ML18095B017

1988 Annual Rept. W/890406 Ltr

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

one

• I Philadelphia Electric Company Annual Report 1988 Financial Highlights 1988 1987  % Change Operating Revenues $3,228,712,000 $3,181,464,000 1%

Operating Expenses $2,486, I I 7,000 $2,464,381,000 I%

Taxes Charged to Operations $444,374,000 $499,653,000 (//%)

Operating Income $742,595,000 $717,083,000 4%

Earnings Applicable to Common Stock $468,765,000 $448,240,000 5%

Earnings per Average Common Share $2.33 $2.33 Cash Dividends Paid per Common Share $2.20 $2.20 Average Shares of Common Stock Outstanding 201,517,000 192,489,000 5%

Construction Expenditures $I ,08 I ,577,000 $1,037,500,000 4%

Total Assets $I I ,862,852,000 $11,209,736,000 6%

Contents Letter to Shareholders two Report of 1988 Operations five Financial Statements nineteen Directors forty-five Officers forty-eight Shareholder Information forty-nine

. ~

Cover:

Various newspaper EARNINGS AND CONSTRUCT/ON headlines of 1988 DIVIDENDS PER SHARE EXPENDITURES reflect both the Million Dollars .50 1.00 1.50 2.00 2.50 3.00 Dollars 200 400 600 800 1000 1200 recent peak demands and the Increased.

economic activity throughout the service territory

.1 that wlll require the additional energy capacity that generating plants such as Limerick (opposite) and Peach Bottom wlll provide. - Earnings Per Share External Sources

- '.'-:_ - 1 Dividends

= Internal Sources I,'

I I

1***  ! .

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.

Joseph F. Paquette,

6. There have been favorable responses to our extensive efforts to establish better communications with Jr., 54, is Chairman of the Board, customers, regulatory agencies, governmental representatives and the media. President and Chief Executive Officer

7. Despite the unavailability of Peach Bottom, our electric system satisfactorily met the record demands of the Company.

He has 31 years of imposed upon it during the unprecedented hot weather of the past summer due to excellent availability service with the Company. He was of our other generation. Our customers' hourly demand reached a new peak of 6,826 megawatts on the Company~

Vice President -

August 15, an increase of 4% over the previous record established in 1987. Finance and Ac-

8. While our energy sales got a boost from favorable weather, solid economic growth in the service territory counting for eight years prior to join-also provided real growth in our electric and gas businesses. Both electric and gas sales were at record ing Consumers Power Company in levels as electric sales rose 5.5% and gas deliveries improved by 7.6%. Michigan in 1986.

He rejoined PE In

9. Your Board of Directors was strengthened with the addition of Susan W Catherwood, Chairman, Board of 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.

I0. 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 *. I 9 8 8 F i n a n* c i a I Re s u I t s five

• 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

~hich. 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

six .

seven 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 Millions of Dollars March Stated Rate Auction Preferred.Stock *

--= 10.75% (initial rate through 4/30/93) .. $ 50.0 April Mortgage Bonds - 10% Serles due 1998 . 150.0 Mortgag_e* Bonds*_ I Wo Series due ~OIB:_ ioo.o Sale of M~rrlll Cr~ek Reservoir Project . 145.3

Customizei Purchas~* Bonds - Floating Rate . 154.2 December. . Accounts Receivable 200.0 January -:--

December* Commop S!ock Purchase Plans:

• Dividend Reinvestment" Plan & Employee ~tock Purchase Plan

. 7,7 I 2;000 shares; average pri~e of$./ 8.19 - . 144.9

• Common Stock Continuous Offering:

2,000,000 shar~s; *average price of$ I 8. 72 . 37.4 Sub To_tal $ 981.B.

January-

. Oecember .-*Bank Borrowings: *- ,.

Revolving Credit Agreement - net*borrowings . 150.0

.: New ter"m /~an borrowings (80.0 Total * $/;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 At 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

-eight nine Corbin A. McNelll, Power-Oper'!tions (INPO) ~nd numerous public meetings. A w~rkforce of as many cis 3,700 peopie

• Jr., 49; Is Executive Vice President, has ~een involved in the resiart _proces_s. , .:

Nuclear' and Is responsible for all Major activities were u!'derta~en to improve the physical_

aspe~s of the Com-pany's.nuclear

• 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

• operations, lnclud*

Ing .construction, * . ' " ' - . ... -

operations, engl*

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

support services. - color-(ode~ and labeled to provide better visibility to ojlerators on key systems. The n~w Peach He completed o 20,year career Bottom control room simulator-is expected to be installed at the plant in the fall of:1989.

with the U.S. Navy . .

In 1981 and has* The* Company has provided ready- access _to information served In various executive copacl* about Pea_ch Bottom to elected officials and ~rea. community leaders th~t;Jugh. a coort:linated-

-ties In nuclear

, generation prior 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 to Joining PE In February 1988.

Immediately prior to PE; he was Sen- - plan~. Biweekly newslett~rs to ev_~ry resident of the~area ~nd ~ fo_cused'speakers burf'.a~ activity.

lor Vice President

• - Nuclear for along with several news media briefings. have helped to keep the public informed.*

-Public Service .

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

• Electric and Gas

_Company. 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. 3restart 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

. Mr.McNel/f

. (back t~ camera) when' ~each Bottom :would be ~eady for restart foll~wed. the iss~ance ~f t~e SALP repo~~ and confers with his . preliminary observqtions *by INPO concerning.its evaluation pf activities at Peach BOttom. The 11Jan~gement . . - ..

team:*(/eft to right}, *additional *time allotted for preparing for restart will also provide greater assurance of an orderly

• John S. Kemper, 60, Senior Vice Presl* restart and power ascension program. Completion of all the physical

. .- . . , ~ ' .r. -

,,~rk leading.to restart.is~.

dent,_Nuclear '

Construction; scheduled for March 1989. The schecjule anticipates a two-week NRC team _assessment in Febru-Graham M. Leitch,. '

• 54, Vice President, ary foliowed by a period of about six w~eks for report development pri~r an NRC decision on to restart. Therefore, the Company anticipates the removal of all impediments to* restart by ea~ly Limerick Generat*.

Ing StatlOn; Joseph W. Gallagher, 63, Vice President, AprlJ, with an N~C dec!sion to folio'!'-

Nuclear Services; S. Joseph Kowalski, .

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

60, Vice President, *a continuing replacement power cost penal~y of approximately $8 million per month ($4 million Nuclear Engineer-ing; and Dickinson : per unit) and an equity* return penalty of approxi~ately $;z.5 million per month, for. a total M. Smith, 55, Vice

• President, Peach - penalty of ....

appro~imat~ly $10.5 million ' -

per month. In A-~gust, the NRC- .proposeci* -

a fine. of -

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

ten eleven o.perators and supervisors ;vho condoned the inattention of reactor operators.at Peach Bottom - Raymond F. Holman,

• 61, ls Senior Vice prior to the March 19B7 sh-utdown."The- NRC also proposed f.nes, ranging 'rr~m $500 to $1,000, - President,

• Operations and has against 33 present or former -reactor oper.ators at *Peach Bottom for sleeping ~r other acts of *_ *. 41 years af service with the Company.

ina~tention.

to ~~ty th~i:* occurred at Peach_- Bottom. . ~ -

The $1,250,000 fine was paid In Sept~mbe~'

He *has respon-

• slblllty far all non- .

-LJnit No. 3. Repiping Completed - TIJe replacement of Peach Bottom Unit No.* 3 primary piping was nuclear opera- - : -

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

• tlans, Including electrlc produc-

• granular stress corrosion llf the original pipe mqterial, was similar to th~t accomplis.hed on Unit tion; electric transmission and -

No. 2 in 19B5. Th~ repla~emen.t ~f this reactor pipi~g- has been undert~ken at othe~ b~iling water distribution; gas .

operations; engl-reac~o~s.. The .r~place,:,,eryt _V.:as. compieted with less radlatio~ *: ~xpdsure t~ workers than ~n~ - neerlng anil research; and all *

-~~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; custome~related

• a~tlvltles. He also

• million. r;;f which PE's share was -$32 million: -- 'supervises the ac-Security_ Chan~eover*-~ Nucl~ar p~wer f?lant security*is a complex l);eration._thqt includ~s security force - tivities of the five

• *DlvlslonManagers

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

• and the *operations:

of a PE subsidiary -*

. -- proper plant de~ign .and con~truction, and:close cooperation.with local law_ enforceme~t. Du~fng company, the

• Con.;wlngo Power '.

t.~e summer,- PE. selected and retained a new cont~octor to provide *protection services at Peach conip11ny. * * - - **

. 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

.. -:. ' ~- . . j;l~d a similar_ :-

f>Ower and Light Compan.y

" ".- . '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

' r * * * * * ,* * * * * ' * '

fcir_ claims **

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

• to c.amera)dls-

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

wltll his m1:1nage-'

' o( the, company and. its shar~holder~ to allow th*e ppr~ies to proceed with_- their *t;:,aims _and

• ment team: (left to

. right) Alvin J.

defenses in ~n appropriat~ legal forum. The -~oard-also 'voted to seek dis-,,,issal of the ~laims Weigand, 50, Vice

• President, Engl-against these former*officers for;acti_ons taken.afte~ the issuance of the March 31, 19B7 s~utdown neerl~g and

• Productlon;"Albert

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

52, Vice President,

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

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

• b~tlon; Kenneth _

• - ** I

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

• _41, Vice President,

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

- Commercial Ope~

~

• atlans; and Ph/lip

• L i rri e r i c k G e n e r a t ;: n g S t a t io n .

• G. Mulllgan, 64,

. Vice President, Gas Unit No. 8. Operations at Limerick Unit No: I cont!nued to go. well. Covering* performance for. ~he Operations.

- twelve'* :

thirteen' I

Richard G. Giimore, period February I, 1987 to Aprll 30, 1988, the NRC SALP report awarded Limerick Unit No. I six 61, ls Senior Vice * * * ~

• r

• President - F.1-.

• category I ratings (highest) and two category 2 ratings (satisfactory). On November 8, Unit No. I

. *nance and Chief Financial Officer. broke its own record of c.ontinu9us operation;_ that record co,;tiriued 'th~ough Ja~uary ~I,' 1989, -

He Is reslJonslbfe for overseeing all 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~

finance, account-'

• ' frig and treasury-related matters; rates; Information length of run. Opei:ating deci~ions -a~e g~verned b~ long-term objectiv_~s and ~ot by sho~-ter~*

systems; IJurchas-lng and other

- _goals.

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

• He assumed his IJresent reslJon- - ' level o(collect!ve personal radiatlolJ exposure~ In 1988, th~ plb-,,t performed- at *a_ near world sibl/itles In AP.ril * * . . ' . -

1986. Mr. Gilmore rec;ord level of ,ow exposure for large. boiling-w_ater reactors. This extremely low level of exposure has served as 'a member of the resulted from exc;ellent pl~nt safety practices, the high re,iability_- experienced in 1988 and design Board of Directors*

• of the ComlJany features which provide for radiation shielding.

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

• Girard Ban_k.

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.

. Mr. Gilmore (back . -. :PE's constr11ction of the B~ads~aw -Reservoir continued .

_to camera) meets . .

with his manage- througho-;,t 1988. The 25-~illion-gailon reservoir and primping.~tation, whi~h will ~eceive wa~er ment team: (left*to

.right) Raymond C.

• f~Qm. POint Ple'cisan-t and act as the dfviding point 'for water for Limerick and two M(?,;tgom~ry

' ' - ~ .

Wllllams,_ 62, Vice

• President, Rates; ,

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

• MononW.

Rlmerman, 59, Vice * . tweeri Bradshaw* Res_ervoir and the_ East_ Branch ofthe Perkiomen- Creek (East Branch) began in_

• President, Finance*

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

Albert J. Solecki, _ . _ '*through the East Branch to a pumping statio_n near Limerick :.Vhich will pump the water through *

, 48, Vice President, . *

• Information Sys- - an eight-mile transmission majn to the station. The estimated completion date of ali components tems and General -

Servlces;"and of the s~pplem~ntal water system fo~ Lim~ri~k is September -1989. . - -

Donald P. Scott, 54, Treasurer. Several legal and regulatory problems exist, any one of

fourteen "

, fi~een which if resolv~d unfavorably to the Company; would prevf!lnt the use of the supplemental cooling Clifford Brenner, 64, is Senior Vice

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

. problems also heighten the importance . oftfle Company's

- . . ability to continu..e,_to.ob_tain adequate*

. Communications ond is responsible

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

• for all Company

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

• communications with the media,

. public information, necessary approvals for a modified supplemental cooling water system: For further discussion, see governmental rela-page 32. tions, and

• operations at . .

Merrill Creek Reservoir Completed *Construction ~f the 15-~illion-gallon M~rrill Creek Reservoir was.' Muddy Run Recre-ation Park' and the completed .and the initial .filling ~f the reservoir was finished in, October. PE. and six other. utilities "Limerick Energy In*

formation Cent~~*

_share* oper'!tion of the *$220 milliori facility. The stored. wate~ will be released to the Delaware /1e has 13 years of

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

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 *Joseph A. Carter, 52; joined the Com-

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

• pany In September 1988 as Vice

.

• Major development is occurring along most of the regiotJ's major highways. In the airport area, _a . .- President, P.ersonnef n.umber d( projects h~ve*b~en.~o~pl~ted, including'the'i~itial phase ~f'a major* shipping ~om and Industrial

• Relations. He Is pany~ distributio_n facility which will .eventu~lly e,;.ploy up to 7,000 peopie, *In addition~ major.*

responsible for all

• personnel and em-r~novations a~e plOnned for Philadelphia ln!ern~tional Airport itself. , - .

• plofee matters and industrial rela-Not far from the airport is _the iritersecti~n of 1~95 and the tions. Mr. Carter*

came to ~E from *

• Blue Route, a highway which will l!nk Delaware County riverfront ~ommuni!ies an~ o~her commu- the BOC Group,

.- Incorporated; of nitles along the highway with the Pennsylvdnia Turnpike w~st ~f ~hiladelphia. This long"awaited, Montvale, New

• Jersey, where he- *

• cr~ss-county highway will open.up the E.ast Coast market to more of the regi~!'-'s businesses. The served as Corporate

• Vice President for first section has opened and construction is underway on the remaining sections, with completion Human Resources. -

• _,*>I * .,_ * , : * ', ' *I * ' ... ... ,, '* "', *

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the.Blue Ro~e~* interse_ctl9ri W,i_th th~ Pei:Jri~ylva~i~"- : ~ :*,

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• _. :. ,. : .~ ,:furnpilCe,.a major.regio~al.shopping*mall'and business complex_ witliover l.6milli0n square*feet of * : ~ ..

'.';).~~~

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sery~: ~h~: ~~IJy:* ~e~. *re,slde~tia~~ :co'!'me~(!~f: ~ii~ fn~u~rlal ~ ~u~tomer~~. , *~. : ..

Th~.'s~c~ess a_nd iecf?~~;~~C?n:_of PE.'s. Excel{en~~ )n *Ene~gy~~fflcie11cy' (EE.Ef ;> ,-:. *'

• .. - .- dent,General- . . **....-.--_-, ..... --** ... , *'- .'* *~* ,........ *.. 1

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• 0

'. :*:: :Port!a~d_G~neral' . * :,: '*"*: :... -._ ._ -:*build~r:s*tq:as~f!.re:cori_struc~.ion_st~n!lar.ds't/:l~t *~esul~ !n -~!'Jergy-eff!ci~rit hci~.es."Th~* hig~ ther111a1:*:.; .'-. .

• . ~-.* *. ~ *- Electric.Company, .1 * ~. **** ~- - ~ __ * - * * ** - * -~- ._ - - * ;:  : *

• _, - -*. "'~... .: '  : * *  : , ...,...,. * * , ** * ** .:::J.: *- *: ; *

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~* .. ': . arid Portl~nciGe~::""'. , -: . .'. -. ;... ; _.:', : ... bµllding.st~i:idard!'qf this program offer. ~he homeo\iner..a11 f!nergy',;ef(i~ien~ hQ.frJe *resulting in* ,:*

• _ ,>

.'

,: _:' .:.:."*: . ,;~a;;~~X~;:~:n.;!".* ~-- .'.~ ;.*-.: *~~:<> :;- . ~~e~~~* of ~9irit~~:~;il.. i~~~" Jt~1i~y *,;ms; Pr~s~ni1Y,. ~lth;~d~e'.tl1~~'200 *b~ifd~r's: ~~rii~i;>~i;~g, .i~iioo :~ >:: :~.: *.

"" * . *.:. -* .::,:. *: < :* .- -' -: .,.; :~: :.~~ *:: *:hew *~_oine~ hav~ -beei_i bufiqo E.EE. . ~~*hd~*rds..;l~c~.:th~~pr~g~'am 6eta~ t~." 19ss:;~-.j~iy;**thiEEE. -. ~ .'* .

' .~ ;.: ,. '.. <. ~. *~;' ;:.  :> \' .::.-*: ,.* ., .:. : . ~ ~ ~-:* Pf~gr.a~*:~~~ r~~~g~i~ed~~ith a *na~lo_~~*-a~a"~ by* -~~f!:Edis~~- Eie~~r:i~:l~stit:ite/~.ln.ni~g~the':E.E.i .; . . -:*.;,..,,

• .* ~, '.. ,-::

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• , ** - . * <-,- * *

• Ga~

~ ,'.~';_ ',;~j~:~~**:~~5::~T~:r*:~*~

R~tes Cof!1p.ete: :. '. ._ OrO!'.nuary.J5~J'!88~ the PUC afipro~e,d njodjfiC:ations ~o_the. Comp.ciny's _in~errcipth :*.';* > :<

1d~:~:~9, ,<

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• ~'.' * *:-* *...-~:._: *:_:* :. _:-.:.- *; -;_ - *: *~:'. ~*:*'. .* .~;:.:*' . ~ble'iiis;i'ate.s t~ provld~:(9r_*;,:,c,rk~t~bas.e.d ~fieicibl~~ ~r~C:lng:*This mhctific.at!on. al/~...{$ fo~ mon~hly. .. ,~~: * *-.:

\ :;::,/-: : *'.'.* ~/:;*~.:.:</~. :_* *.\ : , ~ . "~~: ,:: ,_:~* ,; :/~:t.~~ch~~i.~s :~~: ~a~f~ ~th,~:*~~'~!~r. ?( ~~;f,_ee~Jn~ *ry~1,.s~4r~e~~ :.p~o~t~~}~~ *di~j~!-e(r~~~'~: ~: _:\:-. ...~:,

-~: .:,: .* ,,.: :, * >_. .: '. *::: '. :'.:-.. -_: *.- . _

~-, ~\ *.>* ..... ,,_ withirf~ rf!gci!att)r.y.;Qpp_r~ved-rarige ..Natur.al gas *~an nt>v(ct>mpe~e-(#lrt:'¢tly-with 'Qil;:propane, and~<" '~ * *:

\::-:: . . " ' :.* :\ ,' :- '< .: .:. + : :, *-;*". :;': _. >*..

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~

-~ 'r' * *--*~ ,*. *::,

g~.soline

• ,r:. *

!n;

• '_'-:; ,';\* .~-:* .::* ~~ ~

_th~ *en~rgy, ~omf!l~di~y* ~atket thr:~ug~'irJUltiple t(ltes::targe~ecl- aqpe~ifi'E alterna~e

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. *': _'>'..-:*. : :* :" -- .. * .' < '\:*~> * ~. *',: ,: . '._ *':>.f>r..ovjde*a.n.Qlt_ern~'tl~e'fuel_opticm~o'Jri.du*tal.~md;commercial ciistomer:~:*'l!ho"havfi!, *dual.fuel*:',.: _*,.,

'.;)~'.~'~;.;;;,

e,*t>:.:~f

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'- - . .. - . . *'*. : ' -\ ' --.

.....~.. -* , .***:**_ ..... :~*:*

. ".~: . ... ~, ~w0,tch.ah~1s-monage- eraJt 01~* ::, *_:* _.-:: ...... . ~-: . . .

."canc¢11ation , ~. . .. , .

of pa#*uripCJ.lcfdebts. . _ ... , .*

tO:customers:*whp haie.a*:verlfied inabllitf*to*ptiy_their:*energy

., - t . ..... * ~

• _ ~ ~

-. x. -,~~-~. *~ ~,:~~~;;~~~~~!'. '.. * *;'- *: .': *:* ...'-_.'. * .. ~ills~-"pudng _, t~fs '.fir~*:..~/~~r..of-:th~ -~~.te~~at~~ Aip~~~~°:. *D~f!l*:'f.!sa'e ::Reduct~~~, and *:~!:'.~om.~~ -

5

.'> *. ,"Bradley, c* * .

• < *ta~y,on~E!lge~~j:_<'.~. . ._._~;* ,..... AssiStarice.P.i:ogra'tns:*ove1:.'4,000)imlte.d !ncorJ;e: ciistome.rs have:r.eceived"enertf. educatlon.. ani:, -: .

69; Vice * -. . ,- * *.. -. " .. - .' .*. * .* *, .. c . ". * *:  : * .. .. ,_. .. - * - ' .. .. .. * ... * . . .', * .. , . " '- * ,.. '

. . *

: *->~: ::;. . f>r~sldeni and As~~ ' .* -~ .* .*' -.::- .: ': ._) ; *9~: custo1,11ers hq":e :had. w~~il1e~i~atlori -.measures: 'ins~~,,e~: Bt~comblnl~g *energy' ec[u~ati~n~ . ,:* ;:-, .:1

" " soclateGenerol._.* . * . * * . - * - - .. * , . , , . , . . * ~,,-.-, .,-* * .- . . . . . .-.:* *. . ,., .... - ,

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eighteen*

nineteen -

~ - \~

• 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.

Management's Discussion and Analysis of Financial Condition and Results of Operations

'*~

Philadelphia . General by approximately $25 million. The estimated annual Electric Company Earnings per share for 1988 were $2.33, the same as in 1987 reduction is $30 million. The associated reduction in common and Subsidiary with approximately 5% more shares outstanding. The stock earnings per share was approximately 7¢ in 1988 and Companies positive effects of higher (5.5%) electric sales and the is estimated at approximately 9¢ annually.

Company's cost reduction efforts offset the negative pressure On June I, 1988, the Company filed its annua/*Energy on earnings caused by the Nuclear Regulatory Commission Cost Rate Factor (ECRF) with the PUC proposing a 4.850 mill

( NRC) order of March 31, 1987 suspending power operations per kWh credit applicable to customers' electric service. On at the Peach Bottom Atomic Power Station. June 30. 1988, the PUC approved an Audit Bureau adjusted The increase in electric sales was the result of the hot ECRF of a 6.291 mill per kWh credit to be effective July I, and humid weather experienced during the summer months 1988 through June 30, 1989. The PUC-adopted rate refiects and the continuing economic development in the Company's an adjustment to the Company's proposal of approximately service territory. $42 million, of which $4.7 million was disallowed and In 1988. the Company set electric output records for approximately $37 million deferred pending resolution of two the second successive year. Records were set for yearly. separate ECRF investigations.

monthly. weekly. daily and hourly output, as well as Saturday On June 27. 1988, the third phase of the three-phase and Sunday daily and hourly output. electric rate increase approved by the PUC in its June 27,

! An all-time hourly peak of 6,826 megawatts (mW) 1986 order became effective. This third phase, amounting to w~s set on August 15, 1988 between the hours of 4 and 5 approximately $117 million per year; is designed to recover p.m., and an a/I-time winter hourly demand of 5,560 mW was costs associated with the operation of Limerick Unit No. I.

set on December 12, 1988, between the hours of 6 and 7 p.m. Revenue deferred under the phase-in plan will be recovered These output records were not forecast until the turn of the from customers over the three-year period beginning June century. 1989.

On March I, 1988, the Company placed into effect In accordance with the PUC order dated June 27, temporary electric rates refiecting an order by the 1986. the Company continues to accrue a carrying charge Pennsylvania Public Utility Commission (PUC) denying a equivalent to allowance for funds used during construction return on the Company's equity investment in the Peach (AFUDC) on the 50% of Limerick common plant excluded Bottom Atomic Power Station. The Company filed a Petition from rate base by the order. In 1988, this accrual benefited for Stay and a Petition for Reconsideration with the PUC common stock earnings by approximately $73. I million.

concerning the order. On April 21. 1988, the PUC denied the On January 15, 1988, the PUC approved an $8.6 Company's petitions. In accordance with the PUC order. the million, 3.1%. increase in gas rates. The increase includes a temporary rate adjustment became effective for an initial one-year Federal Tax Adjustment Surcharge to recover $0. 9 period of six months. On June 30. 1988. the PUC extended the million for the prior effects of the Tax Reform Act of 1986.

temporary rate adjustment for an additional six-month period On September 30, 1988, the PUC approved a $16 ending February 28, 1989. The PUC also authorized the million increase in the Purchased Gas Cost Rate for the Company to file a tariff supplement which, on one day's period October I, 1988 through September 30, 1989. The notice, would remove the temporary rate adjustment when a increase is principally the result of the expiration of a refund generating unit at Peach Bottom operates for I00 continuous for past overcollections which had been in effect since hours at 95% of that unit's rated capacity. As part of the October 1987.

settlement, the Company agreed not to seek any recoupment As a result of the Tax Reform Act of 1986 that of revenue lost as a result ofthe Peach Bottom temporary rate reduced federal income taxes, the Company passed back to order for the period March I, 1988 through February 28, 1989. its electric customers $89.5 million through a Federal Tax On October 21, 1988, the Company announced that Adjustment Credit (FTAC) for the year 1988. In 1989, the its schedule for restart readiness of Peach Bottom Unit No. 2 Company will pass back to its electric customers $86.5 had been extended from late December 1988 until the second million through a FTAC.

quarter of 1989, with Unit No. 3 restart extended until the On June 16. 1988, the Company sold its 44.241%

third quarter of 1989. As a result, the Company does not interest in the Merrill Creek Reservoir Project for $145.3 expect that one unit at Peach Bottom will operate for I00 million. Under the terms of the agreement, the Company is

. continuous hours at 95% ofthat unit's capacity prior to leasing back its share of the reservoir for 44 Vi years with February 28, 1989. /ease renewals and a purchase option available to the The temporary rates will become permanent on Company.

February 28, 1989 unless the Company files a complaint with On December 20, 1988, the Company sold a portion the PUC. The Company is currently reviewing all of its options of its existing and future accounts receivable for $200 million to prevent these rates from becoming permanent. through a five-year purchase and sale agreement.

The Company estimates the delay in restart will result The Company is completing construction of Limerick in a continuing replacement power cost penalty of Unit No. 2 under a PUC-mandated cost containment plan approximately $8 million per month ($4 million per unit) and which provides for a maximum net rate base allowance for an equity return penalty of approximately $2.5 million per Unit No. 2 (exclusive of common plant) of a prudent month. See note 2 of Notes to Financial Statements, page 29. investment of$3./97 billion. The Company estimates that In 1988, the write-off of$6/ .4 million of Peach Bottom the cost of Limerick Unit No. 2 will not exceed the $3.197 replacement power costs had a negative impact on earnings billion cap.

of/ 8¢ per share. As of December 31, 1988, Limerick Unit No. 2 was In 1988, the temporary electric rates reduced revenue 97.6% complete with expenditures. including AFUDC,

Man age m.e n t 's Discussion and An a I y sis of twenty-two Financial Condition and Results of Operations twenty-three

-Continued '

Philadelphia totalling $2.258 billion. the Company's cost reduction efforts. The increase in non-fiJel Electric Company In December 1987, the Financial Accounting operating and maintenance expenses in 1987 and 1986 was and Subsidiary Standards Board (FASB) issued SFAS 96, Accounting for primarily attributable to the commercial operation of Limerick Companies Income Taxes," which requires an asset and liability approach Unit No. I.

for financial accounting and reporting for income taxes. Due to the complexities of SFAS 96, its original effective date has Depreciation been delayed by FASB for one year. The Company is required Increases in depreciation in each of the last three years to adopt this statement by 1990. The provisions of the *re~ected additions to plant in service. In 1987 and 1986 statement may be applied cumulatively in the year of increases in depreciation were primarily attributable to adoption or may be applied retroactively by restating Limerick Unit No. I being placed into service.

previously issued financial statements. The Company is

. continuing to evaluate the provisions ofSFAS 96 and its effect Income Taxes on the Company's financial statements. Income taxes charged to operations and income tax credits included in other income decreased in 1988 compared to 1987 Electric Operating Revenue primarily due to higher operating and maintenance expenses Increased electric revenue for 1988, 1987 and 1986 was and interest charges. Total income taxes for 1987 compared to attributable to higher base rates and increased sales. restated 1986 were higher primarily due to the Company Ki/owatthour sales of electricity to retail customers increased adoption of Statement of Financial Accounting Standards No.

5.5% in 1988 over 1987 and 5.4% in 1987 over 1986. 90, "Regulated Enterprises -Accounting for Abandonments and Disallowances of Plant Costs" and Statement No. 92, .

Electric Revenue Increase/( Decrease) "Regulated Enterprises - Accounting for Phase-in Plans."

Millions of Dollars

'88 vs. '87 '87 vs. '86 '86 vs. '85 Other Taxes Rate Increase $ 0.9 $193.7 $185.0 Other taxes increased slightly in 1988 versus 1987 due to FTAC (SS.I) (34.4) higher payroll and gross receipts taxes. Other taxes increased Fuel Related Revenue 16.I (149.0) (39.4) in 1987 versus 1986 due to higher capital stock and gross Sales and Other 78.7 100.0 37.6 receipts taxes. In 1986 other taxes decreased due to lower realty taxes.

Tota/ $40.6 $110.3 $183.2 Allowance for Funds Used During Construction (AFUDC)

Gas Operating Revenue The increase in AFUDC in 1988 compared with 1987 was the Increased gas revenue for 1988 was attributable to increased result of increases in construction work in progress, due sales and rates. For 1988, total gas sales, including transported primarily to construction of Limerick Unit No. 2. AFUDC gas, increased 7.6% over 1987. Lower gas revenue in 1987 decreased in 1987 and 1986 as a result of the commercial compared with 1986 was primarily attributable to a lower operation of Limerick Unit No. I.

Purchased Gas Cost Rate resulting from reduction in the price of gas from suppliers. For 1987, total gas sales, including Interest Charges transported gas, increased 13. 7% over 1986. Interest charges on debt increased in each of the last three years due to additional debt outstanding. The ratio of earnings Fuel and Energy Interchange Expense . to mortgage interest, which is one measure of the Company's For accounting purposes, fiJel and energy interchange costs are ability to issue mortgage bonds, for the calendar years 1988, deferred until billed as fiJel adjustment revenue. See note I of 1987, and 1986 was 2.69, 2.83 and 2.82 times, respectively.

Notes to Financial Statements, page 29. In 1988, gross fiJel and Under the Company's mortgage; additional mortgage bonds energy interchange costs were $I 0 million lower than in 1987 may not be issued on the basis of property additions or cash primarily due to the reduced cost of interchange purchases and deposits unless earnings before income taxes and interest increased output at Limerick Unit No. I. Fuel and energy during 12 consecutive calendar months of the preceding 15 interchange costs deferred in previous years reduced expense calendar months are at least two times the pro forma annual in 1988 by $43 million. In 1987, gross fiJe/ and energy interest on all mortgage bonds outstanding and applied for. In interchange costs were $98 million higher than in 1986 addition, as of December 31, 1988, the Company was entitled primarily due to the refiJeling outage at Limerick and the Peach to issue approximately $I. I billion of mortgage bonds, without Bottom shutdown. Fuel and energy interchange costs deferred regard to the earnings test, against previously retired bonds.

in previous years reduced expense in 1987 by $88 million. In 1986, gross fiJel and energy interchange costs were $281 Capital Expenditures and Changes in Financial Position million lower than in 1985 primarily due to the excellent The Company's construction program is estimated to require performance of the Company's nuclear units. Fuel and energy expenditures of approximately $/.I billion in 1989 and $2.0 interchange costs deferred in previous years and charged to billion from 1990 to 1992. A significant portion of the expense in 1986 amounted to $189 million. expenditures relate to the construction of Limerick Unit No. 2.

Successful completion of this program is dependent on the Other Operating and Maintenance Expenses Company's ability to obtain external financing primarily In 1988, non-fiJel operating and maintenance expenses through sales of debt and equity securities which are subject increased $30 million or 3.0% over last year primarily due to to market conditions and to meeting certain earnings tests.

Peach Bottom related expenses which were partially offset by The program is also subject to the licensing requirements of

the NRC, other regulatory approvals in connection with the protest will be successful. If the IRS claims against the planned supplemental cooling water system for Limerick, purchaser are upheld, compliance with the indemnification financing approvals by the PUC and changes due to litigation. provisions of the agreement could result in a significant Interim financing of the construction program is charge to income.

provided by short- and intermediate-term bank loans which In the long run, the future financial health of the are also dependent on the Company's financial position. Company is highly dependent on the regulatory treatment of Limerick Unit No. 2. The Company believes that the prospects Outlook for favorable treatment have increased because Limerick Unit On July 27, 1988, Public Service Enterprise Group No. 2 has become more valuable and yet less costly to build Incorporated and its subsidiar.y Public Service Electric and since construction resumed. The Company's recent sales Gas Company filed an action against the Company in the growth and peak load experience is a clear indication ofthe United States District Court concerning t/:ie shutdown of need for the additional capacity which Limerick represents.

Peach Bottom Atomic Power Station that was ordered by the Although the Company continues to actively support NRC. On the same date, Atlantic City Electric Company and conservation and co-generation and factor them into the Delmarva Power and Light Company filed a similar suit planning equation, the customers' increasing demand must against the Company with the same court. The three be met with reliable sources of committed power. Completion companies, as co-owners of Peach Bottom, seek to recover of Limerick Unit No. 2 will assure the ability to meet the damages resulting from the NRC ordered shutdown of the expanding growth in the service territory and provide an Station. The suits alleged breach by the Company of the opportunity to arrange short-term capacity sales to other Owners Agreement under which it operates the Station and utilities in need of additional generation. For example. in various tort claims. The complaints do not specify any dollar September the Company announced that it has arranged the amount of damages. On October 21, 1988, the Company filed sale of200 mW of system capacity to a neighboring utility motions seeking dismissal of the tort claims in both actions. from 1990 to 1994. In addition, negotiations are continuing for The Company filed answers to the complaints with respect to the sale of an additional 200 mW to another utility for the the breach of contract claims on January 13, 1989. If the same time period. These arrangements are scheduled to litigation is ultimately determined adversely to the Company, conclude when the capacity will be needed on the Company's such adverse determination could have a material adverse system.

effect on the Company's financial condition. Considering the outstanding progress in the In December 1981, the Company sold the federal construction of Limerick Unit No. 2, the Company anticipates income tax benefits associated with Unit No. 2 of the Salem filing a rate case in the summer of 1989 to include its revenue Generating Station for $53.7 million in a safe harbor lease requirements in rates. The Company is examining every transaction. Under the sale agreement, the Company agreed possible option which would aid in mitigating the impact of to indemnify the purchaser against the loss of the tax benefits placing Unit No. 2 in service.

resulting from any Internal Revenue Service (IRS) claims In conclusion, earnings per share have held up well which render the sale invalid. The Company's indemnification during this difficult year due, in large part, to increased sales obligation also includes the payment of interest, at prime from favorable weather and a strong regional economy.

rates, on the indemnification amount and all associated costs However, the Company has made significant strides in cost of contesting an IRS challenge. The Company has been reduction and in increased efficiencies.

advised that IRS has asserted, in auditing the purchaser, that These efforts will continue to be a high priority for the sale was invalid. Although the purchaser has protested management and are critical to the objective of maintaining the IRS claims, the Company has no assurance that the the common stock dividend.

Consolidated Statements 0 f Income twenty-four twer1ty-five I Philadelphia For the Years Ended December 31 Electric Company 1988 1987 1986 and Subsidiary 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 and Subsidiary 1988 1987 1986 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.

Consolidated Balance Sheets twenty-six twenty-seven Philadelphia December 31 Electric Company 1988 1987 and Subsidiary Companies (Thousands of Dollars)

ASSETS Utility Plant, at original cost Electric $ 9,003,850 $ 8,760,993 Gas 583,705 542,483 Common, used in all services 148,942 144,650 9,736,497 9.448,126 Less: Accumulated Depreciation 2,395,820 2,169,390 7,340,677 7.278,736 Nuclear Fuel, Net 242,040 193,110 Construction Work in Progress 2,465,750 /,999,991 Leased Property, Net 287,538 287,198 Net Utility Plant 10,336,005 9,759,035 Current Assets Cash and Temporary Cash Investments 43,598 43,081 Accounts Receivable Customers 141,107 344,560 Other 34,611 41,274 Inventories, at average cost Fossil Fuel 50,046 59,202 Materials and Supplies 120,210 91,052 Deferred Energy Costs 50,399 6,220 Compensated Absences 60,859 56,641 Unrecovered Revenue 54,087 Other 18,008 17,150 Total Current Assets 572,925 659,180 Deferred Debits and Other Assets Unrecovered Revenue, Net 250,952 217,646 Deferred Limerick Costs 375,910 285,969 Investments 97,780 100,934 Loss on Reacquired Debt 118,338 119,052 Other 110,942 67,920 Total Deferred Debits and Other Assets 953,922 791,521 Total $11,862,852 $11,209,736 See notes to financial statements.

December 31 1988 1987 (Thousands of Dollars)

CAPITALIZATION AND LIABILITIES Capitalization Common Shareholders' Equity Common Stock $ 3,177,584 $ 2,995,239 Other Paid-In Capital 5,119 4,579 Retained Earnings 409,863 387.070 3,592,566 3,386,888 Preferred Stock Without Mandatory Redemption 622,472 572.472 With Mandatory Redemption 368,078 389.146 Long-Term Debt 5,219,511 4,870.733 Total Capitalization 9,802,627 9,219,239 Current Liabilities Notes Payable, Bank 102,000 Long-Term Debt Due Within One Year 70,235 80,889 Capital Lease Obligations Due Within One Year 72,046 60,588 Accounts Payable 180,831 169,353 Taxes Accrued 139,966 114,738 Deferred Income Taxes - Energy Costs 20,011 2.679 Interest Accrued 129,408 121,650 Dividends Payable 39,575 36,643 Compensated Absences 60,859 56,641 Other 19,877 15.510 Total Current Liabilities 732,808 760,691 Deferred Credits and Other Liabilities Capital Lease Obligations 215,492 226,610 Deferred Income Taxes 753,267 682,899 Unamortized Investment Tax Credits 272,976 282,311 Other 85,682 37,986 Total Deferred Credits and Other Liabilities 1,327,417 1.229,806 Commitments and Contingencies (Notes 2, 3 and 15)

Total $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.

Notes to Financial Statements Philadelphia I. Significant Accounting Policies recoverable through adjustments of rates charged to its Electric Company customers.

and Subsidiary General Companies All utility subsidiary companies of Philadelphia Electric Income Taxes Company are wholly owned and are included in the Deferred income taxes are provided for differences between consolidated financial statements. Non-utility subsidiaries are book and taxable income to the extent permitted for rate-not material and are accounted for on the equity method. making purposes. In addition, the effects of the Alternative Accounting policies are in accordance with those prescribed Minimum Tax (AMT) are normalized. Investment tax credits, by the regulatory authorities having jurisdiction, principally other than credits resulting from contributions to employee the Federal Energy Regulatory Commission (FERC) and the stock ownership plans which do not affect income, are Pennsylvania Public Utility Commission (PUC). deferred and amortized to income over the estimated useful life of the related utility plant. Investment tax credits related Revenues to property not included in rate base are accounted for on Revenues are generally recorded in the accounts upon billing the flow-through method (see. note I0).

to the customer. Rate increases are billed from dates authorized or permitted to become effective by the Allowance for Funds Used During Construction (AFUDC) regulatory authorities. AFUDC is a non-cash item which is defined in the Uniform Pursuant to a rate phase-in plan approved by the System ofAccounts as "the net cost for the period of PUC in its electric rate order of June 27, 1986, the Company construction of borrowed funds used for construction is recording revenue equal to the full amount of the rate purposes and a reasonable rate on other funds when so used."

increase approved, based on kilowatthours billed to AFUDC is recorded as a charge to Construction Work In customers. Unrecovered Revenue is classified as a current or Progress, and the equivalent credits are to "Interest Charges" other asset in the accompanying balance sheets according to for the pretax cost of borrowed funds and to "Other Income whether it will be billed to customers within the next year or and Deductions" for the remainder as the allowance for other in subsequent years (see note 3). funds. The rate used for capitalizing AFUDC, which averaged 9.50% in 1988 and 1987 and 9.55% in 1986, is computed Fuel Adjustment Clauses under a method prescribed by the regulatory authorities. The The Company's retail electric service provided in Pennsylvania rate is a "net a~er-tax rate" and the current income tax is subject to a fuel adjustment clause designed to recover or reductions applicable to the interest charges capitalized are refund 80% of the differences between the actual costs of fuel, recorded in "Other Income and Deductions." In addition, the energy interchange and purchased power and the amount of PUC is permitting the Company to record a carrying charge such costs billed to customers. The gas service has a equivalent to AFUDC on 50% of Limerick common plant purchased gas adjustment clause designed to recover or which is deemed associated with Unit No. 2 and the refund the differences between the actual costs of gas sold equivalent credits are to Capitalized Limerick Costs. AFUDC and the amount of such costs .included in rates. Differences and carrying charges on 50% of Limerick common plant are between the amounts billed to customers and the costs not included in taxable income and the depreciation of recoverable.are deferred and collected or refunded in future capitalized AFUDC and the amortization of carrying charges periods by means of prospective adjustments to rates. are not tax deductible. Under the Tax Reform Act of 1986, Generally such rates are adjusted annually (see note 2). AFUDC and carrying charges are considered tax preference items when computing the Company's AMT.

Nuclear Fuel Nuclear fuel is capitalized and charged to fuel expense on the Gas Exploration and Development Joint Ventures unit of production method. Estimated costs of nuclear fuel The Company has invested in several joint ventures for disposal are charged to fuel expense as the related fuel is exploring and drilling for natural gas. Costs are capitalized consumed. under the full-cost method and charged to operations commensurate with production.

Depreciation and Decommissioning For financial reporting purposes, depreciation is provided Gains and Losses on Reacquired Debt over the estimated service lives of the plant on the straight- Gains and losses on reacquired debt are deferred and line method and, for tax purposes. generally over shorter lives amortized to interest expense over the periods permitted for on accelerated methods. Annual depreciation provisions. rate-making purposes.

expressed as a percent of average depreciable utility plant in service, were approximately 2.87% in 1988, 2.84% in 1987 2. Shutdown of Peach Bottom Station and 2.95% in 1986. On March 31, 1987, a Nuclear Regulatory Commission The estimated Company ownership portion of the (NRC) order required the Company to shut down the Peach nuclear-related costs for decommissioning as approved for Bottom Atomic Power Station (Peach Bottom) located in York rate-making purposes totals approximately $287,801,000 as County. Pennsylvania, and consisting of two nuclear of December 31, 1988. This cost is being charged to generating units. These units were placed into commercial operations as permitted for rate-making purposes. The operation in 1.974 and are jointly owned by the Company, amounts charged are deposited in escrow and trust accounts 42.49%; Public Service Electric and Gas Company, 42.49%;

and invested for funding offuture costs. The Company Atlantic City Electric Company, 7.51%; and Delmarva believes that any increase in the estimated costs would be Power and Light Company, 7.51%. Under the ownership

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

,thirty-one Philadelphia agreement, the Company, as operator of Peach Bottom, is the inattention of reactor operators at Peach Bottom. The Electric Company reimbursed by the other owners for costs incurred in the NRC also proposed fines, ranging from $500 to $1,000, and Subsidiary Companies operation of the facility in the same proportion as their against 33 present or former reactor operators at Peach respective ownership interests. At December 31, 1988, the Bottom for sleeping and/or other acts of inattention to duty Company's net investment in Peach Bottom was $449.5 that occurred at Peach Bottom. The $1,250,000 fine was paid million (see note 5). on September 30, 1988.

The Company charged to expense replacement The Company expects its scheduled readiness for power costs of$61 million and $58 milliof) in 1988 and 1987, restart of Unit No. 2 to be the second quarter of 1989, and respectively, caused by the NRCs shutdown order. The scheduled readiness for restart of Unit No. 3 to be the third Company does not believe that its investment in the Peach quarter of 1989. The Peach Bottom units cannot be restarted Bottom Units has been impaired as a result of this shutdown. without the required approvals, which the Company has no assurance it will receive. The Company cannot predict when NRCActions the NRC will permit the Company to restart Peach Bottom.

On August 7. 1987, the Company submitted its Peach Bottom Commitment to Excellence Action Plan (Plan) in response to INPO the NRCs requirement that, prior to being permitted to On January 12, 1988, the Chairman of the Nuclear restart either unit at Peach Bottom, the Company provide to Committee of the Board of Directors received a letter from the Administrator of Region I for his approval a detailed, the President of the Institute of Nuclear Power Operations comprehensive plan and schedule to assure that the facility (INPO). an independent industry organization which reviews will safely op.erate and comply with all requirements, the operations of utilities with nuclear plants, on the subject including station procedures. At a meeting held on September of accountability for Peach Bottom problems. The INPO letter 14, 1987, the NRC Commissioners expressed their recapped "some of the history that led to and that continues dissatisfaction with the Plan as submitted, indicating, among to contribute to serious performance problems at Peach other concerns, their disagreement with the Plan's emphasis Bottom, and within the Philadelphia Electric Corporate on solutions to problems related to the plant and its organization:* The letter was highly critical of senior personnel without adequate emphasis on solutions to management with respect to its effectiveness in preventing problems related to corporate management responsibility. and resolving Peach Bottom problems and the lack of On November 18 and 19, 1987, the Company filed adequate corporate accountability. The Jetter recommended with the NRC applications to amend its nuclear facility (I) the development of a full report of an investigation operating licenses (License Amendments) to refiect proposed completed by the Company on Peach Bottom control room reorganizational changes, including on-site changes. On operator behavior, (2) the modification of the Company's November 25, 1987, the Company submitted to the NRC the Peach Bottom restart plan so as to minimize the number of Corporate Action Section (Section I) of its Plan for Restart of measures planned to strengthen assessment of nuclear Peach Bottom Atomic Power Station (Plan for Restart) station performance independent of line management and detailing its nuclear reorganization. On December 24, 1987, ( 3) major changes in the corporate culture, the acquisition of the NRC notified the Company that, based upon its "sufficient outside talent to properly upgrade the PECO preliminary review of the Company's Plan for Restart and a nuclear situation" and corporate accountability for "the Temporary Waiver of Compliance, the Company should unsatisfactory situation that has been allowed to develop over proceed with implementing the Plan for Restart. The letter a period of years." The Company has taken a number of stated that the NRCs conclusions regarding the Plan for actions in response to these recommendations.

Restart were preliminary until the NRC had assessed the effectiveness of the revised corporate structure and had Commonwealth of Pennsylvania completed action on the Company's proposed License On January 22, 1988, the Commonwealth of Pennsylvania filed Amendments.Section II of the Plan for Restart, which covers with the NRC a petition to intervene and requested a hearing responses to issues and root causes specific to the plant site, in the Peach Bottom License Amendment proceeding was submitted on February 12, 1988, and a revision of the regarding the Company's applications to amend its nuclear Plan for Restart was submitted on April 8, 1988. operating licenses' technical specifications to refiect its On October 19, 1988, the NRC issued its Safety proposed nuclear reorganization, including on-site changes.

Evaluation Report documenting the NRC's acceptance On April I, 1988, the NRC issued an order referring of the Company's Plan for Restart. The NRC concluded that Pennsylvania's petition to an Atomic Safety and Licensing the Plan for Restart, as revised, meets the requirements of the Board (Licensing Board) to consider whether it should be NRC's shutdown order in that it adequately characterizes the granted. On June 22, 1988, with the petition for intervention problems leading to the shutdown and that the Company's and hearing still pending, the NRC issued the Company's actions or plans are appropriate to address the root causes requested amendment to the nuclear operating licenses' identified by the Company in its Plan for Restart. The NRC technical specifications, with any hearing to be held after such will continue to monitor the effectiveness of the issuance. On August 21, 1988, the Commonwealth filed with implementation by the Company of the Plan for Restart. the United States Court of Appeals for the Third Circuit a On August 10, 1988, the NRC issued a Notice of petition for review of the NRC's issuance of the License Violation and proposed imposition of Civil Penalties to the Amendments. The Company and the Commonwealth have Company proposing a fine of$/,250,000 against the been conducting negotiations toward settlement of restart Company for failing to detect, report and deal with issues raised by the Commonwealth in the Licensing Board inattentive reactor operators and supervisors who condoned and Court ofAppeals litigation, both of which remain pending.

On February 23, 1988, the PUC entered an order to 3. Limerick Generating Station reduce electric revenue through the imposition of temporary rates which refiect the denial of a return on common equity General investment in Peach Bottom, effective March I, 1988. The The Company's Limerick Unit No. I commenced commercial Company entered a settlement with respect to the denial of a operation on February I, 1986. Construction of Unit No. 2 return on common equity investment in Peach Bottom under resumed in February / 986, following a suspension of which temporary rates would be extended for an additional approximately two years which was ordered by the PUC. Unit 6-month period ending February 28, 1989 and the Company No. 2 is scheduled to be completed in 1990. At December 31, would be permitted to remove the negative surcharge on one 1988, Unit No. 2 was approximately 98 percent complete day's notice when one unit at Peach Bottom has operated for based on estimated man-hours needed to complete the Unit.

100 continuous hours at 95% of the unit's rated capacity. The NRC approval is necessary for startup of Unit No. 2. As of Company has announced that its scheduled readiness for December 31, 1988, the Company had invested restart of Peach Bottom Unit No. 2 has been extended until approximately $5.83 billion in the Limerick Generating the second quarter of 1989. The projected restart schedule Station, consisting of $2.25 billion in Unit No. I, $2.26 billion will prevent the operation of one unit at Peach Bottom for in Unit No. 2 and $1.32 billion in common facilities.

100 continuous hours at 95% of that unit's capacity prior to On June 27, 1986, in connection with the Company's February 28, 1989, with the result that the temporary rates filing to recover the costs associated with Limerick Unit No. I, will become permanent on February 28, 1989. The Company the PUC approved an increase in electric rates of intends to take the necessary action to prevent these rates approximately $351 million annually, and authorized a rate of from becoming permanent. However. there can be no return on common equity of 14.75%. The increase is being assurance that the Company's actions will be successful. phased in over three years in equal steps, followed by a three-year recovery period, without interest, of amounts Co-Owners Lawsuits recoverable under the phase-in plan. In accordance with its On July 27, 1988, Public Service Enterprise Group prior practice, the PUC excluded 50% of common plant from Incorporated and its subsidiary Public Service Electric and rate base, but permitted continued accrual of an amount Gas Company (PSE&G) filed an action against the Company equivalent to AFUDC on the excluded 50%. Accordingly. the in the United States District Court for the District of New Company is capitalizing a carrying charge equivalent to Jersey concerning the shutdown of Peach Bottom ordered by AFUDC on this investment, classified as Deferred Limerick the NRC; on the same date, Atlantic City Electric Company Costs in the accompanying balance sheets. The increase also (Atlantic Electric) and Delmarva Power and Light Company refiects an exclusion from the Company's rate base of $368. 9 filed a similar suit against the Company with the same court. million, which the Company recognized in 1986 as a loss for The two suits allege that the Company breached the Owners' accounting purposes, due to allegedly imprudent construction Agreement (the Owners' Agreement) pursuant to which the delays in 1976 and 1978. The Company believes that the four companies own Peach Bottom and under which the $368. 9 million disallowed by the PUC was a prudent Company operates Peach Bottom. The two suits claim that investment and appealed the PUC's decision to the the Company has breached two provisions of the Owners' Commonwealth Court of Pennsylvania. On March 31, 1988, Agreement. These suits also variously allege negligence, gross the Commonwealth Court reversed the PUC's decision and negligence, failure to disclose, fraudulent misrepresentation remanded the case for further hearing. The PUC has and negligent misrepresentation. Neither of the complaints appealed _the Commonwealth Court's decision to the specifies any dollar amounts of damages. The plaintiffs seek Pennsylvania Supreme Court.

compensation for certain replacement power costs they have On December 23, 1985, following a PUC investigation, incurred as a result of the shutdown of Peach Bottom. the Company filed its response with the PUC accepting the Additionally. the complaints allege that the co-owners have conditions of the cost containment and operating incentive been deprived of the benefits of their Peach Bottom ownership plans set forth in the PUC's December 5, 1985 order, which interests and investments, that they have made payments to concluded that the Company could complete the construction the Company for capital and operating and maintenance of Limerick Unit No. 2 conditioned upon the acceptance by costs for which they have received no benefit, and that they the Company of such cost containment and operating have incurred increased costs and lost profits. PSE&G and incentive plans, including a maximum net rate base allowance Atlantic Electric further allege that they have been required for Unit No. 2 (exclusive of common plant) of a prudent by the New Jersey Board of Public Utilities to provide their investment of $3.197 billion.

customers with a credit because of the Peach Bottom shutdown. Both complaints include claims for punitive Recovery of Costs Pending Regulatory Proceedings damages. On October 21, 1988, the Company filed motions In accordance with the Declaratory Order issued by the PUC seeking dismissal of the tort claims in both actions. The on September 28, 1984, the Company deferred all operating Company filed answers to the complaints with respect to the costs, carrying charges on investment, fuel savings and breach of contract claims on January 13, 1989. If the litigation associated income tax effects of Limerick Unit No. I and 50%

is ultimately determined adversely to the Company. such of common plant from February I, 1986, the date of adverse determination could have a material adverse effect commercial operation, until the plant was included in rates on on the Company's financial condition. 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

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 Philadelphia part of Deferred Limerick Costs. protracted permit proceedings and related appeals, some of Electric Company If the Company estimates the total cost to complete which remain pending.

and Subsidiary Unit No. 2, including AFUDC, would exceed the $3.197 billion The availability of cooling water from the System is Companies cap, an immediate charge to expense would be recognized contingent upon completion of construction of the several for the excess. The Company estimates the cost of Limerick components; the successful completion by the Company of Unit No. 2 will not exceed the $3.197 billion cap. Of course, condemnation proceedings to acquire fiowage rights over completion of Limerick Unit No. 2 within the cost cap is some four hundred riparian properties along the East Branch dependent upon receiving the necessary permits and licenses of the Perkiomen Creek (East Branch), or the purchase of on a timely basis. Recovery of amounts expended for such fiowage rights; the successful appeal by the Company of construction of Limerick Unit No. 2 and Deferred Limerick National Pollutant Discharge Elimination System (NPDES)

Costs will be subject to the PUCs determination that such permit effluent conditions imposed by the Pennsylvania costs were prudently incurred. Currently, the PUC has an Department of Environmental Resources (DER) on the independent party conducting an audit of the Limerick Unit discharge of System water into the East Branch; and the No. 2 construction costs. If the PUC disallows the recovery of affirmance in pending appeals, and possible further appeals, certain costs from customers, an immediate charge to of various other DER permit-related actions which have been expense would be required. challenged by intervenors. The unfavorable disposition of the condemnation proceedings, the NPDES appeal, and other Excess Capacity Standards pending appeals would prevent the use of the System as On July 10, 1986, the Governor of Pennsylvania signed into law presently designed and approved.

legislation amending numerous provisions of the Pennsylvania Pending availability of the System, Limerick Unit No. I Public Utility Code. One provision of the legislation which has been operating since 1985 using, during the critical affects rate regulation imposes standards on the PUC in months, interim sources of supplemental cooling water determining whether new generating capacity is excess approved by the De/aware River Basin Commission (DRBC) capacity. This provision requires a disa/lowance from rates of on an annual basis. The last DRBC approvals were effective any portion of capacity which is determined to be excess through December 31, 1988, and the Company has submitted capacity. The provisions relating to excess capacity are to the DRBC requests for such approvals for 1989, amended applicable to rate cases "pending before the Commission." to include requests to approve such interim sources for both The PUC held that the legislation did not apply to the Limerick units in anticipation of the Limerick Unit No. 2 Limerick Unit No. I rate case. Furthermore, the PUC held scheduled fuel loading and power ascension in 1989. Since the that, even if the legislation did apply, Limerick Unit No. I did approval of such modified requests for interim sources may not constitute excess capacity under the standards imposed not provide a sufficient supply of interim supplemental by the legislation. On July 28, 1986, Petitions for Review of the cooling water for Limerick Unit No. 2, the Company plans to PUCsjune 27, 1986 electric rate order were filed with the submit to the DRBC requests for the approval of new interim Commonwealth Court by the Company appealing the sources for Limerick Unit No. 2 for 1989. Among the interim exclusion of $368. 9 million from rate base and by the Office of sources required to meet the needs of both Limerick units are Consumer Advocate (OCA) and a group of the Company's municipal reservoirs, for which contracts must be negotiated commercial and small industrial customers on the issue of with two municipalities. Such contracts are subject to possible excess capacity and on various rate design and cost of service PUC proceedings.

issues. On March 31. 1988, the Commonwealth Court issued Should the System for any reason not become an order affirming the PUC on excess capacity and all other operational, the operation of the Limerick units during the issues, and remanded the construction delay issue to the PUC critical months will depend upon the successful development.

for further hearing and adjudication. On May 2, 1988, the licensing and construction of a modified supplemental cooling PUC and the OCA appealed the Commonwealth Court water system and the continued successful acquisition and decision to the Supreme Court. This excess capacity law will approval of interim sources as discussed above pending the be applicable to Limerick Unit No. 2, which, if found to be availability of the modified system. There is no .assurance that excess capacity upon becoming operational, could result in a the Company will be successful in these efforts.

partial or complete disallowance from rates of the applicable plant cost. 4. Retirement Benefits The Company and its subsidiaries have non-contributory Supplemental Cooling Water trusteed retirement plans applicable to all regular employees.

Because of permit and regulatory conditions which restrict The benefits are based primarily upon employees' years of the use of the normal source of cooling water, a supply of service and average earnings prior to retirement. The supplemental cooling water is needed to avoid the limitation Company's funding policy is to contribute at a minimum, or cessation of operation of the Limerick units during certain amounts sufficient to meet ER/SA requirements.

months of the year. The number of critical months, which may Approximately 55% of pension costs were charged to be as many as six, will vary from year to year depending upon operations and the remainder, associated with construction stream fiows and related conditions. The construction of labor, to the cost of new utility plant.

various components of a planned supplemental cooling water In January 1987, the Company adopted Statement of system (System), which includes pumping stations, a Financial Accounting Standards No. 87 (SFAS 87),

reservoir and transmission mains and utilizes existing "Employees' Accounting for Pensions. Pension cost for prior streams, is nearing completion despite substantial opposition years was not restated.

from various groups, construction stoppages, litigation, Pension cost was $7,101,000 in 1988, $29,458,000 in

1987 and $42,500,000 in 1986. Pension costs for 1988 and to 7% at December 31, 1987 ..

1987 included the following components: Prior service cost is amortized on a straight-line basis (Thousands) over the average remaining service period of employees 1988 1987 expected to receive benefits under the plan.

Service cost - Benefits earned The funded status of the plan at December 31, 1988 during the period $ 24,073 $ 26,970 and 1987 is summarized as follows:

Interest cost on projected benefit obligations 85,779 80,588 (Thousands)

Actual return on plan assets (134,647) (41,929) 1988 1987 Amortization of transition asset ( 4,539) ( 4,539) Actuarial present value of Amortization and deferral 36,435 (31,632) accumulated plan benefit obligations:

Net pension cost $ 7,101 $ 29,458 Vested benefit obligation $ (738,761) $(641,713)

Accumulated benefit obligation (747,751) (650,/46)

Projected benefit obligation for Change in Net Periodic Pension Cost services rendered to date $(1,046,731) $( 1,044,612)

The change in net periodic pension cost in 1988 and 1987 is Plan assets at fair value 1,163,148 1,056,358 accounted for as follows: Funded Status 116,417 I 1,746 (Thousands) Unrecognized transition asset ( 76,554) ( 81,092) 1988 1987 Unrecognized prior service costs 111,715 115,276 (a) change in number, characteristics Unrecognized net gain $ 151,578 $ 45,930 and salary levels of participants Prepaid pension costs $ $ and net actuarial gain $16,189 $ ( 1,492)

(b) change in plan provisions 375 2,873 (c) net change prior to SFAS 87 16,564 1,381 In addition to providing pension benefits, the (d) changes to comply with SFAS 87 (24, 972) Company provides certain health care and life insurance

( e) changes due to mid-year plan benefits for retired employees. Substantially all of the amendment (38,921) 10,549 Company's employees may become eligible for these benefits (f) net change: (c) + ( d) + ( e) $(22,357) $( 13,042) if they reach retirement age while still working for the Company. These benefits and similar benefits for active Plan assets consist principally of common stock, U. S. employees are provided by an insurance company whose government obligations and other fixed income instruments. premiums are based on the benefits paid during the year.. The In determining pension cost for 1988 and 1987, the assumed Company recognizes the cost of providing these benefits by long-term rate of return on assets was 8.5% and 7.5%, charging the annual insurance premiums to expense. The respectively. cost of providing those benefits for approximately 4,000 The weighted-average discount rate used in retirees during the years 1988, 1987 and 1986 is not determining the actuarial present value of the projected separable from the cost of providing benefits for benefit obligation was 8. 75% at December 31, 1988 and approximately 11,500 active employees for the same period.

1987. The rate of increase in fi.Jture compensation levels Tota/ premiums amounted to $38.8 million, $30.0 million and ranged from 5% to 7% at December 31, 1988 and 6% $31.6 million for 1988, 1987 and 1986, respectively.

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

Not 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 Philadelphia 7. Preferred Stock Electric Company At December 31, 1988, and 1987, Preferred Stock, $I 00 par, cumulative, consisted of 15,000,000 shares authorized.

and Subsidiary Companies Shares Amount Current Refunding Redemption Restricted Outstanding Price (a) Prior to (b) 1988 1987 1988 1987 (Thousands of Dollars)

Series (without mandatory redemption)

/4. 15% (c) $/ 14.15 2-/-90 500,000 500,000 $ 50,000 $ 50,000 13.35% (c) 113.35 2-1-89 750,000 750,000 75,000 75,000 12.80% (c) 108.50 750,000 750,000 75,000 75,000 10.75% (e) (e) (e) 500,000 50,000 9.50% 103.50 750,000 750,000 75,000 75,000 8.75% 101.00 650,000 650,000 65,000 65,000 7.85% 101.00 500,000 500,000 50,000 50,000 7.80% 10/.00 750,000 750,000 75,000 75,000 7.75% 10/.00 200,000 200,000 20,000 20,000 4.68% 104.00 150,000 150,000 15,000 15,000 4.4% 112.50 274,720 274,720 27,472 27,472 4.3% 102.00 150,000 150,000 15,000 15,000 3.8% 106.00 300,000 300,000 30,000 30,000 6,224,720 5,724,720 622,472 572,472 Series (with mandatory redemption) (d) 15.25% I /0.00 5-/-90 350,000 400,000 35,000 40,000 14.625% (f) (f) 500,000 500,000 50,000 50,000 10% /Of.I/ 5-/-90 88,000 132,000 8,800 13,200 9.875% 109.88 8-/-92 650,000 650,000 65,000 65,000 9.52% 103.00 287,180 332,557 28,718 33,256 9.50% I 986 Series 109.50 I /-1-91 750,000 750,000 75,000 75,000 8.75% 1978 Series 103.60 333,500 366,800 33,350 36,680 7.325% 102.93 450,000 480,000 45,000 48,000 7% 101.00 272,100 280,/00 27,210 28,010 3,680,780 3,891,457 $368,078 $389,/46 Total Preferred Stock 9,905,500 9,616, I 77 $990,550 $961,618 (a) Redeemable, at the option of the Company. at the either a long-term period ( /-10 years) or a short-term period indicated do/far amounts per share, plus accrued dividends. ( 49 days), wi// be established by an auction held on the (b) Prior to the date specified, none of the shares of each business day next preceding the beginning of each such series indicated may be redeemed through refunding at an period. The issue is redeemable during any long-term period interest cost or dividend rate which is less than the dividend only on the fast day of the period or fol/owing an unsuccessful rate of such series. auction, in an aggregate number which constitutes one or (c) Ownership of these series of preferred stock is evidenced more units ( /,000 shares), at a price of $100 per share, plus by depositary receipts, each representing I/ 10 of a share of accrued and unpaid dividends to the redemption date on the preferred stock. shares redeemed. On any dividend payment date with (d) Sinking fund requirements (par value) in the period respect to a short-term period, units are redeemable, in 1989-1993 are as fo//ows: 1989-$15, 910,000; whole or in part, at the option of the Company at a price of I990-$26,030,000; I99 /-$2 I,630,000; 1992-$25,380,000; $100,000 per unit, plus an amount equal to accrued and 1993-$38,380,000. unpaid dividends to the date of redemption.

(e) The dividend rate through April 30, 1993 will be 10.75% (f) Not redeemable prior to May I, 1990.

per annum, and the rate for each subsequent dividend period,

8. Long-Term Debt At December 31 Series Due 1988 1987 (Thousands of Dollars)

First and Refunding Mortgage Bonds (a) 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 Total First and Refunding Mortgage Bonds 3,624,316 3,564,904 Notes Payable - Banks (b) 1991-1993 405,000 225,000 Revolving Credit and Term Loan Agreements (c) 1991-1995 300,000 150,000 Pollution Control Notes 5!/i%-/3% 1997-2013 269,615 269,620 Debentures 14Vs% 1990 50,000 Debentures 9.85%-/4:i.4% / 1993-2011 706,850 706,850 Sinking Fund Debentures -

• Philadelphia Electric Power Company, a Subsidiary 4!/i% 1995 13,671 14,580 Unamortized Debt Discount and Premium, Net (29,706) (29,332)

Total Long-Term Debt 5,289,746 4,951,622 Due Within One Year (d) 70,235 80,889 Long-Term Debt included in Capitalization (e) $5,219,511 $4,870,733 (a) Utility Plant is subject to the lien of the Company's on the unused amount. At December 31, 1988, $300 million mortgage. was outstanding under this agreement.

(b) At various interest rates. The Company also has a $400 million revolving credit and (c) The Company has a $700 million revolving credit and term loan agreement with a group of banks which expires in term loan agreement with a group of banks which is designed 1992. There is an annual commitment fee of%% on the to provide the financing for the construction program, unused amount. At December 31, 1988. no amount was including completion of Limerick Unit No. 2, and general outstanding under this agreement.

corporate purposes. The revolving credit arrangement (d) Long-term debt maturities in the period 1990-1993 are as converts into a term loan in November 1992. The borrowings follows: 1990-$26, 960,000; 1991-$27,850.000; are due in six semi-annual installments with the first payment 1992-$181,913,000; 1993-$472,348,000.

due 6 months after the conversion into the term loan. Interest (e) The annualized interest on long-term debt at December on outstanding borrowings is based on specific formulas 31. 1988, was $531.6 million of which $355.0 million was selected by the Company involving yields on several types of associated with mortgage bonds and $176.6 million was debt instruments. There is an annual commitment fee of .3% associated with other long-term debt.

9. Short-Term Debt 1988 1987 1986 (Thousands of Dollars)

Average Short-Term Borrowings $114,164 $ 30,937 $ 233 Average Interest Rates, Computed on Daily Basis 8.18% . 7.74% 9.51%

Maximum Short-Term Borrowings Outstanding $216,000 $205,000 $/,000 Average Interest Rates on Short-Term Bank Loans at December 31: 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.

Not 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 Philadelphia ID. Income Taxes (Continuing Operations)

Electric Company 1988 1987 1986 and Subsidiary (Thousands of Dollars)

Companies Included in Operating Income:

Federal Current * $ 57,484 $ 74,185 $114,496 Deferred 132,742 186,390 110,178 Investment Tax Credits, Net (9,291) (16,960) 29,041 State Current 22,982 9,386 30,134 Deferred 2,857 11,939 506 Included in Other Income and Deductions:

Federal Current 16,578 1,845 (I 01,566)

Deferred (48,732) (27,730) ( 121,303)

Investment Tax Credits. Net (20,400)

State Current (10,602) (10,650) ( 19,057)

Deferred (711) 1,211 ( 17,383)

Total $163,307 $229,616 $ 4,646 Investment tax credits (ITC) and income tax credits resulting on AMT taxable income which includes certain preferences from contributions to employee stock ownership plans and adjustments. The Company's 1988 and 1987 current tax reduced Federal income taxes currently payable by $23 liability was determined under the AMT method resulting in a million in 1988, $20 million in 1987 and $43 million in.1986. tax credit of $113 million which can be utilized in future years Under the Tax Reform Act of 1986, ITC has been repealed when regular tax liability exceeds AMT liability.

effective January I, 1986 with the exception of transition For a number of years the Company has used property. The Company believes that Limerick LJ_nit No. 2 accelerated deprec:iation for income tax purposes and qualifies as transition property eligible for ITC. straight-line depreciation for financial reporting purposes.

Appraximately $180 million of additional business Deferred taxes were recorded only on those timing credits generated from 1983 through 1988 have not been differences recognized for rate-making. The cumulative net utilized due to limitations based on taxable income. These amount of such timing differences for which deferred taxes credits, which expire between 1998 and 2003, may be used to were not recorded was approximately $393 million at reduce Federal income taxes in future years. December 31, 1988. Since the Company expects to charge The Tax Reform Act of 1986 created a new customers for taxes when the timing differences reverse, the Alternative Minimum Tax (AMT). calculated at a 20% rate 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:

1988 1987 1986 (Thousands of Dollars)

Depreciation and Amortization $72,966 $ 93,075 $127.278 Deferred Energy Costs 17,332 45,566 (95,383)

Precommercial Operation of Limerick Unit No. I 10,210 Deferred Limerick Costs 11,004 Net Loss on Reacquired Debt (1,874) 16,668 14,305 Unrecovered Revenue 23,425 77,583 55,040 Alternative Minimum Tax (29,776) (82, 963)

Effects of SFAS 90 and SFAS 92 25,087 23,533 (161.421)

Gain on Sale of Merrill Creek Reservoir (19,899)

Other (l,105) ( 1,652) 10,965 Total $86,156 $171,810 $(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 $147,938 $213,436 $(32,590)

Increase (Decrease) due to:

Depreciation Timing Differences Not Normalized 5,493 23,920 19,230 Effects ofSFAS 90 and SFAS 92 5,993 (9,784) 27,870 Unbilled Revenue 12,903 12,137 State Income Taxes, Net of Federal Income Tax Bene'fits 9,587 9,151 6,620 Amortization of Investment Tax Credits (11,903) (13,586) ( 13.468)

Other. Net (6,704) (5,658) (3,016)

Total income tax provisions $163,307 $229,616 $ 4,646 Provision for Income Taxes as a Percent of Income Before Income Taxes 22.4% 29.8% 1.7%

Adjusted Income Before Income Taxes 37.5% 43.0%

In December 1987, the Financial Accounting Standards the statement may be applied cumulatively in the year of Board issued SFAS 96, Accounting for Income Taxes." which adoption or may be applied retroactively by restating requires an asset and liability approach for 'financial previously issued financial statements. The Company is accounting and reporting for income taxes. The Company is continuing to evaluate the provisions of SFAS 96 and its required to adopt this statement by 1990. The provisions of effect on the Company's 'financial statements.

II. Taxes, Other Than Income - Operating 1988 1987 1986 (Thousands of Dollars)

Gross Receipts $137,172 $134,091 $132,468 Capital Stock 33,519 32,400 25,511 Realty 35,975 37,098 49.110 Payroll 27,095 25,978 23,594 Other 3,839 5,146 1,944 Total $237,600 $234,713 $232,627

12. Investments At December 31 1988 1987 (Thousands of Dollars)

Gas Exploration and Development Joint Ventures $ 11,657 $ 37,158 Real Estate Developments and Other Ventures 23,541 19,155 Non-Utility Property 17,550 11.525 Escrow Deposits for Decommissioning Nuclear Plants 43,677 31,521 Other Deposits 1,355 1,575 Total $ 97,780 $100,934

Not 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 Philadelphia 13. Leases Electric Company Leased property included in Utility Plant at December 3I 1988 1987 and Subsidiary Companies (Thousands of Dollars)

Nuclear Fuel $502,796 $500.733 Electric Plant 9,879 10.452 Common Plant 56 110 Gross Leased Property 512,731 511.295 Accumulated Amortization (225,193) (224.097)

Net Leased Property $287,538 $287,198 The nuclear fuel obligation is amortized as the fuel is operating expenses include interest on capital lease

• consumed. Amortization of leased property totaled $36. I obligations of$15.4 million, $14.0 million and $16.4 million in million. $49.7 million. and $65.6 million for the years ended 1988, 1987 and 1986, respectively. Minimum future lease December 31. 1988. 1987 and 1986, respectively. Other payments as of December 31. 1988, are:

Year Ending December 3 I Capital Leases Operating Leases Total (Thousands of Dollars) 1989 $ 99,347 $ 65,757 $ 165.104 1990 102,603 65,491 168.094 1991 67,457 84,620 152.077 1992 41,209 76,489 117.698 1993 31,369 74,988 106,357 Remaining years I 0,678 743,788 754.466 Total Minimum Future Lease Payments $352.663 $1.111.133 $1.463.796 Imputed Interest (rates ranging from 6.5% to 17%) (65, 125)

Present Value of Net Minimum Future Lease Payments $287,538 On June 16. 1988, the Company sold its 44.241% interest in for as an operating lease and the gain on the sale is being the Merrill Creek Reservoir Project for $145.3 million and amortized on a straight-line basis over the life of the lease.

entered into a leasing arrangement for a 44.241% interest in Under this lease, total rental expense was $8.4 million in the project for an initial period of 44.5 years. with renewals 1988.

and a purchase option available. During the lease term. the Rental expense under operating leases, including the Company is responsible for its share of the cost of operating Merrill Creek project, totaled $64.2 million, $51.4 million, and and maintaining the reservoir. The lease is being accounted $54.0 million in 1988, 1987 and 1986, respectively.

14. Segment Information 1988 1987 1986 (Thousands of Dollars)

Electric Operations Operating Revenues $ 2,850,315 $ 2,809,673 $ 2.699.365 Operating Expenses, excluding depreciation 1,913,725 1,895,104 1,961.429 Depreciation 245,499 234,925 201,773 Operating Income $ 691,091 $ 679.644 $ 536.163 Utility Plant Additions $ 827,620 $ 908,799 $ 753,232 Gas Operations Operating Revenues $ 378,397 $ 371.791 $ 391.504 Operating Expenses, excluding depreciation 308,301 317.343 337.287 Depreciation 18,592 17.009 15,867 Operating Income $ 51,504 $ 37.439 $ 38.350 Utility Plant Additions $ 46,117 $ 44,328 $ 35,053 Identifiable Assets( ..)

Electric $10,012,922 $ 9,178,435 $ 8,341.559 Gas 500,205 449,986 416,824 Nonallocable Assets 1,349,725 1,581,315 1.411,937 Total Assets $I I,862,852 $11,209,736 $I 0.170,320

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

15. Commitments and Contingencies other individual present or former officers, directors and The Company has incurred substantial commitments in employees who had been named as defendants in the connection with its construction program. Construction lawsuits, and dismissal of all claims concerning the proxy expenditures are estimated to be $1. I billion for 1989 and statement which has been distributed by the Company in

$2.0 billion for 1990-1992. These estimates are reviewed and connection with the 1987 Annual Meeting of Shareholders.

revised periodically to re~ect changes in economic conditions, Counsel for the plaintiff shareholders have subsequently revised load forecasts and other appropriate factors. Facilities consolidated their actions into one lawsuit and amended their under construction and to be constructed, particularly* complaint to comport with the resolutions of the Board.

Limerick Generating Station and associated facilities, will Because the consolidated lawsuit which remains pending require permits and licenses which the Company hds no against the two former officers is brought derivatively by assurance will be granted. shareholders on behalf ofthe Company, any monetary.

The Price-Anderson Act, as revised August 22, 1988, damages which may be recovered, net of expenses, will be sets a "Limit of Liability" of$7.I billion for claims that could paid to the Company.

arise from an incident involving any licensed nuclear facility in On September 12, 1988, the PUC issued a proposed policy the nation. All utilities with nuclear generating plants, statement with respect to recovery of pipeline take-or-pay including the Company, obtained coverage for these potential costs billed by the interstate pipelines under FERC-approved claims through a combination of private insurances ($160 tariffs. The policy statement proposes a preferred recovery million, increased to $200 million January I, 1989) and method under which the distribution company would absorb mandatory participation in a financial protection pool. Under 50% of take-or-pay amounts billed by its pipeline suppliers.

the amended law, all nuclear reactor operators can be The Company begar:i incurring such charges in May 1988, and assessed up to $63 million per reactor, payable at $10 million presently estimates a total liability of approximately $41 per reactor per year. If the damages exceed $7. I billion, the million over a five-year period. In recognition of its pending President is to submit to Congress a plan for providing policy statement, the PUC, by order entered September 30, additional compensation to the injured parties. Congress 1988, removed take-or-pay costs of approximately $11.5 could impose further revenue raising measures on the nuclear million in the Company's current purchased gas clause industry to pay claims. The Company's maximum total adjustment effective October I, 1988. This amount was annual assessment for Limerick Unit No. I and its ownership ordered deferred until further action is taken on the proposed interest in Peach Bottom and Salem is $27 million per year up policy statement.

to a maximum of$170 million. In December 1981, the Company sold the federal income tax The Company maintains property insurance, benefits associated with Unit No. 2 of the Salem Generating including contamination coverage, for loss or damage to its Station for $53.7 million in a safe harbor lease transaction.

nuclear facilities. Although it is impossible to determine the Under the sale agreement, the Company agreed to indemnify total amount of the loss that may result from an occurrence the purchaser against the loss of the tax benefits resulting at these facilities, the Company maintains the maximum from any Internal Revenue Service (IRS) claims which render amount of insurance presently available, $1.57 5 billion for the sale invalid. The Company's indemnification obligation each station. Under the terms of the various insurance . also includes the payment of interest, at prime rates, on the agreements, the Company could be assessed up to $31 indemnification amount and all associated costs of contesting million for losses incurred at any plants insured by the an IRS challenge. The Company has been advised that IRS insurance companies. The Company is self-insured to the has asserted, in auditing the purchaser, that the sale was extent that any losses may exceed the maximum amount of invalid. Although the purchaser has protested the IRS claims, insurance available. the Company has no assurance that the protest will be The Company is a member of an industry mutual successful. If the IRS claims against the purchaser are upheld, insurance company which provides replacement power cost compliance with the indemnification provisions of the insurance in the event of a major outage at a nuclear station. agreement could result in a significant charge to income.

The premium for this coverage is subject to an assessment for adverse loss experience. The Company's maximum share of 16. Sales of Accounts Receivable any assessment is $15 million. In December 1988, the Company entered into a five-year The Company is subject to assessments under its agreement with a financial institution whereby it can sell on a directors' and officers' liability and general liability insurance daily basis and with limited recourse up to $200 million of an policies. The maximum 1988 insurance premium assessments undivided interest in designated accounts receivable. At under these policies could be approximately $10 million. December 31, 1988, the Company had sold a $200 million In September 1988, the Board of Directors adopted interest in accounts receivable under this agreement. The the recommendations of a Spedal Committee ofthe Board Company retained the servicing responsibility for these and resolved to take no action to preclude four then-pending receivables. The average interest rate computed on a daily shareholder derivative lawsuits from proceeding against the basis on the portion of the accounts receivable sold but not former Chairman/Chief Executive Officer and President/ yet collected was 9.39% in December 1988.

Chief Operating Officer of the Company. with respect to By the terms of this agreement, under certain claims alleging mismanagement on their part prior to the circumstances up to $75 million of unrecovered revenue could shutdown of Peach Bottom by the NRC in March 1987. be included in the pool of eligible receivables. At December The Board also resolved to seek the dismissal of all claims in 31, 1988, $51 million of unrecovered revenue has been the lawsuits against these former officers for actions on their included in the pool of eligible receivables.

part after the shutdown, dismissal of all claims against the

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 Philadelphia I7. Cash and Cash Equivalents with fiscal years ending a~er July 15, 1988. For purposes of Electric Company Statement of Financial Accounting Standards No. 95, the Statement of Cash Flows, the Company considers all and Subsidiary "Statement of Cash Flows" (SFAS No. 95) requires highly liquid debt instruments purchased with a maturity of Companies replacement of the Statement of Changes in Financial Position three months or less to be cash equivalents. The following with the Statement of Cash Flows for financial statements supplemental disclosures are required by SFAS No. 95:

1988 1987 1986 (In thousands)

Cash paid during the year:

Interest (net of amount capitalized) $420,181 $367,277 $371,590 Income taxes (net of refunds) $ 82,730 $ 75,100 $ 3,149 Noncash Investing and Financing:

Capital lease obligations incurred $ 35,800 $ 55,095 $ 48,471

18. Quarterly Data (Unaudited)

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

Operating Revenues Operating Income Net Income Quarter Ended 1988 1987 1988 1987 1988 1987 (Thousands of Dollars)

March3/ $851,259 $869,463 $204,301 $215.721 $161,374 $172,010 June 30 699,640 735.193 I55,751 158.724 I 10,064 111.965 September 30 898,988 839,268 244,076 191.258 196,861 144,823 December 31 778,825 737,540 138,467 151,380 97,651 113,598 Earnings Applicable Average Shares to Common Stock Outstanding Earnings Per Average Share Quarter Ended 1988 1987 1988 1987 1988 1987 (Thousands of Dollars) (Thousands) (Dollars)

March]/ $137,734 $148,124 197,575 189,294 $.70 $.78 June 30 85,435 89,037 200,227 191.469 .43 .47 September 30 172,401 121,142 202,843 193,379 .85 .63 December 31 73,195 89,937 205,366 195,735 .36 .46 Independent Auditor's Report To the Shareholders and Board of Directors Philadelphia Electric Company 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 St at is t ic 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 St a t is t ic 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 ra t ing St at i S t i C S- Continued Philadelphia Electric Company and Subsidiary Companies forty-four forty-five GAS OPERATIONS 1988 1987 1986 1985 1984 1983 1978 Sales (Millions of Cubic Feet)

Residential 1,933 1,854 1,856 1,810 1,941 2,168 2,316 House Heating 28,112 26,010 25.731 23,227 25,429 22,981 24,974 Commercial and Industrial 39,073 38,170 33,834 36,254 41,145 39,043 32,784 Al/Other 2,228 1,541 578 1,209 1,282 672 94 Total Gas Sales 71,346 67,575 61,999 62,500 69,797 64,864 60,168 Gas Transported for Customers 9,272 7,374 3,907 10,262 3.794 789 Total Gas Sales & Transported 80,618 74,949 65,906 72.762 73,591 65,653 60,168 Number of Customers, December 31 Residential 66,599 67,688 68,590 69,632 70.794 72,501 87,715 House Heating 239,022 231,618 225,010 217,840 211,984 206,443 163,469 Commercial and Industrial 27,119 26,021 24,884 24,234 23,442 22,810 19,207 Total Gas Customers 332,740 325,327 318,484 311.706 306,220 301.754 270,391 Operating Revenues (Millions of Dollars)

Residential $ 17.0 $ 16.7 $ 18.0 $ 18.7 $ 19.0 $ 19.I $ 9.9 House Heating 180.6 175.7 189.8 185.4 191.7 165.8 86.6 Commercial and Industrial 165.I 167.5 177.7 214.I 243.7 227.3 92.2 Al/Other 6.6 4.4 2.0 5.2 5.6 3.0 0.2 Subtotal $369.3 $364.3 $387.5 $423.4 $460.0 $415.2 $188.9 Other Revenues (including Transported for Customers) 9.1 7.5 4.0 5.5 3.0 1.8 0.6 Total Gas Revenues $378.4 $371.8 $391.5 $428.9 $463.0 $417.0 $189.5 Operating Expenses (Millions of Dollars)

Operating expenses excluding depreciation $308.3 $317.4 $337.3 $375.4 $413.9 $377.6 $163.0 Depreciation 18.6 17.0 15.9 14.8 13.5 12.7 8.6 Total Operating Expenses $326.9 $334.4 $353.2 $390.2 $427.4 $390.3 $171.6 Gas Operating Income (Millions of Dollars) $ 51.5 $ 37.4 $ 38.3 $ 38.7 $ 35.6 $ 26.7 $ 17.9 Securities Statistics Ratings on Philadelphia Electric Company's Securities Mortgage Bonds Debentures Preferred Stock Agency Rating Date Established Rating Date Established Rating Date Established Duff and Phelps, Inc. 9 3/80 ID 3/80 II 2/83 Fitch Investors Service BBB 9/82 BBB- 9/82 BB+ 9/82 Moodys Investors Service Baa3 1/83 Bal 1/83 bal 1/83 Standard & Poors Corporation BBB- 9/82 BB+ 9/82 BB+ 7/86 NYSE - Composite Common Stock Prices, Earnings and Dividends by Quarters (Per Share) 1988 1987 Fourth Third Second First Fourth Third Second First Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter High Price $20ll.i $19 $19Va $21ll.i $20% $23% $22Vi $26 Low Price $18Vi $17VB $16Vs $18 $I 6:i4 $ / 9:i4 $19Va $20:i4 Earnings 36¢ 85¢ 43¢ 70¢ 46¢ 63¢ 47¢ 78¢ Dividends 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 55¢ 55¢

Board of Directors:

Susan W. Catherwood Director Changes:

Chairman, Board of Overseers, The University Museum, University john H. Austin, Jr. resigned as a member of the Board, effective of Pennsylvania March I, 1988 Wiiiiam T. Coleman, Jr., Esquire Joseph F. Paquette, Jr. was elected a member of the Board and a Senior Partner of the law firm member of the Executive Committee on March 7, 1988, and was O'Melveny & Myers elected Chairman of the Board on April 13, 1988 M. Walter D'Alesslo* Robert F. Gilkeson did not stand for re-election in 1988, having President and Chief Executive Officer, reached the mandatory retirement age Latimer & Buck, Inc. (Mortgage banking and real estate development) James L. Everett resigned from the Board, effective October 24, 1988 William S. Gaither Vice Chairman, Roy F. Weston, Inc. James D. Watkins was elected a member of the Board on June 27, (Environmental and consulting 1988, and resigned upon appointment as Secretary. Department engineering) of Energy, onjanuary 12, 1989 Richard G. Gilmore Susan W Catherwood was elected a member of the Board, effective Senior Vice President. Finance and January 23, 1989 Chief Financial Officer of the Company Ronald Rubin was elected a member of the Board, effective January 23, 1989 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

).

Officers: forty-eight Joseph F. Paquette, Jr. Eugene J. Bradley Donald P. Scott Chairman, President and Chief Vice President and Associate General Treasurer Executive Officer Counsel M. Dorothy Lyons Corbin A. McNeil/, Jr. Albert J. Solecki Assistant Secretary Executive Vice President, Nuclear Vice President, Information Systems and General Services Jon A. Katherine Richard G. Gilmore Assistant Treasurer Senior Vice President, Finance and Joseph A. Carter Chief Financial Officer Vice President, Personnel and Industrial William M. Lennox, Jr.

Relations Assistant Treasurer John S. Kemper Senior Vice President, Nuclear Lucy S. Binder J. Robert Causton Construction Secretary Assistant Treasurer Raymond F. Holman Senior Vice President, Operations Management Changes:

Clifford Brenner john H. Austin, Jr. resigned as President and Chief Operating Officer, Senior Vice President, Corporate effective March I, 1988 Communications James L. Everett resigned as Chairman of the Board and Chief James W. Durham Executive Officer, effective April 13, 1988 Senior Vice President, Legal and General Counsel Joseph F. Paquette, Jr. was elected President and Chief Operating Officer on March 7. 1988 and Chairman of the Board, President Philip G. Mulligan and Chief Executive Officer on April 13, 1988 Vice President, Gas Operations Corbin A McNeil/, Jr. was elected Executive Vice President, Nuclear Morton W. Rlmerman on March 7, 1988 Vice President. Finance and Accounting Edward G. Bauer.Jr. resigned as Senior Vice President, Legal and Raymond C. Williams General Counsel on May 23, 1988 Vice President, Rates Clifford Brenner was elected Senior Vice President, Corporate Albert G. Mlkalauskas Communications on June 27, 1988 Vice President, Electric Transmission and Distribution Eugene J. Bradley was elected Vice President, Legal and Associate General Counsel on June 27, 1988 Joseph W. Gallagher Vice President, Nuclear Services Albert}. Solecki was elected Vice President, Information Systems and General Services on June 27, 1988 S. Joseph Kowalski Vice President, Nuclear Engineering Charles L. Fritz retired as Vice President, Personnel and Industrial Relations on July I, 1988 Alvin J. Weigand Vice President, Engineering and Joseph A Carter was elected Vice President, Personnel and Production Industrial Relations, effective September I, 1988 Kenneth G. Lawrence James W Durham was elected Senior Vice President, Legal and Vice President, Commercial General Counsel, effective October 24, 1988 Operations A Lewis Parry, Jr. retired as Vice President, Purchasing and General Graham M. Leitch Services on October I, 1988 Vice President, Limerick Generating Station Dickinson M. Smith Vice President, Peach Bottom Atomic Power Stotion

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