ML18095B017

1988 Annual Rept

ML18095B017
Person / Time
Site:	Peach Bottom, Limerick, 05000000
Issue date:	12/31/1988
From:	Bradley E PECO ENERGY CO., (FORMERLY PHILADELPHIA ELECTRIC
To:	Murley T NRC OFFICE OF INFORMATION RESOURCES MANAGEMENT (IRM), Office of Nuclear Reactor Regulation
References
NUDOCS 8904210133
Download: ML18095B017 (52)

Text

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• I one Cover:

Various newspaper headlines of 1988 reflect both the recent peak demands and the Increased.

economic activity throughout the service territory that wlll require the additional energy capacity that generating plants such as Limerick (opposite) and Peach Bottom wlll provide.

Philadelphia Electric Company Annual Report 1988 Financial Highlights Operating Revenues Operating Expenses Taxes Charged to Operations Operating Income Earnings Applicable to Common Stock Earnings per Average Common Share Cash Dividends Paid per Common Share Average Shares of Common Stock Outstanding Construction Expenditures Total Assets Contents Letter to Shareholders Report of 1988 Operations Financial Statements Directors Officers Shareholder Information EARNINGS AND DIVIDENDS PER SHARE Dollars

.50 1.00 1.50 Earnings Per Share

- '.'-:_ - 1 Dividends 2.00 2.50 3.00 1988

$3,228,712,000

$2,486, I I 7,000

$444,374,000

$742,595,000

$468,765,000

$2.33

$2.20 201,517,000

$I,08 I,577,000

$I I,862,852,000 1987

% Change

$3,181,464,000 1%

$2,464,381,000 I%

$499,653,000

(//%)

$717,083,000 4%

$448,240,000 5%

$2.33

$2.20 192,489,000

$1,037,500,000

$11,209,736,000 5%

4%

6%

two five nineteen forty-five forty-eight forty-nine CONSTRUCT/ON EXPENDITURES Million Dollars

=

200 400 External Sources Internal Sources 600 800 1000 1200 J

two three To Our Shareholders In 1988, Philadelphia Electric Company gained substantial momentum in the process of recovering from the 1987 shutdown of our Peach Bottom Atomic Power Station. A~er an absence of two years, I was deeply honored to be invited by your Board of Directors to return to the Company to help provide leadership for this difficult, complex and continuing effort and to help achieve new levels of excellence, not only in our nuclear operations, but in all our activities.

Although much remains to be done, I am pleased to report that your management was able to accomplish a number of important objectives in 1988.

I. Despite the significant costs of the Peach Bottom shutdown, total common stock earnings reached a record $469 million in 1988, an increase of 5% over 1987 earnings. However, with 5% more shares outstanding, earnings per share remained the same -

$2.33.

2. The dividend was maintained at $2.20 per share. The market value improved from $18.00 per share in the first quarter to $20.00 per share at year-end, providing a dividend yield of 11%.

3. Costs have been reduced in key areas of the Company's operations, with a large share coming from restrictions on overtime, reduction in management salaries and directors' fees, debt refundings and a reduction in contract forces.

4. Although we have changed our estimate of when Peach Bottom will be ready for restart until the second quarter of 1989 to assure a successful restart and power ascension program, we completed all 138 initially scheduled restart readiness items by September 1988.

5. Construction of Limerick Unit No. 2 continues to be a success story. We now anticipate loading fuel in the summer of 1989 and achieving commercial operation as early as February 1990, which would be about six months ahead of schedule and which would result in a final cost of Unit No. 2 about $200 million under the cost cap established by the Pennsylvania Public Utility Commission.

6. There have been favorable responses to our extensive efforts to establish better communications with customers, regulatory agencies, governmental representatives and the media.

7. Despite the unavailability of Peach Bottom, our electric system satisfactorily met the record demands imposed upon it during the unprecedented hot weather of the past summer due to excellent availability of our other generation. Our customers' hourly demand reached a new peak of 6,826 megawatts on August 15, an increase of 4% over the previous record established in 1987.

8. While our energy sales got a boost from favorable weather, solid economic growth in the service territory also provided real growth in our electric and gas businesses. Both electric and gas sales were at record levels as electric sales rose 5.5% and gas deliveries improved by 7.6%.

9. Your Board of Directors was strengthened with the addition of Susan W Catherwood, Chairman, Board of Joseph F. Paquette, Jr., 54, is Chairman of the Board, President and Chief Executive Officer of the Company.

He has 31 years of service with the Company. He was the Company~

Vice President -

Finance and Ac-counting for eight years prior to join-ing Consumers Power Company in Michigan in 1986.

He rejoined PE In March 1988.

Overseers, the University Museum, University of Pennsylvania and Ronald Rubin, General Partner, Richard I. Rubin & Company, a leading nation-wide real estate development firm. Admiral James D.

Watkins, United States Navy (Retired), former Chief of Naval Operations, joined the Board in June, but resigned on January 12, 1989, upon his appointment as Secretary of the U.S. Department of Energy.

I 0. Our management team was also strengthened by the addition of three seasoned executives from outside the Company. Corbin A. McNeil/, Jr. joined the Company in March as Executive Vice President for Nuclear Operations; James W. Durham became Senior Vice President, Legal and General Counsel in October; and Joseph A. Carter became Vice President of Personnel and Industrial Relations in September.

In 1989, our top priorities will be to return both units at Peach Bottom to service; complete construction, load fuel and begin power testing of Limerick Unit No. 2; achieve earnings at least adequate to preserve our common stock dividend and lay the foundation for future economic success. To accomplish this, we will continue to emphasize cost control; to set and closely monitor performance objectives and to measure and improve the quality and quantity of our work.

This summer we plan to file an electric rate increase request with the Pennsylvania Public Utility Commission to seek recovery of the costs of Limerick Unit No. 2. The proceeding should conclude by mid-1990, and the decision will have a major impact on the Company's

• future financial condition. I believe we have a solid basis to justify Limerick Unit No. 2 as a valuable asset for our service territory and the Commonwealth of Pennsylvania's economic development efforts.

I am optimistic about the future of this Company. With a solid capacity base to serve the expanding needs of our service territory, an excellent record of service reliability, ready access to the capital markets, a strengthened management team, and dedicated, skilled employees, we will be ready to respond to the challenges and opportunities that lie ahead.

Joseph F. Paquette, Jr.

Chairman of the Board, President and Chief Executive Officer February I, 1989

I.

four *.

five I 9 8 8 F i n a n* c i a I R e s u I t s

• • Earnings Improve

. Tot~I earnlngs for co~rrion st~i::k improved to CJ record $469 million In 1988, a 5%

increase from th.e $448 million earned in_ 198!. However, becau~e the average number of shares outstanding also increased by 5% to '202 million shares, earnings pe; shqre of $2.33 were the same as in 1987.

Earnings growth was prim'!rily due to.higher ~lf!ctric sales and the Company's continuing co~t. reduction. efforts which offset tlie e~rnings _penalty* ?f th~

.Peach Boit~m.*_shutdown. Strict cost controls reduced fossil and other operating_ exp~nses.by

• approximate1~*$22 million. Replacement power ~osts*a~t~ibutable to t~e Peach Bottom shutdown whi~h.w~re charged against earnings amount~d to $61 million fot 1988 and have totalled $119

. miil~o~*sinc~ the sh~tdo;..",n began* on March.31, 1987. Eff~ctiv~ Niarch *l,.198B, ~he Pennsyi~ania

. *Public Utility _Commissi!'n (PUC)* di~~~ted the Company ~o est~blish **temporary ~l~ctric rates

~hi ch. reduced re~enue by. approximat~ly $30 million.. per year, refl~cting the d_isallowance of: ~

.,.. return on the Ci:>mpany's common equity, investment in Peach Bottom. The reduction iri cqmmon

~

stock earnings per share assot:idted. with both the replacement power costs ~nd 'the equity retur'!

penalty was approximately.254.for 1988, versus 174-in 1987..

Sa8e Records Established Electric and. gas sales benefitE!d f~om a *strong.. regioncil economy, additional customers and favorabl~ weather. Total electric sales increa~ed t~ a recori32 billion kilowat~-

• hou~s *. up 5.5% over.1987.iev~ls.- with. about. one-half of th~. lncr;ase. r~sulting f~om ecori~mi~ *.

growtli. Electric residential and house ~e~ting ~ales we~e 7% above* l~st year with 16,$00: new

~

customers. Commercial and industrial sales were 5% higher with a 3, 900 customer increase. Total gas.sales were up 7.6% t~ Bl billlon cubic fe~t. r!!flectirig i~creases in virtually al! class~~ of service

• . and 7,400 additio~pl customers.

. * ~

Re_c~rd Power Use : The s~mmer of *;988 poste~ ;e~o~d-breaki~g ten:iperatures, *r~a~h:ing 90,degrees or.

higher on 45 days. This, coupled with continuing economic groWth, resulted in record electric

. demands by company cu~tomers~ New maximum hourly ~rid.d~1iy outputs were ~et f~r.;,~ekdays *.

sat~_rdays and Sundays. A new rec~rd houri~ ~e",,.a~d of 6,826 megawatts occurr~d on August ts

, despite a 5% vol~age reduction and load* ci.irtailments by interruptible customers. Without these

• :imposed c~~strail)ts, th~ esti~ated.. peak.would.have been. 7,114 rneg'!w~t~s. a level w_hicli was-.

foreca_st for the year 200i In addition, a record winter peak of'5;560 megawatts w~s ~stablished 4

on December 12. The shutdown of ~eac*h Bottom strained our supply system, but the remaining** *.

. *generat!~n. together with.all transmission a'!d d_istribution syste~_s.-* peiform~d very well during.

th~ summer. These higl]er demands. will require a revision.of our foreca's~s 9f fut~re pe~k demands.'*

. Limerick *unit.No. 2, scheduled'f~r fuU-operation in 1990, Is essential.io. a c~ntinulng, reliable,. *

~

energy supply in-our.service territory in th_e fut!ire..

• ~

_New Capital !Provided..

198~ -was.another busy ye<Ji: of financing. The Company *~ai~e~ approximately

$1.3 bUlion in capit~I for Its co!'struction prograrn.-debt refundings and.general corporat~ needs.

Major 1988 finani::lngs pppear in* the table on page 6. In June, the Company sold its undivid.ei:l 44%

• i?te*r~st in.the Mer~ill Cre~k Reservoir Pro}ec,t"for $145.3 million thr~ugh _a sale/leaseback.ar~a!"ge-

~

. ment. See page I~ for a further description of the Project. In Q continuing effort ~o reduce costs,

$1~~.2. million ~f t~~-exempt Customized P~rchased !3onds (CP Bonds)"~ere issued in July o'n behalf of the,C9mpany. proceeds ofthe CP Bo.nds were 'used *to refund $.154:2 million of higher-r cost, tax-exempt debt. previously issued to finance pollution control equipment for the Comppny.

~.

This transaction-r:esulted in* annual lnterest.s~vings of approximately $600,000: The Company also.

J

arranged $180 million of new bank term.loans, the proceeds of which_ were ~sed. to call two high coupon debt issues. This refunding r~sulted in annual interest savings of approxima~ely $5 million.

To date, the debt r~funding program which began in 1985 has enabled th~ Company to reduce annual interest expense by m_ore than $28 million. I'! December, the Company ~old a portion of its account~ recei~a~le for $2!]0 million* to conclude the *yean financing.

1988 Maj_or Financings March April December.

January -:--

December*

January-Stated Rate Auction Preferred.Stock *

--= 10.75% (initial rate through 4/30/93)

Mortgage Bonds -

10% Serles due 1998.

Mortgag_e* Bonds*_ I Wo Series due ~OIB:_

Sale of M~rrlll Cr~ek Reservoir Project.

Customizei Purchas~* Bonds -

Floating Rate

. Accounts Receivable Commop S!ock Purchase Plans:

• Dividend Reinvestment" Plan & Employee ~tock Purchase Plan

. 7,7 I 2;000 shares; average pri~e of$./ 8.19

• Common Stock Continuous Offering:

2,000,000 shar~s; *average price of$ I 8. 72.

. Oecember

.-*Bank Borrowings: *-,.

Revolving Credit Agreement -

net*borrowings

.: New ter"m /~an borrowings Millions of Dollars Sub To_tal Total 50.0 150.0 ioo.o 145.3

. 154.2 200.0

. 144.9 37.4

$ 981.B.

150.0 (80.0

$/;3il.8

$1.1 Billion of New.Pfont !nvestments Made lnve~tm_e!Jt for new plant and eqriip'!'ent i~ 1988 t<?tall~c{

$1.1 billion, up 4% from th~ 1987 level: Approximat~ly $626 mil,lio,;* was. foi.. construction at Limerick Generati~~-$t~tion. lri 1989, PE. exf:Jects ~o sptmd approximately $1.1. bi."ion for new plqni

~nd equipment. Begim:iing in 1990, the levels ofplant invertment are expected tp decline dramat~

i~cilly :~pon the completion of Limeric~ U~it No. 2, the Company's last~ maior construdiorJ project planned for ~his century.

P e a c h B o t -t i:J m A t o m i c, P o. w e r S. t a t i o n Restart A~tivities

. F~llowi~g the shut d<!wn of Peach. Bottom on March 31, 1987 pursua!J_t to a Nuclear

• *.. Regulato~y Commission _(NRC) order, the*Company has* been diligently pursuing a comprehensive prog_ra~ aimed at a* successful restart. Over t~e *past ~ 8 months, ilie Company's ri_uclear opera-*.

. tions have ~een completely restructured into a.nuclear-dedicated organization, in: which all as-pects of the Company's nuclear operations are combined into a single, Integrated. organizational stru~ture. This structure will provide improved control, accountability !Jnd _dir~ctiOf'.l In all nuclear operatjon_s.

The specific restart process which the Company has_ fol-lowed has been detailed and exhaustive. It has produced thousands of hours of work and volumes of questions, annvers and technical data involving the NRC, tw,o states, *the Institute of Nudear six.

seven..

-eight nine Corbin A. McNelll,

• Jr., 49; Is Executive Vice President, Nuclear' and Is responsible for all aspe~s of the Com-pany's.nuclear

• operations, lnclud*

Ing.construction,

• operations, engl*

neerlngond support services. -

He completed o 20,year career with the U.S. Navy In 1981 and has*

served In various executive copacl*

-ties In nuclear

, generation prior to Joining PE In February 1988.

Immediately prior to PE; he was Sen- -

lor Vice President Nuclear for

-Public Service.

Electric and Gas

_Company.

. Mr.McNel/f

. (back t~ camera) confers with his 11Jan~gement team:*(/eft to right},

John S. Kemper, 60, Senior Vice Presl*

dent,_Nuclear '

Construction; Graham M. Leitch,. '

• 54, Vice President, Limerick Generat*.

Ing StatlOn; Joseph W. Gallagher, 63, Vice President, Nuclear Services; S. Joseph Kowalski,.

60, Vice President, Nuclear Engineer-ing; and Dickinson :

M. Smith, 55, Vice

• President, Peach -

Bottom Atomic Power Station.

Power-Oper'!tions (INPO) ~nd numerous public meetings. A w~rkforce of as many cis 3,700 peopie has ~een involved in the resiart _proces_s.,

Major activities were u!'derta~en to improve the physical_

facilities at Peach Bottoni. While the plant has. been out of service, some 13,000 maintenance tasks have -bee~ perfo;~ed, 178 modifica-tions have been undertaken; radiat{on ~ontamlnation

• and radiorictive waste inventories have been substantially reduced.- and co~trol panels have been.

color-(ode~ and labeled to provide better visibility to ojlerators on key systems. The n~w Peach Bottom control room simulator-is expected to be installed at the plant in the fall of:1989.

The* Company has provided ready-access _to information about Pea_ch Bottom to elected officials and ~rea. community leaders th~t;Jugh. a coort:linated-community relation~* and public affairs program. S.eni~r PE. '!fficials have regularly attended*

governmental mee~ings and, in turn: g9verf!ment and' civic leade~s-have visited and toured ihe plan~. Biweekly newslett~rs to ev_~ry resident of the~area ~nd ~ fo_cused'speakers burf'.a~ activity.

along with several news media briefings. have helped to keep the public informed.*

• The *company ~as made, considerable progress ori its ex-

• tensive restart plan to.prepare Peach Bottom for a*return to servi_ce.. Although 138 major restart

~

~

plan action items were completed by September, in October, the Company announced that Its scheduled restart readiness for Peach Bottom Unit fVo. 2 would be extended until the second quarter '!f 1989, with Peach Bottom Unit No. 3 restart readiness extend~CI until the third.quarter of 1989. This action wa~ taken in order to provide additional operator training. to* improve managerial and s~pervisory effectiveness and 'to improve plant security. Also in October,* the NRC.

accepted ~he-company'$ revised plan for res..tart.

An NRC Systematic Ass~ssment *of Licensee Perform_ance.

(SALP) report covering the activities_ at Peach Bottom ~etween:June I, 1987 and*Jli!Y 31,)988, indicated. that "considerable progress~ had been made in -th~- plant's ~erations.

• T~e NRC awarded grades of category I~ i~s highest ~ating. ~n engineering support at the station;" category 3, its lowest rating which indicates a need for significant improvement, in the security area; and category 2, indi~ating that *s~tisf~ctory performance is being ai::bieved, if? air other _areas. The Company already has taken. steps to* improve security at the plant.

The Company announcement* changing the estimate of when' ~each Bottom :would be ~eady for restart foll~wed. the iss~ance ~f t~e SALP repo~~ and

. preliminary observqtions *by INPO concerning. its evaluation pf activities at Peach BOttom. The

• additional *time allotted for preparing for restart will also provide greater assurance of an orderly

• restart and power ascension program. Completion of all the physical ;,,~rk leading.to restart.is~.

~

.r.

scheduled for March 1989. The schecjule anticipates a two-week NRC team _assessment in Febru-ary foliowed by a period of about six w~eks for report development pri~r to an NRC decision on restart. Therefore, the Company anticipates the removal of all impediments to* restart by ea~ly AprlJ, with an N~C dec!sion to folio'!'-

Th~ Company estimates that the r~start delay will result in:

• a continuing replacement power cost penal~y of approximately $8 million per month ($4 million per unit) and an equity* return penalty of approxi~ately $;z.5 million per month, for. a total penalty of appro~imat~ly $10.5 million per month. In A-~gust, the NRC.proposeci* a fine of -

$1,250,000 against the Company ;or. failing to_ detect, report, an.d ~leal with inattentive reactor

o.perators and supervisors ;vho condoned the inattention of reactor operators.at Peach Bottom -

prior to the March 19B7 sh-utdown."The-NRC also proposed f.nes, ranging 'rr~m $500 to $1,000, against 33 present or former -reactor oper.ators at *Peach Bottom for sleeping ~r other acts of *_ *.

ina~tention. to ~~ty th~i:* occurred at Peach_- Bottom. The $1,250,000 fine was paid In Sept~mbe~

~

-LJnit No. 3. Repiping Completed -

TIJe replacement of Peach Bottom Unit No.* 3 primary piping was

.co,;,plet~d o~ scfledule.~nd unde~*budge~ i~ i9BB: The pipe repl~~~men~, ne~~ssitated by inte;...

• granular stress corrosion llf the original pipe mqterial, was similar to th~t accomplis.hed on Unit No. 2 in 19B5. Th~ repla~emen.t ~f this reactor pipi~g-has been undert~ken at othe~ b~iling water reac~o~s.. The. r~place,:,,eryt _ V.:as. compieted with less radlatio~ *: ~xpdsure t~ workers than ~n~ -

-~~mparabl~ i?~ i~ -t~e c~u~try. Tlie*tot~I c~sf of the* piping w~rk do~e in _l?BB wps* ~b'aut $7i;

• million. r;;f which PE's share was -$32 million:

Security_ Chan~eover*-~

Nucl~ar p~wer f?lant security*is a complex l);eration._thqt includ~s security force -

management,-~adt1!inistr~tive con~ro~~. phy~ic.al ~ecurity equipment, a: trained se~

0 urity for,~e.

. -- proper plant de~ign.and con~truction, and:close cooperation.with local law_ enforceme~t. Du~fng t.~e summer,- PE. selected and retained a new cont~octor to provide *protection services at Peach

. Bottom, ~he same ~~e that provides high-quality ~ecuriti ~t l.ime;ick. W~th. the -ne'W c:o~tractor a~

Peach Bo~tom and improved'corpo;ate r.evlew, nuclear. se~urity has b.een significantly upgraded. --

Co-o~iiers file -Suit*-~ : On J~ly 27, 19BB,.. Public_ ~ervice Enterpris~ Gr~up: incorporcrted* and its sub~idlary,.

Public Service Electric and Gt;rs Company, filed an action again~. the Company -in the United States

_- _* D~Strict_Court_ con~erning the shutdl)w~.of Pe~ch.Bottoin t_hat was-ordered by_-~he NRC. On the_

• s~me' date~ Atlantic City Electric Co;npany and*D~lma;..,a f>Ower and Light Compan.y j;l~d a similar_ :

~-

'suit' agairist the Company_ with the same court: The ~hree companies~ as co-owners of Peach B~ttoni, Seek to recov_er d~in~ges resUlting from the shut~oWn of the St~iOn.~ The suit~*Gllege~bre*a~h -..

_by the Co,;,pany of.the Own~rs Agr~e{Jlen~- unde,' which it op~rated the sta~/~n -and va~lou~ tort.

.... :~l~ims. Th_e suits do"not specify any dollar: am~~nt of ~amage~. !n Octob~r~ the Company filed.

• tn~tions "seeking *dlsinfssa( of the tort clai",,,s in -both. ac~io~s: *The* Co111pany f,ied.' answers_ to.

• . - th~ co~plaints with r~~pect to br.each of ~ontr~ct. clalms *in- }anu~ry. FC?r further ~iscus~io~~ se~.

' page 31... *

• *,Shareholder Law~uits

-In.sej,~ember;* the Comp~ny's Bo~rd of q_irectors vot~p. to take !JO action to

preclude-sharehol~er lawsuits from proceeding agai~st ~he fdrmer Company Chairm~n and Chief.

. Exec~-ti~e Pffi~er- ~~d the f~rmer Company P~~si~en~ a~d

• Chief Operating Offlcer fcir_ claims *

• r

~llegirig mismanagement which* resulted In the shutdown C?f Peach Bott~m. This action does not.._-

. :*constitut~ a p~ej~~gme~t by.th~ Board but ~~her re~ects -a decis.io~ that it is in the best interes~s -

' o( the, company and. its shar~holder~ to allow th*e ppr~ies to proceed with_- their *t;:,aims _and defenses in ~n appropriat~ legal forum. The -~oard-also 'voted to seek dis-,,,issal of the ~laims against these former*officers for;acti_ons taken.afte~ the issuance of the March 31, 19B7 s~utdown

. order/dismissal of all claims pgainst the,remaining individual defend'!nts,*.a~I ~f whom were eithe~.--.*

• officers or directors at the tiine of the Peach Bottom.shutdowri, and dismissal of certain proxy.,-

. ~IQim~ in connectio~ '~ith the 19B7 Annual Meeting ~f Shareholders. C~uns~I for the sharehoid~rs. _

I

_in th_e law~uits that we_re pending have subsequently modified their lawsuits to conform. to. these-.

decisions of th~ Board.' F~r further discussion, see page 39.

~

• L i rri e r i c k G e n e r a t ;: n g S t a t i o n Unit No. 8.

Operations at Limerick Unit No: I cont!nued to go. well. Covering* performance for. ~he ten eleven Raymond F. Holman,

• 61, ls Senior Vice

- President,

• Operations and has 41 years af service with the Company.

He *has respon-

• slblllty far all non-.

nuclear opera- -

• tlans, Including electrlc produc-tion; electric transmission and -

distribution; gas.

operations; engl-neerlng anil research; and all

• custome~related

• a~tlvltles. He also

'supervises the ac-tivities of the five

• *DlvlslonManagers *

• and the *operations:

of a PE subsidiary -*

company, the

• Con.;wlngo Power '.

conip11ny.

Mr.. Holman (back

• to c.amera)dls-cusses *operations _

wltll his m1:1nage-'

• ment team: (left to

. right) Alvin J.

Weigand, 50, Vice

• President, Engl-neerl~g and

• Productlon;"Albert G. Mlkalauskas,,

52, Vice President, Electric Transmis-sion and Dlstrl-

• b~tlon; Kenneth _

. -. G. Lawrence,* - -

• _41, Vice President, *

- Commercial Ope~

• atlans; and Ph/lip

.

• G. Mulllgan, 64,

. Vice President, Gas Operations.

twelve'* :

thirteen' I

Richard G. Giimore, 61, ls Senior Vice President -

F.1-. *

. *nance and Chief Financial Officer.

He Is reslJonslbfe for overseeing all finance, account-'

• ' frig and treasury-related matters; rates; Information systems; IJurchas-lng and other general services.

• He assumed his IJresent reslJon- - '

sibl/itles In AP.ril 1986. Mr. Gilmore has served as 'a member of the Board of Directors*

• of the ComlJany since 1979, when he was Executl~e Vice Presfdent of

• Girard Ban_k.

. Mr. Gilmore (back.

_to camera) meets..

with his manage-ment team: (left*to

.right) Raymond C.

• Wllllams,_ 62, Vice

• President, Rates; MononW.

Rlmerman, 59, Vice *

• President, Finance*

and Accounting; Albert J. Solecki, _. _

, 48, Vice President,. *

• Information Sys-tems and General -

Servlces;"and Donald P. Scott, 54, Treasurer.

period February I, 1987 to Aprll 30, 1988, the NRC SALP report awarded Limerick Unit No. I six

~

r category I ratings (highest) and two category 2 ratings (satisfactory). On November 8, Unit No. I broke its own record of c.ontinu9us operation;_ that record co,;tiriued 'th~ough Ja~uary ~I,' 1989, -

totalling.263 days. Although such records are impressive and ~ncouraging, the.Compa_ny's operO-

, t"ional values are focused on the safety, predictability and quality of operati~n. and riot on th~

length of run. Opei:ating deci~ions -a~e g~verned b~ long-term objectiv_~s and ~ot by sho~-ter~*

- _goals.

-An example: of excellent perform~nce at Limerick_ is the _.

level o(collect!ve personal radiatlolJ exposure~ In 1988, th~ plb-,,t performed-at *a_ near world rec;ord level of,ow exposure for large. boiling-w_ater reactors. This extremely low level of exposure resulted from exc;ellent pl~nt safety practices, the high re,iability_-experienced in 1988 and design features which provide for radiation shielding.

Fuel cladding failures have occurred.on the Unit Intermit-tently since.*the spring of 1988. These fuel cladding fai~ures are_bei~g corrected by replaci~g the affected fuel rods with corrosion-resistant fuel_during _the -refueling outag~. th,dt began on January I I., 1989. The refueling outage is expected to be comp_leted in approximately three -months.

Unit No. *2 Nearly Complete

. At yea~nd, Unit No. 2 construction was 97.6%-complete and the pre-*-.

- operational testing program was 63.5% *complete. This C!'mpares with _target goals.of 95%.and *

-50%, respe~tivelY. Becaus~ of the excellent construction p~ogress, the Company anti~ipates load- *

-ing fuel in Unit No~ 2 in the summer of 1989~ approximately" six months ahead of schedule, and

commercial Oj'eration of Unit ~o. 2 Is now anticipated in February 1990, als~ abo~ six ~onths a~ead of sched'!le. Based upan that schedule, the forecast flnql co~t would be about $~00 millio11 und~r the cost cap established, by the PUC in 1985. Construction at µnit No. 2 h°"s b~nefited from

• sched11le adherenc_e, high productivity and quality construction.

Water System Update Limerick >Generatln~ Statlo~ need~_~ supplemental suf>Ply of cooling water during p~rlods of low 'flow on the Schuylkill River, to be supplied *_through a planned_ supplemental cooling wa~er system designed ~o _draw water_ from the De_lawa~e River to* Ll~er::ick: Following the -~

, reso_luti~n of cer_tain legal ~nd r~gulatory impedi;,,ents, ~onstructl~n of the i>o_in~ -f>lea~arit Pump- : *,

Ing Station resumed in March '19~8*and continued through-the year. The Sucks County Commis--_

sioners -assu_med cont~ol of the watf#i-diversi~n projed which. is scheduled-for.comple_ticm In th~

summer of 1989. At December ~I. Potnt,Pleasant ~as appr~ximately '65% complete. Work_ on.the

2Vi-mile pipeline between Point *Pleasant and the Bradshaw Reseryoir, whi_ch*began in April, was completed in November.

PE's constr11ction of the B~ads~aw -Reservoir continued.

througho-;,t 1988. The 25-~illion-gailon reservoir and primping.~tation, whi~h will ~eceive wa~er f~Qm. POint Ple'cisan-t and act as the dfviding point 'for water for Limerick and two M(?,;tgom~ry

~

• County water autflorities~ ar_e essentially compiete. Construction of the seven-mile Pif>ellne be- *

. tweeri Bradshaw* Res_ervoir and the_ East_ Branch of the Perkiomen-Creek (East Branch) began in_

• April 1988 ~nd was completed in January 1989. The.water.;,...ill f!ow appr~x{mately is ~lies.

'*through the East Branch to a pumping statio_n near Limerick :.Vhich will pump the water through

• an eight-mile transmission majn to the station. The estimated completion date of ali components of the s~pplem~ntal water system fo~ Lim~ri~k is September -1989.. -

Several legal and regulatory problems exist, any one of

which if resolv~d unfavorably to the Company; would prevf!lnt the use of the supplemental cooling

• water _system as presently designed and approv_ed. The d~lay~ inherent in t~e r.~solutio1_1.. of these

. problems also heighten the importance oftfle Company's ability to continu..e,_to.ob_tain adequate*

• soim;es of interim*cooUng water. While there is-no' assurance as to the outcom<<!' of these problems,,

• _.the Company believes that it Will successfully resolve ther!i, or succes~f ully redesign. and obtain-the.

necessary approvals for a modified supplemental cooling water system: For further discussion, see page 32.

Merrill Creek Reservoir Completed

• Construction ~f the 15-~illion-gallon M~rrill Creek Reservoir was.'

completed.and the initial.filling ~f the reservoir was finished in, October. PE. and six other. utilities

_share* oper'!tion of the *$220 milliori facility. The stored. wate~ will be released to the Delaware

~iver during periods of low-flow ~o replace w~ter evapor:at.ed in the operati~n of the participating

util.ities' power.plants; including l.im~rick..

• .capa~ity/Energy Saies-, :

• Completlo~ o(.ilmerick u~i~-N~; 2 will-ass*ure the-~bility to meet the 'ec-oriomic

. * * -. gr~~h.-in tbe.Deld~are Valley and also will give the c;ompa~y an ~pportunit,Y to arra~ge short-. -.

term capacity and energy sales to other utilities in.'need.of additional_genel:atio~: In September, -_

the Co~pany iirr.ang~d for the ~ale.of 200 meg~w~tts ~f syste~. capacit~ ~nd ~sso~idt~~ ene.rgy to* *

':a n~ighJ>oring u*tility from.1990to*1994: In addition, we h~ve nearly co~pleted negotiations for the.'.

_sale of *~n addltional 200 megawatts to. another utility for:.the same time period. These arrange-

. ments dre sc~edul~d to_e~pire when ~he ~ap*acity wili be:needed*~olely for C9mpany*c~~tomer~.'

Se *r V"i n g.c u s* t o m* e rs

• A n d C a* m m Q. n i *t y

'~

E.xp_~nding E.co_nomy Served 1988,was.another. producti~e_year fo~ the-*Greater ~hiladelphia regic;>_n and

. Pliil~delp~ia E.lect~ic Company. The region's unemployment r"te of 4.3% continued-to. ~e bel.ow '.

national (5.5%) cfnd state*.(5.1%) rates. indust~y continued to. diversify, tflereby enhancing the r~~io~*'s ability.t_o *:,,:ath~r *~conomic :~o;;,~turns.. In 1988, ~the *c~~pan_y helped _to locate 68

' companies in its service area, with 12 c~mpani~s establishing new fadiities, 16 "establishing branch.

plants, and 40 relo.cating within-the territorf_ As a resuit, 8,500 jobs were ei~her-created -~r_

retai~ed. -

,*.*Evidence of the-region's-vitali,t.y wa~ ev~ry~here: In.Center_.

~ -CitY Philadelphia, nine ne~ office *buildings were either complet~d or under construction. *Major

-* tenants* have been obtained for a significant number of the projects. AIOng_ the Delaware River.*

.. * wate1r,:mt, l"(lajor development i~ und~",.way from.the T~c~ny-Palmyr(i Bridge to:the Walt Whit~.*.~.*

-.. *. '!'an Brid~e~ *A* nu~f1er ~f dev~lopers. and investors_ have co"'!mitied mor~. thcin- $1_*.biliion of their:

. _. ~wn capital~to. marinas, hotels, offices, and residential projects along th_e waterfro~t. fc~noinic

. _.growth. also continued in the suburbs *which comprise 95ofo -_of the C~mpany's ~e;vice t~rrit~ry. *

.

• Major development is occurring along most of the regiotJ's major highways. In the airport area, _a..-

n.umber d( projects h~ve*b~en.~o~pl~ted, including'the'i~itial phase ~f'a major* shipping ~om pany~ distributio_n facility which will.eventu~lly e,;.ploy up to 7,000 peopie, *In addition~ major.*

r~novations a~e plOnned for Philadelphia ln!ern~tional Airport itself.

Not far from the airport is _the iritersecti~n of 1~95 and the

• Blue Route, a highway which will l!nk Delaware County riverfront ~ommuni!ies an~ o~her commu-nitles along the highway with the Pennsylvdnia Turnpike w~st ~f ~hiladelphia. This long"awaited, cr~ss-county highway will open.up the E.ast Coast market to more of the regi~!'-'s businesses. The first section has opened and construction is underway on the remaining sections, with completion fourteen "

, fi~een Clifford Brenner, 64, is Senior Vice President, Corporate Communications ond is responsible for all Company

• communications with the media,

. public information, governmental rela-tions, and

• operations at.

Muddy Run Recre-ation Park' and the "Limerick Energy In*

formation Cent~~*

/1e has 13 years of experience with PE.

• Joseph A. Carter, 52; joined the Com-pany In September 1988 as Vice President, P.ersonnef and Industrial

• Relations. He Is responsible for all

• personnel and em-plofee matters and industrial rela-tions. Mr. Carter*

came to ~E from

• the BOC Group,

.- Incorporated; of Montvale, New

• Jersey, where he- *

• served as Corporate

• Vice President for Human Resources. -

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• i"1proving the ability of these cust~mers to cope.

Storms _Interrupt Customers

• - 1988_ was a yedr of severe storms whi~h signi'(ical)tly aff~cted the transmi~-

. sion and electric-dlstribution system, customers and Company employees. The biggest storm.of

-the year, the lightning *storm of August 17, interrupted nearly 170,000 cu~tomers and became the

~

~

seventh most severe storm on recor.d for number of customers affected. Over. I,00() field and office.

personnel were -in~olve~ in the restorati~n effort. - _ -.

O:the_r Highlights

• Management Changes Two of the Company~ iop officers retired in 1988.John H. Austin, Jr., resigned as.

Pre~ident,_ Chief.Oper~ting Offic~~ an,d Direc;tor, effecti~e *March-I, 1988,. and James L. Everett

~

resig'nei as c;;hairman and. G;hief Exec~tive Officer, effectiv_e April-13, 1988, and subsequendy

. tesignec;I fro'n) the Board.of Directors on Oc~obe(~4, 1988:. Bot~ men sta~:ted with PE as engineers*

in 1950 and spent.their entire careers devoted to serv!ce to th~ *public. They.have served the

~

• Company un~e!'(ishly while contributing witlf distinction to t_h_;s* city's business, educational,

' cultura{ and charitable communities.

• 20-Ye~r Plan Submitted In April 1988, th'e Company submitted to the PUC an lntegr~ed Resource Plan.

-. 'This i~ the*'(irst of ~n im~ual "least*cosi:"_plan t~ meet the projec_t~d ~eeds ~f the Company~

. el~i:tric customers during the. next.20 years. ~E ~u~init~ed the plan totiJe PUC-in complianc_e with -

ne~ state legi;lati~n. Highlights ~f the plan include:. I) no new po~er plant con~truction schedu~ed

• following the completio~ of Limerick_ Unit No. i; 2) ~dditio,;al cu~~ome; :requ!re~ent~.met through

-ci combin~tion of load managemen~ "program,s,.:rehabilitation of older ge_nerating facilities, -inter-rupt~ble load,, and. new non-utility genera_tion* sources such as municipal solid waste facilities; and

~) excl'!ding infla~iof!~*the real,c~st of electri~ ~ervice i~ the year.2007 is.* exp~_cted to be a~o~t the I

I

~(Jl'ne as' in-1988.

Training Upgr°cded The Company is expanding its management and technical train,ingin support.of the

.nudear stations an~ in. the past year haj added -"pe9ple skills* to _the 'training effort:Co,;,municq--

tions skills and teah, ~ra!ning ha~e be~n. ~mphasized in the sim~l~to_~s. Perf~rma~c~~b~:s~d team

. -trciining-h~s also become possible ~y adding ~oine site-specific.nu~lear pla~t equipment mock-ups

• to our Barbadoes Training Ce~ter..Teams made ~p of varie~ work gr~ups are able t_o pract_ice their'.

-* skills in specialized and in:terrelated tasks. in a simulated radiological e-nvironment and under conditions found at both nuclear station,s. This training is designed to. teach Company employees

.ho.;., to' more effectively' peftorm the tech~iccdly co_mplex tasks ~equired in a nucl~arpla,;t and.-

equally important, how to-work t_~gether*n!ore prciductively.

Conowingo Project,

• iwo of.the Company~ subs!diaries; Philadelphia Electric Power Company and The, _:

• Susquehanna Power Company, as licensees of th_e C~nowingo Hydro-electriC Project; reac;hed *a

• settlerrie~t in connection with._ the Conowingo relicensing-case before the. Federal Ene~gy Reg~

. ulatory Coin,;.i~sion (FERC) in Aug~s_t -1988. The :se~tle~ent requlr~s the lic;n~ees to ~ainta_in Maryland State water quqlity _standards, maintain a schedule of mini;,,um flows, and provide*

'additi~nal fish.pass~g~ f~cilities at.the Pr~ject.*The*settlemen_t agreement ~as approved by fERC on.January 24, 1~89, and resolves_ all remaining issues in the relicensing proceeding w~ich has been __

in litigation ~ince August 14, 1980. !he Company plans to construct a new fish p_assage facility at

• an estimated cost of $12.5 million.

eighteen*

nineteen -

~

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Philadelphia Electric Company and Subsidiary Companies Management's Discussion and Analysis of Financial Condition and Results of Operations General Earnings per share for 1988 were $2.33, the same as in 1987 with approximately 5% more shares outstanding. The positive effects of higher (5.5%) electric sales and the Company's cost reduction efforts offset the negative pressure on earnings caused by the Nuclear Regulatory Commission

( NRC) order of March 31, 1987 suspending power operations at the Peach Bottom Atomic Power Station.

The increase in electric sales was the result of the hot and humid weather experienced during the summer months and the continuing economic development in the Company's service territory.

In 1988. the Company set electric output records for the second successive year. Records were set for yearly.

monthly. weekly. daily and hourly output, as well as Saturday and Sunday daily and hourly output.

An all-time hourly peak of 6,826 megawatts (mW) w~s set on August 15, 1988 between the hours of 4 and 5 p.m., and an a/I-time winter hourly demand of 5,560 mW was set on December 12, 1988, between the hours of 6 and 7 p.m.

These output records were not forecast until the turn of the century.

On March I, 1988, the Company placed into effect temporary electric rates refiecting an order by the Pennsylvania Public Utility Commission (PUC) denying a return on the Company's equity investment in the Peach Bottom Atomic Power Station. The Company filed a Petition for Stay and a Petition for Reconsideration with the PUC concerning the order. On April 21. 1988, the PUC denied the Company's petitions. In accordance with the PUC order. the temporary rate adjustment became effective for an initial period of six months. On June 30. 1988. the PUC extended the temporary rate adjustment for an additional six-month period ending February 28, 1989. The PUC also authorized the Company to file a tariff supplement which, on one day's notice, would remove the temporary rate adjustment when a generating unit at Peach Bottom operates for I 00 continuous hours at 9 5% of that unit's rated capacity. As part of the settlement, the Company agreed not to seek any recoupment of revenue lost as a result of the Peach Bottom temporary rate order for the period March I, 1988 through February 28, 1989.

On October 21, 1988, the Company announced that its schedule for restart readiness of Peach Bottom Unit No. 2 had been extended from late December 1988 until the second quarter of 1989, with Unit No. 3 restart extended until the third quarter of 1989. As a result, the Company does not expect that one unit at Peach Bottom will operate for I 00

. continuous hours at 95% of that unit's capacity prior to February 28, 1989.

The temporary rates will become permanent on February 28, 1989 unless the Company files a complaint with the PUC. The Company is currently reviewing all of its options to prevent these rates from becoming permanent.

The Company estimates the delay in restart will result in a continuing replacement power cost penalty of approximately $8 million per month ($4 million per unit) and an equity return penalty of approximately $2.5 million per month. See note 2 of Notes to Financial Statements, page 29.

In 1988, the write-off of$6/.4 million of Peach Bottom replacement power costs had a negative impact on earnings of/ 8¢ per share.

In 1988, the temporary electric rates reduced revenue by approximately $25 million. The estimated annual reduction is $30 million. The associated reduction in common stock earnings per share was approximately 7¢ in 1988 and is estimated at approximately 9¢ annually.

On June I, 1988, the Company filed its annua/*Energy Cost Rate Factor (ECRF) with the PUC proposing a 4.850 mill per kWh credit applicable to customers' electric service. On June 30. 1988, the PUC approved an Audit Bureau adjusted ECRF of a 6.291 mill per kWh credit to be effective July I, 1988 through June 30, 1989. The PUC-adopted rate refiects an adjustment to the Company's proposal of approximately

$42 million, of which $4.7 million was disallowed and approximately $37 million deferred pending resolution of two separate ECRF investigations.

On June 27. 1988, the third phase of the three-phase electric rate increase approved by the PUC in its June 27, 1986 order became effective. This third phase, amounting to approximately $117 million per year; is designed to recover costs associated with the operation of Limerick Unit No. I.

Revenue deferred under the phase-in plan will be recovered from customers over the three-year period beginning June 1989.

In accordance with the PUC order dated June 27, 1986. the Company continues to accrue a carrying charge equivalent to allowance for funds used during construction (AFUDC) on the 50% of Limerick common plant excluded from rate base by the order. In 1988, this accrual benefited common stock earnings by approximately $73. I million.

On January 15, 1988, the PUC approved an $8.6 million, 3.1%. increase in gas rates. The increase includes a one-year Federal Tax Adjustment Surcharge to recover $0. 9 million for the prior effects of the Tax Reform Act of 1986.

On September 30, 1988, the PUC approved a $16 million increase in the Purchased Gas Cost Rate for the period October I, 1988 through September 30, 1989. The increase is principally the result of the expiration of a refund for past overcollections which had been in effect since October 1987.

As a result of the Tax Reform Act of 1986 that reduced federal income taxes, the Company passed back to its electric customers $89.5 million through a Federal Tax Adjustment Credit (FTAC) for the year 1988. In 1989, the Company will pass back to its electric customers $86.5 million through a FTAC.

On June 16. 1988, the Company sold its 44.241%

interest in the Merrill Creek Reservoir Project for $145.3 million. Under the terms of the agreement, the Company is leasing back its share of the reservoir for 44 Vi years with

/ease renewals and a purchase option available to the Company.

On December 20, 1988, the Company sold a portion of its existing and future accounts receivable for $200 million through a five-year purchase and sale agreement.

The Company is completing construction of Limerick Unit No. 2 under a PUC-mandated cost containment plan which provides for a maximum net rate base allowance for Unit No. 2 (exclusive of common plant) of a prudent investment of$3./97 billion. The Company estimates that the cost of Limerick Unit No. 2 will not exceed the $3.197 billion cap.

As of December 31, 1988, Limerick Unit No. 2 was 97.6% complete with expenditures. including AFUDC,

Philadelphia Electric Company and Subsidiary Companies Man age m.e n t 's Discussion and An a I y sis of Financial Condition and Results of Operations

-Continued twenty-two twenty-three totalling $2.258 billion.

In December 1987, the Financial Accounting Standards Board (FASB) issued SFAS 96, Accounting for Income Taxes," which requires an asset and liability approach for financial accounting and reporting for income taxes. Due to the complexities of SFAS 96, its original effective date has been delayed by FASB for one year. The Company is required to adopt this statement by 1990. The provisions of the statement may be applied cumulatively in the year of adoption or may be applied retroactively by restating previously issued financial statements. The Company is

. continuing to evaluate the provisions ofSFAS 96 and its effect on the Company's financial statements.

Electric Operating Revenue Increased electric revenue for 1988, 1987 and 1986 was attributable to higher base rates and increased sales.

Ki/owatthour sales of electricity to retail customers increased 5.5% in 1988 over 1987 and 5.4% in 1987 over 1986.

Electric Revenue Increase/( Decrease)

Millions of Dollars

'88 vs. '87

'87 vs. '86

'86 vs. '85 Rate Increase

$ 0.9

$193.7

$185.0 FTAC (SS.I)

(34.4)

Fuel Related Revenue 16.I (149.0)

(39.4)

Sales and Other 78.7 100.0 37.6 Tota/

$40.6

$110.3

$183.2 Gas Operating Revenue Increased gas revenue for 1988 was attributable to increased sales and rates. For 1988, total gas sales, including transported gas, increased 7.6% over 1987. Lower gas revenue in 1987 compared with 1986 was primarily attributable to a lower Purchased Gas Cost Rate resulting from reduction in the price of gas from suppliers. For 1987, total gas sales, including transported gas, increased 13. 7% over 1986.

Fuel and Energy Interchange Expense For accounting purposes, fiJel and energy interchange costs are deferred until billed as fiJel adjustment revenue. See note I of Notes to Financial Statements, page 29. In 1988, gross fiJel and energy interchange costs were $I 0 million lower than in 1987 primarily due to the reduced cost of interchange purchases and increased output at Limerick Unit No. I. Fuel and energy interchange costs deferred in previous years reduced expense in 1988 by $43 million. In 1987, gross fiJe/ and energy interchange costs were $98 million higher than in 1986 primarily due to the refiJeling outage at Limerick and the Peach Bottom shutdown. Fuel and energy interchange costs deferred in previous years reduced expense in 1987 by $88 million. In 1986, gross fiJel and energy interchange costs were $281 million lower than in 1985 primarily due to the excellent performance of the Company's nuclear units. Fuel and energy interchange costs deferred in previous years and charged to expense in 1986 amounted to $189 million.

Other Operating and Maintenance Expenses In 1988, non-fiJel operating and maintenance expenses increased $30 million or 3.0% over last year primarily due to Peach Bottom related expenses which were partially offset by the Company's cost reduction efforts. The increase in non-fiJel operating and maintenance expenses in 1987 and 1986 was primarily attributable to the commercial operation of Limerick Unit No. I.

Depreciation Increases in depreciation in each of the last three years

• re~ected additions to plant in service. In 1987 and 1986 increases in depreciation were primarily attributable to Limerick Unit No. I being placed into service.

Income Taxes Income taxes charged to operations and income tax credits included in other income decreased in 1988 compared to 1987 primarily due to higher operating and maintenance expenses and interest charges. Total income taxes for 1987 compared to restated 1986 were higher primarily due to the Company adoption of Statement of Financial Accounting Standards No.

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

"Regulated Enterprises -

Accounting for Phase-in Plans."

Other Taxes Other taxes increased slightly in 1988 versus 1987 due to higher payroll and gross receipts taxes. Other taxes increased in 1987 versus 1986 due to higher capital stock and gross receipts taxes. In 1986 other taxes decreased due to lower realty taxes.

Allowance for Funds Used During Construction (AFUDC)

The increase in AFUDC in 1988 compared with 1987 was the result of increases in construction work in progress, due primarily to construction of Limerick Unit No. 2. AFUDC decreased in 1987 and 1986 as a result of the commercial operation of Limerick Unit No. I.

Interest Charges Interest charges on debt increased in each of the last three years due to additional debt outstanding. The ratio of earnings to mortgage interest, which is one measure of the Company's ability to issue mortgage bonds, for the calendar years 1988, 1987, and 1986 was 2.69, 2.83 and 2.82 times, respectively.

Under the Company's mortgage; additional mortgage bonds may not be issued on the basis of property additions or cash deposits unless earnings before income taxes and interest during 12 consecutive calendar months of the preceding 15 calendar months are at least two times the pro forma annual interest on all mortgage bonds outstanding and applied for. In addition, as of December 31, 1988, the Company was entitled to issue approximately $I. I billion of mortgage bonds, without regard to the earnings test, against previously retired bonds.

Capital Expenditures and Changes in Financial Position The Company's construction program is estimated to require expenditures of approximately $/.I billion in 1989 and $2.0 billion from 1990 to 1992. A significant portion of the expenditures relate to the construction of Limerick Unit No. 2.

Successful completion of this program is dependent on the Company's ability to obtain external financing primarily through sales of debt and equity securities which are subject to market conditions and to meeting certain earnings tests.

The program is also subject to the licensing requirements of

the NRC, other regulatory approvals in connection with the planned supplemental cooling water system for Limerick, financing approvals by the PUC and changes due to litigation.

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

Outlook On July 27, 1988, Public Service Enterprise Group Incorporated and its subsidiar.y Public Service Electric and Gas Company filed an action against the Company in the United States District Court concerning t/:ie shutdown of Peach Bottom Atomic Power Station that was ordered by the NRC. On the same date, Atlantic City Electric Company and Delmarva Power and Light Company filed a similar suit against the Company with the same court. The three companies, as co-owners of Peach Bottom, seek to recover damages resulting from the NRC ordered shutdown of the Station. The suits alleged breach by the Company of the Owners Agreement under which it operates the Station and various tort claims. The complaints do not specify any dollar amount of damages. On October 21, 1988, the Company filed motions seeking dismissal of the tort claims in both actions.

The Company filed answers to the complaints with respect to the breach of contract claims on January 13, 1989. If the litigation is ultimately determined adversely to the Company, such adverse determination could have a material adverse effect on the Company's financial condition.

In December 1981, the Company sold the federal income tax benefits associated with Unit No. 2 of the Salem Generating Station for $53.7 million in a safe harbor lease transaction. Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of the tax benefits resulting from any Internal Revenue Service (IRS) claims which render the sale invalid. The Company's indemnification obligation also includes the payment of interest, at prime rates, on the indemnification amount and all associated costs of contesting an IRS challenge. The Company has been advised that IRS has asserted, in auditing the purchaser, that the sale was invalid. Although the purchaser has protested the IRS claims, the Company has no assurance that the protest will be successful. If the IRS claims against the purchaser are upheld, compliance with the indemnification provisions of the agreement could result in a significant charge to income.

In the long run, the future financial health of the Company is highly dependent on the regulatory treatment of Limerick Unit No. 2. The Company believes that the prospects for favorable treatment have increased because Limerick Unit No. 2 has become more valuable and yet less costly to build since construction resumed. The Company's recent sales growth and peak load experience is a clear indication of the need for the additional capacity which Limerick represents.

Although the Company continues to actively support conservation and co-generation and factor them into the planning equation, the customers' increasing demand must be met with reliable sources of committed power. Completion of Limerick Unit No. 2 will assure the ability to meet the expanding growth in the service territory and provide an opportunity to arrange short-term capacity sales to other utilities in need of additional generation. For example. in September the Company announced that it has arranged the sale of200 mW of system capacity to a neighboring utility from 1990 to 1994. In addition, negotiations are continuing for the sale of an additional 200 mW to another utility for the same time period. These arrangements are scheduled to conclude when the capacity will be needed on the Company's system.

Considering the outstanding progress in the construction of Limerick Unit No. 2, the Company anticipates filing a rate case in the summer of 1989 to include its revenue requirements in rates. The Company is examining every possible option which would aid in mitigating the impact of placing Unit No. 2 in service.

In conclusion, earnings per share have held up well during this difficult year due, in large part, to increased sales from favorable weather and a strong regional economy.

However, the Company has made significant strides in cost reduction and in increased efficiencies.

These efforts will continue to be a high priority for management and are critical to the objective of maintaining the common stock dividend.

Consolidated Statements 0 f Income twenty-four twer1ty-five I

Philadelphia For the Years Ended December 31 Electric Company 1988 and Subsidiary 1987 1986 Companies (Thousands of Dollars)

Operating Revenues Electric

$2,850,315

$2,809,673

$2,699,365 Gas 378,397 371,791 391,504 Total Operating Revenues 3,228,712 3,181,464 3,090,869 Operating Expenses Fuel and Energy Interchange 745,110 710,648 889,277 Other Operating Expenses 727,791 695,440 618,257 Maintenance 304,751 306,706 274,200 Depreciation 264,091 251,934 217,640 Income Taxes 206,774 264,940 284,355 Other Taxes 237,600 234.713 232,627 Total Operating Expenses 2,486,117 2,464,381 2,516,356 Operating Income 742,595 717,083 574,513 Other Income and Deductions Allowance for Other Funds Used During Construction 98,924 77,228 76,821 Capitalized Limerick Costs 73,074 66,582 172,926 Adjustment to Utility Plant Costs (368,900)

Credit (Charge) Related to Phase-In Plan 26,162 18,459 (91,880)

Income Tax Credits, Net 43,467 35,324 279,709 Other, Net 7,900 18,270 2.462 Total Other Income and Deductions 249,527 215,863 71,138 Income Before Interest Charges 992,122 932,946 645,651 Interest Charges Long-Term Debt 524,131 467,252 458,885 Short-Term Debt 24,188 17,243 12,512 Allowance for Borrowed Funds Used During Construction (122,147)

(92.155)

(101,617)

Net Interest Charges 426,172 392,340 369,780 Income from Continuing Operations 565,950 540,606 275,871 Income from Discontinued Steam Operations 1,790 1,916 Loss on Disposal of Discontinued Steam Operations

( 1,250)

Net Income 565,950 542,396 276,537 Preferred Stock Dividends 91,185 94,156 90,961 Earnings Applicable to Common Stock

$ 468,765

$ 448,240

$ 185,576 Average Shares of Common Stock Outstanding (Thousands) 201,517 192,489 183,141 Earnings Per Average Common Share From Continuing Operations (Dollars)

$2.33

$2.33

$1.01 Earnings Per Average Common Share (Dollars)

$2.33

$2.33

$/.OJ Dividends Per Common Share (Dollars)

$2.20

$2.20

$2.20 See notes to financial" statements.

Consolidated Statements 0 f Cash FI ow s Philadelphi~

For the Years Ended December 31 Electric Company 1988 1987 1986 and Subsidiary Companies (Thousands of Dollars)

Cash Flows From Operating Activities Net Income

$~65,950

$542.396

$276,537 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:

Adjustment to Utility Plant Costs 368,900 Depreciation and Amortization 291,277 288,039 282,200 Deferred Income Taxes 86,156 169,605 (26,528)

Investment Tax Credits, Net (9,291)

(16.958) 8,655 Allowance for Other Funds Used During Construction (98,924)

(77,228)

(76,821)

Increase In Deferred Limerick Costs (73,074)

(66,582)

(165,699)

Increase in Unrecovered Revenue (61,231)

( 178,595)

( 112.472)

Credit (Charge) Related to Phase-in Plan (26,162)

( 18,459) 91,880 Amortization of Leased Property 36,100 49,700 65,600 Limerick Precommercial Fuel Cost 16,448 Change in Current Assets and Other Current Liabilities 193,939 (92,399) 230,988 Change in Other Deferred Debits and Credits (28,843)

(11,769)

( 17,707)

Net Cash Provided by Operating Activities 875,897 587,750 941,981 Cash Flows From Investing Activities Increase in Utility Plant (937,419)

(925,550)

(723,527)

Allowance forOther Funds Used During Construction 98,924 77.228 76.821 Cost of Property Retired and Cost of Removal (54,528)

(37,636)

(86,332)

Sale of Merrill Creek Reservoir 145,330 Sale of Steam Plant 28,762 Transfer from Deferred Debits 25,157 lncrease/(Decrease) in Other Investments 3,154 (11.232)

(2.032)

Net Cash Used by Investing Activities (744,539)

(868.428)

(709,913)

Cash Flows From Financing Activities Issuance of Common Stock 182,345 162,272 230,978 Issuance of Preferred Stock 50,000 65,000 75,000 Retirement of Preferred Stock Including Change in Other Paid-in Capital (20,529)

. (54,018)

( 17.897)

Dividends on Preferred and Common Stock (541,526)

(517,353)

(494. 916)

Change in Dividends Payable 2,933 (2.964)

(/,091)

Expenses of Issuing Preferred and Common Stock (1,632)

(1.318)

(2,005)

Issuance of Long-Term Debt 584,200 740.000 821.000 Retirement of Long-Term Debt (395,702)

(328,588)

(260,829)

Premium on Retirement of Long-Term Debt (2,800)

(42,747),

(28,930)

Net Borrowings Under Revolving Credit Agreements 150,000 150,000 (550,000)

Change in Short-Term Debt (102,000) 102.000 (1.000)

Capital Lease Payments (36,100)

(49.700)

(65,600)

Change in Escrow Funds (30) 10.459 2,872 Payment of Other Obligations (37.719)

Net Cash (Used) Provided by Financing Activities (130,841) 233,043 (330,137)

Net Change in Cash and Cash Equivalents 517

$(47,635)

$(98,069)

Cash and Cash Equivalents at the beginning of the period

$ 43,081

$ 90,716

$188,785 Cash and Cash Equivalents at the end of the period

$ 43,598

$ 43,081

$ 90,716 See notes to financial statements.

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

twenty-six twenty-seven December 31 1988 1987 (Thousands of Dollars)

$ 9,003,850

$ 8,760,993 583,705 542,483 148,942 144,650 9,736,497 9.448,126 2,395,820 2,169,390 7,340,677 7.278,736 242,040 193,110 2,465,750

/,999,991 287,538 287,198 10,336,005 9,759,035 43,598 43,081 141,107 344,560 34,611 41,274 50,046 59,202 120,210 91,052 50,399 6,220 60,859 56,641 54,087 18,008 17,150 572,925 659,180 250,952 217,646 375,910 285,969 97,780 100,934 118,338 119,052 110,942 67,920 953,922 791,521

$11,862,852

$11,209,736

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

Energy Costs Interest Accrued Dividends Payable Compensated Absences Other Total Current Liabilities Deferred Credits and Other Liabilities Capital Lease Obligations Deferred Income Taxes Unamortized Investment Tax Credits Other Total Deferred Credits and Other Liabilities Commitments and Contingencies (Notes 2, 3 and 15)

Total December 31 1988 1987 (Thousands of Dollars)

$ 3,177,584

$ 2,995,239 5,119 4,579 409,863 387.070 3,592,566 3,386,888 622,472 572.472 368,078 389.146 5,219,511 4,870.733 9,802,627 9,219,239 102,000 70,235 80,889 72,046 60,588 180,831 169,353 139,966 114,738 20,011 2.679 129,408 121,650 39,575 36,643 60,859 56,641 19,877 15.510 732,808 760,691 215,492 226,610 753,267 682,899 272,976 282,311 85,682 37,986 1,327,417 1.229,806

$11,862,852

$11.209,736

Consolidated Statements of Changes in Common twenty-eight Shareholders' Equity a n d Preferred s t 0 c k twenty-nine Philadelphia Other Electric Company Common Stock Paid-In Retained Preferred Stock and Subsidiary Shares Amount Capital Earnings Shares Amount Companies (All amounts in thousands)

Balance, January I, 1986 177,680 $2,601,989

$7,331

$583,728 8,908

$890.781 Net/ncome 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 Redem_ptions 456 (184)

( 18,353)

Balance, December 31, 1986 189,079 2,832,967 7,787 363,344 9,474 947,428 Net/ncome 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 9,6/6 961,618 Net Income 565,950 Cash Dividends Declared Preferred Stock (at specified annual rates)

(97,463)

Common Stock ($2.20 per share)

(444,063)

Expenses of Capital Stock Issues (1,631)

Issuance of Stock Public Sales 2,000 37,435 500 50,000 Employee Stock Ownership Plans 609 11,478 Dividend Reinvestment and Stock Purchase Plan 7,103 133,432 Redemptions 540 (21 I)

(21,068)

Balance, December 31, 1988 206,589 $3,177,584

$5,I 19

$409,863 9,905

$990,550 See notes to financial statements.

Philadelphia Electric Company and Subsidiary Companies Notes to Financial Statements I. Significant Accounting Policies General All utility subsidiary companies of Philadelphia Electric Company are wholly owned and are included in the consolidated financial statements. Non-utility subsidiaries are not material and are accounted for on the equity method.

Accounting policies are in accordance with those prescribed by the regulatory authorities having jurisdiction, principally the Federal Energy Regulatory Commission (FERC) and the Pennsylvania Public Utility Commission (PUC).

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

Pursuant to a rate phase-in plan approved by the PUC in its electric rate order of June 27, 1986, the Company is recording revenue equal to the full amount of the rate increase approved, based on kilowatthours billed to customers. Unrecovered Revenue is classified as a current or other asset in the accompanying balance sheets according to whether it will be billed to customers within the next year or in subsequent years (see note 3).

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

Generally such rates are adjusted annually (see note 2).

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

Depreciation and Decommissioning For financial reporting purposes, depreciation is provided over the estimated service lives of the plant on the straight-line method and, for tax purposes. generally over shorter lives on accelerated methods. Annual depreciation provisions.

expressed as a percent of average depreciable utility plant in service, were approximately 2.87% in 1988, 2.84% in 1987 and 2.95% in 1986.

The estimated Company ownership portion of the nuclear-related costs for decommissioning as approved for rate-making purposes totals approximately $287,801,000 as of December 31, 1988. This cost is being charged to operations as permitted for rate-making purposes. The amounts charged are deposited in escrow and trust accounts and invested for funding of future costs. The Company believes that any increase in the estimated costs would be recoverable through adjustments of rates charged to its customers.

Income Taxes Deferred income taxes are provided for differences between book and taxable income to the extent permitted for rate-making purposes. In addition, the effects of the Alternative Minimum Tax (AMT) are normalized. Investment tax credits, other than credits resulting from contributions to employee stock ownership plans which do not affect income, are deferred and amortized to income over the estimated useful life of the related utility plant. Investment tax credits related to property not included in rate base are accounted for on the flow-through method (see. note I 0 ).

Allowance for Funds Used During Construction (AFUDC)

AFUDC is a non-cash item which is defined in the Uniform System of Accounts as "the net cost for the period of construction of borrowed funds used for construction purposes and a reasonable rate on other funds when so used."

AFUDC is recorded as a charge to Construction Work In Progress, and the equivalent credits are to "Interest Charges" for the pretax cost of borrowed funds and to "Other Income and Deductions" for the remainder as the allowance for other funds. The rate used for capitalizing AFUDC, which averaged 9.50% in 1988 and 1987 and 9.55% in 1986, is computed under a method prescribed by the regulatory authorities. The rate is a "net a~er-tax rate" and the current income tax reductions applicable to the interest charges capitalized are recorded in "Other Income and Deductions." In addition, the PUC is permitting the Company to record a carrying charge equivalent to AFUDC on 50% of Limerick common plant which is deemed associated with Unit No. 2 and the equivalent credits are to Capitalized Limerick Costs. AFUDC and carrying charges on 50% of Limerick common plant are not included in taxable income and the depreciation of capitalized AFUDC and the amortization of carrying charges are not tax deductible. Under the Tax Reform Act of 1986, AFUDC and carrying charges are considered tax preference items when computing the Company's AMT.

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

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

2. Shutdown of Peach Bottom Station On March 31, 1987, a Nuclear Regulatory Commission (NRC) order required the Company to shut down the Peach Bottom Atomic Power Station (Peach Bottom) located in York County. Pennsylvania, and consisting of two nuclear generating units. These units were placed into commercial operation in 1.974 and are jointly owned by the Company, 42.49%; Public Service Electric and Gas Company, 42.49%;

Atlantic City Electric Company, 7.51%; and Delmarva Power and Light Company, 7.51%. Under the ownership

Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s -

Continued thirty agreement, the Company, as operator of Peach Bottom, is reimbursed by the other owners for costs incurred in the operation of the facility in the same proportion as their respective ownership interests. At December 31, 1988, the Company's net investment in Peach Bottom was $449.5 million (see note 5).

The Company charged to expense replacement power costs of$61 million and $58 milliof) in 1988 and 1987, respectively, caused by the NRCs shutdown order. The Company does not believe that its investment in the Peach Bottom Units has been impaired as a result of this shutdown.

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

On November 18 and 19, 1987, the Company filed with the NRC applications to amend its nuclear facility operating licenses (License Amendments) to refiect proposed reorganizational changes, including on-site changes. On November 25, 1987, the Company submitted to the NRC the Corporate Action Section (Section I) of its Plan for Restart of Peach Bottom Atomic Power Station (Plan for Restart) detailing its nuclear reorganization. On December 24, 1987, the NRC notified the Company that, based upon its preliminary review of the Company's Plan for Restart and a Temporary Waiver of Compliance, the Company should proceed with implementing the Plan for Restart. The letter stated that the NRCs conclusions regarding the Plan for Restart were preliminary until the NRC had assessed the effectiveness of the revised corporate structure and had completed action on the Company's proposed License Amendments.Section II of the Plan for Restart, which covers responses to issues and root causes specific to the plant site, was submitted on February 12, 1988, and a revision of the Plan for Restart was submitted on April 8, 1988.

On October 19, 1988, the NRC issued its Safety Evaluation Report documenting the NRC's acceptance of the Company's Plan for Restart. The NRC concluded that the Plan for Restart, as revised, meets the requirements of the NRC's shutdown order in that it adequately characterizes the problems leading to the shutdown and that the Company's actions or plans are appropriate to address the root causes identified by the Company in its Plan for Restart. The NRC will continue to monitor the effectiveness of the implementation by the Company of the Plan for Restart.

On August 10, 1988, the NRC issued a Notice of Violation and proposed imposition of Civil Penalties to the Company proposing a fine of$/,250,000 against the Company for failing to detect, report and deal with inattentive reactor operators and supervisors who condoned

, thirty-one the inattention of reactor operators at Peach Bottom. The NRC also proposed fines, ranging from $500 to $1,000, against 33 present or former reactor operators at Peach Bottom for sleeping and/or other acts of inattention to duty that occurred at Peach Bottom. The $1,250,000 fine was paid on September 30, 1988.

The Company expects its scheduled readiness for restart of Unit No. 2 to be the second quarter of 1989, and scheduled readiness for restart of Unit No. 3 to be the third quarter of 1989. The Peach Bottom units cannot be restarted without the required approvals, which the Company has no assurance it will receive. The Company cannot predict when the NRC will permit the Company to restart Peach Bottom.

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

( 3) major changes in the corporate culture, the acquisition of "sufficient outside talent to properly upgrade the PECO nuclear situation" and corporate accountability for "the unsatisfactory situation that has been allowed to develop over a period of years." The Company has taken a number of actions in response to these recommendations.

Commonwealth of Pennsylvania On January 22, 1988, the Commonwealth of Pennsylvania filed with the NRC a petition to intervene and requested a hearing in the Peach Bottom License Amendment proceeding regarding the Company's applications to amend its nuclear operating licenses' technical specifications to refiect its proposed nuclear reorganization, including on-site changes.

On April I, 1988, the NRC issued an order referring Pennsylvania's petition to an Atomic Safety and Licensing Board (Licensing Board) to consider whether it should be granted. On June 22, 1988, with the petition for intervention and hearing still pending, the NRC issued the Company's requested amendment to the nuclear operating licenses' technical specifications, with any hearing to be held after such issuance. On August 21, 1988, the Commonwealth filed with the United States Court of Appeals for the Third Circuit a petition for review of the NRC's issuance of the License Amendments. The Company and the Commonwealth have been conducting negotiations toward settlement of restart issues raised by the Commonwealth in the Licensing Board and Court of Appeals litigation, both of which remain pending.

On February 23, 1988, the PUC entered an order to reduce electric revenue through the imposition of temporary rates which refiect the denial of a return on common equity investment in Peach Bottom, effective March I, 1988. The Company entered a settlement with respect to the denial of a return on common equity investment in Peach Bottom under which temporary rates would be extended for an additional 6-month period ending February 28, 1989 and the Company would be permitted to remove the negative surcharge on one day's notice when one unit at Peach Bottom has operated for 100 continuous hours at 95% of the unit's rated capacity. The Company has announced that its scheduled readiness for restart of Peach Bottom Unit No. 2 has been extended until the second quarter of 1989. The projected restart schedule will prevent the operation of one unit at Peach Bottom for 100 continuous hours at 95% of that unit's capacity prior to February 28, 1989, with the result that the temporary rates will become permanent on February 28, 1989. The Company intends to take the necessary action to prevent these rates from becoming permanent. However. there can be no assurance that the Company's actions will be successful.

Co-Owners Lawsuits On July 27, 1988, Public Service Enterprise Group Incorporated and its subsidiary Public Service Electric and Gas Company (PSE&G) filed an action against the Company in the United States District Court for the District of New Jersey concerning the shutdown of Peach Bottom ordered by the NRC; on the same date, Atlantic City Electric Company (Atlantic Electric) and Delmarva Power and Light Company filed a similar suit against the Company with the same court.

The two suits allege that the Company breached the Owners' Agreement (the Owners' Agreement) pursuant to which the four companies own Peach Bottom and under which the Company operates Peach Bottom. The two suits claim that the Company has breached two provisions of the Owners' Agreement. These suits also variously allege negligence, gross negligence, failure to disclose, fraudulent misrepresentation and negligent misrepresentation. Neither of the complaints specifies any dollar amounts of damages. The plaintiffs seek compensation for certain replacement power costs they have incurred as a result of the shutdown of Peach Bottom.

Additionally. the complaints allege that the co-owners have been deprived of the benefits of their Peach Bottom ownership interests and investments, that they have made payments to the Company for capital and operating and maintenance costs for which they have received no benefit, and that they have incurred increased costs and lost profits. PSE&G and Atlantic Electric further allege that they have been required by the New Jersey Board of Public Utilities to provide their customers with a credit because of the Peach Bottom shutdown. Both complaints include claims for punitive damages. On October 21, 1988, the Company filed motions seeking dismissal of the tort claims in both actions. The Company filed answers to the complaints with respect to the breach of contract claims on January 13, 1989. If the litigation is ultimately determined adversely to the Company. such adverse determination could have a material adverse effect on the Company's financial condition.

3. Limerick Generating Station General The Company's Limerick Unit No. I commenced commercial operation on February I, 1986. Construction of Unit No. 2 resumed in February / 986, following a suspension of approximately two years which was ordered by the PUC. Unit No. 2 is scheduled to be completed in 1990. At December 31, 1988, Unit No. 2 was approximately 98 percent complete based on estimated man-hours needed to complete the Unit.

NRC approval is necessary for startup of Unit No. 2. As of December 31, 1988, the Company had invested approximately $5.83 billion in the Limerick Generating Station, consisting of $2.25 billion in Unit No. I, $2.26 billion in Unit No. 2 and $1.32 billion in common facilities.

On June 27, 1986, in connection with the Company's filing to recover the costs associated with Limerick Unit No. I, the PUC approved an increase in electric rates of approximately $351 million annually, and authorized a rate of return on common equity of 14.75%. The increase is being phased in over three years in equal steps, followed by a three-year recovery period, without interest, of amounts recoverable under the phase-in plan. In accordance with its prior practice, the PUC excluded 50% of common plant from rate base, but permitted continued accrual of an amount equivalent to AFUDC on the excluded 50%. Accordingly. the Company is capitalizing a carrying charge equivalent to AFUDC on this investment, classified as Deferred Limerick Costs in the accompanying balance sheets. The increase also refiects an exclusion from the Company's rate base of $368. 9 million, which the Company recognized in 1986 as a loss for accounting purposes, due to allegedly imprudent construction delays in 197 6 and 1978. The Company believes that the

$368. 9 million disallowed by the PUC was a prudent investment and appealed the PUC's decision to the Commonwealth Court of Pennsylvania. On March 31, 1988, the Commonwealth Court reversed the PUC's decision and remanded the case for further hearing. The PUC has appealed _the Commonwealth Court's decision to the Pennsylvania Supreme Court.

On December 23, 1985, following a PUC investigation, the Company filed its response with the PUC accepting the conditions of the cost containment and operating incentive plans set forth in the PUC's December 5, 1985 order, which concluded that the Company could complete the construction of Limerick Unit No. 2 conditioned upon the acceptance by the Company of such cost containment and operating incentive plans, including a maximum net rate base allowance for Unit No. 2 (exclusive of common plant) of a prudent investment of $3.197 billion.

Recovery of Costs Pending Regulatory Proceedings In accordance with the Declaratory Order issued by the PUC on September 28, 1984, the Company deferred all operating costs, carrying charges on investment, fuel savings and associated income tax effects of Limerick Unit No. I and 50%

of common plant from February I, 1986, the date of commercial operation, until the plant was included in rates on June 27, /986. The recovery of these costs, which is not assured, will be addressed by the PUC in a subsequent electric rate case. The Company has deferred a total of

$137.2 million in accordance with the Declaratory Order. as

Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s -

Continued thirty-two thirty-three part of Deferred Limerick Costs.

If the Company estimates the total cost to complete Unit No. 2, including AFUDC, would exceed the $3.197 billion cap, an immediate charge to expense would be recognized for the excess. The Company estimates the cost of Limerick Unit No. 2 will not exceed the $3.197 billion cap. Of course, completion of Limerick Unit No. 2 within the cost cap is dependent upon receiving the necessary permits and licenses on a timely basis. Recovery of amounts expended for construction of Limerick Unit No. 2 and Deferred Limerick Costs will be subject to the PUCs determination that such costs were prudently incurred. Currently, the PUC has an independent party conducting an audit of the Limerick Unit No. 2 construction costs. If the PUC disallows the recovery of certain costs from customers, an immediate charge to expense would be required.

Excess Capacity Standards On July 10, 1986, the Governor of Pennsylvania signed into law legislation amending numerous provisions of the Pennsylvania Public Utility Code. One provision of the legislation which affects rate regulation imposes standards on the PUC in determining whether new generating capacity is excess capacity. This provision requires a disa/lowance from rates of any portion of capacity which is determined to be excess capacity. The provisions relating to excess capacity are applicable to rate cases "pending before the Commission."

The PUC held that the legislation did not apply to the Limerick Unit No. I rate case. Furthermore, the PUC held that, even if the legislation did apply, Limerick Unit No. I did not constitute excess capacity under the standards imposed by the legislation. On July 28, 1986, Petitions for Review of the PUCsjune 27, 1986 electric rate order were filed with the Commonwealth Court by the Company appealing the exclusion of $368. 9 million from rate base and by the Office of Consumer Advocate (OCA) and a group of the Company's commercial and small industrial customers on the issue of excess capacity and on various rate design and cost of service issues. On March 31. 1988, the Commonwealth Court issued an order affirming the PUC on excess capacity and all other issues, and remanded the construction delay issue to the PUC for further hearing and adjudication. On May 2, 1988, the PUC and the OCA appealed the Commonwealth Court decision to the Supreme Court. This excess capacity law will be applicable to Limerick Unit No. 2, which, if found to be excess capacity upon becoming operational, could result in a partial or complete disallowance from rates of the applicable plant cost.

Supplemental Cooling Water Because of permit and regulatory conditions which restrict the use of the normal source of cooling water, a supply of supplemental cooling water is needed to avoid the limitation or cessation of operation of the Limerick units during certain months of the year. The number of critical months, which may be as many as six, will vary from year to year depending upon stream fiows and related conditions. The construction of various components of a planned supplemental cooling water system (System), which includes pumping stations, a reservoir and transmission mains and utilizes existing streams, is nearing completion despite substantial opposition from various groups, construction stoppages, litigation, protracted permit proceedings and related appeals, some of which remain pending.

The availability of cooling water from the System is contingent upon completion of construction of the several components; the successful completion by the Company of condemnation proceedings to acquire fiowage rights over some four hundred riparian properties along the East Branch of the Perkiomen Creek (East Branch), or the purchase of such fiowage rights; the successful appeal by the Company of National Pollutant Discharge Elimination System (NPDES) permit effluent conditions imposed by the Pennsylvania Department of Environmental Resources (DER) on the discharge of System water into the East Branch; and the affirmance in pending appeals, and possible further appeals, of various other DER permit-related actions which have been challenged by intervenors. The unfavorable disposition of the condemnation proceedings, the NPDES appeal, and other pending appeals would prevent the use of the System as presently designed and approved.

Pending availability of the System, Limerick Unit No. I has been operating since 1985 using, during the critical months, interim sources of supplemental cooling water approved by the De/aware River Basin Commission (DRBC) on an annual basis. The last DRBC approvals were effective through December 31, 1988, and the Company has submitted to the DRBC requests for such approvals for 1989, amended to include requests to approve such interim sources for both Limerick units in anticipation of the Limerick Unit No. 2 scheduled fuel loading and power ascension in 1989. Since the approval of such modified requests for interim sources may not provide a sufficient supply of interim supplemental cooling water for Limerick Unit No. 2, the Company plans to submit to the DRBC requests for the approval of new interim sources for Limerick Unit No. 2 for 1989. Among the interim sources required to meet the needs of both Limerick units are municipal reservoirs, for which contracts must be negotiated with two municipalities. Such contracts are subject to possible PUC proceedings.

Should the System for any reason not become operational, the operation of the Limerick units during the critical months will depend upon the successful development.

licensing and construction of a modified supplemental cooling water system and the continued successful acquisition and approval of interim sources as discussed above pending the availability of the modified system. There is no.assurance that the Company will be successful in these efforts.

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

The benefits are based primarily upon employees' years of service and average earnings prior to retirement. The Company's funding policy is to contribute at a minimum, amounts sufficient to meet ER/SA requirements.

Approximately 55% of pension costs were charged to operations and the remainder, associated with construction labor, to the cost of new utility plant.

In January 1987, the Company adopted Statement of Financial Accounting Standards No. 87 (SFAS 87),

"Employees' Accounting for Pensions. Pension cost for prior years was not restated.

Pension cost was $7,101,000 in 1988, $29,458,000 in

1987 and $42,500,000 in 1986. Pension costs for 1988 and 1987 included the following components:

Service cost -

Benefits earned during the period Interest cost on projected benefit obligations Actual return on plan assets Amortization of transition asset Amortization and deferral Net pension cost (Thousands) 1988 1987

$ 24,073 85,779 (134,647)

( 4,539) 36,435

$ 7,101

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

( 4,539)

(31,632)

$ 29,458 Change in Net Periodic Pension Cost The change in net periodic pension cost in 1988 and 1987 is accounted for as follows:

(a) change in number, characteristics and salary levels of participants and net actuarial gain

( b) change in plan provisions

( c) net change prior to SFAS 87

( d) changes to comply with SFAS 87

( e) changes due to mid-year plan amendment (f) net change: ( c) + ( d) + ( e)

(Thousands) 1988 1987

$16,189 375 16,564 (38,921)

$(22,357)

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

$( 13,042)

Plan assets consist principally of common stock, U. S.

government obligations and other fixed income instruments.

In determining pension cost for 1988 and 1987, the assumed long-term rate of return on assets was 8.5% and 7.5%,

respectively.

The weighted-average discount rate used in determining the actuarial present value of the projected benefit obligation was 8. 7 5% at December 31, 1988 and 1987. The rate of increase in fi.Jture compensation levels ranged from 5% to 7% at December 31, 1988 and 6%

5. Jointly Owned Electric Utility Plant to 7% at December 31, 1987..

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

The funded status of the plan at December 31, 1988 and 1987 is summarized as follows:

(Thousands) 1988 1987 Actuarial present value of accumulated plan benefit obligations:

Vested benefit obligation

$ (738,761)

$(641,713)

Accumulated benefit obligation (747,751)

(650,/46)

Projected benefit obligation for services rendered to date

$(1,046,731) $( 1,044,612)

Plan assets at fair value 1,163,148 1,056,358 Funded Status 116,417 I 1,746 Unrecognized transition asset

( 76,554)

( 81,092)

Unrecognized prior service costs 111,715 115,276 Unrecognized net gain 151,578 45,930 Prepaid pension costs

$ $ In addition to providing pension benefits, the Company provides certain health care and life insurance benefits for retired employees. Substantially all of the Company's employees may become eligible for these benefits if they reach retirement age while still working for the Company. These benefits and similar benefits for active employees are provided by an insurance company whose premiums are based on the benefits paid during the year.. The Company recognizes the cost of providing these benefits by charging the annual insurance premiums to expense. The cost of providing those benefits for approximately 4,000 retirees during the years 1988, 1987 and 1986 is not separable from the cost of providing benefits for approximately 11,500 active employees for the same period.

Tota/ premiums amounted to $38.8 million, $30.0 million and

$31.6 million for 1988, 1987 and 1986, respectively.

The Company's ownership interests in jointly owned utility plant at December 31, 1988 were as follows:

Production Plants Transmission Plant Peach Bottom Sa/em Keystone Conemaugh Operator Philadelphia Public Service Pennsylvania Pennsylvania Various

• Electric Electric and Electric Electric Companies Company Gas Company Company Company Participating Interest 42.49%

42.59%

20.99%

20.72%

21% to 43%

Company's share of:

(Thousands of Dollars)

Utility Plant

$583,043

$968,196

$72,347

$74,474

$73,410 Accumulated Depreciation 162,971 227,404 28,525 29,335 18,623 Construction Work In Progress 29,458 22,100 2,741 4,195 61 The Company's participating interests are financed with Company funds and, when placed in service, all operations are accounted for as if such participating interests were wholly owned facilities.

6. Common Stock At December 31, 1988, and 1987, Common Stock without par value consisted of 240,000,000 shares authorized and 206,589,023 and 196,876,848 shares, respectively, outstanding. At December 31, 1988, there were 5,810,383 shares reserved for issuance under stock purchase plans.

Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s -

Continued thirty-four thir~y-five

7. Preferred Stock At December 31, 1988, and 1987, Preferred Stock, $I 00 par, cumulative, consisted of 15,000,000 shares authorized.

Current Redemption Price (a)

Series (without mandatory redemption)

/4. 15% (c)

$/ 14.15 13.35% (c) 113.35 12.80% (c) 108.50 10.75% (e)

(e) 9.50%

103.50 8.75%

101.00 7.85%

101.00 7.80%

10/.00 7.75%

10/.00 4.68%

104.00 4.4%

112.50 4.3%

102.00 3.8%

106.00 Series (with mandatory redemption) (d) 15.25%

I /0.00 14.625%

(f) 10%

/Of.I/

9.875%

109.88 9.52%

103.00 9.50% I 986 Series 109.50 8.75% 1978 Series 103.60 7.325%

102.93 7%

101.00 Total Preferred Stock (a) Redeemable, at the option of the Company. at the indicated do/far amounts per share, plus accrued dividends.

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

(c) Ownership of these series of preferred stock is evidenced by depositary receipts, each representing I/ 10 of a share of preferred stock.

(d) Sinking fund requirements (par value) in the period 1989-1993 are as fo//ows: 1989-$15, 910,000; I 990-$26,030,000; I 99 /-$2 I,630,000; 1992-$25,380,000; 1993-$38,380,000.

(e) The dividend rate through April 30, 1993 will be 10.75%

per annum, and the rate for each subsequent dividend period, Shares Amount Refunding Restricted Outstanding Prior to (b) 1988 1987 1988 1987 (Thousands of Dollars) 2-/-90 500,000 500,000

$ 50,000

$ 50,000 2-1-89 750,000 750,000 75,000 75,000 750,000 750,000 75,000 75,000 (e) 500,000 50,000 750,000 750,000 75,000 75,000 650,000 650,000 65,000 65,000 500,000 500,000 50,000 50,000 750,000 750,000 75,000 75,000 200,000 200,000 20,000 20,000 150,000 150,000 15,000 15,000 274,720 274,720 27,472 27,472 150,000 150,000 15,000 15,000 300,000 300,000 30,000 30,000 6,224,720 5,724,720 622,472 572,472 5-/-90 350,000 400,000 35,000 40,000 (f) 500,000 500,000 50,000 50,000 5-/-90 88,000 132,000 8,800 13,200 8-/-92 650,000 650,000 65,000 65,000 287,180 332,557 28,718 33,256 I /-1-91 750,000 750,000 75,000 75,000 333,500 366,800 33,350 36,680 450,000 480,000 45,000 48,000 272,100 280,/00 27,210 28,010 3,680,780 3,891,457

$368,078

$389,/46 9,905,500 9,616, I 77

$990,550

$961,618 either a long-term period ( /-10 years) or a short-term period

( 49 days), wi// be established by an auction held on the business day next preceding the beginning of each such period. The issue is redeemable during any long-term period only on the fast day of the period or fol/owing an unsuccessful auction, in an aggregate number which constitutes one or more units ( /,000 shares), at a price of $100 per share, plus accrued and unpaid dividends to the redemption date on the shares redeemed. On any dividend payment date with respect to a short-term period, units are redeemable, in whole or in part, at the option of the Company at a price of

$100,000 per unit, plus an amount equal to accrued and unpaid dividends to the date of redemption.

(f) Not redeemable prior to May I, 1990.

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

Total First and Refunding Mortgage Bonds Notes Payable -

Banks Revolving Credit and Term Loan Agreements Pollution Control Notes Debentures Debentures Sinking Fund Debentures -

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

Long-Term Debt included in Capitalization (e)

(a) Utility Plant is subject to the lien of the Company's mortgage.

(b) At various interest rates.

(c) The Company has a $700 million revolving credit and term loan agreement with a group of banks which is designed to provide the financing for the construction program, including completion of Limerick Unit No. 2, and general corporate purposes. The revolving credit arrangement converts into a term loan in November 1992. The borrowings are due in six semi-annual installments with the first payment due 6 months after the conversion into the term loan. Interest on outstanding borrowings is based on specific formulas selected by the Company involving yields on several types of debt instruments. There is an annual commitment fee of.3%

9. Short-Term Debt Average Short-Term Borrowings Average Interest Rates, Computed on Daily Basis Maximum Short-Term Borrowings Outstanding At December 31 Series Due 1988 1987 (Thousands of Dollars) 3:i.4%-/4%

1988 52,500 5%-14%

1989 62,500 62,500 14%

1990 11,000 11,000 14%

1991 11,000 11,000

/3:i.4%-/4%

1992 11,000 136,000 6!/i%-/4%

1993 71,000 71,000 4!/i%-15!1.i%

1994-1998 1,042,134 902,553 T%%-I /%%

1999-2003 524,220 526,889 6%-/2!/i%

2004-2008 488,500 588,500 13%%

2008-2013 107,962 7,962 8Va%-l 2!1a%

2014-2018 1,295,000 1,195,000 3,624,316 3,564,904 (b) 1991-1993 405,000 225,000 (c) 1991-1995 300,000 150,000 5!/i%-/3%

1997-2013 269,615 269,620 14Vs%

1990 50,000 9.85%-/4:i.4%

/

1993-2011 706,850 706,850 4!/i%

1995 13,671 14,580 (29,706)

(29,332) 5,289,746 4,951,622 70,235 80,889

$5,219,511

$4,870,733 on the unused amount. At December 31, 1988, $300 million was outstanding under this agreement.

The Company also has a $400 million revolving credit and term loan agreement with a group of banks which expires in 1992. There is an annual commitment fee of%% on the unused amount. At December 31, 1988. no amount was outstanding under this agreement.

(d) Long-term debt maturities in the period 1990-1993 are as follows: 1990-$26, 960,000; 1991-$27,850.000; 1992-$181,913,000; 1993-$472,348,000.

(e) The annualized interest on long-term debt at December

31. 1988, was $531.6 million of which $355.0 million was associated with mortgage bonds and $176.6 million was associated with other long-term debt.

1988

$114,164 8.18%

$216,000 1987 (Thousands of Dollars)

$ 30,937 1986

$ 233 9.51%

$/,000 Average Interest Rates on Short-Term Bank Loans at December 31:

. 7.74%

$205,000 7.98%

At December 31, 1988, the Company had no short-term debt outstanding under formal and informal lines of credit with banks

• aggregating approximately $310 million. The Company generally does not have formal compensating balance arrangements with these banks.

Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s -

Continued thirty-six thirty,-seven ID. Income Taxes (Continuing Operations)

Included in Operating Income:

Federal Current

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

Federal Current Deferred Investment Tax Credits. Net State Current Deferred Total Investment tax credits (ITC) and income tax credits resulting from contributions to employee stock ownership plans reduced Federal income taxes currently payable by $23 million in 1988, $20 million in 1987 and $43 million in.1986.

Under the Tax Reform Act of 1986, ITC has been repealed effective January I, 1986 with the exception of transition property. The Company believes that Limerick LJ_nit No. 2 qualifies as transition property eligible for ITC.

A ppraximately $180 million of additional business credits generated from 1983 through 1988 have not been utilized due to limitations based on taxable income. These credits, which expire between 1998 and 2003, may be used to reduce Federal income taxes in future years.

The Tax Reform Act of 1986 created a new Alternative Minimum Tax (AMT). calculated at a 20% rate 1988

$ 57,484 132,742 (9,291) 22,982 2,857 16,578 (48,732)

(10,602)

(711)

$163,307 1987 (Thousands of Dollars)

$ 74,185 186,390 (16,960) 9,386 11,939 1,845 (27,730)

(10,650) 1,211

$229,616 1986

$114,496 110,178 29,041 30,134 506 (I 01,566)

( 121,303)

(20,400)

( 19,057)

( 17,383)

$ 4,646 on AMT taxable income which includes certain preferences and adjustments. The Company's 1988 and 1987 current tax liability was determined under the AMT method resulting in a tax credit of $113 million which can be utilized in future years when regular tax liability exceeds AMT liability.

For a number of years the Company has used accelerated deprec:iation for income tax purposes and straight-line depreciation for financial reporting purposes.

Deferred taxes were recorded only on those timing differences recognized for rate-making. The cumulative net amount of such timing differences for which deferred taxes were not recorded was approximately $393 million at December 31, 1988. Since the Company expects to charge customers for taxes when the timing differences reverse, the tax effect of such timing differences is not recorded currently.

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

Depreciation and Amortization Deferred Energy Costs Precommercial Operation of Limerick Unit No. I Deferred Limerick Costs Net Loss on Reacquired Debt Unrecovered Revenue Alternative Minimum Tax Effects of SFAS 90 and SFAS 92 Gain on Sale of Merrill Creek Reservoir Other Total 1988 1987 1986 (Thousands of Dollars)

$72,966

$ 93,075

$127.278 17,332 45,566 (95,383)

(1,874) 23,425 (29,776) 25,087 (19,899)

(l,105)

$86,156 16,668 77,583 (82, 963) 23,533

( 1,652)

$171,810 10,210 11,004 14,305 55,040 (161.421) 10,965

$(28,002)

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:

1988 1987 1986 (Thousands of Dollars)

Income From Continuing Operations

$565,950

$540,606

$275,871 Total Income Tax Provisions 163,307 229,616 4,646 Income Before Income Taxes 729,257 770,222 280,517 Deduct: Allowance for Funds Used During Construction 221,071 169,383 178.438 Limerick Carrying Charges 73,074 66,582 172,926 Adjusted Income Before Income Taxes

$435,112

$534,257

$(70,847)

Income Taxes on Above at Federal Statutory Rate of 34% in 1988,

39. 95% in 1987 and 46% in 1986 Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized Effects ofSFAS 90 and SFAS 92 Unbilled Revenue State Income Taxes, Net of Federal Income Tax Bene'fits Amortization of Investment Tax Credits Other. Net Total income tax provisions Provision for Income Taxes as a Percent of Income Before Income Taxes Adjusted Income Before Income Taxes In December 1987, the Financial Accounting Standards Board issued SFAS 96, Accounting for Income Taxes." which requires an asset and liability approach for 'financial accounting and reporting for income taxes. The Company is required to adopt this statement by 1990. The provisions of II. Taxes, Other Than Income -

Operating Gross Receipts Capital Stock Realty Payroll Other Total

12. Investments At December 31 Gas Exploration and Development Joint Ventures Real Estate Developments and Other Ventures Non-Utility Property Escrow Deposits for Decommissioning Nuclear Plants Other Deposits Total

$147,938

$213,436

$(32,590) 5,493 23,920 19,230 5,993 (9,784) 27,870 12,903 12,137 9,587 9,151 6,620 (11,903)

(13,586)

( 13.468)

(6,704)

(5,658)

(3,016)

$163,307

$229,616

$ 4,646 22.4%

29.8%

1.7%

37.5%

43.0%

the statement may be applied cumulatively in the year of adoption or may be applied retroactively by restating previously issued financial statements. The Company is continuing to evaluate the provisions of SFAS 96 and its effect on the Company's 'financial statements.

1988

$137,172 33,519 35,975 27,095 3,839

$237,600 1987 (Thousands of Dollars)

$134,091 32,400 37,098 25,978 5,146

$234,713 1988 1986

$132,468 25,511 49.110 23,594 1,944

$232,627 1987 (Thousands of Dollars)

$ 11,657

$ 37,158 23,541 19,155 17,550 11.525 43,677 31,521 1,355 1,575

$ 97,780

$100,934

Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s -

Continued thirty-eight thirty-nine

13. Leases Leased property included in Utility Plant at December 3 I Nuclear Fuel Electric Plant Common Plant Gross Leased Property Accumulated Amortization Net Leased Property The nuclear fuel obligation is amortized as the fuel is consumed. Amortization of leased property totaled $36. I million. $49.7 million. and $65.6 million for the years ended December 31. 1988. 1987 and 1986, respectively. Other Year Ending December 3 I 1989 1990 1991 1992 1993 Remaining years Total Minimum Future Lease Payments Imputed Interest (rates ranging from 6.5% to 17%)

Present Value of Net Minimum Future Lease Payments On June 16. 1988, the Company sold its 44.241% interest in the Merrill Creek Reservoir Project for $145.3 million and entered into a leasing arrangement for a 44.241% interest in the project for an initial period of 44.5 years. with renewals and a purchase option available. During the lease term. the Company is responsible for its share of the cost of operating and maintaining the reservoir. The lease is being accounted

14. Segment Information Electric Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Gas Operations Operating Revenues Operating Expenses, excluding depreciation Depreciation Operating Income Utility Plant Additions Identifiable Assets(.. )

Electric Gas Nonallocable Assets Total Assets 1988 1987 (Thousands of Dollars)

$502,796

$500.733 9,879 10.452 56 110 512,731 511.295 (225,193)

(224.097)

$287,538

$287,198 operating expenses include interest on capital lease obligations of$15.4 million, $14.0 million and $16.4 million in 1988, 1987 and 1986, respectively. Minimum future lease payments as of December 31. 1988, are:

Capital Leases Operating Leases (Thousands of Dollars)

$ 99,347 65,757 102,603 65,491 67,457 84,620 41,209 76,489 31,369 74,988 I 0,678 743,788

$352.663 (65, 125)

$287,538

$1.111.133 Total

$ 165.104 168.094 152.077 117.698 106,357 754.466

$1.463.796 for as an operating lease and the gain on the sale is being amortized on a straight-line basis over the life of the lease.

Under this lease, total rental expense was $8.4 million in 1988.

Rental expense under operating leases, including the Merrill Creek project, totaled $64.2 million, $51.4 million, and

$54.0 million in 1988, 1987 and 1986, respectively.

1988 1987 (Thousands of Dollars)

$ 2,850,315 1,913,725 245,499 691,091 827,620 378,397 308,301 18,592 51,504 46,117

$10,012,922 500,205 1,349,725

$I I,862,852

$ 2,809,673 1,895,104 234,925 679.644 908,799 371.791 317.343 17.009 37.439 44,328

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

$11,209,736 1986

$ 2.699.365 1,961.429 201,773 536.163 753,232 391.504 337.287 15,867 38.350 35,053

$ 8,341.559 416,824 1.411,937

$I 0.170,320

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

15. Commitments and Contingencies The Company has incurred substantial commitments in connection with its construction program. Construction expenditures are estimated to be $1. I billion for 1989 and

$2.0 billion for 1990-1992. These estimates are reviewed and revised periodically to re~ect changes in economic conditions, revised load forecasts and other appropriate factors. Facilities under construction and to be constructed, particularly*

Limerick Generating Station and associated facilities, will require permits and licenses which the Company hds no assurance will be granted.

The Price-Anderson Act, as revised August 22, 1988, sets a "Limit of Liability" of$7.I billion for claims that could arise from an incident involving any licensed nuclear facility in the nation. All utilities with nuclear generating plants, including the Company, obtained coverage for these potential claims through a combination of private insurances ($160 million, increased to $200 million January I, 1989) and mandatory participation in a financial protection pool. Under the amended law, all nuclear reactor operators can be assessed up to $63 million per reactor, payable at $10 million per reactor per year. If the damages exceed $7. I billion, the President is to submit to Congress a plan for providing additional compensation to the injured parties. Congress could impose further revenue raising measures on the nuclear industry to pay claims. The Company's maximum total annual assessment for Limerick Unit No. I and its ownership interest in Peach Bottom and Salem is $27 million per year up to a maximum of$170 million.

The Company maintains property insurance, including contamination coverage, for loss or damage to its nuclear facilities. Although it is impossible to determine the total amount of the loss that may result from an occurrence at these facilities, the Company maintains the maximum amount of insurance presently available, $1.57 5 billion for each station. Under the terms of the various insurance agreements, the Company could be assessed up to $31 million for losses incurred at any plants insured by the insurance companies. The Company is self-insured to the extent that any losses may exceed the maximum amount of insurance available.

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

The premium for this coverage is subject to an assessment for adverse loss experience. The Company's maximum share of any assessment is $15 million.

The Company is subject to assessments under its directors' and officers' liability and general liability insurance policies. The maximum 1988 insurance premium assessments under these policies could be approximately $10 million.

In September 1988, the Board of Directors adopted the recommendations of a Spedal Committee of the Board and resolved to take no action to preclude four then-pending shareholder derivative lawsuits from proceeding against the former Chairman/Chief Executive Officer and President/

Chief Operating Officer of the Company. with respect to claims alleging mismanagement on their part prior to the shutdown of Peach Bottom by the NRC in March 1987.

The Board also resolved to seek the dismissal of all claims in the lawsuits against these former officers for actions on their part after the shutdown, dismissal of all claims against the other individual present or former officers, directors and employees who had been named as defendants in the lawsuits, and dismissal of all claims concerning the proxy statement which has been distributed by the Company in connection with the 1987 Annual Meeting of Shareholders.

Counsel for the plaintiff shareholders have subsequently consolidated their actions into one lawsuit and amended their complaint to comport with the resolutions of the Board.

Because the consolidated lawsuit which remains pending against the two former officers is brought derivatively by shareholders on behalf of the Company, any monetary.

damages which may be recovered, net of expenses, will be paid to the Company.

On September 12, 1988, the PUC issued a proposed policy statement with respect to recovery of pipeline take-or-pay costs billed by the interstate pipelines under FERC-approved tariffs. The policy statement proposes a preferred recovery method under which the distribution company would absorb 50% of take-or-pay amounts billed by its pipeline suppliers.

The Company begar:i incurring such charges in May 1988, and presently estimates a total liability of approximately $41 million over a five-year period. In recognition of its pending policy statement, the PUC, by order entered September 30, 1988, removed take-or-pay costs of approximately $11.5 million in the Company's current purchased gas clause adjustment effective October I, 1988. This amount was ordered deferred until further action is taken on the proposed policy statement.

In December 1981, the Company sold the federal income tax benefits associated with Unit No. 2 of the Salem Generating Station for $53.7 million in a safe harbor lease transaction.

Under the sale agreement, the Company agreed to indemnify the purchaser against the loss of the tax benefits resulting from any Internal Revenue Service (IRS) claims which render the sale invalid. The Company's indemnification obligation

. also includes the payment of interest, at prime rates, on the indemnification amount and all associated costs of contesting an IRS challenge. The Company has been advised that IRS has asserted, in auditing the purchaser, that the sale was invalid. Although the purchaser has protested the IRS claims, the Company has no assurance that the protest will be successful. If the IRS claims against the purchaser are upheld, compliance with the indemnification provisions of the agreement could result in a significant charge to income.

16. Sales of Accounts Receivable In December 1988, the Company entered into a five-year agreement with a financial institution whereby it can sell on a daily basis and with limited recourse up to $200 million of an undivided interest in designated accounts receivable. At December 31, 1988, the Company had sold a $200 million interest in accounts receivable under this agreement. The Company retained the servicing responsibility for these receivables. The average interest rate computed on a daily basis on the portion of the accounts receivable sold but not yet collected was 9.39% in December 1988.

By the terms of this agreement, under certain circumstances up to $75 million of unrecovered revenue could be included in the pool of eligible receivables. At December 31, 1988, $51 million of unrecovered revenue has been included in the pool of eligible receivables.

Philadelphia Electric Company and Subsidiary Companies N o t e s t o F i n a n c i a I S t a t e m e n t s -

Continued forty forty-one I 7. Cash and Cash Equivalents Statement of Financial Accounting Standards No. 95, "Statement of Cash Flows" (SFAS No. 95) requires replacement of the Statement of Changes in Financial Position with the Statement of Cash Flows for financial statements Cash paid during the year:

Interest (net of amount capitalized)

Income taxes (net of refunds)

Noncash Investing and Financing:

Capital lease obligations incurred

18. Quarterly Data (Unaudited) with fiscal years ending a~er July 15, 1988. For purposes of the Statement of Cash Flows, the Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. The following supplemental disclosures are required by SFAS No. 95:

1988 1987 1986

$420,181

$ 82,730

$ 35,800 (In thousands)

$367,277

$ 75,100

$ 55,095

$371,590

$ 3,149

$ 48,471 The data shown below include all adjustments which the Company considers necessary for a fair presentation of such amounts.

Operating Revenues Quarter Ended 1988 1987 March3/

$851,259

$869,463 June 30 699,640 735.193 September 30 898,988 839,268 December 31 778,825 737,540 Earnings Applicable to Common Stock Quarter Ended 1988 1987 (Thousands of Dollars)

March]/

$137,734

$148,124 June 30 85,435 89,037 September 30 172,401 121,142 December 31 73,195 89,937 Independent Auditor's Report To the Shareholders and Board of Directors Philadelphia Electric Company Operating Income Net Income 1988 1987 1988 1987 (Thousands of Dollars)

$204,301

$215.721

$161,374

$172,010 I 55,751 158.724 I 10,064 111.965 244,076 191.258 196,861 144,823 138,467 151,380 97,651 113,598 Average Shares Outstanding Earnings Per Average Share 1988 1987 1988 1987 (Thousands)

(Dollars) 197,575 189,294

$.70

$.78 200,227 191.469

.43

.47 202,843 193,379

.85

.63 205,366 195,735

.36

.46 We have audited the accompanying consolidated balance sheets of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1988 and 1987, and the related consolidated statements of income, changes in common shareholders' equity and preferred stock, and cash flows for each of the three years in the period ended December 31, 1988.

These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for aur opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Philadelphia Electric Company and Subsidiary Companies as of December 31, 1988 and 1987, and the consolidated results of their operations and their cash flows for each of three years in the period ended December 31, 1988, in conformity with generally accepted accounting principles.

As discussed in Note 2 to the consolidated financial statements, certain legal actions were flied against the Company in 1988 by the other co-owners of the Peach Bottom Atomic Power Station seeking compensatory and punitive damages related to the shutdown of this Station. The ultimate outcome of these legal actions cannot presently be determined. Accordingly, no provision for any liability that.may result has been made in the accompanying consolidated financial statements.

2400 Eleven Penn Center Philadelphia, Pennsylvania February I, 1989

Financial S t a t i S t i C S Philadelphia Electric Company and Subsidi~ry Companies

SUMMARY

OF_ EARNINGS (Millions of Dollars)

For the Year Ended 1988 1987 1986 1985 1984 1983 1978 Operating Revenues (for details see pages 43 and 44)

$3,228.7

$3,181.5

$3,090.9

$2,945.2

$2,898.7

$2,524.9

$1,413,9 Operating Expenses Fuel and Energy Interchange 745.I 710.6 889.3 1,097.8

/,069.9 939.5 546./

Labor 424.2 437.6 417.2 370.8 339.6 311.2 195.0 Other Materials, Supplies and Services 608.3 564.6 475.2 440./

413.B 342.3 124.9 Total Operation and Maintenance 1,777.6 1.712.B J,7Bl.7 l,90B.7 I,B23.3

/,593.0 B66.0 Depreciation 264.I 251.9 217.7 IB3.0 176.4 163.4 114.9 Taxes 444.4 499.7 517.0 440.9 449./

376.B 193.3 Total Operating Expenses 2,486.I 2,464.4 2,516.4 2,532.6 2,44B.B 2,133.2 1,174.2 Operating Income 742.6 717.I 574.5 412.6 449.9 391.7 239.7 Other Income and Deductions Allowance for Other Funds Used During Construction 98.9 77.2 76.B 176.3 134.5

/OB.I 37.6 Capitalized Limerick Costs 73.I 66.6 172.9 Adjustment to Utility Plant Costs (36B.9)

Credit (Charge) Related to Phase-In Plan 26.2' IB.4 (91.B)

Income Tax Credits, Net 43.5 35.3 279.7 133.4 116.4 Bl.9 26.3 Other. Net 7.9 IB.3 2.4 (3.5) 0.2 (3. I) 4.6 Total Other Income and Deductions 249.6 215.B

71. I 306.2 251./

192.9 6B.5 Income Before Interest Charges 992.2 932.9 645.6 7/B.B 701.0 5B4.6 30B.2 Interest Charges Long-Term Debt 524.I 467.3 45B.9 435.4 402.5 330.2 176.3 Short-Term Debt 24.2 17.2 12.5 17.7 30.9 35.2 2.5 Allowance for Borrowed Funds Used During Construction (122.1)

(92.2)

( 101.6)

(257.2)

(220.4)

(167.9)

(53.4)

Net Interest Charges 426.2 392.3 369.B 195.9 213.0 197.5 125.4 Income From Continuing Operations 566.0 540.6 275.B 522.9 4BB.O 3B7.I IB2.B Income From Discontinued Operations l.B 1.9 2.4 4.4 2.0

'2.0 Loss on Disposal of Discontinued Operations

( 1.2)

Net Income 566.0 542.4 276.5 525.3 492.4 3B9.J IB4.B Preferred Stock Dividends 97.2 94.2 90.9 90.6 B2.7 67.4 43.5 Earnings Applicable to Common Stock 468.8 44B.2 IB5.6 434.7 409.7 321.7 141.3 Dividends on Common Stock 444.I 423.3 403.5 373.5 334.3 2B3.6 135.7 Earnings Retained

$ 24.7 24.9

$ (217.9) 61.2 75.4 3B.I 5.6 Earnings Per Average Common Share From Continuing Operations (Dollars) 2.33 2.33 I.Of 2.55 2.67 2.39 l.B5 Earnings Per Average Common Share (Dollars) 2.33 2.33 I.Of 2.56 2.70 2.40 l.B7 Dividends per Common Share (Dollars) 2.20 2.20 2.20 2.20 2.20 2.12 I.BO Common Stock Equity (Per Share)

$ 17.39

$ 17.20

$ 16.95

$ 17.97

$ 17.BI

$ 17.99

$ /9.2B Average Shares of Common Stock Outstanding (Millions)

• 201.5 192.5 IB3./

169.B 151.B 133.9 75.4

Financial S t a t i s t i c s -

Continued Philadelphia Electric Company and Subsidiary Companies forty-two forty-three I

SUMMARY

OF FINANCIAL CONDITION (Millions of Dollars)

December 31 1988 1987 1986 1985 1984 1983 1978 Assets Utility Plant, at original cost

$12,444.3

$11,641.2

$10,847.8

$10,572.2

$9,834.I

$8,864.2

$5,502.5 Less: Accumulated Depreciation 2,395.8 2, 169.4 2,005.7 1,824.4 1.726.3 1,592.0 1,053.3 Leased Property, Net 287.5 287.2 281.3 338.I 352.I 364.0 109.4 Net Utility Plant 10,336.0 9,759.0 9,123.4 9,085.9 8,459.9 7,636.2 4,558.6 Current Assets Cash and Temporary Cash Investments 43.6 43.0 90.7 188.8 30.4 57.2 38.6 Accounts Receivable 175.7 385.8 375.6 370.9 384.2 338.6 223.5 Inventories 170.3 150.3 129.7 123.7 150.5 131.I 93.3 Unrecovered Revenue 54.I Deferred Energy Costs 50.4 6.2 (88.2) 101.7 229.9 149.3 4.2 Other 78.9 73.8 78.6 71.8 137.0 52.3 25.7 Deferred Debits and Other Assets Unrecovered Revenue, Net 251.0 217.6 20.6 Deferred Limerick Costs 375.9 286.0 202.7 Investments 97.8 100.9 89.7 87.7 80.9 99.4 30.0 Loss on Reacquired Debt 118.3 119.I 76.8 48.6 Other 110.9 68.0 70.7

• 86.2 82.9 80.4 7.5 Total

$11,862.9

$11,209.7

$10,170.3

$10,165.3

$9,555.7

$8,544.5

$4,981.4 Capitalization and Liabilities Common Stock

$ 3,177.6

$ 2,995.2

$ 2,833.0

$ 2,602.0

$2,361.0

$2,110.5

$1,139.7 Other Paid-In Capital 5.1 4.6 7.8 7.3 6.7 5.9 2.0 Retained Earnings 409.9 387.I 363.3 583.7 523.3 452.9 333.6 Common Shareholders' Equity 3,592.6 3,386.9 3,204.I 3,193.0 2,891.0 2,569.3 1,475.3 Preferred Stock:

Without Mandatory Redemption 622.4 572.5 572.5 572.5 572.5 522.5 372.5 With Mandatory Redemption 368.I 389.I 374.9 318.3 326.2 284.9 210.9 Long-Term Debt 5,219.5 4,870.7 4,286.8 4,309.2 3,778.0 3,381.8 2,173.2 Total Capitalization 9,802.6 9,219.2 8,438.3 8,393.0 7,567.7 6,758.5 4,231.9 Current Liabilities Short-Term Debt 102.0 1.0 260.0 267.5 16.2 Long-Term Debt Due Within One Year 70.2 80.9 108.6 80.8 50.4 52.9 Lease Obligations Due Within One Year 72.I 60.6 69.4 76.3 68.3 61.5 18.8 Accounts and Dividends Payable 220.4 206.0 222.I 185.I 200.I 179.9 120.3 Taxes Accrued 140.0 114.7 86.I 58.5 40.3 25.8 42.3 Deferred Income Taxes -

Energy Costs 20.0 2.7 (44.8) 51.8 117.7 76.5 2.2 Interest Accrued 129.4 121.7 90.7 93.0 91.I 91.8 51.0 Other 80.7

72. I 80.0 72.0 127.2 54.I 29.3 Deferred Credits and Other Liabilities Capital Lease Obligations 215.5 226.6 212.0 261.8 283.8 302.5 90.6 Deferred Income Taxes 753.3 682.9 560.5 502.6 373.3 346.5 177.3 Unamortized Investment Tax Credits 273.0 282.3 299.7 302.4 299.4 249.7 138.4 Other 85.7 38.0 47.7 87.0 76.4.

130.2 10.2 Total

$11,862.9

$11,209.7

$10, 170.3

$10,165.3

$9,555.7

$8,544.5

$4,981.4

Operating S t a t i s t i c s Philadelphia Electric Company and Subsidiary Companies ELECTRIC OPE.RATIONS 1988 1987 1986 1985 1984 1983 1978 Output (Millions ofKilowatthours)

Steam 10,225 9,835 7,864 9.455 11.085 10.457 13,160 Nuclear 12,328 11.853 17,125 8,359 6,462 5,520 7,769 Hydraulic 1,307 1.590 1,848 1.484 2,085 1,739 J,700 Pumped Storage Output 1,515 1,251 1,176 1,235 I.JOO 979 1,109 Pumped Storage Input (2,163)

(1.787)

( 1,661)

( 1,754)

( 1,579)

( 1,427)

( 1,606)

Purchase and Net Interchange 11,367 9,806 4,258 10,252 11.975 12,181 6,651 Internal Combustion 285 232 269 178 425 491 704 Other 382 1,254 Total Electric Output 34,864 32,780 31.261 30.463 3/,553 29,940 29,487 Sales (Millions ofKilowatthours)

Residential 10,058 9,441 8,900 8,440 8,515 8,467 7,875 Small Commercial and Industrial 4,666 4.341 4,022 3,731 3,543 3,284 2,888 Large Commercial and Industrial 16,516 15.789 15.068 14,920 14,881 14,478 15,302 Al/Other 999 974 993 1,044 1,061 1,003

/,329 Service Territory 32,239 30,545 28,983 28,135 28,000 27,232 27,394 Jersey Central Power and Light (Salem Unit No. 2) 1,395 346 Total Electric Sales 32,239 30,545 28,983 28,135 29,395 27.578 27,394 Number of Customers, December 31 Residential 1,296,784 1.280.297 1.263,465 1,245.481 1,230,883 1,217,635 1,158,853 Small Commercial and Industrial 135,274 131,279 127,797 124,719 121,676 119,292 115,945 Large Commercial and Industrial 4,520 4,589 4,668 4,881 5,100 5,437 5,780 All Other 779 771 763 773 751 751 2.413 Total Electric Customers 1,437,357 1,416,936 1,396,693 1,375,854 1,358,410 1.343,115 1,282,991 Operating Revenues (Millions of Dollars)

Residential

$1,127.8

$1,092.6

$1,023.6

$923.9

$854.9

$744.0

$ 430.8 Small Commercial and Industrial 489.4 471.7 437.0 388.7 360.2 316.6 176.5

_Large Commercial and Industrial 1,089.3 1.103.3 1.103.3 1,061.8 1.008.5 877.4 544.0 All Other 143.8 142.I 135.5 141.8 145./

139.4 73.I Service Territory 2,850.3 2.809.7 2,699.4 2.516.2 2.368.7 2.077.4 1.224.4 Jersey Central Power & Light (Salem Unit No. 2) 67.0 30.5 Total Electric Revenues

$2,850.3

$2,809.7

$2,699.4

$2,516.2

$2,435.7

$2,107.9

$1,224.4 Operating Expenses (Millions of Dollars)

Operating expenses excluding depreciation

$1,913.7

$1,895.I

$1,961.4

$1,974.2

$1,858.5

$1,592.0

$ 896.3 Depreciation 245.5 234.9 201.8 168.2 163.0 150.9 106.3 Total Operating Expenses

$2,159.2

$2,130.0

$2,163.2

$2,142.4

$2,021.5

$1,742.9

$1,002.6 Electric Operating Income (Millions of Dollars)

$ 691.I

$ 679.7

$ 536.2

$ 373.8

$ 414.2

$ 365.0

$ 221.8 Average Use per Residential Customer

( ki/owatthours)

Without Electric Heating 6,667 6,431 6,177 6,034 6,/60 6,319 6,290 With Electric Heating 17,738 16,824 16,661 15,923 17.293 16.523 21.884 Total 7,807 7.427 7,097 6,820 6,960 6,990 6,883 Electric Peak Load, Demand (thousands of kWs) 6,826 6,547 6,134 6,034 5,925 5,879 5,667 Net Electric Generating Capacity -

Year-End Summer rating (thousands of kWs) 7,762 7,762 7,870 7,599 7,765 7,974 7,727 Cost of Fuel per Million Btu

$1.19

$1.35

$1.18

$1.72

$2.22

$2.25

$1.29 Btu per Net Kilowatthour Generated 10,881 10,879 10,844 10,843 10.920 10,906 10.773

0 p e r a t i n g S t a t i S t i C S -

Continued Philadelphia Electric Company and Subsidiary Companies GAS OPERATIONS 1988 1987 1986 1985 1984 Sales (Millions of Cubic Feet)

Residential 1,933 1,854 1,856 1,810 1,941 House Heating 28,112 26,010 25.731 23,227 25,429 Commercial and Industrial 39,073 38,170 33,834 36,254 41,145 Al/Other 2,228 1,541 578 1,209 1,282 Total Gas Sales 71,346 67,575 61,999 62,500 69,797 Gas Transported for Customers 9,272 7,374 3,907 10,262 3.794 Total Gas Sales & Transported 80,618 74,949 65,906 72.762 73,591 Number of Customers, December 31 Residential 66,599 67,688 68,590 69,632 70.794 House Heating 239,022 231,618 225,010 217,840 211,984 Commercial and Industrial 27,119 26,021 24,884 24,234 23,442 Total Gas Customers 332,740 325,327 318,484 311.706 306,220 Operating Revenues (Millions of Dollars)

Residential

$ 17.0

$ 16.7

$ 18.0

$ 18.7

$ 19.0 House Heating 180.6 175.7 189.8 185.4 191.7 Commercial and Industrial 165.I 167.5 177.7 214.I 243.7 Al/Other 6.6 4.4 2.0 5.2 5.6 Subtotal

$369.3

$364.3

$387.5

$423.4

$460.0 Other Revenues (including Transported for Customers) 9.1 7.5 4.0 5.5 3.0 Total Gas Revenues

$378.4

$371.8

$391.5

$428.9

$463.0 Operating Expenses (Millions of Dollars)

Operating expenses excluding depreciation

$308.3

$317.4

$337.3

$375.4

$413.9 Depreciation 18.6 17.0 15.9 14.8 13.5 Total Operating Expenses

$326.9

$334.4

$353.2

$390.2

$427.4 Gas Operating Income (Millions of Dollars)

$ 51.5

$ 37.4

$ 38.3

$ 38.7

$ 35.6 Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Agency Rating Date Established Rating Date Established Rating Duff and Phelps, Inc.

9 3/80 ID 3/80 II Fitch Investors Service BBB 9/82 BBB-9/82 BB+

Moodys Investors Service Baa3 1/83 Bal 1/83 bal Standard & Poors Corporation BBB-9/82 BB+

9/82 BB+

NYSE -

Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1988 1987 Fourth Third Second First Fourth Third Quarter Quarter Quarter Quarter Quarter Quarter High Price

$20ll.i

$19

$19Va

$21ll.i

$20%

$23%

Low Price

$18Vi

$17VB

$16Vs

$18

$I 6:i4

$ / 9:i4 Earnings 36¢ 85¢ 43¢ 70¢ 46¢ 63¢ Dividends 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ forty-four forty-five 1983 1978 2,168 2,316 22,981 24,974 39,043 32,784 672 94 64,864 60,168 789 65,653 60,168 72,501 87,715 206,443 163,469 22,810 19,207 301.754 270,391

$ 19.I

$ 9.9 165.8 86.6 227.3 92.2 3.0 0.2

$415.2

$188.9 1.8 0.6

$417.0

$189.5

$377.6

$163.0 12.7 8.6

$390.3

$171.6

$ 26.7

$ 17.9 Pref erred Stock Date Established 2/83 9/82 1/83 7/86 Second First Quarter Quarter

$22Vi

$26

$19Va

$20:i4 47¢ 78¢ 55¢ 55¢

Board of Directors:

Susan W. Catherwood Chairman, Board of Overseers, The University Museum, University of Pennsylvania Wiiiiam T. Coleman, Jr., Esquire Senior Partner of the law firm O'Melveny & Myers M. Walter D'Alesslo*

President and Chief Executive Officer, Latimer & Buck, Inc. (Mortgage banking and real estate development)

William S. Gaither Vice Chairman, Roy F. Weston, Inc.

(Environmental and consulting engineering)

Richard G. Gilmore Senior Vice President. Finance and Chief Financial Officer of the Company Robert D. Harrison*

Management and marketing consultant Joseph C. Ladd*

Chairman and Chief Executive Officer, The Fidelity Mutual Life Insurance Company Edithe J. Levit, M.D.

President Emeritus and Life Member of the Board, National Board of Medical Examiners Joseph}. McLaughlin*

President and Chief Executive Officer, Beneficial Mutual Savings Bank Joseph F. Paquette, Jr.*

Chairman, President and Chief Executive Officer of the Company Ralph J. Roberts Chairman, President and Chief Executive Officer. Comcast Corporation (Communications company)

Ronald Rubin General Partner, Richard 1. Rubin & Company (Real estate development and management)

• Member of Executive Committee Director Changes:

john H. Austin, Jr. resigned as a member of the Board, effective March I, 1988 Joseph F. Paquette, Jr. was elected a member of the Board and a member of the Executive Committee on March 7, 1988, and was elected Chairman of the Board on April 13, 1988 Robert F. Gilkeson did not stand for re-election in 1988, having reached the mandatory retirement age James L. Everett resigned from the Board, effective October 24, 1988 James D. Watkins was elected a member of the Board on June 27, 1988, and resigned upon appointment as Secretary. Department of Energy, onjanuary 12, 1989 Susan W Catherwood was elected a member of the Board, effective January 23, 1989 Ronald Rubin was elected a member of the Board, effective January 23, 1989

Officers:

Joseph F. Paquette, Jr.

Chairman, President and Chief Executive Officer Corbin A. McNeil/, Jr.

Executive Vice President, Nuclear Richard G. Gilmore Senior Vice President, Finance and Chief Financial Officer John S. Kemper Senior Vice President, Nuclear Construction Raymond F. Holman Senior Vice President, Operations Clifford Brenner Senior Vice President, Corporate Communications James W. Durham Senior Vice President, Legal and General Counsel Philip G. Mulligan Vice President, Gas Operations Morton W. Rlmerman Vice President. Finance and Accounting Raymond C. Williams Vice President, Rates Albert G. Mlkalauskas Vice President, Electric Transmission and Distribution Joseph W. Gallagher Vice President, Nuclear Services S. Joseph Kowalski Vice President, Nuclear Engineering Alvin J. Weigand Vice President, Engineering and Production Kenneth G. Lawrence Vice President, Commercial Operations Graham M. Leitch Vice President, Limerick Generating Station Dickinson M. Smith Vice President, Peach Bottom Atomic Power S totion Eugene J. Bradley Vice President and Associate General Counsel Albert J. Solecki Vice President, Information Systems and General Services Joseph A. Carter Vice President, Personnel and Industrial Relations Lucy S. Binder Secretary Management Changes:

Donald P. Scott Treasurer M. Dorothy Lyons Assistant Secretary Jon A. Katherine Assistant Treasurer William M. Lennox, Jr.

Assistant Treasurer J. Robert Causton Assistant Treasurer john H. Austin, Jr. resigned as President and Chief Operating Officer, effective March I, 1988 James L. Everett resigned as Chairman of the Board and Chief Executive Officer, effective April 13, 1988 Joseph F. Paquette, Jr. was elected President and Chief Operating Officer on March 7. 1988 and Chairman of the Board, President and Chief Executive Officer on April 13, 1988 Corbin A McNeil/, Jr. was elected Executive Vice President, Nuclear on March 7, 1988 Edward G. Bauer.Jr. resigned as Senior Vice President, Legal and General Counsel on May 23, 1988 Clifford Brenner was elected Senior Vice President, Corporate Communications on June 27, 1988 Eugene J. Bradley was elected Vice President, Legal and Associate General Counsel on June 27, 1988 Albert}. Solecki was elected Vice President, Information Systems and General Services on June 27, 1988 Charles L. Fritz retired as Vice President, Personnel and Industrial Relations on July I, 1988 Joseph A Carter was elected Vice President, Personnel and Industrial Relations, effective September I, 1988 James W Durham was elected Senior Vice President, Legal and General Counsel, effective October 24, 1988 A Lewis Parry, Jr. retired as Vice President, Purchasing and General Services on October I, 1988

).

forty-eight

Philadelphia Electric Company 2301 Market Street PO Box 8699 Philadelphia PA 1910 I

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