses Fuel and Energy Interchange 710.6 Labor 437.6 Other Materials, Supplies and Services 564.6 Total Operation and Maintenance 1,712.8 Depreciation 251.9 Taxes 499.7 Total Operating Expenses 2,464.4 Operating Income 717.1 Other Income and Deductions Allowance for Other Funds Used During Construction 11.2 Capitalized Limerick Costs 66.6 Adjustment to Utility Plant Costs Credit (Charge) Related to Phase-In Plan 18.4 Income Tax Credits, Net 35.3 Other, Net 18.3 Total Other Income and Deductions 215.8 Income Before Interest Charges 932.9 Interest Charges Long-Term Debt 467.3 Short-Term Debt 17.2 Allowance for Borrowed Funds Used During Construction (92.2)

Net Interest Charges 392.3 Income From Continuing Operations 540.6 Income From Discontinued Operations 1.8 Loss on Disposal of Discontinued Operations Net Income 542.4 Preferred Stock Dividends 94.2 Earnings Applicable to Common Stock 448.2 Dividends on Common Stock 423.3 Earnings Retained 24.9 Income From Continuing Operations Per Average Common Share (Dollars) 2.33 Earnings Per Average Common Share (Dollars) 2.33 Dividends per Common Share (Dollars) 2.20 Common Stock Equity (Per Share)

$ 17.20 Average Shares of Common Stock Outstanding (Millions) 192.5

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

1986*

1985

$3,090.9

$2,945.2 889.3 1,097.8 417.2 370.8 475.2 440. l 1.781.7 1,908. 7 2I 7.7 I83.0 5I 7.0 440.9 2,5I6.4 2,532.6 574.5 4I2.6 76.8 I 76.3 I 72.9 (368.9)

(91.8) 279.7 I33.4 2.4 (3.5) 71.I 306.2 645.6 718.8 458.9 435.4 I2.5 I 7.7

( IOl.6)

(257.2) 369.8 I95.9 275.8 522.9 1.9 2.4 (1.2) 276.5 525.3 90.9 90.6 I85.6 434.7 403.5 373.5

$ (2I7.9) 61.2 1.0 I 2.55

!.OI 2.56 2.20 2.20

$ I6.95

$ I 7.97 183.I I69.8 1984 1983 1982 1977

$2,898.7

$2,524.9

$2,571.5

$1,352.5 1,069.9 939.5 1,079.0 548.2 339.6 311.2 285.4 179.2 413.8 342.3 307.4 112.8 1,823.3 1,593.0 1,671.8 840.2 176.4 I63.4 I42.I I06. l 449.I 376.8 370.8 I86.7 2,448.8 2,I33.2 2,I84.7 I,I33.0 449.9 39I.7 386.8 2I9.5 134.5 I08.I 65.7 36.2 I 16.4 87.9 75.8 25.3 0.2 (3.I)

(0.7) 3.5 251. I I92.9 I40.8 65.0 701.0 584.6 527.6 284.5 402.5 330.2 308.9 I 61.0 30.9 35.2 32.0 2.6 (220.4)

(I67.9)

(I47.6)

(49.8)

.213.0 I97.5 I93.3 I I3.8 488.0 387.I 334.3 I 70.7 4.4 2.0 1.9 2.7 492.4 389.I 336.2 I 73.4 82.7 67.4 57.6 40.7 409.7 321.7 278.6 I32.7 334.3 283.6 240.5 I24.9 75.4 38.I 38.1 7.8 2.67 2.39 2.38 1.84 2.70 2.40 2.39 1.87 2.20 2.12 2.06

!.76

$ I 7.81

$ I 7.99

$ I 7.93

$ 19.26 I51.8 I33.9 I I6.5 70.8

SUMMARY

OF FINANCIAL CONDITION (Millions of Dollars)

December 31 1987 1986*

1985 1984 1983 1982 1977 Assets Utility Plant, at original cost

$11,641.2 $10,847.8 $10,572.2

$9,834.1

$8,864.2

$7,905.7

$5, 121.1 Less: Accumulated Depreciation 2,169.4 2,005.7 1,824.4 1,726.3 1,592:0 1,450.1 955.3 Leased Property, Net 287.2 281.3 338.1 352.1 364.0 299.l 98.3 Net Utility Plant 9,759.0 9,123.4 9,085.9 8,459.9 7,636.2 6,754.7 4,264.l Current Assets cash and Temporary Cash Investments 43.0 90.7 188.8 30.4 57.2 50.0 30.8 Accounts Receivable 385.8 375.6 370.9 384.2 338.6 342.2 184.0 Inventories 150.3 129.7 123.7 150.5 131.1 143.0 102.3 Deferred Energy Costs 6.2 (88.2) 101.7 229.9 149.3 (85.4) 23.0 Other 73.8 78.6 71.8 137.0 52.3 40.2 23.6 Deferred Debits and Other Assets Unrecovered Revenue, Net 217.6 20.6 Deferred Limerick Costs 286.0 202.7 Investments 100.9 89.7 87.7 80.9 99.4 91.4 27.4 Loss on Reacquired Debt 119.1 76.8 48.6 Other 68.0 70.7 86.2 82.9 80.4 24.9 10.9 Total

$11,209.7 $10,170.3 $10,165.3

$9,555.7

$8,544.5

$7,361.0

$4,666.1 capitalization and Liabilities Common Stock

$ 2,995.2 $ 2,833.0 $ 2,602.0

$2,361.0

$2, 110.5

$1,826.2

$1, 106.7 Other Paid-In Capital 4.6 7:8 7.3 6.7 5.9 4.6 1.8 Retained Earnings 387.1 363.3 583.7 523.3 452.9 423.6 328.7 Common Shareholders' Equity 3,386.9 3,204.1 3,193.0 2,891.0 2,569.3 2,254.4 1,437.2 Preferred Stock:

Without Mandatory Redemption 572.5 572.5 572.5 572.5 522.5 372.5 372.5 With Mandatory Redemption 389.1 374.9 318.3 326.2 284.9 292.3 161.7 Long-Term Debt 4,870.7 4,286.8 4,309.2 3,778.0 3,381.8 3,028.5 2,078.3 Total Capitalization 9,219.2 8,438.3 8,393.0 7,567.7 6,758.5 5,94 7.7 4,049.7 Current Liabilities Short-Term Debt 102.0 1.0 260.0 267.5 64.7 14.9 Long-Term Debt Due Within One Year 80.9 108.6 80.8 50.4 21.3 28.7 Lease Obligations Due Within One Year 60.6 69.4 76.3 68.3 61.5 32.5 16.8 Accounts and Dividends Payable 206.0 222.1 185.I 200.1

. 179.9 188.5 92.4 Taxes Accrued 114.7 86.1 58.5 40.3 25.8 65.9 24.5 Deferred Income Taxes -

Energy Costs 2.7 (44.8) 51.8 117.7 76.5 (43.3) 12.2 Interest Accrued 121.7 90.7 93.0 91.1 91.8 99.8 48.6 Other 72.1 80.0 72.0 127.2 54.I 24.7 24.0 Deferred Credits and Other Liabilities Capital Lease Obligations 226.6 2I2.0 261.8 283.8 302.5 266.6 8I.4 Deferred Income Taxes 682.9 560.5 502.6 373.3 346.5 290.5 146.4 Unamortized Investment Tax Credits 282.3 299.7 302.4 299.4 249.7 296.0 110. 7 Other 38.0 47.7 87.0 76.4 130.2 106.1 15.8 Total

$11,209.7 $10,I70.3 $10, 165.3

$9,555.7

$8,544.5

$7,361.0

$4,666.1

• Restated for the effects of adoption of SFAS 90 and SFAS 92.

421 Philadelphia Electric Company and Subsidiary Companies Operating Statistics ELECTRIC OPERATIONS 1987 Output (Millions ofKilowatthours)

Steam 9,835 Nuclear 11,853 Hydraulic 1,590 Pumped Storage Output 1,251 Pumped Storage Input

( 1,787)

Purchase and Net Interchange 9,806 Internal Combustion 232 Other Total Electric Output 32,780 Sales (Millions ofKilowatthours)

Residential 9,441 Small Commercial and Industrial 4,341 Large Commercial and Industrial 15,789 All Other 974 Service Territory 30,545 Jersey Central Power and Light (Salem Unit No. 2)

Total Electric Sales 30,545 Number of Customers, December 31 Residential 1,280,297 Small Commercial and Industrial 131,279 Large Commercial and Industrial 4,589 All Other 771 Total Electric Customers 1,416,936 Operating Revenues (Millions of Dollars)

Residential

$1,092.6 Small Commercial and Industrial 471.7 Large Commercial and Industrial 1,103.3 All Other 142.l Service Territory 2,809.7 Jersey Central Power & Light (Salem Unit No. 2)

Total Electric Revenues

$2,809.7 Operating Expenses (Millions of Dollars)

Operating expenses excluding depreciation

$1,895.1 Depreciation 234.9 Total Operating Expenses

$2,130.0 Electric Operating Income (Millions of Dollars)

$ 679.7 Average Use per Residential Customer (kilowatthours)

Without Electric Heating 6,431 With Electric Heating 16,824 Total 7,427 Electric Peak Load, Demand (thousands ofkWs) 6,547 Net Electric Generating Capacity -

Year-End Summer rating (thousands ofkWs) 7,762 Cost of Fuel per Million Btu

$1.35 Btu per Net Kilowatthour Generated 10,879 1986*

7,864 17,125 1,848 1,176 (1,661) 4,258 269 382 31,261 8,900 4,022 15,068 993 28,983 28,983 1,263,465 127,797 4,668 763 I,396,693

$1,023.6 437.0 l,I03.3 I35.5 2,699.4

$2,699.4

$1,961.4 201.8

$2, 163.2

$ 536.2 6,177 16,661 7,097 6,134 7,870

$1. I8 10,844

• Restated for the effects of adoption ofSFAS 90 and SFAS 92.

1985 1984 1983 1982 1977 9,455 I I,085 I0,457 8,598 I I,468 8,359 6,462 5,520 10,743 4,596 1,484 2,085 1,739 1,581 1,997 1,235 l,IOO 979 1,126 1,223 (1,754)

(1,579)

(1,427)

(1,665)

(1,761) 10,252 I I,975 12, 181 1 I,I20 9,759 I78 425 491 178 847 I,254 716 30,463 31,553 29,940 31,681 28,845 8,440 8,515 8,467 7,877 8, I 10 3,731 3,543 3,284 3,142 2,825 14,920 14,88I I 4,4 78 14, 178 I4,912 1,044 I,061 I,003 I,012 1,350 28, 135 28,000 27,232 26,209 27,I97 1,395 346 3,352 28,135 29,395 27,578 29,561 27, 197 1,245,481 1,230,883 I,2I 7,635 1,206,944 I, 148, 17I 124,7I9 121,676 1 I9,292 118,407 115,883 4,881 5, 100 5,437 5,6I6 5,772 773 75I 75I 762 2,38I I,375,854 1,358,410 1,343, I 15 l,33I,729 1,272,207

$923.9

$854.9

$744.0

$694.4

$427.6 388.7 360.2 3I6.6 3I0.6 168.4 1,061.8 1,008.5 877.4 922.3 5I3.4 I41.8 145.I I39.4 I 18.3 68.3 2,5I6.2 2,368.7 2,077.4 2,045.6 1,177.7 67.0 30.5 135.4

$2,5I6.2

$2,435.7

$2,107.9

$2,181.0

$1,177.7

$1,974.2

$1,858.5

$1,592.0

$1,688.4

$881.2 I68.2 163.0 I50.9 I30.2 97.9.

$2, 142.4

$2,021.5

$I,742.9

$1,818.6

$979.1

$ 373.8

$ 414.2

$ 365.0

$ 362.4

$I98.6 6,034 6,I60 6,319 5,875 6,584 15,923 17,293 I6,523 I6,813 23,593 6,820 6,960 6,990 6,544 7,097 6,034 5,925 5,879 5,691 5,888 7,599 7,765 7,974 8,006 8, 198

$1.72

$2.22

$2.25

$1.57

$1.40 10,843 10,920 I0,906 I0,918 10,882

GAS OPERATIONS 1987 1986 1985 1984 1983 1982 1977 Sales (Millions of Cubic Feet)

Residential 1,854 I,856 I,8IO I,94I 2,I68 2,442 2,394 House Heating 26,010 25,73 I 23,227 25,429 22,98I 24,237 26,335 Commercial and Industrial 38,170 33,834 36,254 4I,I45 39,043 4I,660 3 I,OI 7 All other 1,541 578 I,209 I,282 672 422 86 Total Gas Sales 67,575 6I,999 62,500 69, 797 64,864 68, 76 I 59,832 Gas Transported for Customers 7,374 3,907 I0,262 3,794 789 Total Gas Sales & Transported 74,949 65,906 72,762 73,59I 65,653 68,76I 59,832 Number of Customers, December 31 Residential 67,688 68,590 69,632 70,794 72,50I 76,638 88,775 House Heating 231,618 225,0IO 217,840 2I1,984 206,443 198,9IO 162,978 Commercial and Industrial 26,021 24,884 24,234 23,442 22,810 22,324 I 9,422 Total Gas customers 325,327 3I8,484 3I!,706 306,220 30I,754 297,872 27I,175 Operating Revenues (Millions of Dollars)

Residential

$ 16.7

$ I8.0

$ I8.7

$ I9.0

$ I 9.1

$ I8.1 9.6 House Heating 175.7 I89.8 I85.4 191.7 165.8 I47.I

84. I Commercial and Industrial 167.5 I77.7 2I4.I 243.7 227.3 221. I 80.4 All other 4.4 2.0 5.2 5.6 3.0 1.8 0.2 Subtotal

$364.3

$387.5

$423.4

$460.0

$4I5.2

$388.I

$I 74.3 Other Revenues (including Transported for Customers) 7.5 4.0 5.5 3.0 1.8 2.3 0.5 Total Gas Revenues

$371.8

$391.5

$428.9

$463.0

$4I 7.0

$390.4

$I74.8 Operating Expenses (Millions of Dollars)

Operating expenses excluding depreciation

$317.4

$337.3

$375.4

$4I3.9

$377.6

$354.I

$145.7 Depreciation 11.0 I5.9 I4.8 I3.5 I2. 7 I 1.9 8.2 Total Operating Expenses

$334.4

$353.2

$390.2

$427.4

$390.3

$366.0

$I53.9 Gas Operating Income (Millions of Dollars)

$ 37.4

$ 38.3

$ 38.7

$ 35.6

$ 26.7

$ 24.4

$ 20.9 Securities Statistics Ratings on Philadelphia Eleetric 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 I I 2/83 Fitch Investors Service BBB 9182 BBB-9182 BB+

9182 Moody's Investors Service Baa3 I/83 Bal I/83 bal I/83 Standard & Poor's Corporation BBB-9182 BB+

9/82 BB+

7186 NYSE -

Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1987 I986 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price

$20%

$23%

$22V:z

$26

$24Ys

$25Ys

$20%

$20Yi Low Price

$16%

$19%

$19Ys

$20%

$2I%

$I9Ya

$I 7Ys

$I6Ya Earnings*

46¢ 63¢ 47¢ 78¢ 43¢ 78¢ (LOI)¢ 8I¢ Dividends 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 55¢

• Earnings have been restated for the effects of adoption ofSFAS 90 and SFAS 92.

143

- Philadelphia Electric Company and Subsidiary Companies Shareholder Information Stock Exchange Listings Most PE securities are listed on the New York Stock Exchange and the Philadelphia Stock Exchange. Philadelphia Electric Power Company Debentures are listed on the Philadelphia Stock Exchange.

Dividends The Company has paid dividends on its common stock continually since I 902.. The Board of Directors normally considers common stock dividends for payment in March, June, September and December.

The Company estimates that the $2.20 per share dividend paid to common shareholders in I987 is fully taxable as dividend income for Federal income tax purposes. _

Dividend Reinvestment and Stock Purchase Plan Shareholders may use their dividends to purchase additional shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric pays all brokerage and service fees. Customers of the Company who* are not shareholders may enroll in the plan by making a one-time purchase of common stock directly from the Company.

All shareholders have the opportunity to invest additional funds in common stock of the Company, whether or not they have their dividends reinvested -

also with all fees borne by the company.

Over 35% of the Company's common-shareholders were participants. In I987, they invested more than $103million

. through the Plan, including cash payments. Information concerning this Plan may be obtained from D. P. Scott, Treasurer, Philadelphfa Electric Company, 230I Market Street, P.0. Box

-8699, Philadelphia, PA I9101.

Comments Welcomed The Company always is pleased to answer questions and provide information. Please address your comments to Mrs. L. s. Binder, Secretary, Philadelphia Electric Company, 230I Market Street, P.O. Box 8699, Philadelphia, PA 19101.

Inquiries relating to shareholder accounting records, stock transfer and change pf address should be directed to Philadelphia Electric Company, 230I Market Street, P.O. Box 8699, Philadeiphia, PA *I9IOI, Attn: Stock Transfer Section, s6-4.

Toll-Free Telephone Line Toll-free telephone lines are avail_able to the Company's shareholders for inquiries concerning their stock ownership.

When calling from putside of Pennsylvania, call 1-800-223-7326. From within Pennsylvania, call

. I-800-242-7326. Local Philadelphia calls should be made to 84I-5795.

Annual Meeting The Annual Meeting of the Shareholders of the Company will be held on April I3, I 988, at I 0:30 A.M. at the Pennsylvania Hall

• *Auditorium, Philadelphia Civic Center, 34th Street & Civic Center Boulevard, Philadelphia, PA.

Common stock shareholders of record at the close of business on March 4, I988, are entitled to vote at this meeting.

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

Form 10-K

- Form lQcK, the annual report filed with the Securities and Exchange Commission, is available; withou(charge, to shareholders upon written request to Philadelphia Electric Company, 230I Market Street, P.O. Box 8699, Philadelphia, PA I9101, Attn: Financial Division, S21-l.

Shareholders The Company has 294, 7 33 shareholders of record of common stock, a 4% increase in 5 years.

Transfer Agents and Registrars PHILADELPHIA ELECTRIC COMPANY~ Preferred and Common Stocks Registrars:

Transfer*

• Agents:

Mellon_ Bank (Ea~t) N.A.

Four Mellon Bank Center Philadelphia, PA 19102

• Morgan Shareholders Services Trust co.

• 30 w. Broadway, m. NY 10015 Philadelphia Electric Company 2301 Market St., Phila., PA I9101. * :

Morgan Shareholders Services l:rust Co.

30 W. Broadway, m, NY 10015 PHII.~ADELPH!A ELECTRIC COMPANY.,..- First and Refunding Mortgage Bonds Trustee:

Fidelity Bank,_ National Association Broad & Walnut Sts., P.hila:, PA 19109

-NewYork Agent:

Morgan Guaranty Trust Co. of NY 30 w. Broadway, m, NY 100 I 5 PHILADELPHIA ELECTRIC COMPANY -

Debentures PHILADELPHIA ELECTRIC POWER COMPANY (A Subsidiary) -

Debentures Trustee:

New York Agent:

General orfice:*

The Philadelphia National Bank, Broad & Chestnut Sts., Phila., PA 19101 Irving Trust Co.

One Wall Street, NY, NY 10015 2301 Market Street, P.O. Box 8699, Phila., PA 19101.(215) 841-4000.

Philadelphia Electric Company 230 I Market Street PO Box 8699 Philadelphia PA 19101 BULK RATE U.S. POSTAGE PAID Philadelphia PA Permit No. 378