ML18093A741

Atlantic Energy 1987 Annual Rept.

ML18093A741
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Site:	Salem, Hope Creek, 05000000
Issue date:	12/31/1987
From:	Feehan J ATLANTIC CITY ELECTRIC CO.
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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 Corporate Address Customers At-A-Glance 17 1199 Black Horse Pike

.~i .,

Pleasantville, New Jersey 08232 ~:

Financial Information 18 (609) 645-4500 Investor Information 39 *<

Statistical Review 1987-1983 40 Corporate Officers 41' Board of Directors 4~

Director Committees 42

Philadelphia Electric Company Annual Report 198 7

(-

1986 1986 Financial Highlights 1987 As Reported %Change As Restated* %Change Operating Revenues $3, 181,464,000 $3,090,869,000 3% $3,090,869,000 3%

Operating Expenses $2,464,381,000 $2,525,859,000 (2%) $2,516,356,000 (2%)

• • i.

1: Taxes Charged to Operations $499,653,000 $521,557,000 (4%) $516,982,000 (3%)

Operating Income $717,083,000 $565,0 I 0,000 27% $57 4,513,000 25%

Earnings Applicable to Common Stock $448,240,000 $475,359,000 (6%) $185,576,000 142%

Earnings per Average Common Share $2.33 $2.60 (10%) $1.01

• 131%

• ~

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 5%

Construction Expenditures $1,037,500,000 $966,500,000 7% $966,500,000 7%

Total Assets $11,209,736,000 $I 0, 748,020,000 4% $I 0, I 70,320,000 10%

• Restated for the effects ofadoption ofSFAS 90 and SFAS 92 (See note 3 ofNotes to Financial Statements)

Contents Letter to Shareholders 2 Report of 1987 Operations 4 Management's Discussion and Analysis of Financial Condition and Results of Operations 21 Consolidated Financial Statements 23 Notes to Financial Statements 28 Report of Independent Certified Public Accountants 39 Financial and Operating Statistics 40 Shareholder Information 44 Officers and Directors 45 EARNINGS AND CONSTRUCTION DIVIDENDS PER SHARE EXPENDITURES Million Dollars .so LOO I.SO 2.00 2.SO 3.00 Dollars 200 400 600 800 !000 1200

• i 87 86 8S 84 83

- Earnings Per Share - External Sources

- Earnings Per Share Restated Dividends r::::::::J Internal Sources

I TO OUR SHAREHOLDERS (SALP) report, with the remaining two areas receiving the second highest rating with The year 198 7 was perhaps more challenging than improvement noted.

any other year in the history of your Company. Construction at Limerick Unit No. 2 There were some negatives, one of which - the continued ahead of schedule with expenditures Peach Bottom shutdown - was especially within budget, consistent with the Pennsylvania serious. But there were also a number of positives Public Utility Commission's mandated that combined to produce an overall better construction cost cap of $3.2 billion. Unit No. 2 performance than certain widely publicized received a SALP report late in the year that gave events would have suggested. an overall excellent rating to our construction Peach Bottom Shutdown activities.

On March 31, 1987, the Nuclear Regulatory While progress was made on the Commission (NRC) ordered a shutdown of Peach supplemental cooling water system for Bottom Atomic Power Station, citing Limerick, there are still challenges to the Point inattentiveness and other inappropriate behavior Pleasant Pumping Project, a key component of by control room operators while on duty as well the planned water system.

as other violations. Financial Results Our corrective efforts have been Earnings per share decreased to $2.33 from $2.60 unprecedented in their scope and reflect a total as reported in 1986.

corporate commitment to restore operational To comply with the requirements of the excellence and management effectiveness and Financial Accounting Standards Board, the accountability. Since March 31, the Company has Company adopted Financial Accounting left no stone unturned in addressing the concerns Standards Board Statements No. 90 and No. 92 raised by the NRC. These efforts are described in retroactive to 1986, reducing 1986 net income and detail beginning on page 10. earnings applicable to common stock as reported Management changes were made at the by $290 million, or $1.59 per share. Restated 1986 plant, including the appointment of a new plant common stock earnings per share are $1.01.

management team. A new, vertically integrated Record sales nuclear organization, headed by a senior vice Electric sales in 1987 climbed 5% to 31 billion president, with corporate vice presidents located kilowatthours, a record level. Accounting for the at each nuclear plant site, has been created. In increase were more customers from an improved addition, a nuclear committee of the Board of residential housing market, strong commercial Directors has been established. and industrial sales, and weather. Gas sales and We are committed to fix the problem, fix gas transportation services were up 14% due to it right and keep it fixed. higher industrial consumption.

Limerick Project During the hot and humid weather During 1987, performance at our other nuclear experienced in our service area in July, customer plant, Limerick, continued on an excellent level. demand for electricity reached record levels. A At mid-year, Unit No. 1 received the highest marks new peak load of 6,54 7 megawatts was set on July in eight often areas rated by the NRC in its 24, surpassing by 7% the all-time record of 6, 134 Systematic Assessment of Licensee Performance* megawatts set in July 1986. The record peak

John H. Austin, fr. James L. Everett equaled the Company's projected peak for the their skill and commitment, we will rise to today's mid- l 990's, indicating an unexpected rate of challenges and assure a better tomorrow. In economic growth in our service area. recognition of the fine efforts of over 11,000 Recent Developments dedicated employees, this report's photography Just as this report was being released for printing, features representative members from each two major events were announced. First, John H. department.

Austin, Jr. resigned as President, Chief Operating To an even greater extent this year than Officer and Director, effective March 1, 1988. The before, we thank our shareholders for their Board of Directors asked James L. Everett to support and extend special appreciation for assume the additional duties of President and standing by the Company during our Peach Chief Operating Officer. These and other related Bottom problems. We renew our pledge to give director and management changes are detailed on our every effort toward making your investment a the inside back cover of this report. Second, we sound and rewarding one.

made public a letter from the Institute of Nuclear Power Operations, a nuclear industry group, that James L. Everett was highly critical of the Company in preventing Chairman of the Board and resolving Peach Bottom problems and the and ChiefExecutive Officer lack of adequate corporate accountability. Please refer to note 2 of the Notes to Financial Statements, page 28, for further discussion of this matter.

Jza.*w John H. Austin, Jr.

President Dedicated Employees and Chief Operating Officer At Philadelphia Electric Company, our people continue to be our most valuable resource. With February 8, 1988

1987 FINANCIAL

SUMMARY

George E Corse, Engineering and Production 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 George F. Corse, Fuel Handler - Eddystone and retained earnings as reported by $290 Generating Station, Engineering and million, or $1.59 per share.

Statement No. 90 required the Company Production. Fourteen years ofservice. George to write off $369 million of Limerick Unit No. 1 costs which the Public Utility Commission represents the more than 1,750 employees disallowed in its June 27, 1986 order. The of the Engineering and Production Department Company continues to believe that the $369 million of costs were prudently incurred and has a who perform all non-nuclear operating, petition for review of the order pending before the Commonwealth Court of Pennsylvania. The write- maintenance and engineering activities for offwas taken solely to comply with the the Company.

requirements of Statement No. 90. See note 3 of

Ann M. TUcker, Personnel and Industrial Relations

\

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 Ann M. Tucker, Director - Affirmative Action, the largest annual percentage gain since 1973.

Virtually all categories of sales experienced Personnel and Industrial Relations.

increases, reflecting a favorable economic Seventeen years ofservice. Ann is one of environment, additional residential and house-heating customers and hot summer weather.

approximately 140 employees of the Residential and house-heating sales were up 6%,

with nearly 17,000 new customers. The industrial Personnel and Industrial Relations Department sector contributed nearly one-half of the who work in the area ofpersonnel, industrial improvement, up 722 million kilowatthours over 1986.

relations and medical.

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

New Peak Demand Successfully Met Exceeding levels not anticipated until the mid- I990'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 Herbert H. Yan, Engineer, General hot weather at the time, correction for weather-related effects reveals that the increase also was Administration. Fifteen years ofservice.

attributable in large part to growth in the Herb represents the 120 employees who Philadelphia area. The Company's generating equipment proved to be exceptionally reliable in operate the Pennsylvania-New Jersey- meeting the higher energy demand during this period.

Maryland (PJM) control center in Valley Forge, PA. 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 6

borrowing of$150 million under the agreement in M. Dorothy Lyons, Corporate Secretary's Office January 1988.

1987 Major Financings Month Millions ofDollars March Mortgage Bonds 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 $20.62 129.8 Common Stock Continuous Offering:

1,500,000 shares; Average price of $21. 62 32.4 Total $967.2 M. Dorothy Lyons, Assistant Secretary of the Construction Spending Progresses Company. nventy-eight years of service. She Investments for new plant and equipment in 1987 amounted to $1.0 billion, with approximately is one of 32 employees in the corporate offices of the

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

and office of the corporate secretary.

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

Jose R. Cox, Corporate Communications 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 Jose R. Cox, Community Affairs nine categories and second highest grades in the Representative, Corporate Communications. other two areas. This report covered a period of 19 months and involved 28 on-site Nuclear Eight years ofservice. Approximately 90 Regulatory Commission (NRC) inspections.

employees in the Corporate Communicqtions Water Supply Progresses Department, represented by jose, work Limerick Generating Station needs a supplemental supply of cooling water during together to provide information to and build periods of low water flow on the Schuylkill River.

One component of the supplemental cooling energy awareness within the community 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 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 Norbert F. Gazda, Supervisor - Radiological Environmental Resources is one of the regulatory Engineering, Peach Bottom Atomic Power agencies which has authority over the construction of the water system. The agency has Station. IWenty-three years of service. All of issued permits authorizing construction of Point Pleasant and the Bradshaw Reservoir. The agency the approximately 875 employees at Peach engaged an independent expert to perform a Bottom, including Norbert, have committed thorough evaluation of the planned supplemental cooling water system. In his final report submitted themselves to excellence in the engineering, in December, the expert supported completion of the water system.

operation and management at Peach Until the water supply system is Bottom. 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?

Kenton W. Keiser, Purchasing and General Services 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 Kenton W. Keiser, Supervising Buyer - Fuel replace the water evaporated in the operation of the utility owners' power plants, including Procurement, Purchasing and General Services. Th!enty Limerick. PE and six other electric utilities share ownership. years ofservice. More than 850 employees in This $217 million project, of which the the Purchasing and General Services Department Company's portion is $96 million, is near Phillipsburg, New Jersey, about so miles north of contribute their skills in the areas offuel Philadelphia. The project's second phase calls for the construction of an education center and procurement, purchasing, insurance, real estate, environmental preserve, which are scheduled for service operations, building management, completion in 1989.

office systems and communications, PEACH BOTIOM stores and transportation.

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

Francis McHale, Electric Transmission and Distribution 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 Francis McHale, Lineman First Class, Electric support services and vice presidents on site at Transmission and Distribution. Nineteen both the Peach Bottom and the Limerick plants.

These proposed management and management years ofservice. All 2,000 members ofthe systems changes were submitted asSection I of a Plan for Restart of Peach Bottom Atomic Power Electric Transmission and Distribution Department Station. On December 24, the NRC notified the work every day to prevent electric service Company that it may proceed with the new organization structure, subject to final NRC review interruptions to maintain the Company's of the effectiveness of the revised corporate structure.

outstanding record ofreliable service.

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. Samuel A. Brackeen, Finance and Accounting 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 Samuel A. Brackeen, Assistant Manager-stainless steel piping, which is resistant to Data Processing, Finance and Accounting.

cracking, will cost approximately $80 million.

Similar repiping was completed on Peach Bottom Nineteen years of service. Sam is one of about Unit No. 2 in 1985.

550 employees in the Finance and Nuclear Organization Moving to Accounting Department who provide Chesterbrook The Company has leased over 190,000 square feet financial, accounting and information of space in the Chesterbrook Corporate Center along Route 202, adjacent to Valley Forge systems services.

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

Gregory N. Dudkln, General Administration Gregory N. Dudkin, Administrative Analyst, General Administration. Eight years ofservice.

Greg represents the IO employees in Corporate Planning.

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

Patricia K. Cloran, Legal 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 Patricia K. Cloran, Stenographer, Legal. Five January I, 1987, it was not until April 16, 1987, that the PUC approved the Company's estimated years ofservice. Patricia represents the nearly credit. The Company began applying the 70 employees in the Legal Department and appropriate credit to customers' electric bills on May I, 1987. The estimated credit for 1987 will be Claims Security Division. 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.

14

Craig H. West, Commercial Operations 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 Craig H. West, Meter Reader; Commercial Quality Company, which will use the fuel in its vehicle fleet. Culligan-Funk is the first customer in Operations. Thia years ofservice. Craig is one the Philadelphia area to install and operate its own NGV station. The only other local of over 2,000 employees who work in the counterpart is at the Company's Plymouth Service areas of area development, technical services, Building, where a similar facility provides NGV refueling for part of the Company's fleet.

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

merchandising departments.

Recreation Facilities Opened Opened on July I I, I 987, the Conowingo

George W. Kaufmann, Gas Operations 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 George W. Kaufmann, Senior Utilization integrating the electric power output of solar cells Mechanic, Gas Operations. 1Wenty-seven into the PE distribution system. Featuring the latest development in the field, these solar cells years ofservice. The 880 employees in Gas use an amorphous silicon thin film technology.

Located at the Pottstown-Limerick Airport in Operations work together to ensure reliable Limerick Township, the installation was the service to our gas customers. 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- has the potential to locate other leaking underground utilities, such as oil-filled electric four years ofservice. As members ofPE's cables. In the future, it may be possible to use Rate Department, radar on a routine basis to verify the integrity of all underground facilities on our system.

Dick and his 25 colleagues handle all Cogeneration Project Initiated rate-related business with the various PE has installed and is monitoring the operation public utility commissions. 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 Loretta E. Cuthbert, Nuclear Services 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

. I to firms that invest in new facilities and/or add Loretta E. Cuthbert, Nuclear Records Clerk, more employees. E2R2 was initiated in 1983 for the Company's Pennsylvania territory. To date, 221 Nuclear Services. Seven years of service. She customers are utilizing this very successful rate.

They have added about 18,000 jobs to their is one of approximately 350 employees of payrolls and made approximately $445 million in the Nuclear Services Department who provide capital investments.

Pharmaceutical industry activity in the support services to the Company's region continues to intensify, as companies add employees and invest capital in new facilities. nuclear operations.

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

Graham M. Leitch, Limerick Generating Station Pharmaceuticals and others. Clearly, Greater Philadelphia is becoming the pharmaceutical 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.

I

• These programs were winners in the Graham M. Leitch, Vice President, Limerick 1986 "Take Pride in America" national awards and Generating Station. Thirty-one years of "Take Pride in Pennsylvania" state awards. These awards' recognize individual, public and private service. He is one of approximately 1,000 groups that conduct "outstanding stewardship, action or awareness efforts on behalf of federal, employees who operate, as well as state, local and/or Indian lands and resources:'

provide engineering and PE Improves Programs for Senior Citizens operating support for, Limerick.

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 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 bavid A. Anders, Project Engineer, Nuclear energy topics, and they have acquired many skills Engineering. Five years ofservice. to prepare them for roles in business, industry and government.

Caren B. Anders, Project Engineer, Nuclear Additionally, thousands of teachers, administrators and community leaders have Engineering. Five years ofservice. This played an important part in helping PE fulfill the husband and wife team is among the 300 dual purpose of this undertaking. The first is to make young people aware of the energy problems employees of the Nuclear Engineering confronting our nation. Because they must complete in-depth research to participate in Department who provide engineering support program debates, these young people become to nuclear operations. 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.

20

Management's Discussion and Analysis of Financial Condition and Results of Operations General On April 16, 1987, the Company filed a request with the Earnings per share for 1987 were $2.33, a decrease of 27 cents PUC for an increase in gas base rates of$16.9 million or 4.5%,

from the originally reported 1986 earnings per share of $2.60. primarily to recover higher non-fuel operating and maintenance The decline in earnings resulted primarily because of the expenses. On January 15, 1988, the PUC issued its final order in Pennsylvania Public Utility Commission's disallowance in its the case permitting the Company to increase its gas rates by June 1986 rate order of investment relating to Limerick Unit $7. 7 million or 2.8%. In addition, the Company was granted a No. I as weII as other rate and accounting treatment ( 16 cents one-year surcharge to recover $0.9 million or 0.3% for the prior per share) and the replacement power costs since March 31, effects of the Tux Reform Act of 1986.

associated with the Nuclear Regulatory Commission's (NRC) As a result of the Tux Reform Act of 1986 that reduced shutdown of the Peach Bottom Atomic Power Station, which federal income taxes, on May 1, 198 7 and continuing through were not recovered from customers ( 16 cents per share). The December 31, 1987, the Company passed back to it.s electric earnings decline was partially offset by the positive effects of customers $34.4 million through a Federal Tux Adjustment higher electric sales. Credit (FTAC) for the year 1987. In 1988, the Company will pass The Company has adopted Financial Accounting back to its electric customers $85.9 million through a FTAC.

Standards Board Statement No. 90, "Regulated Enterprises - OnJune I, 1987, theCompanyfileditsannualEnergy Accounting for Abandonments and Disallowances of Plant Cost Rate Factor (ECRF) with the PUC proposing an 8.627 mill Costs" and Statement No. 92, "Regulated Enterprises - per kWh credit applicable to customers' electric service. On June Accounting for Phase-in Plans" retroactive to 1986. The 25, 1987, the PUC ordered an adjusted ECRF of a I 0.457 mill per combined effects of adopting these statements reduced 1986 kWh credit. The net effect of this action, at least temporarily, is income from continuing operations and net income as reported to deny the recovery of approximately $52.4 million of energy by $289.8 million, the related per share amount by $1.59 and costs. The Company has filed its response requesting the PUC to retained earnings by $289.8 million. See note 3 of Notes to reverse its action. Hearings on this matter began in January 1988.

Financial Statements, page 29. Effective January I, 198 7, the Company has adopted Total revenue increased in 198 7 over 1986 primarily as a Financial Accounting Standards Board Statement No. 87, result of increased electric sales and the fuII-year effect of the "Employer's Accounting for Pensions:* In 1987, pension cost was electric rate increase of June 1986. $29 million, $13 million Jess than the 1986 pension cost. 1987 Non-fuel operating and maintenance expense increased earnings were not materially affected by Statement No. 87. See in 1987 compared with 1986 primarily as the result of the note 4 of Notes to Financial Statements, page 31.

commercial operation of Limerick Unit No. I. In accordance In addition, the Company is required to adopt Financial with the Declaratory Order issued by the Pennsylvania Public Accounting Standards Board Statement No. 96, .Accounting for Utility Commission (PUC) on September 28, 1984, the Company Income Taxes" by 1989. See note I 7 of Notes to Financial deferred aII operating costs, carrying charges on investment, Statements, page 39.

fuel savings and income taxes associated with Limerick Unit No. I On March 31, 1987, the Company initiated the and 50% of common plant from February I, 1986, the date of necessary action to comply with an NRC order suspending commercial operation, until June 27, 1986, the date the plant power operations at the Peach Bottom Atomic Power Station.

was included in rates. Restart of the plant is dependent upon submission to and On June 27, 1986, the PUC approved an electric rate approval by the NRC of a plan assuring safe operation and increase of approximately $351 million annuaIIy. The increase is compliance with all requirements. The Company's current being phased-in over three years in equal steps followed by a estimate of replacement power costs for Peach Bottom incurred three-year period for recovery, without interest, of revenue solely and proximately as a result of the NRC shutdown is $5 deferred under the phase-in plan. On June 27, 1987, the million per month per unit. See note 2 of Notes to Financial Company implemented the second phase of the plan increasing Statements, page 28.

base rates by approximately $1 I 7 million.

In accordance with the PUC order dated June 27, 1986, Electric Operating Revenue the Company continues to accrue a carrying charge equivalent Increased electric revenue for 1987 and 1986 is attributable to to aIIowance for funds used during construction (AFUDC) on the higher base rates and increased sales. Kilowatthour sales of remaining 50% of Limerick common plant excluded from rate electricity to retail customers increased 5.4% in 1987 over 1986.

base by the order. In 1987, this accrual benefited common stock The increase in electric revenue in 1985 over 1984 is attributable earnings by approximately $67 million. to higher base rates.

On June 27, 1986, the PUC modified the Company's Energy Cost Rate (ECR) so that only 80% of the difference Electric Revenue Millions of Dollars between the actual electric energy costs and the amount billed Jncrease/(Decrease) '87 vs. '86 '86 vs. '85 '85 vs. '84 to customers is subject to after-the-fact reconciliation for over/ Rate Increases $193.7 $185.0 $141.4 under collection. In 1987, the energy cost not subject to FTAC (34.4) reconciliation reduced common stock earnings by Fuel Related Revenue (149.0) (39.4) (2.8)

Sales and Other 100.0 37.6 ~)

approximately $5 million.

Total $110.3 $183.2 $ 80.5 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.

I 11:

Gas Operating Revenue OtherTaXes Lower gas revenue in 1987 compared with 1986 is primarily Other taxes increased slightly in 1987 versus 1986 due to higher attributable to a lower Purchased Gas Cost Rate resulting from capital stock and gross receipts taxes. Other taxes decreased in reductions in the price of gas from suppliers. Gas revenue 1986 versus 1985 due to lower capital stock and realty taxes.

decreased in 1986 and I 985 compared with the previous year as In I 985 other taxes increased due to higher capital stock and a result of decreases in sales and lower fuel-related revenue realty taxes.

resulting from reductions in the price of gas purchased from suppliers. Allowance for FUnds Used During Construction (AFUDC)

The decreases in AFUDC in 1987 and 1986 are a result of the FUel and Energy Interchange Expense commercial operation of Limerick Unit No. I. AFUDC increased For accounting purposes, fuel and energy interchange costs are in 1985 as a result of increases in construction work in progress.

deferred until billed as fuel adjustment revenue. See note I of Notes to Financial Statements, page 28. In 1987, gross fuel and Interest Charges energy interchange costs were $98 million higher than in 1986 Interest charges on debt increased in each of the last three years primarily due to the refueling outage at Limerick and the Peach due to additional debt outstanding. The ratio of earnings to Bottom shutdown. Fuel and energy interchange costs deferred mortgage interest, which is one measure of the Company's in previous years reduced expense in 198 7 by $88 million. ability to issue mortgage bonds, for the calendar years 198 7, In 1986, gross fuel and energy interchange costs were $281 1986 and 1985 was 2.83 times, 2.82 times (2.83 times after million lower than in 1985 primarily due to the excellent restatement) and 1.98 times, respectively. Under the Company's performance of the Company's nuclear units. Fuel and energy mortgage, additional mortgage bonds may not be issued on the interchange costs deferred in previous years and charged to basis of property additions or cash deposits unless earnings expense in 1986 amounted to $189 million. In 1985, gross fuel before income taxes and interest during 12 consecutive calendar and energy interchange costs were $212 million lower than in months of the preceding 15 calendar months are at least two 1984 primarily due to the excellent performance of the Salem times the proforma annual interest on all mortgage bonds Generating Station. Fuel and energy interchange costs deferred outstanding and applied for. In addition, as of December 31, in previous years and charged to expense in 1985 amounted to 1987, the Company was entitled to issue approximately $874

$135 million resulting in net fuel and energy interchange million of mortgage bonds, without regard to the earnings test, expense remaining essentially the same in 1985 as in 1984. against previously retired bonds.

Other Operating and Maintenance Expenses capital Expenditures and Changes in Financial Position In 1987, non-fuel operating and maintenance expenses The Company is carrying on a construction program which is increased over 1986 primarily as the result of the full-year effect estimated to require expenditures of approximately $1.2 billion of the commercial operation of Limerick Unit No. I. The increase in 1988 and $2.5 billion from 1989 to 1991. A majority of these in non-fuel operating and maintenance expenses in 1986 over expenditures relate to the construction of the Company's second 1985 is also attributable to the commercial operation of 1055-mW nuclear generating unit at Limerick. Successful Limerick Unit No. I. The increase in operating and maintenance completion of this program is dependent on the Company's expenses in 1985 over 1984 is due to inflation, growth in utility ability to obtain external financing primarily through sales of plant and increased costs associated with the Company's debt and equity securities which are subject to market nuclear generating units and with operating the flue gas conditions and to meeting certain earnings tests. The program is scrubbing systems at the Company's two wholly owned, coal- also subject to the licensing requirements of the NRC, other burning stations. regulatory approvals in connection with the planned supplemental cooling water system for Limerick, financing Depreciation approvals by the PUC and changes due to litigation.

Increases in depreciation in each of the last three years reflect On December 18, 1987, the Company entered into an additions to plant in service. The 1987 and 1986 increases in agreement with a group of 21 banks, with Citibank as agent, for depreciation are primarily attributable to Limerick Unit No. I a $700 million revolving credit/term loan agreement. The eight-being placed into service. year facility will supply the Company with revolving credit for up to five years, followed by a three-year amortizing term loan.

Income TaXes Proceeds will provide funds for the Company's construction As a result of the above-mentioned restatement, income taxes program and general corporate purposes. An initial borrowing charged to operations and income tax credits, net, included in of$150 million was made on January 26, 1988.

other income increased in 1987 compared with restated 1986 Interim financing of the construction program is and restated 1986 decreased compared with 1985. 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 For the Years Ended December 31 1987 1986* 1985 (Thousands ofDollars)

Operating Revenues Electric $2,809,673 $2,699,365 $2,516, l 91 Gas 371,791 391,504 428,984 Total Operating Revenues 3,181,464 3,090,869 2,945,175 Operating Expenses Fuel and Energy Interchange 710,648 889,277 1,097,73 I Other Operating Expenses 695,440 6I8,257 548,609 Maintenance 306,706 274,200 262,419 Depreciation 251,934 217,640 183,049 Income Taxes 264,940 284,355 199,900 Other Tuxes 234,713 232,627 240,962 Total Operating Expenses 2,464,381 2,516,356 2,532,670 Operating Income 717,083 574,513 412,505 Other Income and Deductions Allowance for Other Funds Used Dunng Construction 77,228 76,821 176,310 capitalized Limerick Costs 66,582 172,926 Adjustment to Utility Plant Costs (368,900)

Credit (Charge) Related to Phase-In Plan 18,459 (91,880)

Income Tux Credits, Net 35,324 279,709 133,415 Other, Net 18,270 2,462 (3,464)

Total Other Income and Deductions 215,863 71,138 306,261 Income Before Interest Charges 932,946 645,651 718,766 Interest Charges Long-Term Debt 467,252 458,885 435,373 Short-Term Debt 17,243 12,512 17,721 Allowance for Borrowed Funds Used During Construction (92,155) (101,617) (257,181)

Net Interest Charges 392,340 369,780 195,913 Income from Continuing Operations 540,606 275,871 522,853 Income from Discontinued Steam Operations 1,790 1,916 2,448 Loss on Disposal of Discontinued Steam Operations (1,250)

Net Income 542,396 276,537 525,301 Preferred Stock Dividends 94,156 90,961 90,577 Earnings Applicable to Common Stock $ 448,240 $ 185,576 $ 434,724 Average Shares of Common Stock Outstanding (Thousands) 192,489 183,141 169, 784 Income from Continuing Operations Per Average Common Share (Dollars) $2.33 $1.01 $2.55 Earnings Per Average Common Share (Dollars) $2.33 $1.01 $2.56 Dividends Per Common Share (Dollars) $2.20 $2.20 $2.20

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

See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Consolidated Balance Sheets ASSETS December 31 1987 1986*

(Thousands ofDollars)

Utility Plant, at original cost Electric $ 8,760,993 $ 8,506,250 Gas 542,483 506,021 Steam 54,176 Common, used in all services 144,650 128,733 9,448,126 9,195,180 Less: Accumulated Depreciation 2,169,390 2,005,675 7,278,736 7, 189,505 Nuclear Fuel, Net 193,110 195,022 Construction Work in Progress 1,999,991 1,457,593 Leased Property, Net 287,198 281,346 Net Utility Plant 9,759,035 9, 123,466 Current Assets Cash and Temporary Cash Investments 43,081 90,716 Accounts Receivable Customers 344,560 345,432 Other 41,274 30,174 Inventories, at average cost Fossil Fuel 59,202 54,517 Materials and supplies 91,052 75,219 Deferred Energy Costs 6,220 (88,215)

Compensated Absences 56,641 50,800 Other 17,150 27,681 TOtal Current Assets 659,180 586,324 Deferred Debits and Other Assets Unrecovered Revenue, Net 217,646 20,592 Deferred Limerick Costs 285,969 202, 719 Investments 100,934 89,702 Loss on Reacquired Debt 119,052 76, 783 Other 67,920 70,734 TOtal Deferred Debits and Other Assets 791,521 460,530 TOtal $11,209,736 $I 0, I 70,320

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

See notes to financial statements.

CAPITAUZATION AND UABIUTIES December 31 1987 1986*

(Thousands ofDollars)

Capitalization Common Shareholders' Equity Common Stock $ 2,995,239 $ 2,832,967 Other Paid-In Capital 4,579 7,787 Retained Earnings 387,070 363,344 3,386,888 3,204,098 Preferred Stock Without Mandatory Redemption 572,472 572,472 With Mandatory Redemption 389,146 374,956 Long-Term Debt 4,870,733 4,286,792 Total Capitalization 9,219,239 8,438,3I8 Current Liabilities Notes Payable, Bank 102,000 Long-Term Debt Due Within One Year 80,889 I08,570 Capital Lease Obligations Due Within One Year 60,588 69,379 Accounts Payable 169,353 I82,498 Tuxes Accrued 114,738 86,I87 Deferred Income Tuxes - Energy Costs 2,679 (44,842)

Interest Accrued 121,650 90,701 Dividends Payable 36,643 39,607 Compensated Absences 56,641 50,800 Other 15,510 29,I53 Total Current Liabilities 760,691 612,053 Deferred Credits and Other Liabilities Capital Lease Obligations 226,610 211,966 Deferred Income Taxes 682,899 560,530 Unamortized Investment Tux Credits 282,311 299,707 Other 37,986 47,746 Total Deferred Credits and Other Liabilities 1,229,806 1,119,949 Total $11,209,736 $I 0, 170,320 J 2s

Philadelphia Electric Company and Subsidiary Companies Consolidated Statements of Changes In Financial Position For the Years Ended December 31 1987 1986* 1985 (Thousands ofDollars) cash Flow From Operations Income from Continuing Operations $540,606 $275,871 $522,853 Non-Cash Items Included in Income Adjustment to Utility Plant Costs 368,900 Depreciation and Amortization 287,877 280,276 183,049 Nuclear Fuel Disposal Costs 5,601 Deferred Income Taxes 171,811 (26, 143) 66,553 Investment Tax Credits, Net (16,959) 8,641 3,582 Allowance for Other Funds Used During Construction (77,228) (76,821) (176,310)

Increase In Deferred Limerick Costs (66,582) (165,699)

Increase in Unrecovered Revenue (178,595) (112,472)

Credit (Charge) Related to Phase-in Plan (18,459) 91,880 Amortization of Leased Property 49,700 65,600 60,900 Limerick Precommercial Fuel Cost 16,448 45,301 Change In:

Deferred Energy Costs (94,435) 189,870 128,240 Other Current Assets and Liabilities 2,036 39,869 45,395 Other Deferred Debits and Credits ( 11,769) (17,707) 6,948 Net Cash Flow From Continuing Operations 588,003 938,513 892,112 Net Cash Flow From Discontinued Operations (253) 3,468 4,105 Net Cash Flow From Operations 587,750 941,981 896,217 Cash Flow From Financing Issuance of Common Stock 162,272 230,978 241,041 Issuance of Preferred Stock 65,000 75,000 Retirement of Preferred Stock Including Change in Other Paid-in Capital (54,018) (17,897) (7,322)

Dividends on Preferred and Common Stock (517,353) (494,916) (464,003)

Change in Dividends Payable (2,964) (1,091) (3,098)

Expenses of Issuing Preferred and Common Stock ( 1,318) (2,005) (870)

Issuance of Long-Term Debt, Including Capital Lease Obligations 795,095 869,471 732,364 Capital Lease Obligations (55,095) (48,471) (46,364)

Retirement of Long-Term Debt (328,588) (260,829) (274,391)

Premium on Retirement of Long-Term Debt (42,747) (28,930) (45,450)

Net Borrowings Under Revolving Credit Agreements 150,000 (550,000) 150,000 Change in Short-Term Debt 102,000 (1,000) (259,000)

Capital Lease Payments (49,700) (65,600) (60,900)

Change in Escrow Funds 10,459 2,872 74,775 Payment of Other Obligations (37,719) (61,843)

Net Cash Flow From Financing 233,043 (330,137) (25,061)

Cash Flow From Investing Increase in Utility Plant, Including Leased Property (980,645) (771,998) (829,814)

Leased Property 55,095 48,471 46,364 Allowance for Other Funds Used During Construction 77,228 76,821 176,310 Cost of Property Retired and Cost of Removal (37,636) (86,332) (86,866)

Sale of Steam Plant 28,762 Transfer (to)/from Deferred Debits 25,157 (11,923)

Decrease in Other Investments (11,232) (2,032) (6,799)

Net Cash Flow From Investing (868,428) (709,913) (712,728)

Net Change in Cash Flow $(47,635) $(98,069) $158,428

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

See notes to _financial statements.

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

Balance, 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 Income Tuxes Deferred income taxes are provided for differences between General book and taxable income to the extent permitted for rate-All utility subsidiary companies of Philadelphia Electric making purposes. Investment tax credits, other than credits Company are wholly owned and are included in the resulting from contributions to employee stock ownership consolidated financial statements. Nonutility subsidiaries are plans, which do not affect income, are deferred and amortized included in investments and accounted for on the equity to income over the estimated useful life of the related utility method. Accounting policies are in accordance with those plant. Investment tax credits related to property not included in prescribed by the regulatory authorities having jurisdiction, rate base are accounted for on the flow-through method.

principally the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC). Allowance for Funds Used During Construction (AFUDC)

AFUDC is a non-cash item which is defined in the Uniform Revenues System of Accounts as "the net cost for the period of Revenues are generally recorded in the accounts upon billing to construction of borrowed funds used for construction purposes the customer. Rate increases are billed from dates authorized or and a reasonable rate on other funds when so used:' AFUDC is permitted to become effective by the regulatory authorities. recorded as a charge to Construction Work In Progress, and the Pursuant to a rate phase-in plan approved by the PUC in equivalent credits are to "Interest Charges" for the pretax cost of its electric rate order of June 27, 1986, the Company is recording borrowed funds and to "Other Income and Deductions" for the revenue equal to the full amount of the rate increase approved, remainder as the allowance for other funds. The rate used for based on kilowatthours billed to customers. Amounts included capitalizing AFUDC, which averaged 9.50% in I987, 9.55% in in revenue which will not be billed to customers within one year 1986, and 9.50% in 1985, is computed under a method are classified as Unrecovered Revenue in the accompanying prescribed by the regulatory authorities. The rate is a "net after-balance sheets (see note 3). tax rate" and the current income tax reductions applicable to the interest charges capitalized are recorded in "Other Income and Fuel Adjustment Clauses Deductions:' In addition, the PUC is permitting the Company to The Company's retail electric service provided in Pennsylvania is record a carrying charge equivalent to AFUDC on 50% of subject to a fuel adjustment clause designed to recover or Limerick common plant which is deemed associated with Unit refund 80% of the differences between the actual costs of fuel, No. 2 and the equivalent credits are to Capitalized Limerick energy interchange and purchased power and the amount of Costs. AFUDC and carrying charges on 50% of Limerick such costs billed to customers. The gas service has a purchased common plant are not included in taxable income and the gas adjustment clause designed to recover or refund the depreciation of capitalized AFUDC is not tax deductible. Under differences between the actual costs of gas sold and the amount the Tax Reform Act of I 986, AFUDC and carrying charges are of such costs included in rates. Differences between the considered tax preference items when computing a company's amounts billed to customers and the costs recoverable are alternative minimum tax.

deferred and recovered or refunded in future periods by means of prospective adjustments to rates. Generally such rates are Gas Exploration and Development Joint Ventures adjusted annually (see note 2). The Company has invested in several joint ventures for exploring and drilling for natural gas. Costs are capitalized Nuclear Fuel under the full-cost method and charged to operations Nuclear fuel is capitalized and charged to fuel expense on the commensurate with production.

unit of production method. Estimated costs of nuclear fuel disposal are charged to fuel expense as the related fuel is Gains and Losses on Reacquired Debt consumed. Gains and losses on reacquired debt are deferred and amortized to interest expense over the period permitted for rate-making Depreciation and Decommissioning purposes.

For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line 2. Shutdown of Peach Bottom Station method and, for tax purposes, generally over shorter lives on On March 31, 1987, a Nuclear Regulatory Commission (NRC) accelerated methods. Annual depreciation provisions, expressed order required the Company to shut down the Peach Bottom as a percent of average depreciable utility plant in service, were Atomic Power Station (Peach Bottom). Peach Bottom consists of approximately 2.84% in 1987, 2.95% in 1986 and 3.35% in 1985. two nuclear generating units located in York county, The estimated Company ownership portion of the Pennsylvania. These units were placed into commercial nuclear-related costs for decommissioning, totaling operation in 197 4 and are jointly owned by the Company, approximately $287,801,000 as of December 31, 1987, is being 42.49%; Public Service Electric and Gas Company, 42.49%;

charged to operations as permitted for rate-making purposes. Atlantic City Electric Company, 7.51%; and Delmarva Power and The amounts charged are deposited in an escrow account and Light Company, 7.51 %. Under the ownership agreement, the invested for funding of future costs. The Company believes that Company, as operator of Peach Bottom, is reimbursed by the any increase in the estimated costs would be recoverable other owners for costs incurred in the operation of the facility in through adjustments of rates charged to its customers. 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 management with respect to its effectiveness in preventing and Bottom Commitment to Excellence Action Plan (Plan) in resolving Peach Bottom problems and the lack of adequate response to the NRC's requirement that, prior to being permitted corporate accountability. The letter recommends (I) the to restart either unit at Peach Bottom, the Company provide to development of a full report of an investigation completed by the Administrator of Region 1 for his approval a detailed, the Company on Peach Bottom control room operator behavior, comprehensive plan and schedule to assure that the facility will (2) the modification of the Company's Peach Bottom restart plan safely operate and comply with all requirements, including so as to minimize the number of measures planned to station procedures. At a meeting held on September 14, 1987 strengthen assessment of nuclear station performance before the NRC Commissioners, the Company summarized the independent of line management and (3) major changes in the contents of the Plan and the NRC staff provided critical

• corporate culture, the acquisition of "sufficient outside talent to comments based on its review of the Plan to date. The properly upgrade the PECO nuclear situation" and corporate Commissioners expressed their dissatisfaction with the Plan as accountability for "the unsatisfactory situation that has been submitted, indicating, among other concerns, their allowed to develop over a period of years."

disagreement with the Plan's emphasis on solutions to problems During 1987, the Company charged to expense related to the plant and its personnel without adequate replacement power costs of $58 million caused by the NRC's emphasis on solutions to problems related to corporate shutdown order. The Company cannot predict when the NRC management responsibility. will permit the Company to restart Peach Bottom. The Company On November 18 and 19, 1987, the Company filed with does not believe that the plant costs of the Peach Bottom Units the NRC applications to amend its nuclear facility operating have been impaired as a result of this shutdown.

licenses (License Amendments) to reflect the proposed reorganizational changes, including on-site changes. On 3. Limerick Generating Station November 25, 1987, the Company submitted to the NRC the General Corporate Action Section (Section I) of its Plan for Restart of The Company's Limerick Unit No. I commenced commercial Peach Bottom Atomic Power Station (Plan for Restart) detailing operation on February I, I 986. Construction of the second of the its nuclear reorganization. On December 18, 1987, the NRC two nuclear units at Limerick resumed in February 1986, issued a Temporary Waiver of Compliance notifying the following a suspension of approximately two years. Unit No. 2 is Company that the NRC staff does not plan to initiate scheduled to be completed in late 1990. At December 31, 1987, enforcement action related to deviations from the Unit No. 2 was approximately 75 percent complete based on organizational structures currently described in the facilities' estimated man-hours needed to complete the Unit. As of Technical Specifications pending completion of the licensing December 31, 1987, the Company had invested approximately actions, and the Company may proceed with the $5.27 billion in the Limerick Generating Station, consisting of implementation of the organizational structures. On December $2.23 billion in Unit No. 1, $1.75 billion in Unit No. 2 and $1.29 24, 1987, the NRC notified the Company that, based upon its billion in common facilities.

preliminary review of the Company's Plan for Restart and the On June 27, 1986, in connection with the Company's Temporary Waiver of Compliance, the Company should proceed filing to recover the costs associated with Limerick Unit No. 1, with implementing the Plan for Restart. The letter states that the the PUC approved an increase in electric rates of approximately NRC's conclusions regarding the Plan for Restart are preliminary $351 million annually, and authorized a rate of return on until the NRC has assessed the effectiveness of the revised common equity of 14. 75%. The increase is being phased in over corporate structure and has completed action on the Company's three years in equal steps, followed by a three-year recovery proposed License Amendments.Section II of the Plan period, without interest, of amounts recoverable under the for Restart, which covers responses to issues and root causes phase-in plan. In accordance with its prior practice, the PUC specific to the plant site, is scheduled to be submitted in excluded 50% of common plant from rate base, but permitted February 1988. continued accrual of an amount equivalent to AFUDC on the On November 20, 1987, the Commonwealth of excluded 50%. Accordingly, the Company is capitalizing a Pennsylvania filed a petition with the NRC requesting a hearing carrying charge equivalent to AFUDC on this investment, before the NRC permits Peach Bottom to resume operations. On classified as Deferred Limerick Costs in the accompanying December 7, 1987, the Company filed a response to the petition balance sheets. The increase also reflects an exclusion from the opposing a request for a hearing. By letter dated January 13, Company's rate base of $368. 9 million due to allegedly 1988, the NRC notified the Commonwealth that it had rejected imprudent construction delays in 1976 and 1978. As indicated the petition. On January 22, 1988, the Commonwealth filed with below, the Company has appealed this exclusion. The PUC the NRC a petition to intervene and requested a hearing rejected allegations by various parties that Limerick Unit No. 1 regarding the Company's proposed License Amendments. On represents excess capacity.

February 8, 1988, the Company filed its response opposing the On December 23, 1985, following a PUC investigation, petition. the Company filed its response with the PUC accepting the On January 12, 1988, the Company received a letter from conditions of the cost containment and operating incentive the President of the Institute of Nuclear Power Operations plans set forth in the PUC's December 5, 1985 order, which (INPO) on the subject of accountability for Peach Bottom concluded that the Company could complete the construction of problems. The INPO letter recaps "some of the history that led to Limerick Unit No. 2 conditioned upon the acceptance by the and that continues to contribute to serious performance Company of such cost containment and operating incentive problems at Peach Bottom, and within the Philadelphia Electric plans, including a maximum net rate base allowance for Unit Corporate organization ... "The letter is highly critical of senior 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 are deferred under a qualified phase-in plan, without interest on Commonwealth Court of Pennsylvania. On December 16, 1987, amounts recoverable during the phase-in period. Amounts oral arguments were held and the decision of the Court is recognized as a loss are returned to income throughout the pending. period of the phase-in. SFAS 92 applies to unrecovered revenue resulting from the June 27, 1986 rate order. As a result of Recovery of Costs Pending Regulatory Proceedings adopting SFAS 92, income from continuing operations and net In accordance with the Declaratory Order issued by the PUC on income, as previously reported, were reduced by $45.2 million September 28, 1984, the Company deferred all operating costs, ($.25 per share). This amount is comprised of a loss on carrying charges on investment, fuel savings and associated unrecovered revenue of $94.4 million net of tax benefits of income tax effects of Limerick Unit No. 1 and 50% of common $46. 7 million and a return to income in 1986 of $2.5 million.

plant from February 1, 1986, the date of commercial operation, Income from continuing operations and net income for 1987 until the plant was included in rates on June 27, 1986. The were increased $9.1 million ($.05 per share) due to a return to recovery of these costs, which is not assured, will be addressed income of $18.5 million net of tax expense of $9.4 million.

by the PUC in a subsequent electric rate case. Of the $286.0 Effects of Restatement:

million of Deferred Limerick Costs, the Company has deferred in (Millions of$ except EPS) accordance with the Declaratory Order a total of$137.2 million.

1987 1986 Under SFAS 90, discussed below, ifthe Company Amount EPS Amount EPS estimates the total cost to complete Unit No. 2, including Net Income Before SFAS AFUDC, would exceed the $3.197 billion cap, an immediate 90&SFAS92 $529.6 $2.26 $566.3 $2.60 charge to expense would be recognized for the excess. The Effect on Net Income of Company estimates the cost of Limerick Unit No. 2 will not Application of SFAS 90 3.7 .02 (244.6) (1.34) exceed the $3.197 billion cap. In addition, recovery of amounts Effect on Net Income of expended for construction of Limerick Unit No. 2 and Deferred Application of SFAS 92 9.1 .05 ~) ~

Limerick Costs will be subject to the PUC's determination that Net Income $542.4 $2.33 $276.5 $1.01 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. Excess capacity Standards On July 10, 1986, the Governor of Pennsylvania signed into law Application of Statements of Financial Accounting legislation amending numerous provisions of the Pennsylvania Standards No. 90 (SFAS 90) and No. 92 (SFAS 92) Public utility Code. One provision of the legislation which As of December 31, 1987, the accounting standards applicable to affects rate regulation imposes standards on the PUC in regulated enterprises were retroactively applied by restating the determining whether new generating capacity is excess financial statements of 1986 to reflect certain provisions of the capacity. This provision requires a disallowance from rates of June 27, 1986 order of the PUC, namely the disallowance of any portion of new capacity which is determined to be excess recovery of$368.9 million in Limerick Unit No. 1 plant costs and capacity. The provisions relating to excess capacity are the non-recognition of return on unrecovered revenue under the applicable to rate cases "pending before the Commission:' The Company's phase-in plan. Office of Consumer Advocate (OCA) and various other parties In December 1986, the Financial Accounting Standards filed Petitions for Reconsideration and a Supplemental Petition Board issued SFAS 90, "Regulated Enterprises - Accounting for for Reconsideration with respect to excess capacity and other Abandonments and Disallowances of Plant Costs:* SFAS 90 issues related to the PUC's June 27, 1986 order. By orders requires the recognition of a loss, for accounting purposes, and entered July 25, 1986, the PUC denied all Petitions for a reduction in the reported cost of the plant, when a portion of Reconsideration and Supplemental Petitions for the cost of a completed plant is disallowed for rate-making Reconsideration. The PUC held that the legislation did not apply purposes. The PU C's decision to disallow the recovery of $368. 9 to the Limerick Unit No. 1 rate case. Furthermore, the PUC held million of investment in Limerick Unit No. 1 meets the criteria of that, even if the legislation did apply, Limerick Unit No. 1 did not a loss under SFAS 90. As a result of adopting SFAS 90, 1986 constitute excess capacity under the standards imposed by the income from continuing operations and net income, as legislation. On July 25, 1986, the OCA filed a Petition for Review previously reported, were reduced by $244.6 million ($1.34 per with the Commonwealth Court of Pennsylvania share). This amount is comprised of utility plant costs of $364.0 (Commonwealth Court) of the PUC'sJune 27, 1986 electric rate million ($368.9 million net of 1986 depreciation charged to order on the issue of excess capacity and on a particular rate expense of $4.9 million) and Limerick capitalized costs of $15. 7 base issue regarding whether certain utility plant was used and million, net of income tax credits of $135. l million. Income from useful. On July 28, 1986, Petitions for Review of the PU C's June continuing operations and net income for 1987 were increased 27, 1986 electric rate order were filed with the Commonwealth

$3. 7 million ($.02 per share) as a result of reduced depreciation Court by the Company appealing the exclusion of $368.9 expense of $9.8 million net of income tax expense of $6.1 million from rate base and by a group of the Company's million. The Company continues to believe that the $368.9 commercial and small industrial customers on the issue of million disallowed by the PUC was a prudent investment and excess capacity and on various rate design and cost of service has an appeal pending before the Commonwealth Court. issues. The Company is awaiting a decision from the In August 1987, FASS issued SFAS 92, "Regulated Commonwealth Court regarding the exclusion of $368.9 million Enterprises -Accounting For Phase-In Plans:* SFAS 92 requires from rate base and the applicability of excess capacity the recognition ofa loss, for accounting purposes, when costs provisions to Limerick Unit No. 1. This excess capacity law will

be applicable to Limerick Unit No. 2, which, if found to be excess 4. Retirement Benefits capacity upon becoming operational, could result in a partial or The Company and its subsidiaries have non-contributory complete disallowance from rates of the applicable plant cost. trusteed retirement plans applicable to all regular employees.

The benefits are based primarily upon employees' years of Supplemental Cooling Water service and average earnings prior to retirement. The Company's The unavailability of sufficient supplemental cooling water funding policy is to contribute at a minimum, amounts would limit or prohibit operation of the Limerick Units during sufficient to meet ERISA requirements. Approximately 70% of certain months of the year. pension costs were charged to operations and the remainder, One component of the planned supplemental cooling associated with construction labor, to the cost of new utility water system for Limerick is the Point Pleasant Pumping plant.

Project. Point Pleasant has been the subject of substantial In January 1987, the Company adopted Statement of opposition from various groups. Construction of Point Pleasant Financial Accounting Standards No. 87 (SFAS 87), "Employers has been halted at various times, most recently as a result of a Accounting for Pensions:' Pension cost for prior years was not decision by the Pennsylvania Department of Environmental restated.

Resources (POER) dated January 26, 1987, extended on Pension cost was $29,458,000 in 1987, $42,500,000 in December 30, 1987, suspending construction of certain 1986 and $46, 700,000 in 1985. Pension costs for 1987 included components pending further study. The Supreme Court of the following components:

Pennsylvania has ruled that the Company's appeal from the (Thousands)

POER decision should initially be to the Environmental Hearing 1987 Board rather than to the courts but that construction may Service cost - Benefits earned during the period $26,970 proceed during the appeal. A Petition for Reconsideration was Interest cost on projected benefit obligations 80,588 Actual return on plan assets (41,929) filed by the Company in the Supreme Court on October 9, 1987. Amortization of transition asset ( 4,539)

On February 2, 1988, in response to the Company's Petition for Amortization and deferral (31,632)

Reconsideration, the Supreme Court ordered that construction Net pension cost $29,458 on Point Pleasant may resume and stayed the order of the POER prohibiting construction of the project under the permits. Change in Net Periodic Pension Cost POER hired an expert to perform a thorough evaluation The change in net periodic pension cost to $29,458,000 for 1987 of the project. His final report, dated December 16, 1987, stated from $42,500,000 for 1986 is accounted for as follows:

that the benefits to be derived from the project by both electric (Thousands) customers and public water users in the area are substantial; (a) change in number, characteristics and salary that the project's environmental benefits outweigh the levels of participants and net actuarial gain $ (I,492) environmental harms; that a joint effort as proposed by the (b) change in plan provisions 2,873 Philadelphia Water Commissioner (the Philadelphia alternative) (c) net change prior to SFAS 87 1,381 is not likely to be administratively functional; and, that no other (d) changes to comply with SFAS 87 (24,972)

(e) change due to mid-year plan amendment 10,549 alternatives appear to be worthy of consideration at this time.

(f) net change: (c) + (d) + (e) $(13,042)

The report recommends that the Secretary (of the POER) generally support completion of Point Pleasant in preference to The funded status of the plan at December 31, 1987 is the Philadelphia alternative that might provide water for both summarized as follows:

the region and the Company. (Thousands)

The Secretary of the POER has stated that he is 1987 committed to examine all of the issues, and is prepared to Actuarial present value of accumulated plan benefit challenge the principals in an effort to reach a mutually obligations:

satisfactory accommodation. A decision by the POER whether to Vested benefit obligation $ (641,713) grant a further extension of the permits is expected in February Accumulated benefit obligation $ (650,146) 1988. The Company cannot predict when construction of the Projected benefit obligation for services rendered to date $( 1,044,612)

Point Pleasant project component will resume or when the Plan assets at fair value 1,056,358 planned supplemental cooling water system will be completed.

Funded Status 11,746 In order to provide the necessary interim supplemental Unrecognized transition asset ( 81,092) cooling water for the Company, the Delaware River Basin Unrecognized prior service costs 115,276 Commission (DRBC) has approved various Company requests Unrecognized net gain $ 45,930 for modification of restrictions on the use of the Schuylkill River for Limerick cooling water (which restrictions create the need Prepaid pension costs $ 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.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements - Continued Pension Plan data for the January 1, 1986 actuarial In addition to providing pension benefits, the Company valuations are as follows: provides certain health care and life insurance benefits for (Thousands) retired employees. Substantially all of the Company's employees 1986 may become eligible for these benefits if they reach retirement Actuarial present value of accumulated plan benefits age while still working for the Company. These benefits and Assumed rate of return 7.5% similar benefits for active employees are provided by an Vested $580,815 Non-vested 7,127 insurance company whose premiums are based on the benefits

$587,942 paid during the year. The Company recognizes the cost of Net assets available for benefits providing these benefits by charging the annual insurance

$854,917 premiums to expense. The cost of providing those benefits for approximately 3,800 retirees during the years 1987, 1986 and Plan assets consist principally of common stock, U.S.

1985 is not separable from the cost of providing benefits for government obligations and other fixed income instruments. In approximately I 1,000 active employees for the same period.

determining pension cost for 1987, the assumed long-term rate Total premiums amounted to $30.0 million, $31.6 million and of return on assets was 7.5%.

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

The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation

5. Common Stock was 8.75% at December 31, 1987 and 7.5% at December 31, At December 31, 1987, and 1986, Common Stock without par 1986. The rate of increase in future compensation levels ranged value consisted of 240,000,000 shares authorized and from 6% to 7% at December 31, 1987.

196,876,848 and 189,078,606 shares, respectively, outstanding.

Prior service cost is amortized on a straight-line basis At December 31, 1987, there were 13,526,039 shares reserved for over the average remaining service period of employees issuance under stock purchase plans.

expected to receive benefits under the plan.

6. Preferred Stock 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 Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1987 1986 1987 1986 (Thousands ofDollars)

Series (without mandatory redemption) 14.15% (c) $114.15 2-1-90 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) I 13.35 2-1-89 750,000 750,000 75,000 75,000 12.80% (c) I 12.80 5-1-88 750,000 750,000 75,000 75,000 9.50% 103.50 750,000 750,000 75,000 75,000 8.75% 101.00 650,000 650,000 65,000 65,000 7.85% 101.00 500,000 500,000 50,000 50,000 7.80% I 01.00 750,000 750,000 75,000 75,000 7.75% I 01.00 200,000 200,000 20,000 20,000 4.68% 104.00 150,000 150,000 15,000 15,000 4.4% I 12.50 274,720 274,720 27,472 27,472 4.3% 102.00 150,000 150,000 15,000 15,000 3.8% 106.00 300,000 300,000 30,000 30,000 5,724,720 5, 724,720 572,472 572,472 Series (with mandatory redemption) (d) 17.125% 300,000 30,000 15.25% I 10.00 5-1-90 400,000 450,000 40,000 45,000 14.625% (e) (e) 500,000 500,000 50,000 50,000 10% 102.22 5-1-90 132,000 176,000 13,200 17,600 9.875% 109.88 8-1-92 650,000 65,000 9.52% 103.00 332,557 375,360 33,256 37,536 9.50% I 986 Series 109.50 11-1-91 750,000 750,000 75,000 75,000 8.75% 1978 Series 104.12 5-1-88 366,800 400, 100 36,680 40,010 7.325% 103.22 480,000 510,000 48,000 51,000 7% 101.00 280,100 288, 100 28,010 28,810 3,891,457 3,749,560 $389,146 $374,956 Total Preferred Stock 9,616,177 9,474,280 $961,618 $947,428

(a) Redeemable, at the option of the Company, at the indicated evidenced by depositary receipts, each representing 1/10 of a dollar amounts per share, plus accrued dividends. share of preferred stock.

(b) Prior to the date specified, none of the shares of each series (d) Sinking fund requirements (par value) in the period indicated may be redeemed through refunding at an interest 1988-1992 are as follows: 1988-$10,740,000; cost or dividend rate which is less than the dividend rate of 1989-$12,755,700; 1990-$26,030,000; 1991-$21,630,000; such series. 1992-$25,380,000.

(c) Ownership of these series of preferred stock is (e) Not redeemable prior to May 1, 1990.

7. Long-Term Debt At December 31 series Due 1987 1986 (Thousands ofDollars)

First and Refunding Mortgage Bonds (a) 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 Total First and Refunding Mortgage Bonds 3,564,904 3,060,542 Notes Payable - Banks (b) 1988-1992 225,000 225,000 Notes Payable - Other 17% 1987 10,000 Revolving Credit and Term Loan Agreements (c) 1991-1995 150,000 Pollution Control Notes 5Yz%-13% 1997-2013 269,620 272,420 Debentures 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 4Yz% 1995 14,580 14,580 Unamortized Debt Discount and Premium, Net (29,332) (24,180)

Total Long-Term Debt 4,951,622 4,395,362 Due Within One Year (d) 80,889 108,570 Long-Term Debt included in capitalization (e) $4,870,733 $4,286,792 (a) Utility plant is subject to the lien of the Company's the conversion into the term loan. Interest on outstanding mortgage. Proceeds from the July 1987 sale of$125,000,000 borrowings is based on specific formulas selected by the principal amount of 11% series due 2016 and $100,000,000 Company involving yields on several types of debt instruments.

principal amount of 10% series due 1997 were used in part to There is an annual commitment fee of .3% on the unused repurchase $117,038,000 principal amount of 13%% series due amount. There were no borrowings under this agreement during 2013 and $80, 150,000 principal amount of 14%% debentures the year.

due 2005. In April 1987, the Company called $37,379,000 The Company also has a $400 million revolving credit and term principal amount of 18% series due 2012 and in October 1987, loan agreement with a group of banks which expires in 1991.

called $23,091,000 principal amount of 15%% series due 2010. There is an annual commitment fee of%% on the unused Premiums on the repurchases of $42, 74 7,390 were charged to amount. At December 31, 1987, $150 million was outstanding loss on reacquired debt. under this agreement.

(b) At various interest rates. (d) Long-term debt maturities in the period 1989-1992 are as (c) The Company has a $700 million revolving credit and term follows: 1989-$77,650,000; 1990-$77,503,000; loan agreement with a group of banks which is designed to 1991-$77,850,000; 1992-$252,850,000.

provide the financing for the construction program, including (e) The annualized interest on long-term debt at December 31, completion of Limerick Unit No. 2, and general corporate 1987, was $495.1 million of which $351.2 million was purposes. The revolving credit arrangement converts into a term associated with mortgage bonds and $143. 9 million was loan in November 1992. The borrowings are due in six semi- associated with other long-term debt.

annual installments with the first payment due 6 months after

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

8. Short-Term Debt 1987 1986 1985 (Thousands ofDollars)

Average Short-Term Borrowings $ 30,937 $ 233 $I27,392 Average Interest Rates, Computed on Daily Basis 7.74% 9.5I% 6.38%

Maximum Short-Term Borrowings Outstanding $205,000 $I,OOO $360,000 Average Interest Rates on Short-Term Bank Loans at December 31: 7.98% 9.50%

At December 31, 1987, the Company had borrowed $102 million generally does not have formal compensating balance under formal and informal lines of credit with banks arrangements with these banks.

aggregating approximately $261.9 million. The Company

9. Jointly Owned Electric Utility Plant The Company's ownership interests in jointly owned utility plant at December 31, 1987 were as follows:

Production Plants Transmission Plant Peach Merrill Creek Bottom Salem Keystone Conemaugh Reservoir Operator Philadelphia Public Service Pennsylvania Pennsylvania C/PUtility Various Electric Electric and Electric Electric Services Companies Company Gas company Company Company Company, Inc.

Participating Interest 42.49% 42.59% 20.99% 20.72% 44.24% 21% to43%

Company's share of: (Thousands ofDollars)

Utility Plant $538,342 $944,014 $68,819 $73,951 $77,062 Accumulated Depreciation 152,748 198,956 26,275 27,336 17,639 Construction Work In Progress 39,6I2 17,320 4,127 I,768 $93,236 The Company's participating interests are financed with accounted for as if such participating interests were wholly Company funds and, when placed in service, all operations are owned facilities.

IO. Income i:axes (Continuing Operations) 1987 1986* 1985 (Thousands ofDollars)

Included in Operating Income:

Federal Current $ 74,185 $1 I4,496 $105, 165 Deferred 186,390 110,178 60,061 Investment Tax Credits, Net (16,960) 29,041 3,582 State Current 9,386 30, 134 24,600 Deferred 11,939 506 6,492 Included in Other Income and Deductions:

Federal Current 1;845 (101,566) (107,542)

Deferred (27,730) (121,303) (2,038)

Investment Tax Credits, Net (20,400)

State Current (10,650) (19,057) (23,348)

Deferred 1,211 (17,383) (487)

Total $229,616 $4,646 $ 66,485

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

Investment tax credits (ITC) and income tax credits resulting Minimum Tax (AMT), calculated at a 20% rate on AMT taxable from contributions to employee stock ownership plans reduced income which includes certain preferences and adjustments.

Federal income taxes currently payable by $20 million in I987, The Company's current tax liability for 1987 was determined

$43 million in 1986 and $12 million in 1985. Under the Tax under the AMT method resulting in an $83 million tax credit to Reform Act of 1986, ITC has been repealed effective January I, be utilized in future years in which regular tax liability exceeds 1986 with the exception of transition property. The Company the AMT liability.

believes that Limerick Unit No. 2 qualifies as transition property For a number of years the Company has used accelerated eligible for ITC. depreciation for income tax purposes and straight-line Approximately $210 million of additional business depreciation for financial reporting purposes. Deferred taxes credits generated from 1983 through 1987 have not been utilized were recorded only on those timing differences recognized for due to limitations based on taxable income. These credits, rate-making. The cumulative net amount of such timing which expire between 1998 and 2002, may be used to reduce differences for which deferred taxes were not recorded was Federal income taxes in future years; however, these credits were approximately $600 million at December 31, 198 7. Since the reduced by approximately $4 7 million in 1987 and may be Company expects to charge customers for taxes when the reduced by a similar amount in 1988 under the provisions of the timing differences reverse, the tax effect of such timing Tax Reform Act of 1986. differences is not recorded currently.

The Tax Reform Act of 1986 created a new Alternative Provisions for deferred income taxes on continuing operations consist of the tax effects of the following timing differences:

1987 1986* 1985 (Thousands ofDollars)

Depreciation and Amortization $ 93,075 $127,278 $ 34,297 Nuclear Waste Disposal Costs (5,932)

Deferred Energy Costs 45,566 (95,383) (65,393)

Precommercial Operation of Limerick Unit No. 1 10,210 97,867 Deferred Limerick Costs 11,004 Net Loss on Reacquired Debt 16,668 14,305 24,592 Unrecovered Revenue 77,583 55,040 Alternative Minimum Tax (82,963)

Adoption of SFAS 90 and SFAS 92 23,533 (161,421)

Other (1,652) 10,965 (21,403)

Total $171,810 $(28,002) $ 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 $540,606 $275,871 $522,853 Total Income Tax Provisions 229,616 4,646 66,485 Income Before Income Taxes 770,222 280,517 589,338 Deduct: Allowance for Funds Used During Construction 169,383 178,438 433,491 Limerick Carrying Charges 66,582 172,926 Adjusted Income Before Income Taxes $534,257 $(70,847) $155,847 Income Taxes on Above at Federal Statutory Rate of 39.95% in 1987 and 46% in 1986 and 1985 $213,436 $(32,590) $71,689 Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized 23,920 19,230 7,062 Adoption of SFAS 90 and SFAS 92 (9,784) 27,870 Unbilled Revenue 12,137 State Income Taxes, Net of Federal Income Tax Benefits 9,151 6,620 3,919 Amortization of Investment Tax Credits (13,586) (13,468) (8,250)

Other, Net (5,658) (3,016) (7,935)

Total income tax provisions $229,616 $ 4,646 $ 66,485 Provision for Income Taxes as a Percent of:

Income Before Income Taxes 29.8% 1.7% 11.3%

Adjusted Income Before Income Taxes 43.0% 42.7%

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

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

11. TaXes, Other Than Income 1987 1986 1985 (Thousands ofDollars)

Gross Receipts $134,091 $132,468 $128,346 Capital Stock 32,400 25,511 28,091 Realty 37,098 49, 110 62,222 Payroll 25,978 23,594 21,047 Other 5,146 1,944 1,256 Total $234,713 $232,627 $240,962

12. Investments At December 31 1987 1986 (Thousands ofDollars)

Gas Exploration and Development Joint Ventures $ 37,158 $38,299 Real Estate Developments and Other Ventures 19,155 17,088 Non-Utility Property 11,525 13,477 Escrow Deposits for Decommissioning Nuclear Plants 31,521 20,278 Other Deposits 1,575 560 Total $100,934 $89,702 13.Leases Leased property included in Utility Plant at December 31 1987 1986 (Thousands ofDollars)

Nuclear Fuel $500,733 $484,536 Electric Plant 10,452 10,953 Common Plant 110 156 Gross Leased Property 511,295 495,645 Accumulated Amortization (224,097) (214,299)

Net Leased Property $287,198 $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 Capital Leases Operating Leases Total (Thousands ofDollars) 1988 $ 83,288 $ 56,376 $139,664 1989 87,157 57,320 144,477 1990 82,915 57,086 140,001 1991 46,142 56,350 102,492 1992 34,774 55,585 90,359 Remaining years 12,924 132,621 145,545 Total Minimum Future Lease Payments $347,200 $415,338 $762,538 Imputed Interest (rates ranging from 6.5% to I 7%) (60,002)

Present Value of Net Minimum Future Lease Payments $287, 198 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 1987 1986* 1985 (Thousands of Dollars)

Electric Operations Operating Revenues $2,809,673 $ 2,699,365 $ 2,516,191 Operating Expenses, excluding depreciation 1,895,104 1,961,429 1,974,222 Depreciation 234,925 201,773 168,208 Operating Income $ 679,644 $ 536, 163 $ 373,761 Utility Plant Additions $ 908,799 $ 753,232 $ 793,195 Gas Operations Operating Revenues $ 371,791 $ 391,504 $ 428,984 Operating Expenses, excluding depreciation 317,343 337,287 375,399 Depreciation 17,009 I5,867 14,841 Operating Income $ 37,439 $ 38,350 $ 38,744 Utility Plant Additions $ 44,328 $ 35,053 $ 32,896 Identifiable Assets (**)

Electric $9,178,435 $ 8,341,559 $ 8,885,738 Gas 449,986 416,824 407,375 Nonallocable Assets 1,581,315 1,411,937 718,732 Total Assets $11,209,736 $10, 170,320 $10,011,845

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

• • 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 ofDollars) (Dollars)

March 31 $214,778 $124,446 $169,500 $166,261 $145,614 $143,699 $.77 $.81 Adjustment 943 2,510 2,510 .01 March 31 Adjusted 215,721 124,446 172,010 166,261 148,124 143,699 .78 .81 June 30 157,782 92, 179 108,887 128,213 85,959 105,964 .45 .58 Adjustment 942 3,428 3,078 (289,771) 3,078 (289,771) .02 ( 1.59)

June 30 Adjusted 158,724 95,607 111,965 (161,558) 89,037 (183,807) .47 (I.OJ)

September 30 190,315 183,081 141,312 168,705 117,631 146,441 .61 .79 Adjustment 943 3,611 3,511 ( 2,297) 3,511 ( 2,297) .02 ( .01)

September 30 Adjusted 191,258 186,692 144,823 166,408 121,142 144, 144 .63 .78 December 31 151,380 165,304 113,598 103,141 89,937 79,255 .46 .42 Adjustment 2,464 2,285 2,285 .01 December 31 Adjusted $151,380 $167,768 $113,598 $105,426 $89,937 $81,540 $.46 $.43 1986 first quarter results include charges of approximately$ 13.1 SFAS 90 and SFAS 92. 1987 second, third and fourth quarter million (net of related incomes taxes) resulting from the PUC's results include charges to income of approximately $7 .6 million, denial of recovery of approximately $9. 75 million of $13.9 million and $10.5 million (net of related income taxes),

replacement power costs and $16 million of Salem Unit No. 2 respectively, resulting from the charge to expense of fuel savings guaranteed to customers which were not realized. replacement power costs caused by the NRC's shutdown of 1986 second quarter results include a charge to income of Peach Bottom.

approximately $289.8 million resulting from the adoption of

16. Commitments and Contingencies The Company maintains property insurance, including The Company has incurred substantial commitments in contamination coverage, for loss or damage to its nuclear connection with its construction program. Construction facilities. Although it is impossible to determine the total expenditures are estimated to be $1.2 billion for 1988 and $2.5 amount of the loss that may result from an occurrence at these billion for 1989-1991. These estimates are reviewed and revised facilities, the Company maintains the maximum amount of periodically to reflect changes in economic conditions, revised insurance presently available, $1.4 billion for each station.

load forecasts and other appropriate factors. Facilities under Under the terms of the various insurance agreements, the construction and to be constructed, particularly Limerick Company could be assessed up to $34 million for losses Generating Station and associated facilities, will require permits incurred at any plants insured by the insurance companies.

and licenses which the Company has no assurance will be The Company is a member of an industry mutual granted. insurance company which provides replacement power cost The current Price-Anderson Act places a "Limit of insurance in the event of a major outage at a nuclear station.

Liability" of $720 million for claims that could arise from an The premium for this coverage is subject to an assessment for incident involving any licensed nuclear facility in the nation. All adverse loss experience. The Company's maximum share of any nuclear utilities, including the Company, have covered this assessment is $16 million.

exposure through a combination of private insurance and The Company is subject to assessments under its mandatory participation in a secondary financial protection directors' and officers' liability and general liability insurance pool. In the event of a nuclear incident the Company could be policies. The maximum 1987 insurance premium assessments assessed up to $13.5 million per incident, involving any licensed under these policies could be approximately $7. I million.

nuclear facility in the nation, with a maximum amount of$27 In April 1987, a shareholder commenced a derivative law million in any one year. The Price-Anderson Act expired in suit, purportedly on behalf of the Company, against John H.

August 198 7. Bills to amend the Price-Anderson Act, including Austin, Jr., James L. Everett, and Joseph W. Gallagher, the then proposals to substantially modify or eliminate the limitation on President and Chief Operating Officer, Chairman of the Board liability provisions, have been introduced in Congress. The and Chief Executive Officer, and Vice President, Nuclear House of Representatives has passed a bill which significantly Operations, respectively, of the Company. The complaint alleges increases the limit of liability. No such bill has that the defendants committed mismanagement and acted yet been approved by the Senate; however, Senate action is recklessly, negligently, in violation of the Pennsylvania expected during 1988. In the interim, the Company is Directors' Liability Act and in breach of their fiduciary duty to required to operate under the provisions of the expired Price- the Company and its shareholders in connection with the events Anderson Act.

underlying the NRC-mandated shutdown of Peach Bottom. The demand and the allegations contained in the three complaints complaint seeks an award of damages to the Company; an mentioned above, and to report its findings and award of costs to the plaintiff, including fees of attorneys and recommendations to the entire Board of Directors for experts; and an order requiring the Company to "institute and determination whether the prosecution of the demand and the enforce an adequate safety and monitoring program" at Peach maintenance of the lawsuits are in the best interests of the Bottom. 1\No additional derivative law suits were commenced (in Company and its shareholders. The Special Committee's October and November 1987, respectively) by three other investigation is ongoing.

shareholders, purportedly on behalf of the Company, against the In December 1981, the Company sold the federal income same three defendants. The complaints in these actions contain tax benefits associated with Unit No. 2 of the Salem Generating similar allegations and seek the same relief as the first Station for $53. 7 million in a safe harbor lease transaction.

complaint, as well as the voiding of an amendment to the Under the sale agreement, the Company agreed to indemnify Company's By-Laws, adopted at the 1987 Annual Meeting of the purchaser against the loss of the tax benefits resulting from Shareholders, which limited the liability of the Company's any Internal Revenue Service (IRS) claims which render the sale directors for monetary damages and expanded the Company's invalid. The Company's indemnification obligation also includes indemnification of directors, officers and other persons. The the payment of interest, at prime rates, on the indemnification Company has filed preliminary objections to the three amount and all associated costs of contesting an IRS challenge.

complaints, seeking their dismissal. The Company has been advised that the IRS has asserted, in Also, in April 1987, another shareholder, by his auditing the purchaser, that the sale was invalid. Although the attorneys, demanded that the Board of Directors cause the purchaser has protested the IRS claims, the Company has no Company to commence legal action to recover damages against assurance that the protest will be successsful. If the IRS claims those officers and directors who were responsible for the against the purchaser are upheld, compliance with the conditions which resulted in the NRC-mandated shutdown of indemnification provisions of the agreement could result in a Peach Bottom. The Board of Directors has created a Special significant charge to income.

Committee of three independent directors to investigate this

17. Accounting Under Statement of Financial Accounting this statement by 1989. The provisions of the statement may be Standards No. 96 (SFAS 96) applied cumulatively in the year of adoption or may be applied In December 1987, the Financial Accounting Standards Board retroactively by restating previously issued financial statements.

issued SFAS 96, l\ccounting for Income Taxes", which requires The effect of adoption of this statement on the Company's an asset and liability approach for financial accounting and financial statements has not been determined.

reporting for income taxes. The Company is required to adopt 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 ofDollars)

For the Year Ended 1987 1986* 1985 1984 1983 1982 1977 Operating Revenues (for details see pages 42 and 43) $3,181.5 $3,090.9 $2,945.2 $2,898.7 $2,524.9 $2,571.5 $1,352.5 Operating Expenses Fuel and Energy Interchange 710.6 889.3 1,097.8 1,069.9 939.5 1,079.0 548.2 Labor 437.6 417.2 370.8 339.6 311.2 285.4 179.2 Other Materials, Supplies and Services 564.6 475.2 440. l 413.8 342.3 307.4 112.8 Total Operation and Maintenance 1,712.8 1.781.7 1,908. 7 1,823.3 1,593.0 1,671.8 840.2 Depreciation 251.9 2I 7.7 I83.0 176.4 I63.4 I42.I I06. l Taxes 499.7 5I 7.0 440.9 449.I 376.8 370.8 I86.7 Total Operating Expenses 2,464.4 2,5I6.4 2,532.6 2,448.8 2,I33.2 2,I84.7 I,I33.0 Operating Income 717.1 574.5 4I2.6 449.9 39I.7 386.8 2I9.5 Other Income and Deductions Allowance for Other Funds Used During Construction 11.2 76.8 I 76.3 134.5 I08.I 65.7 36.2 Capitalized Limerick Costs 66.6 I 72.9 Adjustment to Utility Plant Costs (368.9)

Credit (Charge) Related to Phase-In Plan 18.4 (91.8)

Income Tax Credits, Net 35.3 279.7 I33.4 I 16.4 87.9 75.8 25.3 Other, Net 18.3 2.4 (3.5) 0.2 (3.I) (0.7) 3.5 Total Other Income and Deductions 215.8 71.I 306.2 251. I I92.9 I40.8 65.0 Income Before Interest Charges 932.9 645.6 718.8 701.0 584.6 527.6 284.5 Interest Charges Long-Term Debt 467.3 458.9 435.4 402.5 330.2 308.9 I 61.0 Short-Term Debt 17.2 I2.5 I 7.7 30.9 35.2 32.0 2.6 Allowance for Borrowed Funds Used During Construction (92.2) ( IOl.6) (257.2) (220.4) (I67.9) (I47.6) (49.8)

Net Interest Charges 392.3 369.8 I95.9 .213.0 I97.5 I93.3 I I3.8 Income From Continuing Operations 540.6 275.8 522.9 488.0 387.I 334.3 I 70.7 Income From Discontinued Operations 1.8 1.9 2.4 4.4 2.0 1.9 2.7 Loss on Disposal of Discontinued Operations (1.2)

Net Income 542.4 276.5 525.3 492.4 389.I 336.2 I 73.4 Preferred Stock Dividends 94.2 90.9 90.6 82.7 67.4 57.6 40.7 Earnings Applicable to Common Stock 448.2 I85.6 434.7 409.7 321.7 278.6 I32.7 Dividends on Common Stock 423.3 403.5 373.5 334.3 283.6 240.5 I24.9 Earnings Retained $ 24.9 $ (2I7.9) $ 61.2 $ 75.4 $ 38.I $ 38.1 $ 7.8 Income From Continuing Operations Per Average Common Share (Dollars) $ 2.33 $ 1.0 I $ 2.55 $ 2.67 $ 2.39 $ 2.38 $ 1.84 Earnings Per Average Common Share (Dollars) $ 2.33 $  !.OI $ 2.56 $ 2.70 $ 2.40 $ 2.39 $ 1.87 Dividends per Common Share (Dollars) $ 2.20 $ 2.20 $ 2.20 $ 2.20 $ 2.12 $ 2.06 $ !.76 Common Stock Equity (Per Share) $ 17.20 $ I6.95 $ I 7.97 $ I 7.81 $ I 7.99 $ I 7.93 $ 19.26 Average Shares of Common Stock Outstanding (Millions) 192.5 183.I I69.8 I51.8 I33.9 I I6.5 70.8

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

SUMMARY

OF FINANCIAL CONDITION (Millions ofDollars)

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 ofSFAS 90 and SFAS 92.

Philadelphia Electric Company and Subsidiary Companies Operating Statistics ELECTRIC OPERATIONS 1987 1986* 1985 1984 1983 1982 1977 Output (Millions ofKilowatthours)

Steam 9,835 7,864 9,455 I I,085 I0,457 8,598 I I,468 Nuclear 11,853 17,125 8,359 6,462 5,520 10,743 4,596 Hydraulic 1,590 1,848 1,484 2,085 1,739 1,581 1,997 Pumped Storage Output 1,251 1,176 1,235 l,IOO 979 1,126 1,223 Pumped Storage Input ( 1,787) (1,661) (1,754) (1,579) (1,427) (1,665) (1,761)

Purchase and Net Interchange 9,806 4,258 10,252 I I,975 12, 181 1 I,I20 9,759 Internal Combustion 232 269 I78 425 491 178 847 Other 382 I,254 716 Total Electric Output 32,780 31,261 30,463 31,553 29,940 31,681 28,845 Sales (Millions ofKilowatthours)

Residential 9,441 8,900 8,440 8,515 8,467 7,877 8, I 10 Small Commercial and Industrial 4,341 4,022 3,731 3,543 3,284 3,142 2,825 Large Commercial and Industrial 15,789 15,068 14,920 14,88I I 4,4 78 14, 178 I4,912 All Other 974 993 1,044 I,061 I,003 I,012 1,350 Service Territory 30,545 28,983 28, 135 28,000 27,232 26,209 27,I97 Jersey Central Power and Light (Salem Unit No. 2) 1,395 346 3,352 Total Electric Sales 30,545 28,983 28,135 29,395 27,578 29,561 27, 197 Number of Customers, December 31 Residential 1,280,297 1,263,465 1,245,481 1,230,883 I,2I 7,635 1,206,944 I, 148, 17I Small Commercial and Industrial 131,279 127,797 124,7I9 121,676 1 I9,292 118,407 115,883 Large Commercial and Industrial 4,589 4,668 4,881 5, 100 5,437 5,6I6 5,772 All Other 771 763 773 75I 75I 762 2,38I Total Electric Customers 1,416,936 I,396,693 I,375,854 1,358,410 1,343, I 15 l,33I,729 1,272,207 Operating Revenues (Millions ofDollars)

Residential $1,092.6 $1,023.6 $923.9 $854.9 $744.0 $694.4 $427.6 Small Commercial and Industrial 471.7 437.0 388.7 360.2 3I6.6 3I0.6 168.4 Large Commercial and Industrial 1,103.3 l,I03.3 1,061.8 1,008.5 877.4 922.3 5I3.4 All Other 142.l I35.5 I41.8 145.I I39.4 I 18.3 68.3 Service Territory 2,809.7 2,699.4 2,5I6.2 2,368.7 2,077.4 2,045.6 1,177.7 Jersey Central Power & Light (Salem Unit No. 2) 67.0 30.5 135.4 Total Electric Revenues $2,809.7 $2,699.4 $2,5I6.2 $2,435.7 $2,107.9 $2,181.0 $1,177.7 Operating Expenses (Millions ofDollars)

Operating expenses excluding depreciation $1,895.1 $1,961.4 $1,974.2 $1,858.5 $1,592.0 $1,688.4 $881.2 Depreciation 234.9 201.8 I68.2 163.0 I50.9 I30.2 97.9 .

Total Operating Expenses $2,130.0 $2, 163.2 $2, 142.4 $2,021.5 $I,742.9 $1,818.6 $979.1 Electric Operating Income (Millions of Dollars) $ 679.7 $ 536.2 $ 373.8 $ 414.2 $ 365.0 $ 362.4 $I98.6 Average Use per Residential Customer (kilowatthours)

Without Electric Heating 6,431 6,177 6,034 6,I60 6,319 5,875 6,584 With Electric Heating 16,824 16,661 15,923 17,293 I6,523 I6,813 23,593 Total 7,427 7,097 6,820 6,960 6,990 6,544 7,097 Electric Peak Load, Demand (thousands ofkWs) 6,547 6,134 6,034 5,925 5,879 5,691 5,888 Net Electric Generating Capacity -

Year-End Summer rating (thousands ofkWs) 7,762 7,870 7,599 7,765 7,974 8,006 8, 198 Cost of Fuel per Million Btu $1.35 $1. I8 $1.72 $2.22 $2.25 $1.57 $1.40 Btu per Net Kilowatthour Generated 10,879 10,844 10,843 10,920 I0,906 I0,918 10,882

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

421

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 ofDollars)

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 ofDollars)

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 ofDollars) $ 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 II 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 Annual Meeting Most PE securities are listed on the New York Stock Exchange The Annual Meeting of the Shareholders of the Company will be and the Philadelphia Stock Exchange. Philadelphia Electric held on April I3, I 988, at I 0:30 A.M. at the Pennsylvania Hall Power Company Debentures are listed on the Philadelphia Stock * *Auditorium, Philadelphia Civic Center, 34th Street & Civic Center Exchange. - Boulevard, Philadelphia, PA.

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

The Company has paid dividends on its common stock Notice of the meeting, proxy statement, and proxy will be continually since I902 ..The Board of Directors normally mailed under separate cover. Prompt return of the proxies will considers common stock dividends for payment in March, June, be appreciated.

September and December.

The Company estimates that the $2.20 per share dividend paid Form 10-K to common shareholders in I987 is fully taxable as dividend - Form lQcK, the annual report filed with the Securities and income for Federal income tax purposes. _ Exchange Commission, is available; withou(charge, to shareholders upon written request to Philadelphia Electric Dividend Reinvestment and Stock Purchase Plan Company, 230I Market Street, P.O. Box 8699, Philadelphia, PA Shareholders may use their dividends to purchase additional I9101, Attn: Financial Division, S21-l. -

shares of common stock through the Company's Dividend Reinvestment and Stock Purchase Plan. Philadelphia Electric Shareholders pays all brokerage and service fees. Customers of the Company The Company has 294, 733 shareholders of record of common who* are not shareholders may enroll in the plan by making a stock, a 4% increase in 5 years.

one-time purchase of common stock directly from the Company.

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

• company.

Registrars: Mellon_ Bank (Ea~t) N.A.

Over 35% of the Company's common-shareholders were Four Mellon Bank Center participants. In I987, they invested more than $103million Philadelphia, PA 19102 *

. through the Plan, including cash payments. Information concerning this Plan may be obtained from D. P. Scott, Treasurer, Morgan Shareholders Services Trust co.

Philadelphfa Electric Company, 230I Market Street, P.0. Box

• 30 w. Broadway, m. NY 10015

-8699, Philadelphia, PA I9101. -

Transfer*

• Agents: Philadelphia Electric Company Comments Welcomed 2301 Market St., Phila., PA I9101. * :

The Company always is pleased to answer questions and provide information. Please address your comments to Mrs. L. s. Binder, Morgan Shareholders Services l:rust Co.

Secretary, Philadelphia Electric Company, 230I Market Street, 30 W. Broadway, m, NY 10015

• P.O. Box 8699, Philadelphia, PA 19101. PHII.~ADELPH!A ELECTRIC COMPANY.,..- First and Refunding Inquiries relating to shareholder accounting records, stock Mortgage Bonds -

transfer and change pf address should be directed to Trustee: Fidelity Bank,_ National Association Philadelphia Electric Company, 230I Market Street, P.O. Box Broad & Walnut Sts., P.hila:, PA 19109 8699, Philadeiphia, PA *I9IOI, Attn: Stock Transfer Section, s6-4.

- NewYork Agent: Morgan Guaranty Trust Co. of NY Toll-Free Telephone Line 30 w. Broadway, m, NY 100 I5 Toll-free telephone lines are avail_able to the Company's PHILADELPHIA ELECTRIC COMPANY - Debentures shareholders for inquiries concerning their stock ownership.

PHILADELPHIA ELECTRIC POWER COMPANY (A Subsidiary) -

When calling from putside of Pennsylvania, call Debentures 1-800-223-7326. From within Pennsylvania, call Trustee: The Philadelphia National Bank,

. I-800-242-7326. Local Philadelphia calls should be made Broad & Chestnut Sts., Phila., PA 19101 to 84I-5795.

New York Agent: Irving Trust Co.

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

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